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Executive Summary: Costco Wholesale

Wholesale Consulting Company
Deven Samson
Alvernia University

Objective: The Wholesale Consulting Company was hired to assess the leadership transition at
the Costco Wholesale Corporation. Our company will identify Costco Wholesale Corporations
business model, strategy and growth initiatives, compensation and benefits, S.W.O.T. analysis,
competitive analysis, as well as Costcos strategic plans for the future. The Wholesale Consulting
Companys overall goal is to assess if Costcos creator, Jim Sinegal, business practices and
philosophy remain intact after his stepping down as Chief Executive Officer.

Company Background: Jim Sinegal former Chief Executive Officer of Costco connected with
Jeff Brotman who at the time was a Seattle entrepreneur. Sinegal and Brotman opened their first
store in 1983, which was at the same time that Walmart opened Sams Club, also a wholesale
membership format. Costco became a public corporation in 1985 to raise additional capital for
store expansions. In 1993, Costco and Price Club merged to form the largest wholesale
corporation in the United States. In 2012, Jim Sinegal stepped down as Chief Executive Officer
or Costco Wholesale Corporation. The board then elected Craig Jelinek to hold the title of both,
President, and Chief Executive Officer of Costco Wholesale Corporation.
Business Model and Strategy: Costco Wholesale Corporations business model is generating high
sales volumes and rapid inventory turnover. Achievable by offering members who pay fees to
receive discounts and limited selections in nationally recognizable brands. The first leg of
Costcos strategy is pricing. Costcos philosophy on pricing is to keep costs lower than expected
for their membership customers to wow them in to coming back for more. Costco Wholesale
Corporation was able to do this because also caps their markup pricing at 14% for brand name
items, and 15% for private-label goods. Marginally different from their supermarket counter
parts who charge upwards of 30% markup to sell goods in their stores. The next business strategy
is product selection. Costco only has about 3,600 items compared to Walmart super stores who
have about 40,000 different items. 85% of Costco Wholesale Corporations products are brand
name and the other 15% is the companys private label, Kirkland Signature items. Costcos
products range from electronics, food, pet items, cleaning supplies, and fresh fruits and
vegetables. The next business strategy is Costcos Treasure Hunting technique. Costco will
purchase high end, expensive items, such as diamond rings priced from $50,000 to $250,000,
Movado Watches, Coach bags, and Italian made Hathaway clothing. Costco changes their
products constantly to keep bargain shoppers coming back on a daily basis. After the strategy of
Treasure Hunting, the next strategy is Low-Cost Emphasis. Costco is able to have such low
prices and high profit margins because they are keeping their operating costs at a bare minimum.
The warehouses that Costco owns are made with concreate floors, and limited decorations. This
allows for the floor plans to be efficient and have optimal shopping space. Costco Wholesale
Corporations daily hours are from 10:00 a.m. to 8:30 p.m., weekends having earlier closing
times. The shorter the corporations hours of operation, the lower labor costs relative to the
volume of sales. The last strategy is Costcos growth plan. The company set realistic goals of
growing each existing stores sales by 5% each year. As well as opening additional warehouses
domestically and internationally. Costco has had continued success with their growth plan
proven by their sales in 2011. Costcos warehouses grew double the amount of what was
expected, at 10%. They also opened 34 new locations annually since the plan was set in place.
Compensation and Benefits for Workforce: 164,000 is the number of fulltime and part-time
employees that Costco Wholesale Corporation had in 2011. Their starting wages for employees
are from $10.00-$12.00, warehouse jobs include pay scales from $12.00-$23.00 depending on
the job. Salaried employees can range from $30,000 a year to $125,000 a year. Salaried
employees are eligible for benefits. Their benefits can include health and dental plans, vision
programs, 401(k) plans, dependent care reimbursement plans, employee stock purchase, and a
long-term care insurance plan for employees with 10 or more years of service.

S.W.O.T. Analysis: Costco Wholesale Corporations strengths are their employee size over
150,000 employees; employee turnover rate; strong financial position made possible by low
operational costs; and largest retailer of wine in the world. The weaknesses that Costco has are
the huge competition within the wholesale market and they do not offer a variety of products as
their competition. Costcos opportunities are international market expansion; website expansion;
marketing techniques; and social media. Finally, Costco Wholesale Corporations threats are
increased labor wages and demands, increasing product pricing on goods and services, and the
threat to the Kirkland private label against brand name labels.
Competitive Analysis: Sams Club and BJs Wholesale Club are Costco Wholesale Corporations
two main competitors. Sams Club, a division of the Walmart Corporation, has a format of
selling products at very low profit margins, resulting in low process to members. In 2012, there
were 611 Sams Club locations in the United States. Sams Club warehouses also have the same
setup as Costco with concrete floors, and little dcor to create low operational costs. Sams Club
offers 4,000 different types of products, similar to Costco. Although, Sams Club has less upscale
items and in turn allows their products to carry a lower price tag than most Costco products. BJs
Wholesale Club has over 195 warehouses in 15 different eastern states. In 2011, BJs became a
privately held company because they agreed to a buyout offer from two private equity firms. BJs
Wholesale Club offers a choice of 7,000 different type of items which is 3,000 more than its
competition. Their strategic plan focuses on the individual consumer and not the consumer
friendly shopping experience, like Costco or Sams Club.
Porters Five Forces Model: Costco has two competitive forces from Porters Five Forces model
that are the strongest. Those are the buyers and the firms in other industries offering substitute
products. The buyers are the consumers who are purchasing Costco Wholesales products. The
competitive pressure from the buyers bargaining power of getting the lowest prices is a huge part
of Costcos business. Also the competitive forces of other firms that are substitute products such
as Sams Club and BJs Wholesale Club are both strong pressures from the market place.
Strategic Analysis and Suggestions: Costco Wholesale Corporation has a sound expansion plan
for their future of growing sales for each of their existing stores at 5% and expanding
domestically and internationally for the future. Countries such as India and Asia would be
beneficial for Costco to expand to. This is because they are known to have large families and if
the company places the stores in the demographic areas suitable for their target market, they
would have an extremely successful international business. Costco has many opportunities in the
online market as well. Costcos business plan is based off of the treasure hunting idea, but it is
not necessarily translated to their online business website. When consumers go online to
purchase products, most of the time they are looking at for one item. Doing marketing research
on ways to translate the treasure hunting technique would be extremely beneficial to increase
purchases online. Costcos competition are also tapping in to the applications market. Costco
does have an app, but it set up like a coupon book and is not easy for the consumer to use. Target
has a great example of a successful application that gives discounts to their consumer. Overall
Costco is profitable company that a sound strategic plan for the future, but these suggestions will
help improve their company competitive nature in their market place.