COSTCO CASE ANALYSIS

1. What is Costcos business model? Is the companys business model

appealing? Why or why not?
The Costcos business model is to generate high sales volume and rapid inventory
turnover by offering low prices on limited selection of national branded and select
private-label products in wide range of merchandise categories. Costcos offers
these products to their members who are of two types business members and
gold star members.
This business model is tempting because it gives a test to Costcos management to
continue to devise strategies and methods through which they can keep hold of
existing members and catch the attention of new members. Otherwise they will
suffer failure because there will be a risk that discontented members will not
renew their membership. This business model takes company towards total
quality management.

2. What are the chief elements of Costcos strategy? How good is the strategy?
Strategy is the organizations pre selected that means to achieve its goals or
objectives, while keeping in view current and future external conditions. Costcos
strategys elements are low prices, limited product lines and selection and treasure
hunt shopping environment.
Costcos is following cost leadership strategy which is good because on this base
they can compete with their competitors. By limited product lines and limited
selection they are offering limited 4000 items which are less as compared to its
competitors. Costcos is adopted market development strategy by capturing new
markets for existing products. Also it provides such product at low prices to its
members which they believe will not be available in next visit. This works as an
incentive and members try to take maximum advantage and therefore Costcos
sales volume increases. At Costcos warehouse products are not offered in every
size. The strategy they followed is that by offering every size their efficiency will
decrease therefore it is said intelligent loss of sales.
3. Do you think Jim Sinegal has been an effective CEO? What grades would you
give him in leading the process of crafting and executing Costcos strategy?
What support can you offer for these grades? Refer to figure 2.1 in Chapter in
developing your answers.
Jim Sinegal is an effective CEO after gone through the case study. There are various
reasons which show that Mr. Jim Sinegal was responsible to lead the path of
strategy effectively.
First, Jim Sinegal had made a transparent and well defined planned path for the
Costco to follow. He was the only person in the company for the preparation of
business model and appreciated over the growth of the strategy of the company.
He 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 quick turnover of inventory. He was responsible for driving
the ability of the company to achieve yearly sales nearly to $130 million per store.
According to the case study Sinegal had performed excellent job in the execution of
the strategy process at Costco. He performed three functions in the company as
producer, knowledgeable critic and director. He went to stores for investigation
for checking out the performance of store managers and asked various questions
from them, about the performance of stores and told them to do more work on
their weak areas. In this case, when Sinegal found answers to his questions less
than expected than he told store managers to do more research and come back
with sufficient information.
4. What core values or business principle has Jim Sinegal stressed 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, also it integrates its employees
in a very nicely way.
Jim Sinegal 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.
5. (in the event you have covered Chapter 3) What is competition like in the
North America wholesale club industry? Which of the five competitive forces
is strongest and why? Use the information in Figures 3.4, 3.5, 3.6, 3.7, and 3.8
(and the related discussions in Chapter 3) to do a complete five-forces
analysis of competition in the North American wholesale club industry.
The wholesale club industry has evolved into a common oligopoly just as other
major industries have. The big three of this industry are Costco, Sams Club, and
BJs. A five forces analysis will be examined in regards to the wholesale club
industry.
Force one, barriers to entry; the three companies are at an advantage because of
the difficulty of new firms entering the industry. They accomplish economies of
scale and scope due to the size and volume of their sales by buying and selling
more goods on a larger scale with lower costs. It would take a considerable
amount of time for a new entrant to achieve the benefits of economies of scale. The
capital requirements are large due to the construction of buildings and acquisition
of land and licenses. Only companies with an established distribution network
would have a fair chance of entering the industry. Force two, the threat of
substitutes, is not a factor because the service they offer is not offered by other
outside competitors. Force three, the bargaining power of buyers, is the strongest
force working in the favor of the industry. This is so because buyers cannot
negotiate the price. The main reason customers come to wholesale clubs is they
are attracted by the already low prices and value of buying in bulk. Force four, the
bargaining power of suppliers could come into play if a more favorable
opportunity presents itself in the general retail industry. Wholesale clubs offer
only a percentage of the products that a general retailer does. A key strategy of
Costco is aimed squarely at selling top-quality merchandise at prices consistently
below what other wholesalers or retailers charge. Force fifth, rivalry among
existing players, is not a major factor. Costco, the runaway leader presently, offers
the treasure hunt deals where extreme bargains are offered for short,
unannounced periods of time. This creates buzz amongst customers by enticing
them to return on a consistent basis to explore what treasures are available. BJs
sets itself apart by being the only club among the three to accept manufacturers
coupons. They also are the only club to accept all four major credit cards,
MasterCard, Visa, Discover, and American Express, at all locations. They also offer
a broader assortment of items as compared to Sams and Costco.

6. How well is Costco performing from a financial perspective? Do some
number-crunching using the data in case Exhibit 1 to support your answer.
Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 104-105)
to help you diagnose Costcos financial performance.



7. Base on the data in case Exhibits 1 and 4, is Costcos financial performance
superior to that at Sams Club and BJs wholesale?


8. Does the data in case Exhibit Exhibit 2 indicate that Costcos expansion
outside the U.S. is financially successful? Why or why not?

9. How well is Costco performing from a strategic perspective? Does Costco
enjoy a competitive advantage over Sams Club? Over BJS Whole sale? If so,
what is the nature of its competitive advantage? Does Costco have a winning
strategy? Why or why not?
Costco has been playing very successful in the wholesaling industry as it can be
seen from its business strategies. First of all, for the purpose of supporting the
Costcos business model of generating high sales volumes and rapid inventory
turnover, Costco members are given a limited selection of nationally branded and
select private label products in a wide range of merchandise categories. Then
Costco combine its rapid inventory turnover with the operating efficiencies to run
the business profitably at significant lower gross margins than traditional
wholesales, mass merchandisers, supermarkets and supercenters. As a result,
Costco takes advantages of its high sales volume and rapid inventory turnover to
obtain the benefits of early payment discounts from merchandise vendors due to
the high sales volume and rapid inventory turnover allow Costco to generate
enough cash in account. Secondly, the pricing strategy of Costco is key factors to
support the low price business strategy which is to cap the margins on branded
name merchandise at 14 percent so that its members can buy with low price.
Thirdly, Costco focus to offer limited selection that is about 4000 items with fast
selling models, sizes and colors, and target the small businesses for its commercial
and professional models selling. Furthermore, advertising and sales campaigns are
not being used frequently by Costco for the marketing strategy and the company
only launches campaigns for new warehouse openings. In addition, Costco also use
direct mail to prospective new members occasionally and direct mail programs
promoting selected merchandise to members regularly. Opening more new
warehouses, building an ever larger and fiercely loyal membership base and
employing well executed merchandising techniques to encourage members to
shopping more frequently with big trip are the main central growth strategy of
Costco. Moreover, online shopping is another alternative that Costco offered to
members so as to make their shopping more convenient rather than switch to
competitors. In addition, Majority of merchandise is owned by Costco, and the
company also builds direct buying relationships with many producers of national
brand name merchandise and manufacturers and this result in the available of
flexible alternatives of suppliers for Costco in anytime to have sufficient of stocked
merchandise. Also, Costcos membership base and member demographics contains
powerful buying ability as it mainly target the individual customers with minimum
income of $75000 and 30 percent of the targeted customers earn more than
$100000 annually. For the purpose of executing Costcos strategy successfully, the
company offer biannual bonuses and full spectrum of benefits for its employees.
More important, the promoting opportunities will consider the insiders first based
on the company policy. Other factors that determine the success of Costco also
include the business philosophy, values and code of ethics such as obey the law
and governmental regulations, take of members, take of employees, respect
suppliers and business partners, and reward the shareholders.
Costco is beating both Sams Club and BJs wholesale in net sales and market share.
However, Sams Club has launched an aggressive campaign to increase its market
share.

10. Are Costcos prices too low? Why or why not?
Yes, because the gross profit margin falls into the normal range for this industry.
However, it should be trending upward and as you can see it is actually decreasing
slightly. If this trend continues, steps will need to be taken to correct the problem.
Another probability indicator, return on stockholder equity indicates that the
company has a problem. Average returns are around 12%, which Costco was
nearing in 2004 and 2005. In2006, the company experienced a sharp decline
which is causing for concern. Investigate this decline. It could be due to low profits
after taxes. If the pricing is too low, this can happen.
Currently, Sinegal, admittedly, tries to sell products at the lowest price possible for
longevity. However, if the investors in the firm are not making appropriate returns
for the risk, they will invest elsewhere. The current ratio figure is in the average
range but on the decline. The debt to equity shows a strong balance sheet and low
levels of debt. It is trending downward. The inventory turnover rate is slightly
higher than average, indicating that Costco is outperforming competitors in
moving product. Also cause for concern is the fact that the working capital is
shrinking. This might indicate the inability to expand without a loan.
11. What do you think of Costcos compensation practices? Does it surprise you
that Costco employees apparently are rather well-compensated?

Costcos compensation and benefits are higher than those at walmart. Salaried
employees in Costco warehouses could earn anywhere from $30000 to $125000
anually. Costco employees enjoyed a benefit package that included the following
points.
Health and dental care plans.
A dependant care reimbursement plan.
Confidential professional counseling services.
Company paid long term disability coverage equal to 60%,of earning for
workers that were out for more than 180 days on a non-workers
compensationleave of absence.
Generous life insurance and accidental death and dismemberment
coverage.
An employee stock purchase plan.
12. What recommendations would you make to Costco top management
regarding how best to sustain the companys growth and improve its
financial performance?

Costco is a company that have some criticism, such as people has to wait for a long
time to pay their products. However costco doeS not have big problems that
desperately need to be fixed. So it should stand in the same course using the
present strategy.
I think Costco has the capacity to continue investing in new stores and grow sales.
It can also expand sales by introducing new products line, like furniture.
The company has the financial resources to keep growing its business and open
more warehouse locations