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Costco Case Study Fourth largest retailer in the US and eight largest in the world Sinegal benefits his

employees is blue collar bargain dressed who cares about his employees Sales per store averaged $130 m annually, about 75% more than the $75 m per store average at Sam s Club, Costco s chief competitor in the membership warehouse retail segment Costco became the first US company ever to reach $1 b in sales in less than 6 years Mission: To continually provide our members with quality G&S at the lowest possible prices Business Model: generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and select private label products in a wide range of merchandise categories Rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no frills, self service warehouse facilities, enabled Costco to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and super centers Costco was able to pay many of its merchandise vendors early to take advantage of early pmt discounts Costco s Strategy: Low prices, limited product line and limited selection, and a treasure hunt shopping environment Pricing o Selling top quality national and regional brands at prices consistently below traditional wholesale or retail outlets o Costco s private label Kirkland Signature were about 20% below comparable namebrand items o The brand is being of equal or better quality than national brands o Wall Street criticized them for selling way below market price and hurting shareholders Product Selection o Costco s selection of only 4000 compared to Wal-Mart with as many as 150,000 o Product range is huge but it deliberately limited the selection in each product category Treasure Hunt Merchandising o Of the 4000 items, 1000 are treasure hunt stuff that s always changing o Customers know they better buy it b/c it will not be there next time o Luxury jewelry, coach bags, Dom Perignon champagne Marketing and Advertising o Low prices and treasure hunt made it unnecessary to engage in advertising or sales campaigns o Mail marketing to prospective new members or existing members o Once a membership base was established, most new members came from word of mouth Growth Strategy o Open more new warehouses, build an even larger and fiercely loyal membership base, and employ well executed merchandising techniques to induce members to shop at Costco more often and purchase more per shopping trip o As of October 08, 102 warehouses were located outside the US o Give members a place to buy supplies of practical, frequently used business and household items at money saving prices o Expand the offering of Kirkland Signature private label items

Make shopping at Costco interesting and rewarding b/c of opportunities to purchase an ever changing array of big ticket items and indulgences at rock bottom prices Website sales o Two website one in US and one in Canada Warehouse Operations o Shoppers were attracted by low prices not the interior design of the building which usually was metal pre-engineered design and concrete floors o Merchandise stored on racks above the sales floor and displayed on pallets therefore reducing labor required for handling and stocking o No shopping bags at checkout counter, put directly into cart or empty boxes o Shorter hrs resulted in lower labor costs relative to the volume of sales o Warehouse managers functioned as entrepreneurs running their own retail operation o Maximized freight volume and handling efficiencies o Low receiving costs by eliminating many of the costs associated with multiple step handling of merchandise o Direct buying relationships with many producers of national brand name merchandise o Costco could switch its purchases to alternative manufacturers easily if its current sources of supply became unavailable o Strict control over warehouse entrances and exits, resulting in inventory losses of less than 2/10 of 1%, well below those of other retail discounters Membership base and member demographics o Average income of individual members was about $75k, over 30% with $100k o Two primary types of memberships: Business and Gold Star o Member renewal rates were about 87% Compensation and workforce practices (Look at Each Individual Benefit) o Starting wage for new Costco employees were $10.50-$11 o 5 or more yrs median pay was $17-21 per hr o Managerial positions range from $55k-$75k o Biannual bonuses and full spectrum of benefits o Were the lowest cost producer but we pay the highest wages so it must mean we get better productivity o An employee with more than 2 yrs could not be fired without approval of a senior company officer Selecting People for Open Positions o Company policy to fill at least 86% of its higher level openings by promotions from within, in actuality the percentage ran close to 98%, employees were home grown o Although warehouse managers at Costco came from the ranks of assistant warehouse managers who had a track record of being shrewd merchandisers and tuned into what new or different products might sell given the clientele Executive Compensation o Executives at Costco did not earn the outlandish salaries that had become customary over the past decade at most large corporations o Best paid senior executives at Costco were paid in the range of $500k-$550k Costco s Business Philosophy, Values, and Code of Conduct o Obey the Law, Take Care of our Members, Take Care of our Employees, Respect our Suppliers, Reward our Shareholders o

Competition o Wholesale club and warehouse segment of retailing in 08 was estimated to be a $120 billion business in the US, and was growing about 20% faster than retailing as a whole o Sam s Club: 713 warehouses in 6 nations 47 m members, BJs: 177 locations in 16 states o Costco had close to a 53% share of warehouse club sales across the US and Canada o Sam s Club had 37%, and BJs and several small warehouse clubs had about 10% o Competition based on price, merchandise quality and selection, warehouse location, and member service o Also competed with Wal-Mart, Dollar General, supermarkets, Target, Kohl s Sam s Club o Concept was to sell merchandise at very low profit margins, resulting in low prices to members o Adding new lines of merchandise, with more emphasis on products for the home as opposed to small businesses o Instituting new payment methods o Running ads on National TV o Adding a collegiate membership o Launching a holiday catering program o Annual fee for Sam s Club business members was $35 with a spouse card available at no additional cost o Like Costco, distribution centers employed cross docking techniques whereby incoming shipments were transferred immediately to outgoing trailers destined for Sam s club locations BJ s Wholesale o 177 stores operating in 16 states from Maine to Florida, 3 cross dock distribution centers o 158 full sized warehouses averaging 113K SF 19 smaller format 71k SF that were located in markets too small to support a full sized warehouse o 100 clubs have self service gasoline stations o It abandoned its pharmacies in early 07 o Merchandise displayed on pallets containing large quantites of each item thereby reducing labor required for handling stocking and restocking o Like Costco, BJs sold high quality, brand name merchandise at prices that were significantly lower than the prices found at supermarkets, discount retail chains, department stores, drugstores, and specialty retail stores like Best Buy o Merchandise lineup of about 7,300 o About 70% of BJs product line could be found in supermarkets (S0 MAYBE A POSSIBILITY OF REMOVING THE NEED FOR SUPERMARKETS AS A WHOLE BC OF ACQUISITION AT LEAST ON THE EAST COAST SINCE COSTCO WAS FORMED ON THE WEST COAST) o 61% of sales was food, o 3 price categories for members to choose from, good, deluxe, and luxury o To encourage more frequent trips to its clubs and also to provide members with more of a one stop shopping opportunity most BJs locations offered a variety of specialty products and services, provided mostly by outside operators that leased warehouse space from BJs o 8.8 million members at year end 2007 (see exhibit 4) o $45 per year for a primary Inner Circle Membership, buy additional at $20 o Membership rewards program offered 2% rebate, capped at $500 per year

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Only warehouse that s accepts MasterCard, Visa, Discover, and American Express Increased customer awareness of its clubs primarily through direct mail, public relations efforts, marketing programs for newly opened clubs, and a publication called BJ s Journal, during holidays BJs engaged in radio and TV advertising Merchandise purchased from manufacturers were shipped either to a BJs cross docking facility or directly to clubs Strategy Features that Differentiated BJs (READ ARTICLE) Do the acquisition but keep the name and its wide range of choices and smaller package sizes Open longer than other competitors

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