Welcome to Our Presentation

In 2008: Mission, Business Model, & Strategy

Case 2

Our Presentation at a Glance

• About Costco Wholesale, Mission & Vision• Costco’s Business Model, Driving Forces,

KSFs• Costco’s Strategies & Objectives• Industry Analysis-SWOT, Porter’s 5 Forces,

Life Cycle• Competitive Analysis- Strategic Group Map• Financial Analysis• Recommendations

Presented By: Group -A

• Sunanda Sarker -161201

• Md. Iftekhar Alam -161202

• Nurul Afsar -161203

• Md. Foysal Ahmed -161204

• Md. Hasnat Khan Rezvi -161205

Purpose of this Case Study

To examine Costco’s business structure and strategy and how those relate to industry success

Case Summary

• End of 2008 – $71 Billion in Sales– 550 stores world-wide

• 54 million members- Avg yearly income $70,000

• Quality merchandise

• Low price

• Rapid inventory turnover

About Costco Wholesale

• Eighth Largest membership retailer in the world and Fourth largest retailer in the U.S

• CEO: James Sinegal• Headquarters: Issaquah, WA• Inception: Seattle, WA 1983• Founders: James Sinegal &

Jefferey Brotman

Vision & Mission of Costco Wholesale

Mission: Continually provide our members with quality goods and services at the lowest possible prices. Vision:

• “Our business is to give the customer the best value we can.” – Jim Sinegal,CEO & Founder of Costco

• “We're going to be a company that’s on a first-name basis with everyone.”

Costco’s Business Model-Appealing or Not

Low prices

Limited selection of quality merchandise

+Wide range of merchandise categories

Rapid inventory turnover

Volume purchasing

Efficient distribution

Reduced handling of merchandise

+No-frills, self-service warehouse

Operating efficiencies

Rapid inventory turnover

+Operating efficiencies

Profit at a very low gross margin

PLUS MEMBERSHIP FEES

Driving Forces

• Internet

• Technology – green technology is a

concern

• Market saturation

• Legislation- proposed tax on big-box stores

• Rising costs

• Recession

Key Success Factors

• Internet sales

• Vast network of retail locations– cross-docking

• No-frills warehouse

• Ongoing effort to cut costs

• Only stock bargains

• Treasure-hunt merchandise

• No-hassle return policy

• Word of mouth advertising

Corporate Strategy

• Cost strategy– Penetration Pricing– Below the Line Promotion– No frills

• “Diversion” Buying Strategy– “Treasure hunt" shopping experience

Chief Elements of Costco's Strategy

• Low prices• Limited product lines and

selection• Treasure hunt shopping

environment

Employment Objectives

• Hire great people

• Treat them well

• Give them good jobs

• Do right by them

Management Objectives

• Always promote from within

• Training happens constantly

• Grow our own talent

• Model what you want from your employees

Business Objectives

• Don’t try to be too much to too many

• Know on what level you compete

• Know your customers– why they do

business with you

• Stay focused on your core business

Growth Objectives

• Run the business for long-term sustainability

• Open new stores– 50-60 new

locations per year

• Keep Internet sales growing

Marketing Objectives

• Word of mouth only• No PR department,

ever?

Ethics Objectives

• Obey the law

• Treat customers right

• Treat employees right

• Treat suppliers right

Costco’s Geographic Expansion-Successful or

Not

Costco opened 127 new warehouses in fiscal years 2005-2008

Industry Analysis

• SWOT Analysis• Porter Analysis• Life Cycle

SWOT Analysis

S

Opportunities Appeal to

conscientious shopper Expand into foreign

stable markets Mergers & Acquisitions Massive supplier pool

Weaknesses Burden of high wages

paid to workers CEO’s retirement Low price margins E-commerce activities Small Marketing budget

compared to discount retailers and Super Markets

W

O

Strengths Low Prices Strong Brand Operating Efficiency Exceptional

Workforce Strong membership

Threats Aggressive price competition by rivals Political complications in

foreign markets Cannibalization due to

domestic market saturation

T

Porter’s Five Forces Model for Costco

SuppliersWeak bargaining power•Many suppliers•Low switching cost•Many substitutes exist•Large quantities are needed

Competing SellersFierce competition•Costco is on top•Quality is slightly better•Buyer demand is growing•Buyer’s switching cost is low

Potential New EntrantsLow threat•Small pool of entry candidates•High barriers to entry•Expanding market•Attractive profits

SubstitutesStrong threat•Good substitutes everywhere•Price not significantly higher•Comparable product features•More variety of features•Low switching cost

BuyersWeak bargaining power•Some switching costs•Large membership base•Costco has the best value

Life Cycle of Costco – Maturity Stage

• Costco is in the mature stage

• Though profitable, slower growth in sales

• Strong brand awareness

• Shares market with established competitors

Competitive Analysis

• Costco's main competitors are Sam's Club, BJ’s Wholesale Club, Other retailers. They share a similar business model, selling high volumes of merchandise at low prices in a membership-only warehouse club. Each company sells a similar array of general merchandise, including food, apparel, and gasoline.

• Sam's Club operates 591 warehouse clubs nationwide and earned $44.4 billion in revenue in 2007.

• BJ's operates 177 warehouse clubs across 16 states in the eastern U.S. In 2007, the company earned $9.0 billion in revenue.

FY 2008 Costco vs. Competitors

CompanyRevenue (Billions)

Net Income (Billions)

Operating Margin

Comparable Store Sales

(Decline) LocationsCostco $70.9 $1.3 2.7% 6.0% 512Sam's Club $46.8 N/A 3.4% 4.8% 602BJ's Wholesale Club $10.0 $2.3 2.3% 9.4% 180

Sales Breakdown

Competitive Analysis

• Greater benefits for Costco employees– Wages: $17/hr on average– Health Insurance : 90% premium

coverage• Lower price margins

Costco’s Strategic Group Map

Op

era

tin

g M

arg

in

Number of Locations

Higher

Lower

Few Many

BJ’s

P

Costco

Sam’sClub

Pricesmart Inc.

Note: Circles are drawn roughly proportional to the sizes of the club chains based on revenue

Financial Analysis

• Costco earned $71 Billion in revenue in 2008 – 12.5% increase from 2007

• In 2008, Costco’s operating margin reached 2.77%

• Costco’s net income in 2008 was $1.28 billion dollars – an 18.5% increase from 2007

Financial Analysis

FY 2008 Costco vs. Competitors

CompanyRevenue (Billions)

Net Income (Billion

s)

Operating

Margin

Comparable

Store Sales

(Decline)Locatio

ns

Costco $70.9 $1.3 2.7% 6.0% 512

Sam's Club $46.8 N/A 3.4% 4.8% 602

BJ's Wholesale Club $10.0 $2.3 2.3% 9.4% 180

Financial Analysis-Key Ratios

Inventory Turnover

(TTM)ROI

5 Yr Avg

Sales 5 Yr.

Growth Rate

Gross Margin

5 Yr Avg

Net Profit Margin 5 Yr Avg

Costco 11.93 11.01 11.24 12.40 1.54

Industry 2.47 7.59 15.11 24.66 2.74

Wal-Mart 8.73 13.80 9.41 23.37 3.59

BJ’s 10.27 11.11 8.42 10.37 1.41

Target 6.64 6.48 9.10 30.90 4.23

Best Buy 6.61 19.74 12.89 24.29 3.29

Sears 3.36 7.17 15.00 27.54 2.23

Pricesmart 9.20 14.12 15.54 16.14 0.40

Recommendation & Conclusion

• Accept food stamps

• Acquire BJ’s Wholesale Club

• Keep expanding overseas

• Be more ethical

• Continue to add services

• Industry Leader strategy– Better promotions

• Improve e-commerce

• A little good PR better than no PR

Any Question?