Costco-CEO-Jim-Sinegal[www.savevid.com].flv

CASE STUDY ON COSTCO WHOLESALE CORPORATIONCase study on

corporation

Introduction & Case Facts

• Costco founded by Jim Sinegal & Seattle entrepreneur Jeff Brotman.

• First store opened in 1983, the same year when Wal-Mart launched its warehouse membership format known as Sam’s Club.

• Jim Sinegal started his career in retailing at 18 with Fed-Mart, a discount retailing store started by Sol Price.

• In Dec 1985, Costco went public & also became first ever US company to reach $ 1bn in less than 6 years.

• In Oct 1993, Costco merged with Price club which was founded by his guru Sol Price.

• Changed its name from Costco Companies Inc to Costco Wholesale Corporation when company

reincorporated from Delaware to Washington in Aug 1999.

• In 2006, Costco’s sales totalled almost $ 59 bln, with 496 stores in 37 states across US & 7 other nations viz. Canada, Japan, UK, Mexico, Taiwan, Korea & Puerto Rico.

• Even at the age of 70, Jim Sinegal had

great levels of energy, enthusiasm &

dedication visiting 8, 10 or sometimes

even 12 stores in a day.

• Employees genuinely like Jim since he

spoke quietly, greets them well, listens

to their feedback, gives measured

inputs & motivates them.

• Today Costco is the 4th largest retailer

in US & 7th largest in the world.

What are the chief elements of Costco’s strategy?

How good is the strategy ?

Mission - To continually provide our members with quality goods and services at the lowest

possible prices.

Strategies -

• They planned for long term.• Ultra low pricing strategies.

14 % markups (others 20 – 50%)• Limited selection.

(4000 items compared to 150000 items

of Wal-Mart)• Treasure-hunt shopping environment• Kirkland (More sales and better quality than

other national brands)• They believed in ancillary business

and believed in “Intelligent loss of sales”.• Cross-docking

How good ?Strategy is the determination of basic long term goals and objectives

of an enterprise and the adoption of courses of action and allocation of resources for carrying out these goals.”

• Their strategy was good as their main focus was to build an organization which will be on a good position 50 years from now and they had followed good strategies like ultra low pricing, treasure hunt and 4000 product and carried out these strategies to fulfill member needs.

• Strategy, implementation and evaluation must be consistent• Low pricing strategies attracted more customers to Costco• Better bargaining power• Less inventory, faster procurement

Do you think Jim Sinegal is an effective CEO?

What grades would you give him in leading the process of crafting &

executing Costco’s strategy?

What support can you offer him in leading the process of crafting &

executing Costco’s strategy?

Yes, Jim Sinegal is an effective CEO & that is because he has:

• CUSTOMER CENTRIC APPROACH –

Personally answered customer’s phone call.

• LEADERSHIP QUALITIES –

1. Functioned as a producer, director and a knowledgeable critic

2. He was kind yet stern & always greeted his employees with a smile

• TASK ORIENTED APPROACH –

1. Exhibited intense attention to detail & pricing

2. Questioned the store managers and asked them to get back with answers

COMMITMENT

Visited 8-10 warehouse daily.

TALENT

1. Had a special knack for

discount retailing.

2. Knew how to reduce cost.

EMPLOYEE CENTRIC APPROACH –

2. Believed that employees are most important asset

3. Have the best employees and give them the best in the industry

RIGHT POLICIES – 4. Believed in framing just & fair policies.

5. Himself had only 1 page contract which said that he could be terminated for a cause

• Earned only about 12 times more than his typical average employee unlike other companies.

• Obey the law, take care of employees & members, respect the suppliers & reward the shareholders.

Keeping in mind all above points we will give him 9/10.

Points to consider for leading the process of crafting & executing costco’s strategy :-• It’s private label offering(Kirkland signature) should be

expanded from 400 to 600.

• Treasure hunt items at Sam’s club tend to carry lower price tags than those at Costco.

• Look for other types of promotion

methods apart from Direct mail.

• Dedicate a larger area for furnitures

since it is the hotseller for quite a

long time even on its website.

• Ancillary businesses.

• International expansion.

Q)How well is costco performing from financial perspective?Use the financial ratios to help you

diagnose costco’s financial performance.?ratio Year (IN MILLION $)

2002 2004 2005 2006 2007 2008 2009 2010

Profit margin ratio(rev/profit)

55.37 54.54 49.79 54.52 59.47 56.49 65.76 59.82

Avg sales/sq. foot

0.28 0.34 0.37 0.40 .41 .44 .45 .42

Inventory turnover ratio(netsales/inventory)

12 13 13 13 13.9 14.38 13.21 13.82

ROCE(ebit/ t.a-c.l)

0.158 .157 0.158 0.180 0.155 0.169 0.134 0.147

RONW(pat/n.w)

9.987 10.20 11.02 11.73 11.51 11.12 8.92 10.02

ratio Year (IN MILLION $)

2002 2004 2005 2006 2007 2008 2009 2010

Current ratio

1.04 1.16 1.22 1.05 1.78 1.8 1.83 1.83

Eps 1.48 1.85 2.18 2.30 2.37 2.89 2.47 2.92

Is costco’s expansion outside U.S financially succesful? Why or why not?

COUNTRY

Year (IN MILLION $)(SALES/WAREHOUSE)

2006 2005 2004 2003 2002

U.S 135.6

127.40

120.58

113.65

111

CANADA

119.4

103.56

95.92 85.85

78.28

OTHER COUNTRIES

111.3 105.16

97.66 81.07

75.33

• COUNTRY

Year (IN MILLION $)(OPERATING PROFIT/WAREHOUSE)2006 2005 2004 2003

U.S 3.480

3.45 3.42 3.00

CANADA 4.308

3.72 3.412 3.26

OTHER COUNTRIES

2.71 2.16 1.85 1.11

Does the data in the exhibit indicate that costco’s financial performance superior to that of sam’s club

and b.j wholesale?

ROCE (IN MILLION $)

YEAR 2002 2004 2005 2006 2007 2008 2009 2010

COSTCO

.15 0.15 .158 .180 .155 .169 .134 .147

B.J .196 .132 .180 .199 .198

OPERATING INCOME/WAREHOUSE (IN MILLION $)

YEAR 2002 2004 2005 2006

COSTCO 3.026 3.32 3.404 3.55

SAM’S CLUB

1.724 1.99 2.067 2.18

B.J WHOLESALE

1.57 1.140 1.23 .83

How well is Costco performing from a strategic perspective?

Does Costco enjoy a competitive advantage over Sam’s Club?

Over BJ’s Wholesale? If so, what is the nature of its competitive

advantage? Does Costco have a winning strategy?

Why or why not?

• Efficient employee support and satisfaction

• Competitive pricing

• Low investment cost because of warehouse location

• Majority of the merchandise was bought directly from manufacturers

Nature of competitive advantage that Costco enjoyed was because of

• Valuable capabilities.

• Rare capabilities.

• Costly to imitate capabilities.

- Historical: A unique and a valuable organizational culture or brand

name

- Social complexity: Interpersonal relationships, trust, and friendship

among managers, suppliers, and customers

Are Costcos price too low? Why or Why not?

• Costco was known for selling top

quality national and regional brands

at prices below traditional wholesale

or retail outlets.

• Costco stocked limited items that

could be priced at bargain levels.

• A key element of Costco pricing

strategy was to cap its markup

• Markup on Costcos 400 private label KIRKLAND

• Costcos philosophy was to keep

customers coming in to the shop by

wowing them with low prices.

• Whereas typical supermarket stocked • about 40,000 items and wall mart had

around 150,000 items.

• Costco limited the selection in each

product category

• Mr. Sinegal believed – Intelligent loss of

Sales and Efficiency

Does Costco pay its employees too much than its competitors? Why or Why not?

• Pay : Initial $10-12• Average $ 17-18

• Costco believed employees are their most important assets and they provided them with various Benefits and Bonuses.

• Costco admitted that they paid good wages & benefits contrary to conventional wisdom in Discounting Retailing business• Executing Strategy successfully • 120,000 loyal ambassadors • Good business sense • Less employee turnover

TYPES OF EMPLOYEE

Full time 71000

Part time 56000

Hourly 13800

• Results: About 85% of costcos

employees had signed up for

Health Insurance versus 50%

of the competitors

• People were satisfied hence gave

their best and wanted to serve the

company till their last breath

• In some of the interviews,

employees stated:

“It’s a good place to work,

they take good care of us”

“My whole family works for costco,

my husband my daughter my son in law”

“I want to retire here and love it here”

What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take sustain the company’s growth and improve its financial performance?

• Entering into China and Brazil Sam’s club exploring these markets. China is expected to have a five-fold increase

in urban consumer spending over the next 20 years to a $2.3 trillion a year.

• Continue testing furniture offerings in Costco locations rather than Costco home:

• Expand Kirkland Product Offerings:

increase from 400.

Membership Strategy Adjustments

• Non-Member Day A quarterly event that allows non-members a trial

day at the store.

• “Household” Plan Can charge $20 for every additional household member.

(increasing membership rates)

• Membership Rewards Program• $80 for annual membership and 2% rebate on every

purchase Competitors Have found this Successful BJ’s allows customers to enroll in reward club membership for

$80 Result: 5% of all membership and 10% of food sales has

increased.

Credit cardsCurrent payment methods: cash, check, debit and Costco

Credit (membership cards) Recommended: Allow the use of Credit Cards. Accept

credit cards but charge a 2-3% fee purchasing credit.

Food stamps• Definition: A stamp or coupon, issued by the

government to persons with low incomes, that can be redeemed for food at stores.

• Educate people and Accept food stamps• Only 67% of people eligible in getting food stamps:o Missouri @ 98%o California @ 50%o New York @ 63%

Expand Ancillary Business Programes

• Increase business services provided by Costco Increase the frequency of customer visits

• Making Costco a “ One Stop Shop”

Competitors offerings: Wireless carrier kiosks, Home security installation service, Break and

muffler service, Home heating oil, Vacation packages, Automobile buying,

Advertising TV brand Advertising. In northwest and West Coast regions. Seasonal TV ads and periodic direct mail promotions of Treasure

Hunt items.

• Competitors: Sam’s club spends $50 million annually on adverting.

What is Costco’s business model appealing? Why or why not?

Costco uses a Low Cost Model by

utilizing:• Rapid Inventory Turnover

• Operating Efficiencies:

created by product selectivity & volume purchases, high sales volume, efficient distribution, reduced handling

of merchandise/ stocking methods

• High Productivity: of well compensated employees

Low Prices

Limited selection of quality merchandise

Wide range of merchandise categories

Volume Purchasing

Efficient distribution

Reduced handling of merchandise

No frills, self service warehouse

Rapid inventory

+

Operating Efficiencies

Rapid Inventory Turnover Operating Efficiencies

Profit at a very low gross margin

What are the implications of this case in the Indian scenario?

Following are the implications for Indian players:

Presently only Metro follows a model somewhat similar to Costco but it is limited only to B2B & not B2C.

• Indian players should promote more internal people to higher positions like Costco.

• Floor & shop managers should be given more authority & independence in decision making.

• Indian players should make outright purchase of real estate/outlets (Costco owns 80% & that too at less prime locations)

• Majority of Indian players don’t have a efficient & full fledged e-commerce site

like Costco.

• Royalty membership programs are not meticulously designed & hence not successful.

• Only obsolete goods are pushed in India through the sale & discounts but Costco follows this for new goods as well.

• Cross-docking model has been pioneered by Costco. Follow this model.

• Hassle free return policy has still not completely taken off in India.

• Build a brand & then expand.

• Offer quality products at best possible prices & you will surely succeed(Costco takes only 14% markup)

SUDHINDRA GADAG 68

ABHISHEK VAID 106

ANKUR KOTECHA 114

HIREN.P.ZALA 115

PARTH JOSHI 116

PRAGYA BIRANI 120

THANK YOU!