Costco- Management Case Analysis; Consulting


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  • - ~90% coverage for health and dental plans - In-house prescription pick up - Discount vision exams and prescriptions - 50 cents per dollar matching on 401k up to $500/yr - Dependent care plans - Professional counseling services - Long-term disability coverage equal to 60% of earnings - Automatic short-term disability coverage after 90-day probation period - Generous life insurance and accidental death coverage - Stock purchasing plan - Health care reimbursement account options - Long-term care insurance plan for employees who have worked >10yrs
  • Sinegal Quote: “Costco is able to offer lower prices and better value by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing, and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members
  • Typically purchase Treasure Hunt items from other whole-Salers or distressed retailers who are looking to get rid of excess or slow inventory. This is a one time deal in most cases, but it the best way to get deep discounted prices.Most of new Costco memberships come from WOM.
  • Ancillary Business Service Offerings are one of the main factors of competition among warehouse retailers.
  • Costco- Management Case Analysis; Consulting

    1. 1. Presented By:<br />Kate Ammerman, Darien Buc,<br />Rachel Hess, Tim Johnson and<br />Tara Van Winkle <br />
    2. 2. OVERVIEW<br /><ul><li>Founded by Jim Sinegal & Jeff Brotman in 1983
    3. 3. 4th Largest retailer in the US
    4. 4. 7th Largest in the World</li></ul>Wholesale Club & Warehouse Industry:<br />- Industry estimated to be $110 Billion total<br />- Industry growing 20% faster than retailing as a whole.<br />
    5. 5. OVERVIEW<br />Costco’s Industry Standing:<br /><ul><li>Costco has 55% share of US & Canada
    6. 6. Sam’s Club: 36% share
    7. 7. BJ’s Wholesale Club: 9% share
    8. 8. Annual sales per store average $128M
    9. 9. Two times larger than chief competitor Sam’s Club ($67M)</li></li></ul><li>Competitor Analysis<br /><ul><li> Primary Competition:</li></ul>Sam’s Club<br />BJ’s Wholesale<br /><ul><li>Factors of Competition: price, merchandise quality, location & membership services.
    10. 10. Secondary Competition:</li></ul>Retail Discounters: Wal-Mart & Dollar General<br />General Merchandise Chains: Target & Kohls<br />Low-Cost Specialty Stores: Lowe’s, Home Depot, Staples, Best Buy, Circuit City, Barnes & Noble<br />
    11. 11. OVERVIEW<br />Internal:<br /><ul><li>$1.2 Billion generated in membership fees
    12. 12. $534 Million in E-commerce Sales
    13. 13. In 2006 Costco owned 80% of their stores land and buildings.
    14. 14. Costco has almost 48 million card holders with a renewal rate of about 86.5%</li></li></ul><li>MISSION& GOALS<br />Mission:<br />To continually provide our members with quality goods and services at the lowest possible prices<br />Goals:<br />Obey the Law<br />Take Care of of Members<br />Take Care of our Employees<br />Respect our Suppliers<br />Reward our Shareholders<br />
    15. 15. GOALS TOWARDS MEMEBERS<br />Take Care of our Members<br /><ul><li>Provide quality products at the best prices
    16. 16. 100% satisfaction guarantee warranty on every product & membership fee.
    17. 17. Provide ecologically sensitive products
    18. 18. Provide the best customer service in the retail industry
    19. 19. Give back to our community through volunteerism and corporate contributions</li></li></ul><li>WORK FORCE<br />Take Care of Our Employees<br /><ul><li>“Our employees are our most important asset” –Sinegal
    20. 20. They are the key to executing the strategy successfully.</li></ul>Provide Competitive Wages<br /><ul><li>Starting hourly wage: $12 Average hourly wage: $17-18 </li></ul>Generous Benefits<br />Career Opportunities<br /><ul><li>Policy that 86% of higher lever openings are hired from within. In actuality, the figure runs at 98%. </li></ul>Open Door Policy- that allows ascending levels of management to resolve issues. <br />
    21. 21. WORK FORCE<br />Executive compensation:<br /><ul><li>Salary- roughly 12 times of a person working the sales floor. (extremely lower than other CEO’s).
    22. 22. Plus Stock Options and Bonuses</li></ul>Results of Taking Care of Employees:<br /><ul><li>120,000 employees spreading a positive message about Costco
    23. 23. High employee retention (6% turnover rate)
    24. 24. Higher productivity from workers</li></li></ul><li>BUSINESS MODEL<br />Costco uses a Low Cost Model by utilizing:<br /><ul><li>Rapid Inventory Turn Over
    25. 25. Operating Efficiencies created by product selectivity & volume purchases, high sales volume, efficient distribution, reduced handling of merchandise/ stocking methods
    26. 26. High Productivity of well compensated employees
    27. 27. Direct Purchasing from Manufacturers or “Grey Market” to obtain lowest price points for products.</li></li></ul><li>FUNCTIONALSTRATEGY<br />High Sales Volume & Rapid Inventory Turnover<br /><ul><li>Allows Costco to sell and receive cash for inventory before it had to pay many of its merchandise vendors.
    28. 28. Costco is able to finance a big percentage of its merchandise inventory through the payment tern provided by vendors rather than by having to maintain sizable working capital. </li></li></ul><li>FUNCTIONALSTRATEGY<br />Low Cost Warehouses:<br /><ul><li>Bought in reasonable real-estate locations.
    29. 29. Constructed inexpensively (concrete floors).
    30. 30. Merchandise stocked on racks above sales floor.
    31. 31. Products displayed on pallets containing large quantities.
    32. 32. Reduced labor required for handling & stocking
    33. 33. Shorter hours of operation
    34. 34. Achieves lower labor costs relative to volume of sales</li></li></ul><li>FUNCTIONALSTRATEGY<br />Efficient Purchasing:<br /><ul><li>Direct purchasing from Manufacturers in high volume</li></ul>Efficient Distribution:<br /><ul><li>Many products routed directly to warehouse stores
    35. 35. 9 Cross-docking depots
    36. 36. Receive container shipments from Manufacturer
    37. 37. Reallocate goods for combined shipment to individual stores within 24 hrs.</li></li></ul><li>FUNCTIONALSTRATEGY<br />Efficient Distribution Continued:<br /><ul><li>This maximizes freight volume and reduces receiving costs
    38. 38. When merchandise is received it is moved straight to the sales floor.
    39. 39. Eliminating inventory holding costs and Labor costs of handling and stocking merchandise</li></ul> These distribution efficiencies allow Costco to lower <br /> overhead costs and pass on savings to customers.<br />
    40. 40. BUSINESS STRATEGY<br />Decentralized Management:<br /><ul><li>Warehouse managers have very high authority over store operations
    41. 41. In charge of effectively merchandising treasure hunt items.
    42. 42. Orchestrate in-store product location & displays that maximize sales and quick turn over
    43. 43. This ensures each store is in touch with their local clientele and offers products that appeal to them.</li></li></ul><li>BUSINESS STRATEGY<br /> Pricing:<br /><ul><li>Only stock items that can be priced at bargain levels
    44. 44. 14 % Cap on the markup of brand name merchandise (compared to 20-50% at other discounters & retailers.)
    45. 45. 15% Cap on the markup of Kirkland Signature products.
    46. 46. Designed to be equal or better quality than national brands.
    47. 47. Philosophy: keep wowing customers with low prices.</li></li></ul><li>BUSINESS STRATEGY<br />Product Selection: <br /><ul><li>Provide members with a selection of only about 4,000 items in a wide variety of categories.
    48. 48. (compared to 150,000 to Wal-Mart & Target).
    49. 49. Limiting selection in each product category to only the fastest selling models, sizes, and colors.
    50. 50. Efficiencies obtained by volume purchasing, lowering distribution receiving costs, and reduced stocking labor.</li></li></ul><li>BUSINESS STRATEGY<br /> Treasure Hunt Merchandising <br /><ul><li>Out of the 4,000 items, about 1/4th of product offerings are constantly changing.
    51. 51. Entice shoppers to spend more by offering irresistible deals on luxury items because they know they won’t be there next time.
    52. 52. Purchased on “Grey Market” for lowest prices.
    53. 53. Example: HD TV’s, luxury handbags, diamond rings
    54. 54. Generates excitement for customers and W.O.M.</li></li></ul><li>CORPORATE STRATEGY<br />Ancillary Businesses<br /><ul><li>To encourage member to visit more frequently
    55. 55. To compete with other Warehouse retailers for superior Service offerings.</li></ul>Costco Currently Offers:<br />
    56. 56. CORPORATE EXPANSION<br />Domestic:<br /><ul><li>Opened 68 new warehouses in the U.S. between 2002-2006,
    57. 57. 16 new stores in the beginning of 2007 with plans to open another 20-24 warehouses by the close of the year.</li></ul>International:<br /><ul><li>Opened 14 warehouses Internationally by 2007
    58. 58. In 2007 Costco had 102 wholly owned warehouses outside the U.S</li></ul>70 in Canada 5 in Japan<br /> 18 in the United Kingdom 4 in Taiwan<br /> 5 in Korea<br /><ul><li>50/50 Partnership Warehouses:</li></ul> 30 locations in Mexico<br />
    59. 59. GROWTH<br />Expand Furniture Offerings:<br /><ul><li>2005 Opened 2 location of Costco Home: high-end furniture warehouse retailers.
    60. 60. Furniture is one of the Top 3 best-selling categories on their website
    61. 61. Shifted to building additional space within new Costco stores to be utilized for stocking a larger selection of furniture.</li></ul>Expand Kirkland Product Offerings:<br /><ul><li>Management aimed to increase the Kirkland Brand assortment from 400 items to as many as 600 in 5 years.</li></li></ul><li>ISSUES<br /><ul><li>Current Membership program creates limitations
    62. 62. Not allowing the use of Credit Cards limits customer expenditures.
    63. 63. Top of Mind Awareness levels decreased by lack of Brand Advertising
    64. 64. Competitors offer a wider variety of Ancillary Services (a significant factor of competition)</li></li></ul><li>RECOMENDATIONS<br />Membership Strategy Adjustments:<br />Non-Member Day <br /><ul><li>A quarterly event that allows non-members a trial day at the store.
    65. 65. Purpose: allowing trial raises probability of a prospect becoming a club member</li></ul>“Household” Plan<br /><ul><li>$20 for every additional household member
    66. 66. Purpose: use existing relationships to leverage new ones  increasing membership rates</li></li></ul><li>RECOMENDATIONS<br />Memberships Strategy Adjustments:<br />Membership Rewards Program<br /><ul><li>Pay $80 for your annual membership and get 2% off every purchase</li></ul>Competitors Have Found This Successful:<br /><ul><li>BJ’s allows customers to enroll in rewards club membership for $80 dollars.
    67. 67. Receive a 2% rebate on purchases (capped at$500).
    68. 68. Results: 5% of all memberships and 10% of all merchandise and food sales.</li></li></ul><li>RECOMMENDATIONS<br />Credit Cards:<br /><ul><li>Current payment methods: cash, check, debit, and Costco Credit
    69. 69. Recommended: Allow The Use Of Credit Cards
    70. 70. Accept credit cards but charge a 2% fee purchasing by credit.</li></ul>Competitors Have Found This Successful:<br /><ul><li>Sam’s Club: A week after the initial acceptance of MasterCard, the average checkout sales increased 35%</li></li></ul><li>RECOMMENDATIONS<br />Advertising:<br /><ul><li>TV Brand Advertising
    71. 71. Awareness & Reminder Ads
    72. 72. In the Northeast and West Coast regions
    73. 73. where locations are clustered in order to receive marketing efficiencies
    74. 74. Seasonal TV advertising & periodic direct mail promotions of Treasure Hunt items</li></ul>Competitor Use of Advertising:<br /><ul><li>Sam’s Club: spends $50 million annually on national TV ads, companion print ads, and direct mail promotions</li></li></ul><li>RECOMMENDATIONS<br />Expand Ancillary Business Programs:<br /><ul><li>Ancillary businesses services benefit Costco by:
    75. 75. Increase the frequency of customer visits
    76. 76. Benefit members by offering multidisciplinary services that are efficient and cost-effective
    77. 77. Making Costco a “One-Stop Shop”
    78. 78. Competitors Offer a Wider Range of Ancillary Services:
    79. 79. Wireless carrier kiosks, home security installation service, break and muffler services, home heating oil, vacation packages, and automobile buying services</li></li></ul><li>RECOMMENDATIONS<br />Growth Opportunities:<br /><ul><li>We recommend entering into China & Brazil next:
    80. 80. Sam’s Club has taken the Pioneering Costs of introducing Warehouse Retail into these societies
    81. 81. China is predicted to have a five-fold increase in urban consumer spending over the next 20 years to $2.3 trillion a year.
    82. 82. Continue testing furniture offerings in Costco locations rather than Costco Home.
    83. 83. Halo Effect achieved when furniture is offered inside existing stores</li>