Case 4 Costco.docx - Costco case study PDF

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Case 4 | Costco Wholesale Corp. in 2016: Mission, Business Model, and Strategy 1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? Costco has a business model that is centered around “generating high sales volumes and rapid inventory turnover by offering low prices on a limited selection of nationally branded and private label products in a wide range of merchandise categories.” This model seems to be appealing because it matches the objectives and mission of the company. Also, the company knows the needs and wants of their customers and has a modeled the business to fit them. They are aware that their customers want a wide range of products. They’ve found a way to provide that at a low cost by offering a limited amount of brands in each category. They also know that consumers like products that are readily available when they want or need them. So they’ve appealed to this concept by having fast inventory turnover through their relationship with suppliers. Manufacturers deliver directly to the warehouses or depots within 24 hours of order placement. 2. What are the chief elements of Costco’s strategy? How good is the strategy? The chief elements of the strategy includes: low prices, limited selection of nationally branded and private label products, treasure hunting shopping experience, low costs, and geographic expansion. Low Prices: Costco engages in competitive pricing which makes the net income low. The strategy isn’t that great in this area, but Costco has found a way to compensate for this. To cover the loss in net income due to low pricing, Costco generates revenue through the large amount of members that pay membership fees. Limited Brand Selection: Costco is able to maintain low costs through the limited selection of brands they offer. This has its short comings because customers may want a larger variety of brands to choose from. But Costco has found a way to compensate for this as well by providing variety in the amount of product and service categories it offers. Treasure Hunt Shopping Experience: Many customers continue to come to Costco because of the treasure hunting experience they get when shopping for items. Costco appeals to this by setting the store up in ways that contribute to this concept. Low Cost: Costco has found several ways to reduce costs, but the major way is through efficiency. The management team is very hands on in analyzing patterns of the company and is always trying to find ways to improve. They’ve found ways to cut costs by increasing inventory turnover, implementing environment friendly practices and appliances, reducing employee turnover by being a great employer, offering what customers are looking for, etc. Geographic Expansion: Costco is always looking for the next opportunity to expand into other countries and new markets. They were set to build 32 more warehouses in early 2016. They would be adding this to the whopping 698 warehouses they already had at the time. 3. Do you think Jim Sinegal was an effective CEO? What grades would you give him in leading the process of crafting and executing Costco’s strategy? What support

can you offer for these grades? How well is Craig Jelinek performing as Sinegal’s successor? Refer to figure 2.1 in Chapter 2 in developing your answers. Jim Sinegal was definitely an effective CEO, worthy of an A+ grade. He developed a clear strategic vision, mission, and core values for the company and set clear objectives to implement these factors. His mission was to provide quality goods and services at the lowest prices possible and he accomplished this by maintaining low costs. Sinegal was excellent at monitoring developments, evaluating performance, and initiating corrective adjustments. He would make personal, daily visits to warehouses around the world to see if they were functionally properly and efficiently. He would ask store managers about sales and make changes if necessary. He had a very direct approach with employees and customers as well. He would dress casually, greet customers and employees, and answer his own phone. So he definitely was a grade A CEO. 4. What core values or business principles did Jim Sinegal stress at Costco? Sinegal implemented five main business principles into the company:  Obey the law  Take care of our members – Costco really appreciates their members and understands that they play a huge role in ensuring the success of the company. They’re main goal is to refrain from violating the trust of members.  Take care of our employees – They believe that the employees are the most important asset to the company.  Respect our suppliers – They see suppliers as partners in business and want to ensure the success of their suppliers along with their own.  Reward our shareholders 5. What is competition like in the North American wholesale club industry? Which of the five competitive forces is strongest and why? Use the information in Figures 3.43.8 from Chapter 3 to do a complete five-forces analysis of competition in the North American wholesale industry club. Competition is very intense amongst three major competitors in the wholesale club and warehouse portion of retail in North America. The entire industry was worth $172 billion in 2015. Costco has 59%, Sam’s Club has 34%, and BJ’s Wholesale Club (along with others) has 7% of the warehouses in North America. These companies compete based on price, merchandise quality and selection, location, and member service. Competition Amongst Sellers in the Industry - After looking at the competition amongst sellers, we see, Sam’s Club is quickly gaining territory in the industry. Sam’s Club provides lower prices than Costco, but the products aren’t as upscale. So they’ve targeted the market that doesn’t put quality over price. They also provide a wider selection of brands than Costco. This is where their competitive advantage emerges. While competition is kind of intense, it is a slow progression for other companies that are trying to obtain Costco’s position. As of now, Costco doesn’t have too much to worry about, but they should just keep an eye on Sam’s Club. Threat of New Entrants -There are currently three major companies in the wholesale industry in North America. The threat of new entry is very low. This is mainly because the pool of entry candidates is small, meaning not too many companies have the capacity

to enter this industry. BJ’s Wholesale Club is the third largest membership warehouse in North America, yet it only has 210 warehouses compared to Costco who nearly has 500 in the United States alone. They started the company in the 1980s along with the other two major companies, and they still have not reached the same level. Even Sam’s Club has a lot of catching up to do to Costco. So it’s evident that anyone else who tries to come into this industry will come to the same conclusion. Substitutes from Other Industries -Now looking at the sellers in other industries. There are sellers in other industries that sell the same products at lower prices, so the competitive pressures from sellers of substitute products do exist. But it isn’t that great of a threat, because Costco offers upscale products at reasonable prices while these other locations like Dollar General and Target focus on affordable products and wide range of brands. The substitutes may not work as well or have the same quality that the typical Costco customer is looking for. So this isn’t that threatening. Supplier Bargaining Power -In this industry, it appears that suppliers work cooperatively with the warehouses. So no threat is posed in this area. This is partially because the warehouses own some of the distribution facilities they buy from. They also have direct buying relationships with brand-name producers. They receive stock from so many different suppliers, that if they were to lose one it wouldn’t make much of a difference. This also allows the warehouses to have somewhat of an upper hand when it comes to the supplier bargain power, but they typically keep the relationship mutually beneficial. Buyer Bargaining Power -The buyers in this industry have a great deal of bargaining power. This appears to be the strongest out of the five competitive forces. This is due to the industry being modeled specifically after the needs and wants of its target market. The prices are so competitive because customers are searching for the best value at the best price. If buyer bargaining power wasn’t strong, Sinegal wouldn’t be pricing his products so low when he could really raise the price as critics have pointed out. Because he chose to go against what business experts advised, he has created a strong following in the loyalty of his customers. 6. How well is Costco performing from a financial perspective? Do some numbercrunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 66-68) to help you diagnose Costco’s financial performance. Costco is performing well from a financial perspective. In the fiscal year of 2015, they generated net sales of $116.6 million and a net income of $2.3 million. Each year the numbers are increasing at an increasing rate. Because they are expanding and adding warehouses all around the world, their operating expenses have increased. But these costs are proportionately low compared to the profits. Overall, the company is doing great financially despite the financial minor financial losses they are experiencing due to expansion. 7. Based on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that at Sam’s Club and BJ’s Wholesale? Costco is the leading wholesale club in the United States with net sales of $116.6 million. Sam’s Club comes closest, but is far behind at $58 million in sales. BJ’s Wholesale Club generated $10.6 million in net sales in the same year (2015). They had an operating income of $3,624 million while

Sam’s Club and BJ’s Wholesale generated operating incomes of $1,976 million and $208 million. They had a total of 697 warehouses around the world in the middle of 2015, so it’s understandable why they have so far ahead financially. Costco clearly has the superior position when it comes to financial performance. 8. Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially successful? Why or why not? By looking at this data, we can’t determine whether or not Costco’s expansion outside of the U.S. is financially successful because the numbers are very mixed. The food merchandise category was the only category that increased in sales. Ancillary and other merchandise categories remained stable while sundries, hard-lines, and soft-lines decreased in sales. As the warehouses increase, the financial profit decreases or remains the same with the exception of food merchandise. 9. How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam’s Club and/or BJ’s Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not? Costco is doing tremendously well from a strategic standpoint. They’ve found ways to lure customers in through their low pricing strategy. Most companies do this by cutting costs in the quality of the products. But Costco has taken another route by offering less brand-names to choose from. While this may cause them to lose some customers, it allows them to bring in proportionately more customers. Many people are drawn to the treasure-hunt merchandising experience. Every visit proposes a new deal so they keep coming back to see what’s new. Because customers keep coming back, Costco is able to expand at a rapid rate. They have the objective of increasing sales in each store by 5% which is a very reasonable, measurable, and specific goal. They won’t have to use much advertising to do this either, because Costco generally sales itself through word-ofmouth from satisfied customers. There are many more factors that contribute to Costco’s winning strategy. A major part of it comes from their ability to understand the needs and wants of their customers and employees. This winning strategy has given them the competitive advantage over Sam’s Club and BJ’s Wholesale. This competitive advantage is their ability to provide high quality products and services at low prices with low costs. The other companies provide lower quality products at lower prices, but they haven’t kept costs as low as Costco has. 10. Are Costco’s prices too low? Why or why not? Costco’s prices aren’t too low. The company is built on being a low-price leader. If they were to raise prices, it would go against their strategy and cause them to lose their competitive advantage. They have successfully obtained low prices through their ability to maintain low costs. The only way their prices would be considered low, is if they weren’t able to compensate for the loss they experience due to their low prices. But since they are, their prices aren’t too low. 11. What do you think of Costco’s compensation practices? Does it surprise you that Costco employees apparently are rather well-compensated? Costco’s compensation practices are very impressive. You don’t find benefits like that at the average large retail companies. It does surprise me that employees are well-compensated because most large retailers like to cut costs by cutting benefits to employees or cutting the amount of employees all together. But Costco understands the value of their employees and would

like to reward them for their service. They are aware that if they provide their employees with proper compensation, it will benefit them in the long-run. Happy employees means happy customers. And happy customers means happy pockets. In this company, it seems they have grasped the concept of mutual benefits. (“You scratch my back, I scratch yours.”) 12. What recommendations would you make to Costco top management regarding how best to sustain the company’s growth and improve its financial performance? Costco is a great company that is always changing to fit the needs and wants of their customers. I would recommend that they focus more attention on their website. Online shopping is increasingly becoming a typical way of shopping. This will give Costco a chance to expand without the costs of building a new warehouse. It would be a great opportunity for the company and they could possibly expand some of their product categories....