Costcocase - Costco Case: GBA 490 PDF

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Costco Case: GBA 490...

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1. Costco implements a paid membership-based warehouse club business model that grants its customers access to a limited selection of lower priced nationally branded and Costco private label Kirkland Signature merchandise. Other elements of the business model include special limited time “treasure-hunt” product offerings, quick inventory turnover, volume purchasing, simplified distribution, decreased inventory handling costs, and the ability to rapidly sell inventory and receive cash that will then be circled back to Costco’s vendors as on-time or early payments. Costco’s business model is appealing because it gives customers exclusive access to low prices for a wide variety of product categories, high quality merchandise, and exciting deals on “treasure hunt” products while also proving itself as an exceptional formula for profitability. In 2017 membership fees accounted for $2.85 billion in revenues and the average annual sales summed to $170 million per Costco store. Costco saw a net income of $2.71 billion the same year. 2. Major players in the Costco strategy include low pricing to generate large sales quantities, limited selection of national brands and Kirkland Signature products, diversified merchandise categories, “treasure hunt” shopping experiences from a constant rotation of inventory selection, low operating and inventory costs, and expansion initiatives. The low pricing strategy at Costco includes a capping markup of brand-name products at around 14% and private label at 15%. The minimization of markups made Costco prices just above the break-even level, leaving Costco membership fees as a vital component in the company’s profit formula. Relying on membership fees as the major driver of revenue (69-75% of operating profits), allows Costco to provide low pricing that exceeds operating expenses at just the right amount. Costco’s merchandising strategy reflects a limitation of around 3,800 items compared to the 40,000-150,000-range seen on their competition’s shelves. Brand name items account for about 75% of Costco’s inventory, leaving 25% as Kirkland Signature private label products. The goal of the “treasurehunt” strategy is to intrigue shoppers into spending when they usually wouldn’t due to the “while it lasts” component. Avoiding high-priced real estate areas, using minimal economic store materials and layouts, strict control of entrances and exits, limited marketing costs, and inventory control are all aspects of Costco’s strategy in reducing operating expenses. Finally, Costco’s growth strategy is to increase store sales by at least 5% annually and to open additional warehouses. Costco’s strategy is sound because it provides a clear foundation that defines the company’s plans and highlights actions that they should prioritize. Following the strategy has also made Costco profitable and has built consumer loyalty. 3. Jim Sinegal was an effective CEO and, in my opinion, receives an “A” in leading the process of crafting and executing Costco’s strategy. Sinegal played a major role in turning a startup venture into the third largest retailer in the US, seventh internationally, and the leading company of the discount warehouse and wholesale club industry. Craig Jelinek, Sinegal’s replacement, would also receive an “A” because the company’s revenue grew from $89 billion and 598 membership warehouses in 2011 to $126.2 billion and 741 membership warehouses in 2017. 4. Jim Sinegal pushed several principles as core values of Costco. These included obeying the law, taking care of members, taking care of employees, respecting suppliers, and rewarding shareholders. 5. The top competitors in the wholesale club industry include Costco, Sam’s Club, and BJ’s Wholesale. In the US and Canada, the three companies accounted for $198 billion in sales total and cumulated over 1460 warehouses in the year 2018 in the US and Canada. Costco held around 64% of the market share while Sam’s Club amounted for 19% and BJ’s Wholesale plus others at 7%. The industry is

expected to grow 4% annually through 2022. The strongest component within the five forces model lies within the Rivalry among Competing Sellers segment because rivalry intensifies as competitors become more equal in capability and size. The buyers segment for the wholesale industry includes individual households, bargain-hunters, large families, small business owners, churches, nonprofits, small restaurants, and caterers. Suppliers include national brand-name producers and manufacturers of the Kirkland Signature products. Potential entrants of the market include possible wholesale venture agendas by Target and the like and specialty grocery stores that offer products specific to market niches. 6. On the surface, Costco seemed to have a successful financial performance. A net income at $2.71 billion, average sales revenue of $170 million per store, membership fee revenue at $2.85 billion, and an operating income of $4.11 billion revealed some strength of Costco’s financial standing in 2017. In one year, Costco saw a net sales growth of $10.1 billion, a membership fee revenue growth of $207 million, and a $439 million growth in operating income. However, operating expenses rose $9.87 billion from 2016 to 2017, leaving a lower net profit margin of 2.1% and operating profit margin of 3.2%, but a decent net return on total assets of 7.47% with the inclusion of membership fees in 2017. 7. Compared to the competition, Costco’s financial performance is favorable. Sam’s Club drove in net sales of $59.26 billion and an operating income of $982 million while BJ’s wholesale had net sales of $12.5 billion and an operating income of $220.3 million. This leaves an operating profit margin of 1.65% for Sam’s and 1.76% for BJ’s Wholesale. Costco has a superior financial standing and growth compared to its rivals and enjoys a staggering market share of around 64% in the US and Canada. 8. Costco’s international endeavors left an operating profit margin of 4.48% in Canada and 3.82% in other international operations. Although operations in the US account for most revenues and operating income, Costco’s international agenda continues to grow and become profitable. 9. Costco is performing well among its competitors because it has enjoyed growth in its consumer base and financial portfolio over the past year. Costco’s competitive advantage over its competitors are its low prices, increasing market share, brand loyalty from its consumers, and employee compensation. A potential new competitive advantage Costco should see soon correlates to their sustainability endeavors. As the awareness of going green becomes more important to consumer demographics, Costco will see a growing consumer base as it takes additional steps to become more environmentally friendly. Costco’s strategy is a winning one because it has continued to grow and overcome break-even points. Costco’s strategy closely aligns to its core values and mission of providing high quality, low priced products to consumers looking to enjoy a wholesale club membership. 10. After evaluating Costco’s financial performance and mission, Costco’s pricing is neither too low nor too high. The pricing of products covers their expenditures just above the breakeven point, leaving membership fees as the major role in profitability. If Costco were to increase price points, they risk a loss of market share and segments of their consumer base. Costco prices play a big part in customer satisfaction and Costco’s competitive advantage, so raising them would have a detrimental effect on the company’s overall performance. 11. Costco’s employee compensation not only brings a competitive advantage but also reflects a vital piece of the company’s code of ethics. By compensating its employees better than its competitors, Costco can enjoy low employee turnover, higher trust, and a productive work environment. Costco’s compensation was surprising only because I was aware of how other competitors pay their employees.

After reading about Sinegal and Costco’s core values of treating employees well, however, anything short of great compensation would have been disappointing. 12. A significant recommendation for Costco’s top management would be enhancing their online shopping presence. They could offer a new subscription-based shopping experience for online consumers only, allowing the option to purchase in store membership cards if needed. Paying members would be able to shop online at no additional fee. By adopting an agenda for increasing an online presence, Costco can reach into untapped consumer segments both within the US and internationally....