1. What What is Costco’ Costco’ss business business model? model? Is the company company’s ’s busines businesss model appealing appealing? ? Why or why not?
Costco’s business model is focused on producing high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of national name brands and select privatelabel products in a wide range variety. Costco is focused in low-cost strategy is concentrated on a narrow buy segment and out competing rivals by having lower costs, therefore being able serve a niche consumers at a lower price. Costco’s business model is appealing because they are able to continually sell to a niche market. This niche market has annual income which ranges from $7,!!! to $"!!,!!! or more a year. #y offering the best products possible at lower price, they are able to have these members return. resently there are %7,&7',!!! card holders which include ()ecutive members, #usiness member, rimar rimary y cardhol cardholders ders and *dd-o *dd-on n cardhol cardholder ders. s. +herea +hereass Costco Costco has offere offered d the mos mostt popular popular products in order to have a rapid turn-over. Costco has proven that there business strategy has worked by continually producing higher net sale. 2. What are are the chief chief elements elements of Costco’s Costco’s strategy? strategy? How How good is the strategy?
Costco’s cornerstone cornerstone strategy is to offer the lowest price possible, to offer a limited selection and a have a treasure-hunt shopping environment. The low pricing strategy consists of capping the markup at "% percent for brand-name. +hile it is around twenty to fifty percent at others big markets, Costco prices are anywhere from si) to thirty-si) percent lower than its competitors. *dditionally, Costco has its own brand named irkland ignature. This store-label produces uice, cookies cookies,, coffe coffee, e, spices spices,, tires, tires, hou house se wares, wares, luggage luggage,, applia appliance nces, s, clothi clothing, ng, and deterg detergent ent.. The markup here is at fifteen percent, which still result for the wholesale company to be five percent lower than comparables named-brand. The production selection is limited to %!!! items classified. 3. o you thin! thin! "im #inegal #inegal has been an effect effecti$e i$e C%&? C%&? What grades grades would would you gi$e him in leading the process of crafting and e'ecuting Costco’s strategy?
/es, 0im inegal is an effective C(1. 0im inegal must get * grade for leading the process of crafting and e)ecuting Costco’s strategy. +hat support can you offer for these grades2 3 0im inegal had made a transparent and well defined planned path for the Costco to follow. 4e was the only person in the company for the preparation of business model and appreciated over the growth of the strategy of the company. 3 inegal had know how skills and created an environment to offer treasure hunt in the stores and maintain low prices and helps in promoting large volume of store traffic that helped in building 5uick turnover of inventory. 4e was responsible for driving the ability of the company to achieve yearly sales nearly to $"6! million per store.
3 inegal had performed e)cellent ob in the e)ecution of the strategy process at Costco. inegal had helped the company by spending more time in the stores, checked out various layouts and converse with employees to get to know how the things are going in the company. 4e helped the company by taking out various actions in stores to improve the condition of the stores. 4e performed three functions in the company as producer, knowledgeable critic and director. 4e went to stores for investigation for checking out the performance of store managers and asked various 5uestions from them, about the performance of stores and told them to do more work on their weak areas. 8n this case, when inegal found answers to his 5uestions less than e)pected than he told store managers to do more research and come back with sufficient information. 4is tremendous savvy skills show that he managed the company e)cellently in order to achieve high profitability. *t last, it can be concluded that inegal had performed e)traordinary in managing the strategic leadership.
(. What core $alues or business principles is "im #inegal stressing at Costco?
There were two core values or business principles appear to place out at Costco. The main business principle activity of Costco is to provide high value to users by offering global and local tag products at low prices. 8t is observed that the human resource management of the Costco was coordinating and integrating its employees very nicely. 8t can be seen from the case that comments of 0im inegal’s made it very apparent that he was very committed to capture these values as division of Costco’s organi9ation culture. 0im inegal wanted to say that these two principal activities reflected in working environment of Costco which makes them profitable throughout the world as compared to other conventional wholesalers and merchandisers. :rom the standpoint of warehouse club retail, Costco clearly is the leader in this market. Their strategy has been effective in making them the choice of consumers. Costco’s winning strategy are keeping prices lower than the competition, treasure-hunt merchandising and compensation for their workforce. Cost co has been performing very well from a strategic perspective; by focusing on competitive pricing, a si9eable selection of products and treasure-hunt merchandising and higher inventory turnover, Costco has developed a franchise that has surpassed its competition like am’s club and #0 +holesale.
Cost co’s competitive advantage is due to its distinctive competencies which are culmination of successful e)ecution of competencies over the last ten years, brand image, e)cellent financial position, developing a niche market and also by its ability to read regional customers tastes and preferences. 8t has been able to bring high 5uality goods and services to the market at the lowest possible prices every day, and done it with integrity at every level of the company while valuing the interests of the stakeholders. They have both the business strategy and operational capacity that allows them to perform remarkably well in passing along savings to their customers. Costcoivalry among wholesale club competitors —a strong to fierce competitive force
The rivalry among Costco, am’s Club, and #0’s +holesale is vigorous and likely to remain so. *ll 6 competitors are striving to attract more members and to offer merchandise selections and a shopping e)perience that will cause members to make more store visits and?or spend larger sums per visit. >ivalry is centered on two main factors@ A Bow prices consistently below retail price levels and the prices charged by retail discountersDE prices had to be at Fbargain levelsG in order to attract members and provide them with considerable cost savings enough to more than cover membership feesD A
roduct 5uality and selection o Herchandise was generally of good to e)cellent 5uality and often included name brand products supplemented with an assortment of private-label products o +arehouse clubs stocked 6,!! to %,!! items, a portion of which were everchanging as company purchasing personnel ran upon one-time buying opportunities. Typical supermarkets stocked about %!,!!! items and a +al-Hart upercenter or uperTarget might have as many as "!,!!! items for shoppers to choose from.. o The product lineup included such items as appliances, electronics, office and restaurant supplies, auto supplies, toys and games, light bulbs, batteries, cookware, tools, apparel, IJIs, books, canned and fro9en foods, fresh meats and seafood, fresh fruits and vegetables, bakery items, beverages, wines, vitamins and personal care products, cleaning supplies, and paper products. o election within each category was limited usually to fast-selling models, colors, and large- 5uantity si9esD. To encourage members to shop more fre5uently and create a bit more of a one-stop shopping appeal, both Costco and am’s Club operated ancillary businesses within or ne)t to most warehousesEgas stations, optical centers, photo centers, print and copy centers, pharmacies, food courts, and the like.
To a much lesser e)tent, rivalry also revolved around attracting members?shoppers by means
of convenient store locations, a comparatively pleasant big-bo) shopping environment, and maybe even satisfactory checkout speeds. 6 /actor intensifies7
A
*ll 6 club rivals are aggressively pursuing top-line revenue growth chiefly by opening new stores, attracting more members at both new and e)isting stores, and endeavoring to grow sales revenues and shopper traffic at e)isting storesD. The industry is becoming somewhat mature which strengthens rivalryD; achieving fast revenue growth is heavily dependent on the speed with which rivals open new stores and grow sales at e)isting stores.
A Low switching costs on the part of consumers membership fees were very similar from club to clubD. 8n large metropolitan areas with stores of two or more of the 6 competitors, it is easy for households and businesses to switch their memberships from one club to another or to belong to both and then shop at whichever club had the best dealsD. A
Weak to modest degrees of product line differentiation from club to club. There is considerable similarity in the merchandise offerings of all three clubs which enhances rivalryD.
+ Factor weaken:
The differentiation that e)ists from club to club as concerns product selection, shopping ambience, and convenient access to store locationsDEthis differentiation poses a barrier to switching to the e)tent that some bargain-hunting shoppers prefer shopping at one club versus another when there are multiple clubs to choose from in their shopping area, thus acting to weaken rivalry. #ut this one factor is not powerful enough to overcome the combination of factors acting to strengthen rivalry * Threat of entry into the warehouse club industry in North America—a weak competitive force
The barriers to a new entrant are 5uite high@ A
Costco and am’s have to be considered formidable competitors and enoy si9able scale economies not easily accessed by a newcomer.
A
Capital re5uirements are si9ableEif an entrant wishes to compete on a scale comparable to the industry incumbents.
The marketing and advertising costs to attract members and build a significant volume of sales and otherwise overcome the loyalty of e)isting warehouse club membersD would seem to be significant. Moreover, the three industry incumbents are in a strong position to vigorously contest a newcomer’s entry !n short, the pool of candidates for fresh entry into warehouse club industry is small and the likelihood of fresh entry in K!"K and beyond is e5ually small, making the competitive pressures
from the threat of new entry virtually non-e)Ltent. 3 Competition from substitutes Ea strong to fierce competitive force The substitutes for being a member of and shopping at wholesale clubs are a relatively strong competitive force, given that
A
*cceptable substitutes are readily available.
A
#uyer costs to switch to substitutes are minimal e)cept for the higher prices that may have to be paidD.
A
Hany consumers are familiar with and comfortable with shopping at substitute retailers?discounters.
A
The merchandise that can be purchased at substitute retailers?discounters is 5uite comparable to the merchandise sold by wholesale clubs.
* The bargaining power and leverage of suppliers to the warehouse club industry—a moderate to weak competitive force
The suppliers consist mainly of the manufacturers of the products that warehouse clubs elect to stock. +hile a big fraction of these manufacturers are undoubtedly large enterprises with wellrecogni9ed brand names and good reputations among consumers, they are not necessarily in a strong bargaining position that allows them to dictate the terms and conditions on which they will sell theL wares to the warehouse clubs. Costco and am’s, in particular, have considerable buying power and bargaining leverage in obtaining the merchandise they desire to stock. 8f a particular manufacturer chooses not to sell to the wholesale clubs at an attractively low price such that the clubs can, in turn, charge what are perceived by members as Fbargain pricesG and save their members moneyD, they can purchase goods for their stores from other more willing and price competitive sources. 8n Costco’s case, no single manufacturer supplied a large percentage of the merchandise that Costco stocked which lessens any one manufacturer’s bargaining powerD. Horeover, because the items that the wholesale clubs stock produce high volumes of sales for manufacturers, manufacturers tend to be an)ious to sell their goods to the wholesale clubsEin other words, the wholesale clubs are big volume buyers and thus have substantial bargaining clout with their suppliers. Costco management b elieved that if its current sources of supply became unavailable for reasons of high supply prices or whateverD, the company could switch its purchases to alternative manufacturers without e)periencing a substantial disruption of its businessEsuch ease of switching suppliers weakens supplier bargaining power and strengthens the bargaining power of a wholesale club. Conclusion@ The suppliers to the wholesale clubs tend to be a relatively weak competitive forceE weak in the sense of being unable to put much pressure on their wholesale club customers in negotiating for better? higher prices and other more favorable terms of sale. * The bargaining power and leverage of customers "the members of wholesale clubs#—a very weak competitive force
+holesale club members buy in relatively small 5uantities; no single member accounts for a meaningful fractions of a wholesale club’s total sales. Conse5uently, individual members of wholesale clubs have essentially no power or leverage to bargain with a wholesale club over the prices they will pay or over other terms and conditions of sale. * member can certainly not purchase a particular item and obtain it for another retailer?discounterD and can also choose not to renew their membership, but this does not convey any bargaining power of conse5uence any customer of any company in any industry can always refuse to purchase and take their business elsewhereD. o even though a member’s switching costs are relatively low, it does not result in having the clout to go to the Customer ervice desk and bargain down a club’s posted price on an item or otherwise obtain any benefit beyond what their membership card provides. A #uyers?members are small, numerous, and buy in relatively small 5uantities. A
There’s no evidence indicating that clubs are fre5uently so overstocked with certain merchandise that a single member is able to bargain down the posted price of overstocked items.
3333 Conclusions concerning the overall strength of competitive forces: Competitive pressures associated with rivalry and substitutes are definitely the two strongest of the five competitive forces. Competitive pressures from the other three competitive forces are weak. 1n the whole, competitive pressures confronting wholesale clubs are FnormalG or reasonableEnot so strong as to unduly crimp profit margins but certainly strong enough to prevent wholesale clubs from earning well above-average profits and attracting outsiders to entry the industry. To some large etent! the competitive market success of a wholesale club is a function of keeping its costs to buy goods and operate its stores low enough to be able to charge "bargain prices #! attract new members! and still achieve acceptable profitability. . How well is Costco performing from a financial perspecti$e? o some number4crunching using the data in case %'hibit 1 to support your answer. se the financial ratios presented in 8able (.1 of Chapter ( *pages 34+ to help you diagnose Costco’s financial performance.
The financial and operating summary in case ()hibit " indicate that Costco’s financial performance during the K!!!-K!"" period has been good. =et sales increased from $6".& billion in fiscalK!!!to $M7.! billion in fiscal K!"", e5ual to a compound average growth rate C*N>D of '.&O since K!!!; this growth rate is respectable given the tough economic conditions that e)isted in K!!M-K!"". Total revenues sales plus membership feesD increasedfrom$6K.KbillioninfiscalK!!!to $MM.'billion in fiscal K!"", e5ual to an average annual compound rate of '.7O from K!!! through K!"". =et income rose from $&6" million in K!!! to $ ".%& billion in K!"", a compound average growth rate of7.'O. Iiluted net income per share increased from $".6 in K!!! to $6.6! in K!"", a compound average growth rate of M. O. Costco’s profitability and e)pense ratios are shown below@ K!"" Herchandise costs as a O of net M'.6O sales '.MO elling, general, and administrative e)penses as a O of total revenues 1perating income as a O of total K.7O revenues operating profit marginD ".&O =et income as a O of total revenues net profit marginD "".&O >eturn on e5uity net income as a O of stockholders’ e5uityD >eturn on assets net income as a .O O of total assetsD Current ratio "."%
K!"! M'.KO
K!!' M'.KO
K!!M K!! M'.O M'.%O
"!."O
"!.KO
'.&O '.O
K.7O
K.O
K.7O K.MO
".7O
".O
".MO K.!O
"K.!O
"!.MO
"%.!O "K.!O
.O
%.'O
&.KO &.%O
"."&
".""
".!7
".KK
Iays of inventory
6".K
6!.6
6".&
K'.!
6".&
A
1perating income as a O of total revenues operating profit marginD has remained stable during the K!!-K!"" fiscal year period, dipping only slightly during the depth of the recession in fiscal K!!'; but the operating margin is materially lower than in fiscal K!!!.
A
=et income as a O of total revenues net profit marginD has eroded slightly as compared to the levels in K!!!, K!!, and K!!MEbut the fiscal K!!'-K!"" percentages still seem decent in light of the unusually weak economic conditions that prevailed.
A
>eturn on e5uity dropped from "%.'O in fiscal K!!! to "K.!O in fiscal K!!, climbed back to "%.!O in fiscal K!!M, and bounced around in the "!.MO to "K.!O range in fiscal years K!!'-K!"".
A
>eturn on assets declined from 7.6O in fiscal K!!! to &.%O in fiscal K!!, to &.KO in fiscal K!!M, to %.'O in fiscal K!!', and then rose marginally to .O in both fiscal K!"! and K!"".
A
The company’s li5uidity is ade5uate, as indicated by the slightly above ".! current ratio levels in fiscal years K!!-K!"".
A
Iays of inventory at Costco have remained 5uite stable in the K'-6K days range; inventories of about "-month seem very reasonable. Costco management appears to have done a good ob of inventory control.
A
8n fiscal K!"", Costco’s long-term debt was $K." billion and has stayed about $K.K billion for the past four fiscal years; long-term debt as a percentage of stockholders’ e5uity in fiscal K!"" was a modest "7."O. The company does not have a debt problem.
=et cash provided by operating activities at Costco has trended upward over the past fiscal "" years, climbing from $ ".!7 billion in fiscal K!!! to $ ".77 billion in fiscal K!! and to $6.K! billion in fiscal K!"". Conclusions regarding the data in case ()hibit "@ Costco’s financial performance, while acceptable, could certainly be better. rofit margins, return on e5uity, and return on assets have gotten skimpier since K!!! and NP* e)penses as a O of total revenues seem to be creeping upward. =one of the performance measures show an alarming deterioration in light of the weak economic environment that confronted the company throughout fiscal years K!!'-K!"". Costco’s biggest geographic market and also its biggest source of profit from a total dollar standpointD is the Qnited tates. 8n fiscal K!"", Costco’s operating profit margin operating income as a O of total revenue, including membership feesD was K." O in the Q.., %.%O in Canada, and%.KO in all other countries. 8n fiscal K!"!, Costco’s operating profit marginD was K.KO intheQ.., %.%O in Canada, and 6.O in all other countries. :rom fiscalK!! through fiscal K!""@ A
Total revenues grew at a C*N> of 7."O in the Qnited tates
A
Total revenues grew at a C*N> of "6.O in Canada
A
Total revenues grew at a C*N> of K".KO in all other countries with warehouse
:rom fiscal K!! through fiscal K!""@ A
1perating income grew at a C*N> of 6.!O in the Qnited tates
A
1perating income grew at a C*N> of "7.!O in Canada
A 1perating income grew at a C*N> of K&.MO in all other countries with warehouses Costco spent $M7& million on capital e)penditure in the u.s. in fiscal K!""; in Canada capital e)penditure were$ "%% million, and elsewhere capital e)penditures were $K7!million. 8n both fiscal K!"" and fiscal K!!', Costco spentover$K!!million on capital e)penditures outside theQ.. and CanadaEwarehouse e)pansion outside =orth *merica is a Costco priority
. #ased on the data in case ()hibits ", , and &, is Costco’s financial performance superior to that at am’s Club and #0’s +holesale2
:inancial performance is the level of performance of a business over a specified period of time, e)pressed in term of overall profits losses during that time and they were shown clearly at the e)hibit ", and &. :rom the e)hibits, we can see that Costco’s financial performance superior to that at am’s Club and #0’s +holesale, two of its largest competitors. :irst is the net sales, Costco has $6",&K" million sales in K!!! and it increased to $M7,!%M million in K!"". +ith the am’s club, they had $K&,7'M million in K!!" and only $6,7' million in K!"K. #0’s +holesale had the poorest financial performance, compared to K above companies. They had $M,KM! mil sales in K!!7 and $"!,&66 in K!"". +e can also concern about the average annual growth at warehouse open more than a year. +ith Costco, e)cept for the year K!!' with -%O, they all made a positive growth, even "!O in K!"". am’s Club and #0’s +holesale also had some positive growth rate year, but it’s much more lower, .KO and %.%O relatively . 4ow well is Costco performing from a strategic perspective2 Ioes Costco enoy a competitive advantage over am’s Club2 1ver #0’s +holesale2 8f so, what is the nature of its competitive advantage2 Ioes Costco have a winning strategy2 +hy or why not2
:rom the standpoint of warehouse club retail, Costco clearly is the leader in this market. Their strategy has been effective in making them the choice of consumers. Costco’s winning strategy are keeping prices lower than the competition, treasure-hunt merchandising and compensation for their workforce. Cost co has been performing very well from a strategic perspective; by focusing on competitive pricing, a si9eable selection of products and treasure-hunt merchandising and higher inventory turnover, Costco has developed a franchise that has surpassed its competition like am’s club and #0 +holesale. Cost co’s competitive advantage is due to its distinctive competencies which are culmination of successful e)ecution of competencies over the last ten years, brand image, e)cellent financial position, developing a niche market and also by its ability to read regional customers tastes and preferences. 8t has been able to bring high 5uality goods and services to the market at the lowest possible prices every day, and done it with integrity at ever y level of the company while valuing the interests of the stakeholders. They have both the business strategy and operational capacity that allows them to perform remarkably well in passing along savings to their customers. Costco
/es, the price of Costco’s are too low. *t Costco, one of Hr. inegal’s cardinal rules is that no branded item can be marked up by more than "% percent, and no private-label item by more than " percent. 8n contrast, supermarkets generally mark up merchandise by K percent, and department stores by ! percent or more. FThey could probably get more money for a lot of items they sell,G said (d +eller, a retailing analyst at Think(5uity. #ut Hr. inegal warned that if Costco increased markups to "& or "M percent, the company might slip down a dangerous slope and lose discipline in minimi9ing costs and prices. Hr. inegal, whose father was a coal miner and steelworker, gave a simple e)planation. F1n +all treet, they’re in the business of making money between now and ne)t Thursday,G he said. F8 don’t say that with any bitterness, but we can’t take that view. +e want to build a company that will still be here ! and &! years from now.G Costco understands its customer. >ather than trying to ma)imi9e profits, it focuses on lowering prices by applying a ma)imum "O markup to the goods it sells even when it could get more. 8n inegal’s words, FHany retailers look at an item and say, F8’m selling this for "! bucks. 4ow can 8 sell it for ""2G +e look at it and say, F4ow can we get it to nine bucks2 *nd then, 4ow can we get it to eight2 +e understand that our customers don’t come and shop with us because of the anta Claus or the piano player. They come and shop with us because we offer great valuesG. Hany people think Costco is in the business of selling products at low prices. +hile its prices are indeed low, that’s not its ultimate goal. Hark Ruckerberg stated in :acebook’s 81 prospectus, F+e don’t build services to make money, we make money to build services.G *t Costco, that translates to Fwe sell products ine)pensively not to generate revenue but to gain loyal members.G >emember, Costco is in the business of selling memberships. +ith an M&O renewal rate worldwide, it doesn’t have to sell too many new memberships to keep revenues rising. ummary /es, they have the policy of ma)imi9ing the marked price that is much lower than supermarkets and department stores. They try to get customers’ loyal rather than taking part in competitions. They get money from renewal customers at the rate of M&O globally. *lso focus on servicing, they make money to build services and aim at long-term plan.
1:. What do you thin! of Costco’s compensation practices? oes it surprise you that Costco employees apparently are rather well4compensated? ;etter compensated than employees at #am’s Club or ;"’s?
:rom my point of view, i think that Costco’s compensation practices are very impressive move to attract potential and talent people to come and work for the company. The salaries that the company payes their workers is pretty high in compared to other retailer such as +almart the number one rank in fortune !! boardD but still a lots customers have recommended that the Costco Corporation is one of the lowest-cost producer. 8n the other hand, they give their employees the benefit package which included health care, insurance and incentive for not only the staffs but also their family. 8t is not a very big surprise that Costco employees are rather well-compensated because it’s one strategic that the corporation used to gain the loyalty of long-term employees and e)pand the labor force. 0im inegal, the Costco co-founder, convinced that having a well-compensated workforce was very important to e)cuting Costco’s strategy sucessfully. 4e said,G imagine that you have "K!!!! loyal ambassadors out there who are constantly saying good thing about Costco, it will be a significant advantage for youS. aying good wages and keeping your people working with you is very good business.G Nood wages and benefits were said to be why employee turnover at costco typically ran under & to 7 percent after the first year of employment. Costco staffs are better compensated than at am’s Club or #0’s. Costco’s average wage is $"7 an hour, and while am’s Club didn’t release the wages of their employees, but still 8 found said that am’s Club employees make anywhere from M-""$ an hour and so is #0’s +holesale, depending on e)perience and ob. Costco
3 ()pand the market share by e)ploring untapped market in Q and outside Q. 3 Haintain the good reputation of providing greater value to its customers. 3 Continue their effective strategies like high compensation to employees, low price and reliable 5uality productsS 3 8ncrease price fractionally.
