International Business Policies & Strategies

Short Case Analyses#1 - July 07, 2011 By Vongsakorn Taechapatraporn (AMP)

Costco Wholesale in 2010

Summary of the case:
Background & Market Environment Costco Wholesale Corporation founded by James (Jim) Sinegal and Jeffrey Brotman, Costco opened its first warehouse in Seattle, Washington, on September 15, 1983. Jim Sinegal had started in wholesale distribution by working for Sol Price at both Fed-Mart and Price Club. Costco Wholesale Corporation is the largest membership warehouse club chain in the United States. In 2010, Costco is the third largest retailer in the United States, where it originated and the eight-largest in the world. As of March 2010, Costco operated 567 warehouses, including 414 stores in the United States and Puerto Rico, 77 stores in Canada, 32 stores in Mexico(via a 50 percents owned joint venture), 21 stores in U.K., 9 stores in Japan, 7 stores in Korea, 6 stores in Taiwan, and 1 in Australia. The Cost's most profitable store was in Korea, and its second most profitable store was in Taiwan. Sales per store averaged $131 million annually. Some 5.7 million businesses and 31.1 million households had Costco memberships. In 1993, Costco merged with Price Club (called Club Price in the Canadian province if Quebec). Costco's business model and size were similar to those of Club Price, which was founded by Sol and Robert Price in 1976 in San Diego, California. Thus, the combined company, PriceCostco, was effectively double the size of each of its parents. Just after the merger, PriceCostco had 206 locations generating $16 billion in annual sales. PriceCostco was initially led by executives from both companies, but then Sol and his son Robert Price founded Price Enterprises and left in December 1994. Prior to the 1993 Price merger, Wal-Mart founder Sam Walton wanted to merge Sam's club with Price Club. The first Price Club location was opened in 1976 in an old airplane hangar, previously owned by Howard Hughes, and still in operation today. In 1997, the company changed its name to Costco Wholesale and all Price Club locations were rebranded Costco. Nowadays, in the United States, the main competitors operating membership warehouse are Sam's Club and BJ's Wholesale Club. Although Sam's Club has more warehouse than Costco, but Costco has higher total sales volume. Costco employs about 142,000 full and part-time employees. As of September 2009, Costco had 58.8 million members.

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International Business Policies & Strategies

Short Case Analyses#1 - July 07, 2011 By Vongsakorn Taechapatraporn (AMP)

Key points to the case I think Jim Sinegal is an effective CEO. He is very much the person in charge. He functioned as producer, director, and knowledgeable critic. He cut to the chase quickly, exhibiting intense attention to detail and pricing, wandering through store aisles firing a barrage of questions at store managers about sales volumes and stock levels of particular items, critiquing merchandising displays or the position of certain products in the stores. Moreover, Jim Sinegal saves on operation costs in order to provide low price while still keeping high quality. However, he offers the employees good health care plan and compensation because he believes this way would increase employees performance and decrease employee turnover. In addition, most Costcos managers and vice presidents had started from entry-level jobs. They are familiar with Costcos operation and know how to better manage the employees and businesses.

Review strategy:
Company's strategy - Costcos business model is to generate high sales volumes and rapid inventory turnover by offering members at ultra-low prices on a limited selection of nationally branded and selected private-label(Kirkland) products in a wide range of merchandise categories. The chief elements of Costcos strategy are low prices, a product quality and limited selection, and a "treasure hunt" shopping environment. Pricing: is a key element of Costcos business model. Costco's mission, "To continually provide our members with quality of goods and services at the lowest possible prices," is to cap the margins on brand-name merchandise at 14% and margins on its private-label Kirkland Signature items at maximum of 15%. This strategy keeps members coming into store by wowing them with low prices. Product Selection: Costcos merchandising strategy is to provide members with a selection of 3,800 to 4,000 items. In the period of 2006 - 2009, Costco provided its private-label Kirkland signature in store from 400 - 600 items. Its product range covers a broad spectrum but it deliberately limited the selection in each product category to fast-selling models, sizes, and colors.

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International Business Policies & Strategies

Short Case Analyses#1 - July 07, 2011 By Vongsakorn Taechapatraporn (AMP)

Treasure-Hunt Merchandising: about one-fourth of Costcos line of 4,000 products is constantly changing. Its merchandise buyers remain on the lookout to make one-time purchases of items that would appeal to the companys clientele and that would sell out quickly. As a result, Costco members planed ahead of time to go buy treasure-hunt specials that interested them, because they knew that the items will not also available for them in the next shopping trip.

Development tools This business model is appealing because high sales volume and rapid inventory turnover allows Costco to sell and receive cash for inventory before it has to pay merchandise vendors, and to take advantage of early payment discounts. Thus, Costco is able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than having to maintain sizable working capital to facilitate timely payment of suppliers. Furthermore, including the welfare compensation to the Costco's employees that build-up employees in their willingness to work at Costco, Jim Sinegal is convinced that having a well-compensated workforce is very important to executing Costcos strategy successfully. It absolutely makes good business sense that employees should have the right to good wages and good careers. Additional, Costco is the lowest-cost producer but it pays the highest wages. So it must mean Costco gets better productivity. Jim Sinegal said "it's a axiomatic in our business - you get what you pay for" that made an influence to their employees to fulfilled their spirit and work hard because they love, where they work and what they do best.

Objectives Costcos ultra-low prices and treasure-hunt merchandising make it unnecessary for the corporation to engage in extensive advertising or sales campaigns, since they cause merchandise to move quickly. The ensuing high sales volume and rapid inventory turnover allow Costco to sell inventory as soon as it arrives at the warehouse resulting in significant savings. To ensure ultra-low prices Costco caps mark-up at 14% and marks up Kirkland products at only 15%. Treasure-hunt merchandising creates a sense of urgency as members know they better buy an item or it will not be there next time.

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International Business Policies & Strategies

Short Case Analyses#1 - July 07, 2011 By Vongsakorn Taechapatraporn (AMP)

Method of implementation Costco has been playing very successful in the wholesaling industry as it can be seen from its business strategies. Moreover, Costcos strategy to grow sales and profits has three main elements: open more new warehouses, build an ever 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. Costcos strategy to attract more members and entice members to do a bigger percentage of their shopping at Costco has three components: y Give members a place to buy supplies of practical, frequently used business and household items at money-saving prices. Make shopping at Costco interesting and rewarding. Acclimate members to the merits of visiting Costco weekly or monthly.

y y

Solutions and analysis:

What I thought on this strategy and issues within the caseBased on the data in Exhibit 2 indicated that Costcos expansion outside the U.S. is financially successful because operating income and total revenue of year 2000-2008 shown in Exhibit 2 have continuously increased. Moreover, the number of warehouse has increased from year to year. The revenue to warehouse ratio has also increased. Although , in the year of 2009, the total revenue is decreased due to the crisis of Membership fees that not growth like the previous years. In addition, the important factor that lower the Costco's revenue is the U.S. currency that is not strong and could not be held on merchandise costs as shown you in Exhibit 2 the chart line of merchandise costs . Based on the data in Exhibits 1, 6 and 7 indicated that Costcos financial performance in 2009 is superior to that at Sams Club and BJs Wholesale due to the Costcos operating income and average sales per store are higher than its competitors. In the fact that the Fiscal year of 2009, the Selected Geographic Operating data in Exhibit 5 said the whole operating income from all regions decreased from $1,969 M. (in 2008) to $1,777 M. (in 2009) and the majority of regions that decreasing Costco's revenue are U.S. and Canadian regions.

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International Business Policies & Strategies

Short Case Analyses#1 - July 07, 2011 By Vongsakorn Taechapatraporn (AMP)

What I should recommend on this strategy The recommendation that I would make to Jim Sinegal regarding to the strategy that Costco management needs to take to sustain the company growth and improve its financial performance in nearby future. The recommendations would be to keep honoring their business philosophy, values and code of ethics. Jim Sinegal could offer a wider range of merchandise, expand internationally by entering to other countries and exchange the products from base country that they produce best in their product. I mentioned that because Costco are the leadership in wholesale management that can blow out all competitors away. Beside, Costco could make a competitive advantage by transferring the brand-name products and Kirkland brand to all over the world. According to the data in Exhibit1, Gold Star members which are for individuals have increased from 10,500,000 members (in 2000) to 20,200,000 members (in 2008). Although, in 2009 the Gold Star members falling back to 21,500,000 members that affected to decrease the total revenue in 2009. From this information, Costco would better to focus on pleasing the Gold Star members and attracting many more customers by offering more products and more on Treasure-Hunt products that can appealing more customers. Moreover, the company should offer a wider range of brandname products at low prices. These strategy will make Costco get out of the established market boundaries to leave the competition behind because they have no rules of the game in new market boundaries. Indeed, this strategy are called Blue Ocean strategy that the company find a systematic approach to break out of existing companies and make the competition irrelevant by reconstructing market boundaries to create a leap in value for both companies, instead of competing in existing industries.

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International Business Policies & Strategies

Short Case Analyses#1 - July 07, 2011 By Vongsakorn Taechapatraporn (AMP)

References:
Reference Books:

1. Crafting & Executing Strategy "THE QUEST FOR COMPETITIVE ADVANTAGE" Concepts and Cases Author: Arthur Thompson, A. J., III Strickland, John Gamble Edition: 18 (2011-02-04) Publisher: McGraw-Hill 2. Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant Author: W. Chan Kim, Renee Mauborgne Edition: Unabridged (2006-09-25)

Reference Websites:

http://www.nytimes.com/2009/12/16/business/16price.html Margalit fox (December 16, 2009). "Sol Price, Who Founded Price Club, Is Dead at 93". The New York Times. Retrieved 2009-12-24. http://media.corporate-ir.net/media_files/irol/83/83830/H_highlights2.pdf "Costco Wholesale Historical Highlights". Costco Wholesale. February 12, 2009. Retrieved 2009-11-27 http://www.stores.org/pdf/09Top100chart.pdf Top 100 Retailers STORES http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-homeprofile "Costco Wholesale company profile". Costco Wholesale. November 12, 2009 http://www.costco.com/Browse/ProductSet.aspx?Prodid=24743&whse=&topnav=&browse "Costco Wholesale info". Costco Wholesale. http://www3.samsclub.com/newsroom "About Sam's Club". Sam's Club. 2009-02-09. Retrieved 200911-27.

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