Inception, Customization and Benchmarking of COSTCO

ANKITA MOHAPATRA

NIKITA JOHNSON

Introduction Founded in 1983

Fifth largest retailer in the U.S.

As of 2012, 573 warehouses in 40 states and 7 countries

Fastest growing company in the history among

American businesses

Costco Only company to achieve $6 billion in sales from zero in six

years

Founder Jim Sinegal coined as the inventor of the wholesale Club concept

Philosophy is to “keep members coming in to shop by wowing them with low prices.”

Does not engage in extensive advertisements or sale campaigns

Five Guiding Principles Obey the law

Take care of members

Take care of employees

Respect suppliers

Reward shareholders

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Product Diversification Core - Costco Wholesale

Warehouse Clubs and Superstores

Premium private-label products

Specialty - Consumer Services

Travel

Optical

Automotive

Financial Services

Loans

Insurance

Benchmarking

• Benchmarking is the process of comparing one's

business processes and performance matrices to

industry bests or best practices from other industries.

Dimensions typically measured are quality, time and

cost.

• In this way, they learn how well the targets perform

and, more importantly, the business processes that

explain why these firms are successful.

The comparison is made between Costco and

Walmart1 ) lower operating margin

2) advertisement

3) Policy of James D. Sinegal ,co-founder and

former COE of Costco

4) Costco doesn’t concentrate on volume

5) Turnover

6) Shrinkage/Employee theft

1 ) Costco has a lower operating margin

Costco keeps around a 3% operating margin,

which means for every dollar in sales they get 3

cents of profit before things like interest and taxes.

Walmart’s operating margin is around 6%, and

target’s is almost 8%.

2) Costco don’t advertise

In addition costco don’t advertise in that way

saves 2 percent a year in costs.

3) Policy of James D. Sinegal,co-founder and former COE

of Costco Mr. Sinegal’s elbows can be sharp as well. As most suppliers well know, his gruff charm is not what lets him sell goods at rock-bottom prices – it’s his fearsome toughness, which he rarely shows in public. He often warns suppliers not to offer other retailers lower prices than Costco gets.

When a frozen-food supplier mistakenly sent Costco an invoice meant for Wal-Mart, he discovered that Wal-Mart was getting a better price. “We have not brought that supplier back,”

4) Costco doesn’t concentrate on volume

A typical Costco store stocks 4,000 types of items,

including perhaps just four toothpaste brands, while

a Wal-Mart typically stocks more than 100,000 types

of items and may carry 60 sizes and brands of

toothpastes. Narrowing the number of options

increases the sales volume of each, allowing

Costco to squeeze deeper and deeper bulk

discounts from suppliers.

5) TurnoverCostco’s practices are clearly more expensive, but they

have an offsetting cost-containment effect: Turnover is unusually low, at 17% overall and just 6% after one year’s employment. In contrast, turnover at Wal-Mart is 44% a year’close to the industry average. In skilled and semi-skilled jobs, the fully loaded cost of replacing a worker who leaves (excluding lost productivity) is typically 1.5 to 2.5 times the worker’s annual salary. To be conservative, let’s assume that the total cost of replacing an hourly employee at Costco or Sam’s Club is only 60% of his or her annual salary. If a Costco employee quits, the cost of replacing him or her is therefore $21,216. If a Sam’s Club employee leaves, the cost is $12,617. At first glance, it may seem that the low-wage approach at Sam’s Club would result in lower turnover costs. But if its turnover rate is the same as Wal-Mart’s, Sam’s Club loses more than twice as many people as Costco does: 44% versus 17%. By this calculation, the total annual cost to Costco of employee churn is $244 million, whereas the total annual cost to Sam’s Club is $612 million. That’s $5,274 per Sam’s Club employee, versus $3,628 per Costco employee.

6) Shrinkage/Employee theft

For example, it had extremely low employee

shrinkage. While the industry average was

somewhere between 2 and 4 percent, Costco’s

was less than 0.02 percent. Managers believed that

their good wages and benefits were the reason

that employee theft was so low.

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