What is Costco’s business model? Assignment

What is Costco’s business model? Assignment Words: 2847

Is the company’s business model appealing? Why or why not? Costco’s business model is to generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories. 1) Management believes that rapid inventory turnover-when combined with the operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities-enables Costco to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters. Costco’s business model is appealing to many consumers because of several reasons. First, because of its low prices and bulk product offerings, Costco is an ideal place for customers to stretch their dollars during slow economic times. Second, Consumers prefer not to have to travel to different places in order to shop. One of the biggest reasons why giant retailers like are successful is because their stores are more than just a place for people to buy food — these stores provide ancillary services like places to eat or get a hair cut. Many of Costco’s stores already provide ancillary services like in-store food service, one-hour photo centers, optical dispensing centers, pharmacies, gas stations, hearing-aid centers, printing/copy centers and car washes.

Costco uses these services to attract customers into their stores for more than just buying bulk items — by the end of 2009, 96% of Costco warehouse stores had food courts, optical dispensing centers and one-hour photo centers. Costco was voted as the best place to shop in the US and improving on these services will help to increase traffic flow into Costco stores and will help generate sales. (4) 2. What are the chief elements of Costco’s strategy? How good is the strategy?

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The chief elements of Costco’s strategy are low prices, a limited product line and limited selection, a ‘treasure hunt’ shopping environment, limited marketing and advertising and growth. (5) A key element of Costco’s pricing strategy to keep prices low to members is to cap the margins on brand-name merchandise at 14%, and on their private-label Kirkland Signature items at 15% (compared to 20 to 50% margins at other discounters and many supermarkets). (6) Costco limits their product selection to approximately 4,000 products vice the up to 150,000 products that Wal-Mart Supercenter or SuperTarget might have.

Costco also deliberately limits the selection in each product category to the fast-selling models, sizes, and colors and maintains a commercial/professional selection of appliances, equipment, and tools to keep their small business clientele. (7) Costco further entices buyers by constantly changing up to 25% of their 4,000 products on the floor also known as Treasure Hunt Merchandising. Costco tries to maintain a sense of urgency in its customers by selling high –end or name-brand products that carry big price tags at rock bottom prices; examples include $800 espresso machines and $29. 9 Italian-made Hathaway shirts just to name a few. (8) Costco searches for these opportunities on the legal gray market from other wholesalers or distressed retailers looking to get rid of excess or slow-selling inventory. (9) Costco’s low prices, and word of mouth reputation means it does not have to engage in extensive advertising or sales campaigns. (10) The bulk of their marketing and promotional activities are conducted for new warehouse openings and to increase membership base.

Opening additional new warehouses, increasing a loyal membership base, and employ well-executed merchandising techniques are the three main elements of Costco’s growth strategy. Costco concentrated on opening new warehouses in cities that they didn’t already have a warehouse both internationally and nationally to increase their number of warehouses. Costco is adding to their loyal membership base by giving members a place to buy supplies of practical, frequently used business and household items at money saving prices, and making each and every shopping trip interesting and rewarding by utilizing well-executed merchandising techniques. 11) 3. Do you think Jim Sinegal is 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? Refer to figure 2. 1 in chapter 2 in developing your answers. My analysis shows that Jim Sinegal is indeed an effective CEO with a B rating. Costco’s initial strategy was low prices, a limited product line and limited selection, and a “treasure hunt” shopping environment. (12) Costco has been able to maintain this strategy while enerating a profit each year. Costco objectives was and is to generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories. (13) Costco can continue to do this because their merchandise buyers diligently scour wholesale sources for items that will appeal to the company’s clientele and that will sell out quickly. (14) They are revising their objectives every time they find a new product to sell.

Costco implements and executes its strategy by limiting their product selection to approximately 4,000 products. Costco also deliberately limits the selection in each product category to the fast-selling models, sizes, and colors and maintains a commercial/professional selection of appliances, equipment, and tools to keep their small business clientele. (15) Costco does not spend a large amount on marketing because the bulk of their marketing and promotional activities are conducted for new warehouse openings and to increase membership base.

Jim Sinegal also believes that having a well-compensated workforce is very important to executing Costco’s strategy successfully so Costco offers higher starting wages, time-and-a-half pay for working on Sundays, biannual bonuses and a full spectrum of benefits. (16) In the fifth phase of the Strategy-Making, Strategy-Executing Process: Monitoring developments, evaluating performance, and making corrective adjustment: a company will revise its strategy in light of actual performance, changing conditions, new opportunities, and new ideas. 17) Costco has been monitoring the depressed real estate market and is capitalizing on the dire U. S. real estate market by snapping up vacant space in shopping malls. (18) This strategy could benefit Costco in the form of increased store count and reduced capital expenditures. Shopping malls could be a viable alternative for Costco in urban markets where land is scarce and expensive. Moreover, mall locations impose fewer burdens on retailers in terms of setting up infrastructure and dealing with community opposition to warehouse-size stores. 19) Costco has also realized the power of the internet and subsequently operates sales websites in the US (www. costco. com) and Canada (www. costco. ca) both to provide members with a way to purchase products and services that might not be available at the warehouse where they customarily shop. (20) 4. 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 “A Guide to Case Analysis” and in table 4. 1 of the text to help you diagnose Costco’s financial performance.

How does the company compare to Sam’s Club and BJ’s Wholesale? From a financial perspective, Costco is performing well. The stock market says the company is worth $25 billion. They have $11 billion in real estate, properties, land, building, plants and equipment, and they have been buying all of these variables since the 1970s. Costco’s margins rarely go over 15%. Mr. Edgerton, the Co-Founder of the Capital Investment Companies, believes that their average margins or markup is around 11%, where, for example, home improvement chains are in the mid-20s in percentage markups, like Lowe’s (LOW) and Home Depot (HD).

Also Costco treats their employees wonderfully, and people who shop at Costco love it. (21) Costco is also capitalizing on the dire U. S. real estate market by snapping up vacant space in shopping malls. This strategy could benefit Costco in the form of increased store count and reduced capital expenditures. Shopping malls could be a viable alternative for Costco in urban markets where land is scarce and expensive. Moreover, mall locations impose fewer burdens on retailers in terms of setting up infrastructure and dealing with community opposition to warehouse-size stores.

Although rent payments could boost Costco’s operating expenses, we would expect a rising proportion of mall stores to reduce its capital expenditures. (22) Financial Ratios: http://finapps. forbes. com/finapps/jsp/finance/compinfo/Ratios. jsp? tkr=COST In the United States, the main competitors operating membership warehouses are Sam’s Club and BJ’s Wholesale Club. Although Sam’s Club has more warehouses than Costco, Costco has higher total sales volume. [ For fiscal year 2009, which ended on August 31, 2009, the company’s sales totaled $71. 42 billion, $1. 8 billion of the revenue was net profit. Costco is #24 on the Fortune 500. (23) For fiscal year ending January 2010, Sam’s Club had total sales of $46,700 million (24) and BJ’s Wholesale Club had a total sales of $10,187 million. (25) 5. Does the data in case exhibit 2 indicate that Costco’s expansion outside the United States is financially successful? Why or why not? Based on the data in case exhibit 2, Costco’s expansion is financially successful; Costco’s Total Revenue from Canadian locations has grown approximately 63. 94% from $6,732m in 2005 to $10,528m in 2008.

Even though Costco’s Operating Income dropped approximately 2% between 2006 (293m) and 2007 (287m), it increased approximately 57. 62% between 2007 (287m) and 2008 (420m). Costco has also increased the number of warehouses in Canada from 65 in 2005 to 75 in 2008. (26) Costco’s Total Revenue from other locations has grown approximately 30% from $3,155m in 2005 to $5,052m in 2008. Costco’s Operating Income in the other locations rose all 4 years from 65m in 2005 to 156m in 2008 for an approximate gain of 41%. Costco has also increased the number of warehouses in other locations from 30 in 2005 to 39 in 2008. 27) Overall, Costco’s Total Revenue from all of its locations has risen approximately 39% from 2005 ($52,952m) to 2008 ($72,483). Costco’s Operating Income for all the locations has risen approximately 33% from $1,474m in 2005 to $1,969m in 2008. Costco has also increased the number of warehouses in all locations approximately 18% from 433 in 2005 to 512 in 2008. (28) 6. Perform a SWOT analysis and complete a strategic group map for Costco. What do these tell you about the company’s strategy and performance? How well is Costco performing from a strategic perspective?

Does Costco enjoy a competitive advantage over Sam’s Club? Over BJ’s Wholesale? SWOT ANALYSIS Strengths Low Prices High Quality Merchandise (private label and brand name) Happy, exceptional employees Over 50 million members Efficiency Weaknesses Higher than average pay and benefit package for employees Maintains low margins CEO and CoFounder, Jim Sinegal is 74 years old Opportunities Easier to find bargain luxury-items on the gray market because of the weak economy More value for the dollar Expand into foreign market (Europe, China, & India) Empty stores in malls Threats

Competition from Other retailers such as BJ’s, Sams, WalMart and Target Supercenters Political problems in other countries Lagging, weak economy Strategic Group Map http://www. slideshare. net/guestce0202a/costco-strategic-plan (29) Based on the above SWOT Analysis and strategic group map, Costco’s strategy was working well in a strong economy and continues to be on target even during our current lackluster economy. Costco’s main competitive advantage over Sams Club and BJ’s Wholesale is there lower number of stocked items as well as the high turnover. 7. Does Costco pay its employees too much?

Does it make sense for Costco to compensate its employees so much better than the employees at Wal-Mart or Sam’s Club? Why or why not? It makes good sense for Costco to compensate its employees so much better than the employees at Wal-mart and/or Sams’s Club because it reflects throughout the business. ‘Most people agree that Costco is the lowest-cost producer. Yet Costco pays the highest wages’. (29) Despite fewer stores, Costco’s sales are about 50% above those of Sam’s Clubs, and sales per employee are about $500,000 a year versus $340,000 at the Wal-Mart unit. (30) Costco also has one of the lowest turnover rates in retailing.

Among employees who have been with the company for at least a year, just 6% leave annually. That may be because store employees such as cashiers can earn more than $40,000 a year after only four years on the job. (31) 8. What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take to sustain the company’s growth and improve its financial performance? Jim Sinegal Costco management needs to continue looking at vacant space at malls because this strategy could benefit Costco in the form of increased store count and reduced capital expenditures.

Shopping malls are also a viable alternative for Costco in urban markets where land is scarce and expensive. Jim Sinegal and Costco management should also continue with their higher than average wage and benefit program. It has already shown greater sales per employee dollar figures, adding to Costco’s success. SOURCES 1)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-35. 2)Thompson Jr. , A. A. , & Strickland III, A.

J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-35. 3)http://www. wikinvest. com/stock/Costco_Wholesale_(COST) 4)http://www. wikinvest. com/stock/Costco_Wholesale_(COST) 5)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-35. 6)Thompson Jr. , A. A. , & Strickland III, A. J. & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-35. 7)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-36. 8)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. New York, NY:McGraw-hill/Irwin), Part 2, pgs C-37. 9)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-37. 10)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-37. 11)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010).

Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-38. 12)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-33. 13)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-35. 14)Thompson Jr. A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-37. 15)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-36. 16)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. New York, NY:McGraw-hill/Irwin), Part 2, pgs C-42. 17)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 1, pg 24. 18)http://blogs. forbes. com/greatspeculations/2010/09/08/costco-scours-for-cheap-mall-space-but-stock-is-still-too-plump/ 19)http://blogs. forbes. com/greatspeculations/2010/09/08/costco-scours-for-cheap-mall-space-but-stock-is-still-too-plump/ 20)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010).

Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-38. 21)http://finance. yahoo. com/news/Costco-Is-Retail-Star-Stock-twst-2667735147. html? x=0&. v=1 22)http://blogs. forbes. com/greatspeculations/2010/09/08/costco-scours-for-cheap-mall-space-but-stock-is-still-too-plump/ 23)http://en. wikipedia. org/wiki/Costco 24)http://www. answers. com/topic/sam-s-club 25)http://www. answers. com/topic/bj-s-wholesale-club-inc 26)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010).

Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-39. 27)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-39. 28)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-39. 9)http://www. slideshare. net/guestce0202a/costco-strategic-plan 30)Thompson Jr. , A. A. , & Strickland III, A. J. , & Gamble, J. E. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage, Concepts and Cases 17 edition. (New York, NY:McGraw-hill/Irwin), Part 2, pgs C-44. 31)http://articles. moneycentral. msn. com/Investing/Extra/CostcoTheAntiWalMart. aspx? page=3 32)http://articles. moneycentral. msn. com/Investing/Extra/CostcoTheAntiWalMart. aspx? page=3 Financial Ratios: http://finapps. forbes. com/finapps/jsp/finance/compinfo/Ratios. jsp? tkr=COST

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