Costco

Management Case Analysis

Presented By:Muhammad Tahir khan (18036)

Kamil Ramzan Ali (18041)Muhammad Faraz Khaliq (7538)

Salamat Ali (8933)

OVERVIEW

Founded by Jim Sinegal & Jeff Brotman in 1983 4th Largest retailer in the US 7th Largest in the World

Wholesale Club & Warehouse Industry:- Industry estimated to be $110 Billion total- Industry growing 20% faster than retailing as a whole

OVERVIEW

Costco’s Industry Standing:

Costco has 55% share of US & Canada Sam’s Club: 36% share BJ’s Wholesale Club: 9% share Annual sales per store average $128M Two times larger than chief competitor Sam’s

Club ($67M)

Competitor Analysis

Primary Competition: Sam’s Club BJ’s Wholesale

Factors of Competition: price, merchandise quality, location & membership services.

Secondary Competition: Retail Discounters: Wal-Mart & Dollar General General Merchandise Chains: Target & Kohls Low-Cost Specialty Stores: Lowe’s, Home Depot, Staples,

Best Buy, Circuit City, Barnes & Noble

MISSION& GOALS

Mission:To continually provide our members with quality goods and services at the lowest possible prices

Goals:

Obey the Law Take Care of Members Take Care of our Employees Respect our Suppliers Reward our Shareholders

Q-1: What is Costco’s business model? Is the company’s business model appealing? Why or why not?

Business Model:

Generate high sales volumes Rapid inventory turnover High Productivity of well compensated employees Direct Purchasing from Manufacturers or “Grey Market” to obtain lowest price

points for products.

Appealing :Yes !!!!

By gaining 2% early payment Discounts Less working capital requirement Offer national brand and select private-label 20% less price

Question 2: What are the chief elements of Costco’s strategy? How good is the strategy?

Costco has three components;› Low pricing› Limited product line and limited selection› “Treasure Hunt” shopping environment and high

quality product.

Best compensation packages enable to low price products by boosting its employee’s productivity level and reducing employee turnover.

FUNCTIONAL STRATEGY

High Sales Volume & Rapid Inventory Turnover: Allows Costco to sell and receive cash for inventory

before it had to pay many of its merchandise vendors.

Efficient Purchasing: Direct purchasing from Manufacturers in high

volume

Efficient Distribution: Many products routed directly to warehouse stores

BUSINESS STRATEGY

Decentralized Management: This ensures each store is in touch with their local clientele

and offers products that appeal to them. Pricing:

Philosophy: keep wowing customers with low prices.

Product Selection : Provide members with a selection of only about 4,000

items in a wide variety of categories. (compared to 150,000 to Wal-Mart & Target).

Treasure Hunt Merchandising  Out of the 4,000 items, about 1/4th of product offerings are

constantly changing.

CORPORATE STRATEGY

Ancillary Businesses To encourage member to visit more frequently To compete with other Warehouse retailers for superior

Service offerings.

CORPORATE EXPANSION Domestic: Opened 68 new warehouses in the U.S. between 2002-2006, 16 new stores in the beginning of 2007 with plans to open

another 20-24 warehouses by the close of the year.

International: Opened 14 warehouses Internationally by 2007 In 2007 Costco had 102 wholly owned warehouses outside the

U.S

Question 3: Do you think Jim Sinegal is an effective CEO ? …………Cont…..

Sinegal is an effective CEO as shown by his goals to keep Costco as the fourth largest retailer in the United States and the eighth largest wholesales in the world.

Jim effectively crafted and executed its plans and is liable to be at top ranking . All stakeholders are motivated.

Crafting a strategy that aligns with the stated vision and objectives. The strategy of a company is all about how the company will achieve its objectives for growth. It is never acceptable to simply do business the way it has always been done because the market changes, the industry evolves, and numerous other external factors make it absolutely necessary for a business to evolve to retain or gain market share

Question no 7: How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive…..

The three components of the company’s strategy are low pricing, limited product selection and what the company calls “treasure-hunt merchandising”, or high-end products acquired in closeouts and liquidations.

Costco is beating both Sam’s Club and BJ’s wholesale in net sales and market share

One other differentiating factor is that it places a premium on a comfortable shopping experience with aisle markers, self checkout, express lane and video sales aids.

Question No. 8 Are Costoco’s Prices too low? Why or why not ?

Costco’s mission statement is to focus on bringing high quality goods and services to the market at the lowest possible prices every day, but to do it with integrity at every level of the company while valuing the interests of the stakeholders

To achieve the price leadership they reduce handling and storage cost,  they maintain in-stock positions without being overstocked and transition seasonal merchandise,  they utilize just-in-time principles when ordering merchandise to minimize the cost of inventory, keep best value pack product to assure low prices through volume buying, expense reduction and low gross margins etc.

Question No. 9 Does Costco Pay its employees too much? Does it make sense……..

Unlike their competitor Costco pay well to their employees.

They have unique way or mechanism that helps them keep the price lower than that of competitors and they can still afford to pay 48 percent higher salaries to their employees than their major competitors mainly Wal-Mart.

WORK FORCE

Take Care of Our Employees “Our employees are our most important asset” –Sinegal They are the key to executing the strategy successfully.

Provide Competitive Wages Starting hourly wage: $12 Average hourly wage: $17-18

Results of Taking Care of Employees: 120,000 employees spreading a positive message about Costco High employee retention (6% turnover rate) Higher productivity from workers

RECOMENDATIONS

Membership Strategy Adjustments:

Non-Member Day 

A quarterly event that allows non-members a trial day at the store. Purpose: allowing trial raises probability of a prospect becoming a

club member

“Household” Plan

$20 for every additional household member

Purpose: use existing increasing membership rates relationships to leverage new ones

RECOMENDATIONS

Credit Cards:

Current payment methods: cash, check, debit, and Costco Credit

Recommended: Allow The Use Of Credit Cards Accept credit cards but charge a 2% fee purchasing by

credit.

Competitors Have Found This Successful:

Sam’s Club: A week after the initial acceptance of MasterCard, the average checkout sales increased 35%

RECOMMENDATIONS

Advertising:

TV Brand Advertising Awareness & Reminder Ads In the Northeast and West Coast regions where locations are clustered in order to receive marketing

efficiencies Seasonal TV advertising & periodic direct mail promotions of

Treasure Hunt items

Competitor Use of Advertising:

Sam’s Club: spends $50 million annually on national TV ads, companion print ads, and direct mail promotions

RECOMMENDATIONS

Growth Opportunities: We recommend entering into China & Brazil next:

Sam’s Club has taken the Pioneering Costs of introducing Warehouse Retail into these societies

China is predicted to have a five-fold increase in urban consumer spending over the next 20 years to $2.3 trillion a year.

Swot Analysis

Strength Low product and services         Internal (Home grown) top management team in majority          Employee’s turnover within a year of recruitment is just six percent          Unique ability to keep overhead cost low resulting in low prices of goods and services          Loyal and affluent customer base          High inventory turnover comparing to its competitors          Consistent return on sales and return on assets          Incredible return policy

Opportunities       Costco’s operations is mainly targeted in countries where there is high GDP and high

disposable income of the consumers (Canada, U.S.A and Japan) with low inflation rate in the countries

         Serves the democratic countries with political and governmental stability           Rapid growth in membership         Possibility of international expansion          Advantage of economic downturn           Increasing brand awareness          Positive image in terms of employees pay and social responsibility

Swot Analysis

Weakness Comparatively less attractive store layout for luxury items          Weak advertisement base leading to the inability of reaching full range of

membership base.          Declining or inconsistent profit margins           Not widely scattered around the world than its competitors          Location is not attractive in terms of real-estate          No self-checkout          Primary focus on business customers rather than individual customers

Threat     Costco cannot attract people who are below poverty line due to its

membership fees and bulk purchase          Not well diversified in terms of geography (presence)          High competition from Sam’s Club and BJ          Highly dependent on United States and Canadian market.   Largely dependent on vendors for  timely supply of  quality merchandise at

reasonable price           High market expectation in terms of price, quality and financial performance

Thank You !