Nova Southeastern UniversityWayne Huizenga Graduate School

of Business & Entrepreneurship

Assignment for Course: MGT 5170 - Applied Strategy for Managers

Submitted to: Dr. Ronald Steffel

Submitted by: Michele M. Jones-Elguezabal N01775845

Date of Submission: April 2nd, 2017

Title of Assignment: Case Study 1 – Costco

Team Members Roberto De Armas Tedrick GreenMichele Jones-Elguezabal

CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledge and disclosed in the paper. I have also cited any sources from which I used data, ideas of words, whether quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course.

Student Signature: __/s:/ Michele M. Jones-Elguezabal

*******************************************

Instructor’s Grade on Assignment:Instructor’s Comments:

APA format corrected. Indent is ½ inch and there is no douoble spacing between paragraphs.

Executive SummaryProblem StatementNew Age Consulting, LLC recognizes that Costco is a leader in the membership warehouse industry. You don’t neede this statement, you are writing to the BoD. Despite a reasonably stable 4% average membership growth rate, given its inability to recruit significant millennial members and its inadequate e-commerce presence; we conclude that its current customer acquisition model is not a sustainable strategy for long-term company growth. Isn’t the problem that Costco is facing slowing growth and declining profit percentages?

AnalysisOur research indicates that there are 2 key areas that require an immediate ‘new age’ approach to position Costco for sustainable future growth:

1. Attracting new members, with a focus on Millennials; and2. Designing a competitive and robust e-commerce strategy for sustainable future growth

AlternativesNew Age Consulting, LLC conceptualizes 3 alternative solutions that we believe could be implemented to address the issues presented:

1. Trial Membership Plans - aimed at Costco members who have adult children, said member could add-on membership/s for their children at a nominal cost between $10 -$20 for a 1-year trial period. Offer is eligible for non-member children only. Since all of the profits for Costco come from membership fees won’t lower membership fees reduce the profits?

2. Tiered Membership Plan - primary members would be issued with add-on memberships to their plan. Each additional add-on membership would cost less than the previous. (i.e. Initial membership $60, 1st add-on $40, 2nd add-on $30, 4th add-on $20). Isn’t this the same issue as noted above?

3. E-commerce subscription service – offering persons the cost saving to order in bulk, but received their bulk purchases separately at predetermined intervals in the future. How does this grow revenue and profit?

RecommendationOur recommendation is to implement an add-on trial membership for non-member children of current Costco individual members. We believe that this approach is synergetic with Costco’s ‘take care of our members’ business philosophy and allows Costco’s members to act as brand evangelist by introducing their children (mostly millennials) to the art of shopping Costco. How does this improve the financial position of Costco?

Implementation Implementation will be fairly simple and cost effective, with only a few small steps to establish and promote the new trail membership add-on for adult children of Members.

1. Alert members of the change in policy to allow add-on Membership for adult children2. Train staff on the change in policy and encourage cashiers to remind members of the

change as they cash-out.

3. Upon Enrollment educate new trial members of the extensive programs and savings available in-store and online via Costco.com How does this solve the problem that Costco faces of slowing growth and declining profit percentage?

4. Nearing end of trial period ensure follow-up with members regarding Memberships of their own.

COSTCO

New Age Consulting, LLC have spent the past 2 weeks analyzing Costco’s position

as a leader in the membership warehousing business, with the purpose of identifying

critical problem areas that will adversely impact the company’s future growth and

potential. Upon assessing the company’s financials, websites and social media presence,

statistical data from governmental and non-governmental resources, and contrasting them

with membership and general consumer data we conclusively identified a key area that

could benefit from change. This would be known to the BoD. The skew toward older

customers (aged 65+) in Costco’s membership demographics (see exhibit 1), versus the

membership demographics of its rivals (which proved more diverse and split across age groups)

(see exhibit 2) raised concerns of Costco’s longevity as a going concern due to its aging

membership community.

Membership fees further accounted for an average of 2.24% of Costco’s net sales for the

period 2014 to 2016 (10-K Report, 2016). This is more than their profit on goods sold. Given the

significance of membership fees as a percentage of net sales, and the fact that the company’s

revenues as a membership warehouse are dependent on members; the realization that the

majority of the current membership base is 65 years or older is alarming. Compounding the

concern is the realization that Costco is not recruiting millennial members at or above a rate

equivalent to sustain or grow the business absent the aging 65+ group. If this is true, why is the

membership increasing and the rate of growth increasing? The long-term viability of the

company is at stake as the primary group of members age-out of the workforce, retire, and/or

become diseased. We were also concerned that e-commerce at Costco experienced limited

growth representing only 4% of net sales in 2016, and a stagnant 3% during 2013 to 2015 (10-K

Report, 2016). This all whilst e-commerce retail grew by 15.6% across retail in general in 2016

(2017, Stefany Zaroban), and accounts for 7.8% of all retail business (2017, US Department of

Commerce).

Further, the ‘true’ figure of growth for the segment according to the US Department of

Commerce was 11.7% when you exclude items not usually purchased online such as fuel,

restaurant bills, bar outings etc. (2017, Stefany Zaroban). This research proves conclusively that

customers are shopping online more frequently and trending at an increasing rate, as is evidenced

by the increasing year-on-year growth rate of e-commerce transactions with every passing year

since 2013 (when the rate was at its highest, 16.9%) (2017, Stefany Zaroban). A reality that is

especially true for millennial consumers. Should Costco intend to compete with other retailers

(known competitors as well as hungry startups), and grow the business into the next several

decades, they will eventually need to re-position themselves to be where consumers shop –

online. Doesn’t Costco offer online shopping?

Management should take note of the incredible e-commerce growth rates of some of

Costo’s primary competitors such as Amazon whose e-commerce sales grew by 31.3% in 2016

(2017, Stefany Zaroban). Whilst it would be somewhat easy to remain complacent given that

fellow-competitor Walmart online sales only grew by an average of 3% over the same period, it

is critical to note that as at 2016 Walmart already transacts over $13.4 billion of sales online in

comparison to Costco’s $3.6 billion (2017, Arthur Zaczkiewicz). This represents a hugely missed

opportunity for the wholesaler’s future growth profile. We also found it curious that despite

Costco’s warehousing operation in Puerto Rico, 24 in Japan, 8 in Australia, and 2 in Spain, the

wholesaler does not currently operate websites within these countries. Is there a reason for this.

What is your recommendation? Further, despite Costco’s 47.6 million members as at 2016 (10-

K Report, 2016), the company only had 97.4k Instagram followers, and 1.5million Facebook

followers which indicates a serious lack of interaction, particularly in comparison to Sam’s Clubs

2.8million, or Walmart’s 33million Facebook followers.

The facts indicate that Costco needs to do a better job at recruiting millennial members. If

membership is growing at an increasing rate where are they coming from; certainly not the

mature customers? They also must do a better job at growing their e-commerce sales, and

interacting with customers with technology and engagement that may have been outside of their

core business practices before now. That said, the current focus should be to recruit millennial

members to Costco’s membership base. This will allow them to utilize the brick & mortar

warehouses (as well as current e-commerce platforms) to become familiar with Costco as

members / insiders. Increasing the membership base in this way, is a strategic move to secure the

members of the company’s tomorrow.

As with everything Costco, we believe that targeting potential millennial members can be

completed affectively without adding any significant cost to marketing, promotions, or

infrastructure. We believe that in light of Costco’s recent increase in membership fees effective

at 1 July 2017 (Costco.com), we believe that Costco should amend membership benefits (for

individuals) to include the privilege to establish 1-year trial (add-on) memberships for their adult

children. A nominal cost between $10 - $20 should be charged to members to take advantage of

the add-on trial membership. Since they don’t make money on the sale of goods, the low cost

membership will hurt profits. This will help ensure that members consult their children before

purchase, which will then increase the likelihood of the trial-members utilizing the program as it

will be perceived as something that carried value (a gift even). We believe that by associating a

value with the trial membership, apart from the immediate cash and brand benefits associated

with a potential 47.6million members talking about Costco or purchasing memberships for their

children and families (brand evangelist-ing); we simultaneously protect the current brand by not

risking the perception of “this should be for free.”

The financial impact of membership fees alone should just 10% of members add only 1

child (approximately 4.76 million people), would result in almost $100m in membership fees at

$20 per trial member. It would also result in approximately 4.76 million more members utilizing

Costco warehouses across the world. Should the retention rate be similar to the current rate of

88%, that would be approx. 4.188 million new subscribers at $60 (minimum) per membership, a

financial impact of $251.3m at the end of the trial period. The most significant win however, is

that the majority of this group would be millennials. The group that retailers are finding it more

and more difficult to target, and retain. (grammar)It’s also the group most critical to future

growth both at brick and mortar locations, but especially via e-commerce platforms.

REFERENCES

Lawrence Gregory (2017, March 25) Costco’s Mission, Business Model, Strategy & SWOT. Retrieve d March 30, 2017 from http://panmore.com/costco-mission-business-model-strategy-swot

Costco (2017, March 2) Costco Wholesale Corporation Reports Second Quarter and Year-to-Date Operating Results for Fiscal Year 2017, February Sales Results, and Plans for Membership Fee Increase. Retrieved March 31, 2017 from http://investor.costco.com/mobile.view?c=83830&v=203&d=1&id=2251231

Emmie Martin (2017, Jan 12) Goldman Sachs says millennials didn’t inherit a spending habit companies have capitalized on for years. Retrieved April 1, 2017 from http://www.businessinsider.com/goldman-sachs-millennials-spending-habits-2017-1

Stefany Zaroban (2017, February 17) US E-commerce Sales Grow 15.6% in 2016. Retrieved March 31, 2017 from https://www.digitalcommerce360.com/2017/02/17/us-e-commerce-sales-grow-156-2016/

Arthur Zaczkiewicz (2016, March 7) Amazon, Walmart Lead Top 25 E-commerce Retail List. Retrieved March 31, 2017 from http://wwd.com/business-news/financial/amazon-walmart-top-ecommerce-retailers-10383750/

Reference list is not in proper APA format.

Exhibit 1

Received 2 April 2017 from http://infoscout.co/retailer/costco

This composition of Costco’s demographics indicates that there is significant room for growth,

and customer acquisition in the Millennial age-range (20s to 30s) versus customers in the Baby

Boomers and Gen X ranges. The issue is that as these groups age, and do-not or cannot continue

to shop at Costco, a critically significant portion of Costco’s customer base will diminish.

Exhibit 2

Retrieved 30 March 2017 from http://www.businessinsider.com/amazon-prime-demographics-chart-2015-1

This graph depicts the demographic breakdown of Amazon US customers by age. We can see that the split between age ranges are fairly even, averaging between 20% - 25% for each category. Whilst Amazon does cater for a wider demographic (via its practically limitless product offerings) than Costco; Costco needs to position themselves to more effectively target demographics below the 65+ age range to compete. Further, Costco’s offering are suitable form many individuals in the 20+ age ranges and as such should opt to increase their membership within same age range.

Exhibit 3

Retail e-commerce sales in the United States from 2015 to 2021 (in billion U.S. dollars)

Received 2 April 2017 from https://www.statista.com/statistics/272391/us-retail-e-commerce-

sales-forecast/

This chart represents the actual and projected year-on-year increase in e-commerce sales for

years ended 2015 to 2021.

TITLE OF RUBRIC: Costco Strategy Case Study Course: MGT5170LEARNING OUTCOME/S: Date: April 2, 2017PURPOSE: Applying theory to practice and consistently using Strategy

Name of Professor: Dr. Ron Steffel

VALIDITY: Strategy Best Practices Name of Student: Industry 45 Team C

COMPANION DOCUMENTS: Group CasesEarning maximum points in each box in ‘PROFICIENT’ column and / or

points in columns to the right of ‘PROFICIENT’ meets standard.<<<<<<<<<< less quality . . . . . . . . . . . . . . . . .. . . . . . . . . . . more quality >>>>>>>>>>

Performance Criteria

Basic Developing Proficient Accomplished Exemplary Score

States Problem Effectively

Does not identify the

problem(4pts)

Identifies a symptom

(8 pts)

Identifies a significant problem(12 pts)

Identifies a critical

problem

(16pts)

Effectively identifies the

crucial problem(20pts)

Analyzes the situation using

tools and concepts of

Strategic Management

Does not present analysis

(4 pts)

Vaguely analyzes material

(8 pts)

Generally analyzes the

situation

(12 pts)

Analyzes some key strategic

factors

(16 pts)

Insightfully analyzes key

strategic factors

(20 pts)Analyzes

quantitative factors

Does not present

quantitative analysis

(2pts)

Presentsirrelevant

quantitative analysis

(4pts)

Generally analyzes the

situation

(6 pts)

Analyzes some key

quantitative measures

(8pts)

Insightfully analyzes key quantitative

measures

(10pts)Generates

realistic Strategic

alternative Solutions

Provides no realistic Strategicsolutions

(2 pts)

Provides ambiguous

Strategicsolutions

(4 pts)

ProvidesStrategic solutions

(6 pts)

Provides realistic Strategicsolutions

(8 pts)

Provides realistic Strategic solutions

related to the problem(10 pts)

Evaluates Solutions/

Selects Optimal

Selects without

evaluation

(4 pts)

Selects with little evaluation

(8 pts)

Evaluates alternatives and selects

one

(12 pts)

Evaluates alternatives and explains rationale for

selection

(16pts)

Evaluates alternatives,

provides rationale, and selects optimal

Strategic solution for

the main problem

(20 pts)Generates an

Implementation

Plan

Provides no plan

(2 pt)

Provides cursory

plan

(4 pts)

Provides an implementatio

n plan

(6 pts)

Provides realistic

implementation

plan

(8pts)

Provides implementatio

nplan

considering major factors

(10 pts)Writes at the

GraduateLevel

Does not use

designated format or standard

(2 pt)

Does not write

clearly or in an

organized format

(4 pts)

Uses effective format, style,

grammar, punctuation,

and references(6 pts)

Uses effective format and

writes at the graduate level

(8 pts)

Uses effective format and

writes at the publishable

level

(10 pts)Maximum score is 100% of points available for a given Case Study

74%Case Rubric

Comments on the Costco case

Per the instructions, given in week one, you were to bring the case up to date using the latest financial information. This requires you to look at either the 10K or the annual report for Costco for fiscal year 2016.

The first question asked, per the rubric, calls for identifying the critical problem. Just as in the BCG, there are a number of metrics that a company works to achieve. Returns on shares, return on equity, share price are among these measures. These are the factors for Costco and their shareholders. Just as in the BCG we are looking for sales growth, net income how this growth is achieved. If you look at the growth in sales you find the following.

Year 2012 2013 2014 2015 2016Net sales ($B) 99.1 105.2 112.6 116.2 118.72Sale growth (%YoY) 6.16% 7.03% 3.20% 2.17% Declining

Gross Profit 12.3 13.21 14.2 15.13 15.82Gross Profit (%) 7.40 7.49 6.55 4.56 Declining

SG&A Expense ($B) 9.56 10.16 10.96 11.51 12.16SG&A Expense (%YOY)

6.28 7.87 5.02 5.65Increasing?

Net income ($B) 1.7 2.04 2.06 2.38 2.34Net income (%) 1.9392 1.8295 2.0482 1.9710 Decreasing

Warehouses 608 634 663 686 715Warehouse growth (YoY)

26 29 23 29 26.27/yr Average

Yearly sales per warehouse ($M)

159.5 162.3 166.2 165.7 166Slight increase

Members (millions) 36.9 39 42 44.6 47.6Member growth (YoY)

5.69% 7.69% 6.19% 6.73%Increasing

Membership Fees ($B)

2.075 2.29 $2.43 2.53 2.646Increasing

Membership (% of sales) 2.1768 2.1581 2.1773 2.2288 Increasing

Note that the membership fees in dollars exceed the Net Income

What are the problems that the financial reports show? Clearly sales have grown but are down from the historic rates. This is clearly a problem.

Net income slightly declined in 2016. Consider also that the majority of this income comes from membership fees. Note that Membership Revenue is greater than the net profit.

Selling, General, and Administrative (SG&A) expense are increasing.

If you divide the yearly sales by the number of warehouses you get the average sales per store. This has been growing steadily. If you need to raise sales by $1.66 billion, isn’t a solution to build 10 more stores?

If you look further into the information provided in the 2016 10K report you’ll see that stores that have been open longer have higher average sales than the new stores. This may be because the markets in which new stores are located are less productive or haven’t received the following necessary time to build clientele or to increase sales.

Membership growth continues to increase. Since there is no cost of sales to add new members (it is virtually prepaid profit) this gives you an idea of where you should focus your marketing efforts.

Teams have also recommended the reduction of membership fees to attract lower income consumers. This directly affects profits as there is virtually no cost in selling memberships. Costco specifically targets those with incomes of $75,000 or more. In a moment will see the difference between Costco and Sam’s Club. Reaching the private consumer has been engaged via word-of-mouth or through mailings to existing members. Social Media and e-Commerce are opportunities for growth in recognition and sales. Enticing new members and having them use this service improves returns substantially as it has no additional cost for SG&A.

Broad brush advertising like television is expensive and not affordable with the low margins that Costco, or any warehouse. Social media provides a new avenue to reach consumers and entice them to join.

Financial comparison between Costco and Sam’s Club

The newly updated BSG Costco case (2016) provides the following information. Note that Costco’s year ends in September while Walmart ends in December.

Company Sam’s 12/15 Costco 9/15Number of stores 647 686Revenue $58.2 B $116.2 BPercentage Growth 1.5% 3.1%Net income $1.976 B $3.642 BNet Income Percent 3.4% 3.1%Revenue per store $89.95 M $169.4 M

It is obvious that Costco is more efficient from a store standpoint delivering 88.33% greater revenue per store than Sam’s Club.

To put this in perspective, we live in a rural county 90 miles north of Tampa and 90 miles from Orlando where Costco stores are located. The population is a collection of people that are retired with medium to high income and a large percentage of the population that is near the poverty line. The median income is $38,109 versus a US median income of $53.482. The nearest Costco stores are in Clearwater (95 miles) Florida (adjacent to Tampa) and to in Orlando (95 miles), both higher income areas.

Along with the thought of growing revenue for Costco, there is a growing suburban population in Wesley Chapel, Northeast of Tampa. The professionals living here work in Tampa. Costco is opening a new store in February 2017 adjacent to a Premium Outlet Mall. Now the distance to a Costco store is only 64 miles away. My shopping opportunities have just increased.

Conversely, I have three Sam’s Club’s within 25 miles of my home. Clearly they are focused on a lower income bracket then Costco. Thus, the revenue per store is lower and the return on Investment is lower. It is true that Sam’s Club has the buying power of Walmart, but if you cannot move the volume of merchandise in the store is it an advantage? On the other hand one would need to dig deeper to see the average cost of items purchased at Costco.

The challenge for Costco in its continued growth depends upon not only attracting new customers but retaining existing customers. In addition, adding stores in geographic areas where incomes are higher presents a substantial opportunity. Low-cost marketing via social media is certainly an option, but will not offer growth in the range of $10 billion, which Costco has achieved in the last year.

As you can see, in two pages you can summarize Costco’s problems and what it needs to do. You can embellish the financial analysis a bit, use the SWOT analysis and the Porter model to supplement this, but the numbers tell the story.

How would you format a report on Costco?

You need to do the analysis of the issues facing a company before you can define the problem, as I have illustrated above. The report would look like the following.

Executive Summary

Problem Statement: The problem facing Costco is to continue profitable growth.

Analysis: What have you found through your analysis? (For example)

Growth of sales per store are stagnant SG&A is increasing Majority of profit comes from memberships Business memberships are declining as a percentage of total memberships Summarize SWOT factors. Higher revenue per store than Sam’s Club BJ’s Warehouse is not a competitive factor Summarize important financial information like points from above.

Alternatives: (For example)

Increase Advertising via Social Media Increase eCommerce Increase the number of stores

Recommendation:

Increase the number of stores

Implementation: (For example)

Continue to build an average of more than 20 stores a year in areas with appropriate demographics.

This cover page allows the reader to understand your entire thought process. You don’t need the history of the company, its management, etc. to make the summary points. Use the next 4-8 pages expanding on these points. The analysis should be done first followed by writing the body of the report. Write the executive summary last.