Costco Case Analysis

INDIA

Overview Costco’s Business Model Costco’s Value Proposition Review of India

o Economyo Governmento Infrastructureo Real Estate Costo Real Estate Availability / Partners

Conclusion on Costco in India Citations

Costco Business Model

Factory direct purchasing, high velocity resale.o Manufactures ship containers directly to Costco

consolidation depot’s.o Allocation of product to warehouse locations is fast (<= 24

hrs)o Cost reductions realized from fast inventory sales.o SKU’s on hand limited to fast-selling models, sizes and

colors.o Efficient sales floor layouts – more product, less wasted

space = more sales.o Customers must pay to shop at Coscto.

• Provides another source of revenue.• Builds customer loyalty.• Helps reduce shrink.

Costco Value Proposition

Very low marketing, labor and a targeted discount modelo Coupon/Sales blasts sent to a limited target audience

– members only.o Reduction in marketing dollars over competitors

equals lower costs for goods.o Labor costs reduced via larger volumes of stock on

hand, in pallets and ready for customer distribution with low labor required.

o Hours of operation limited to core shopping times and light need for overnight stocking staff.

o Return policy highly favorable in the market, most goods accepted back without receipts and with extended warranty options.

India - Economy Gross Domestic Product (GDP)

o 2010 - $4.06 trillion (5th in the world)• $3.44 Trillion in 2008• $3.67 Trillion in 2009.

Inflationo 2010 - 12% - High (206th in the world)

• 10.9% in 2009

GDP Growth Rateo 10.4% (5th in the world)

• 6.2% in 2008• 6.8% in 2009

Foreign Reserveso $287.1 Billion (7th in the world)

GDP Per Capitao $3,500 (262nd in the world)

• $3,000 in 2008• $3,200 in 2009

Currency Stabilityo The Indian Rupee is trading around 43 - 49:1 USD in the last 52 weeks.

India - Government Ruling Party and Leader

o Pratibha Devisingh Patil – (2007 – Current)o Party: Indian National Congress

Government Stabilityo Democratic Nationo Harsh relations with China over allegations of munitions

being traded with Pakistan and China’s oversized military footprint.

Subsidieso 14% of Indian GDP is subsidized.o Majority of Indian subsidies are oil of which 39% of

subsidized kerosene is stolen.

India – Imports

2009-2010 2010-2011 0.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

140,000.00

Mineral Fuels and Oils. Pearls and Precious StoneNuclear ReactorsElectrical Machinery and EquipmentOrganic ChemicalsIron and SteelPlasticsAnimal and Vegetable FatsFertiliserMisc Goods

India is one of the largest importers of fossil fuels in the world.

Pearls and precious stone imports are important as a large portion of India’s revenue comes from the export of handicrafts.

These two represent 50% of all imported goods into India from 2009 to now.

Growth from 2009 - 2011o Fuels – 20.6%o Pearls – 66.35%

India - Infrastructure Indian Transport and Fuel Infrastructure

o Airports – 353 (249 with paved runways)o Heliports – 40o Pipelines

• Condensate/Gas – 2km• Gas – 9,596km• Liquid Petroleum Gas – 2,152km• Oil – 7,448km• Refined Products – 10,486km

o Railways – 63,974km (4th in the world)o Roadways - 3,320,410km (3rd in the world)o Waterways – 14,500km (9th in the world)o Merchant Marine – 324 (29th in the world)

Air and sea import/export is generally considered to be sufficient in India. The recent thread of pirates from Somalia have reduced the efficiency of waterway capability and have added risk of shipping/freight contains being compromised.

Road and railway conditions are poor in India. Public investment has been insufficient to correct this condition and India is seeking private investments to help improve these two.

Energy infrastructure in India is sufficient for sustaining retail business operations.

India – Real Estate Cost

Indian Real Estate Costo India-wide real estate prices have increased 21.3% in

Q2 2011.o Ranked 2nd out of 50 countries for annual growtho High Growth - Compared to 2010 by City

• Bhopal +46.41%• Faridabad +44.74%• Chennai +35.52%• Bengaluru +35.29%• New Delhi +33.64%

o Low Growth – Compared to 2010 by City• Kolkata +10.23%• Surat +9.56%• Jaipur +4.92%

India Real Estate – Avail/Partners

Real Estate Availabilityo Moderate availability due to financial situations in

India.o High cost is a big detractor in Indian Real Estate

Sales.o Cost of land post Indian 2001 Economic Bubble

exceed that of the median home sales prices.o 65% of flats sold in Delhi and 35% of flats sold in

Mumbai have sold to speculators.o Booming growth in Indian GDP may result in more

availability over 2013-2015 at affordable prices.o Jones Lang LaSalle remains the largest partner for

real estate sales and coverage in India.

Costco in India - Conclusion

We do not believe Costco should seek India as a market to move into over the course of the next 3 years. The following points highlight how we came to this decision:

Indian land prices are too higho High land prices now make moving into India in the short term less

attractive.o Continued GDP growth over the next 1-2 years may help lower land

prices. Indian Inflation too high

o Continued growth in Inflation would make doing business in India risky.o GDP Per Capita shows the standard of living is improving in India,

however not at a rate fast enough to make India an attractive market to enter.

Indian Infrastructure is poor and threats loomo Indian road conditions would not support the Costco business model of

central delivery and distribution within 24 hours. o Higher costs would be incurred by Costco by moving product slower than

they do in the US, Canada and Mexico markets.o The presence of pirates from nearby Somalia makes importing of goods

via sea risky.

ADA Citations The following Web Content was used for this presentation.

o The United States Central Intelligence Agency, Retrieved 10/6/2011 • https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

o Yahoo! Finance, Retrieved 10/6/2011• http://finance.yahoo.com/q/bc?s=USDINR=X&t=5y&l=on&z=m&q=l&c

o Wikipedia, Retrieved 10/6/2011• http://en.wikipedia.org/wiki/Energy_policy_of_India• http://en.wikipedia.org/wiki/Real_Estate_in_India

o Global Property Guide, Retrieved 10/6/2011• http://www.globalpropertyguide.com/Asia/India

o Costco Investor Relations, Retrieved 10/6/2011• http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-sec

o World Trade Organization, Retrieved 10/10/2011• http://www.wto.org/english/tratop_e/tpr_e/s249_sum_e.pdf

o India Department of Commerce, Retrieved 10/10/2011• http://commerce.nic.in/eidb/Icomq.asp