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Case Study: Costco Wholesale in 2008: Mission, Business Model & Strategy

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Case study from the book: Strategic Management, 18th edition, Thompson and Stickland

Published in: Business
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Case Study: Costco Wholesale in 2008: Mission, Business Model & Strategy

  1. 1. Case 2 In 2008: Mission, Business Model, & Strategy
  2. 2. Our Presentation at a Glance • About Costco Wholesale, Mission & Vision • Costco’s Business Model, Driving Forces, KSFs • Costco’s Strategies & Objectives • Industry Analysis-SWOT, Porter’s 5 Forces, Life Cycle • Competitive Analysis- Strategic Group Map • Financial Analysis • Recommendations
  3. 3. Presented By: Group -A • • • • • Sunanda Sarker Md. Iftekhar Alam Nurul Afsar Md. Foysal Ahmed Md. Hasnat Khan Rezvi - 161201 161202 161203 161204 161205
  4. 4. Purpose of this Case Study To examine Costco’s business structure and strategy and how those relate to industry success
  5. 5. Case Summary • End of 2008 – $71 Billion in Sales – 550 stores world-wide • 54 million members - Avg yearly income $70,000 • Quality merchandise • Low price • Rapid inventory turnover
  6. 6. About Costco Wholesale • Eighth Largest membership retailer in the world and Fourth largest retailer in the U.S • CEO: James Sinegal • Headquarters: Issaquah, WA • Inception: Seattle, WA 1983 • Founders: James Sinegal & Jefferey Brotman
  7. 7. Vision & Mission of Costco Wholesale Mission: Continually provide our members with quality goods and services at the lowest possible prices. Vision: • “Our business is to give the customer the best value we can.” – Jim Sinegal,CEO & Founder of Costco • “We're going to be a company that’s on a first-name basis with everyone.”
  8. 8. Costco’s Business ModelAppealing or Not Low prices Volume purchasing Limited selection of quality merchandise Efficient distribution +Wide range of merchandise categories Rapid inventory turnover Reduced handling of merchandise +No-frills, self-service warehouse Operating efficiencies Rapid inventory turnover +Operating efficiencies Profit at a very low gross margin
  9. 9. Driving Forces • Internet • Technology – green technology is a concern • Market saturation • Legislation- proposed tax on big-box stores • Rising costs • Recession
  10. 10. Key Success Factors • Internet sales • Vast network of retail locations – cross-docking • No-frills warehouse • Ongoing effort to cut costs • Only stock bargains • Treasure-hunt merchandise • No-hassle return policy • Word of mouth advertising
  11. 11. Corporate Strategy • Cost strategy – Penetration Pricing – Below the Line Promotion – No frills • “Diversion” Buying Strategy – “Treasure hunt" shopping experience
  12. 12. Chief Elements of Costco's Strategy • Low prices • Limited product lines and selection • Treasure hunt shopping environment
  13. 13. Employment Objectives • Hire great people • Treat them well • Give them good jobs • Do right by them
  14. 14. Management Objectives • Always promote from within • Training happens constantly • Grow our own talent • Model what you want from your employees
  15. 15. Business Objectives • Don’t try to be too much to too many • Know on what level you compete • Know your customers – why they do business with you • Stay focused on your core business
  16. 16. Growth Objectives • Run the business for long-term sustainability • Open new stores – 50-60 new locations per year • Keep Internet sales growing
  17. 17. Marketing Objectives • Word of mouth only • No PR department, ever?
  18. 18. Ethics Objectives • Obey the law • Treat customers right • Treat employees right • Treat suppliers right
  19. 19. Costco’s Geographic ExpansionSuccessful or Not Costco opened 127 new warehouses in fiscal years 20052008
  20. 20. Industry Analysis • SWOT Analysis • Porter Analysis • Life Cycle
  21. 21. SWOT Analysis S O Strengths  Low Prices  Strong Brand  Operating Efficiency  Exceptional Workforce  Strong membership Opportunities  Appeal to conscientious shopper  Expand into foreign stable markets  Mergers & Acquisitions  Massive supplier pool W T Weaknesses  Burden of high wages paid to workers  CEO’s retirement  Low price margins  E-commerce activities  Small Marketing budget compared to discount retailers Threats and Super Markets  Aggressive price competition by rivals  Political complications in foreign markets  Cannibalization due to domestic market saturation
  22. 22. Porter’s Five Forces Model for Costco Substitutes Strong threat •Good substitutes everywhere •Price not significantly higher •Comparable product features •More variety of features •Low switching cost Suppliers Weak bargaining power •Many suppliers •Low switching cost •Many substitutes exist •Large quantities are needed Competing Sellers Fierce competition •Costco is on top •Quality is slightly better •Buyer demand is growing •Buyer’s switching cost is low Potential New Entrants Low threat •Small pool of entry candidates •High barriers to entry •Expanding market •Attractive profits Buyers Weak bargaining power •Some switching costs •Large membership base •Costco has the best value
  23. 23. Life Cycle of Costco – Maturity Stage • Costco is in the mature stage • Though profitable, slower growth in sales • Strong brand awareness • Shares market with established competitors
  24. 24. Competitive Analysis • Costco's main competitors are Sam's Club, BJ’s Wholesale Club, Other retailers. They share a similar business model, selling high volumes of merchandise at low prices in a membership-only warehouse club. Each company sells a similar array of general merchandise, including food, apparel, and gasoline. • Sam's Club operates 591 warehouse clubs nationwide and earned $44.4 billion in revenue in 2007. • BJ's operates 177 warehouse clubs across 16 states in the eastern U.S. In 2007, the company earned $9.0 billion in revenue. FY 2008 Costco vs. Competitors Company Costco Sam's Club BJ's Wholesale Club Comparable Revenue Net Income Operating Store Sales (Billions) (Billions) Margin (Decline) Locations $70.9 $1.3 2.7% 6.0% 512 $46.8 N/A 3.4% 4.8% 602 $10.0 $2.3 2.3% 9.4% 180
  25. 25. Competitive Analysis • Greater benefits for Costco employees – Wages: $17/hr on average – Health Insurance : 90% premium coverage • Lower price margins
  26. 26. Costco’s Strategic Group Map P Pricesmart Inc. Operating Margin Higher Sam’s Club BJ’s Costco Lower Few Many Number of Locations Note: Circles are drawn roughly proportional to the sizes of the club chains based on revenue
  27. 27. Financial Analysis • Costco earned $71 Billion in revenue in 2008 – 12.5% increase from 2007 • In 2008, Costco’s operating margin reached 2.77% • Costco’s net income in 2008 was $1.28 billion dollars – an 18.5% increase from 2007
  28. 28. Financial Analysis FY 2008 Costco vs. Competitors Company Comparabl Net e Revenue Income Operating Store Sales Location (Billions) (Billions) Margin (Decline) s Costco $70.9 $1.3 2.7% 6.0% 512 Sam's Club $46.8 N/A 3.4% 4.8% 602 BJ's Wholesale Club $10.0 $2.3 2.3% 9.4% 180
  29. 29. Financial Analysis-Key Ratios Inventory Turnover (TTM) Costco ROI 5 Yr Avg Sales 5 Yr. Growth Rate Gross Margin 5 Yr Avg Net Profit Margin 5 Yr Avg 11.93 11.01 11.24 12.40 1.54 Industry 2.47 7.59 15.11 24.66 2.74 Wal-Mart 8.73 13.80 9.41 23.37 3.59 10.27 11.11 8.42 10.37 1.41 Target 6.64 6.48 9.10 30.90 4.23 Best Buy 6.61 19.74 12.89 24.29 3.29 Sears 3.36 7.17 15.00 27.54 2.23 Pricesmart 9.20 14.12 15.54 16.14 0.40 BJ’s
  30. 30. Recommendation & Conclusion • Accept food stamps • Acquire BJ’s Wholesale Club • Keep expanding overseas • Be more ethical • Continue to add services • Industry Leader strategy – Better promotions • Improve e-commerce • A little good PR better than no PR
  31. 31. Any Question?

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