Report to Jim Sinegal, CEO of Costco, of the competitive analysis of Costco Wholesale vs.

Sams Club and BJs Wholesale

Tony Roegiers Roegiers Consulting Firm

October 24th, 2011

Introduction Costco, founded by Jim Sinegal in 1983, is the third-largest retailer in the United States. Globally they rank as the eighth-largest retailer. This discount wholesale club prides itself on selling top-quality merchandise at the lowest possible prices. There are currently 567 total warehouses in the world including 414 in the United States. Costco has been able to extend membership to about six million businesses and 31 million households with an average income of 74 thousand dollars a year. These customers have attributed to an astounding 87 percent renewal rate. This report will be constructed as an analysis of Costco. Furthermore there will be an evaluation of Costcos biggest competitors, Sams Club and BJs. Company strategies will be the main focus for this evaluation. The next part of this report will include a breakdown of the financials as well as recommendations for management. These recommendations will be made with the intent of sustaining company growth and improving financial performance. Finally, there will be a five year projection included. This projection will assess Costcos standing as the industry leader and evaluate potential threats from competitors. Costcos Mission Costco's mission is to continually provide our members with quality goods and services at the lowest possible prices. In order to achieve our mission we will conduct our business with the following Code of Ethics in mind: Obey the law, take care of our members, take care of our employees, and respect our vendors. If we do these four things throughout our organization, then we will realize our ultimate goal, which is to reward our shareholders. Costco has remained true to their mission and carried it out effectively. This mission drives every employee of Costco, all of whom understand its importance. Strategic Plan Costcos strategies are laid out very well. Treasure-hunt shopping is the term that Costco uses to describe the customers shopping experience; a technique that allows Costco to offer high-end products at a shockingly low price, intriguing customers to take advantage of dramatic savings. They believe in offering a limited selection of merchandise in a wide variety of areas. The idea of offering a limited selection allows Costco to acquire the product at a significantly lower price. This is made possible because of the lower purchasing, shipping, and in-store handling of volume merchandise. All of these factors allow Costco to sell their products at an extremely low price. In fact Costco will not even stock a product if they feel that it cannot be priced low enough. The low prices of the products at Costco result in rapid turnover. The rapid turnover paired with the operating efficiencies and membership fees equate to a high profit with a low gross margin. Another way for Costco to cut costs is to print all of the signs in the store on a laser printer. Also they do not keep shopping bags at the counter and sometimes even use empty boxes that would have been disposed to load merchandise.

One Costco strategy that is widely disputed is how they compensate employees. New Costco employees usually start out making $11 an hour and once they have been with the company for five years that salary increases to $20 per hour. These numbers are significantly higher than other warehouse companies and critics say that Costco can increase revenue if they decrease employee salaries. Cutting employee salaries would be detrimental to the company however. Costco employees start with the company and stay for a very long time. The work atmosphere is more than favorable and a vast majority loves their job. Costco employees are extremely productive. Furthermore Costco believes in promoting from within. A staggering 98 percent of Costco management has been promoted from within, meaning people who started pushing shopping carts or working on a cash register are now managers for the company. Costco can also make up for high employee salaries with their lack of marketing. Word of mouth marketing is the technique used because of how many employees and members are already in existence. Their marketing expenses are significantly lower than other warehouses or supermarkets. Competition Strategies Costcos biggest competitors include Sams Club (a branch of Wal Mart) and BJs Wholesale. Sams Club operates 596 warehouses in the United States. The strategies of Sams Club are similar to Costco. Membership fees for business members at Sams Club cost $35 per year. Business members can also add up to eight associates for another $35 each. A typical member cost is $40 per year and a premium membership costs $100 per year. This is compared to Costcos $50 per year business membership and typical member fee; however the premium membership is also $100 per year. Sams Club offers brand-name, top quality merchandise at low prices. Also they use the same method of stocking about 4,000 items. Another similarity shared between Costco and Sams Club is how they display their items. Both warehouses stack their inventory on the sales floor allowing for decreased labor in restocking. Although Sams Club seems to have extremely similar strategies they do not execute with the same efficiency of Costco. Costcos corporation is run more effectively making Sams Club an inferior competitor. While Sams Club and Costco have similar business strategies, BJs Warehouse uses some different techniques. The quality of merchandise and low selling price seems to be the same as the other two competitors but the operating model is where the differences lie. BJs offers 7,000 different items where Sams and Costco only offer 4,000. Also to make the shopping experience better for customers BJs has added aisle markers and video-based sales aids. Their stores operate longer hours than the other two warehouses as well. Smaller package sizes were also offered, similar to sizes at grocery stores, contrary to industrial sized products offered at Sams Club and Costco. Finally, BJs has set up their products into three price categories of good, deluxe, and luxury making it easier for the customer to identify the product they are searching for. Costco clearly has the best strategy of the three because of its standing as the industry leader. Although Costco and Sams Club have similar strategies it seems that Sams Clubs strategy is weaker. BJs Warehouse has a slightly different strategy, but it has differentiated itself effectively and could eventually challenge Costco even more than Sams Club.

Five Forces Model

Suppliers Have weak bargaining power Many suppliers create a low switching cost Many substitutes exist Large quantities required

Buyers Have weak bargaining power Switching costs will be a problem Extremely larger membership base Costco presents the best value

Rival Competators Extremely firece competition Costco industry leader and offers higher quality product Economic recession created a bigger need for low cost distributer Buyer's switching cost is currently low

Substitutes Very strong threat Easily accessible substitutes Other prices are not significantly higher Competition offers comparable products Low switching costs Other warehouses offer more of a selection

New Entrants Very low threat Small pool of entry Very high entry barriers Expanding market Attractive profits

Competitive Financial Analysis Costcos financial security far exceedes Sams Club and BJs wholesale. The net sales for Costco, in 2009, were $69,889,000,000 compared to $47,976,000,000 of Sams Club. BJs net sales equaled $9,954,000,000.Costcos best sellers are meat with sales of $3.7 billion, seafood with sales of $708 million, $2.2 billion in electronic (television) sales, fresh produce sales of $3.1 billion, and Costco is the world largest seller of fine wines with $597 million.

Net sales of Costco, Sams and BJs from 2005 through 2009

Net Sales
80,000 70,000 60,000 $ in millions 50,000 40,000 30,000 20,000 10,000 0 2005 2006 2007 2008 2009 Costco Sam's Club BJ's Wholesale

Costcos total revenue, in 2009, totaled up to $71,422,000,000 compared to Sams Clubs $46,710,000,000 and BJs $10,027,000,000. Total revenue of Costco and BJs from 2006 through 2009. Sams clubs total revenue was analyzed from 2008 through 2009.

Total Revenue
80,000 In Millions 60,000 Costco 40,000 20,000 0 2006 2007 2008 2009 Sam's Club BJ's Wholesales

Costco also has an advantage in net income. Costcos net income comes mostly from their membership fees due to Costco capping the margins on brand-names up to 14%. Other retailers are at 20% to 50% on same items. Over 70% of Costcos operating profits were attributable to membership fees.

Net Income of Costco and BJs

Net Income
1,400 1,200 in millions 1,000 800 600 400 200 0 2006 2007 2008 2009 Costco Sam's Club BJ's Wholesales

Costco offers two types of memberships: Business and Gold Star. The business member pays an annual fee of $50, which includes a spouse membership card and could purchase membership add-on cards for $40. The Gold Star is an annual payment of $50, which includes a spouse card. A member can also purchase an Executive Membership which cost $100 annually, which includes savings opportunities. Costco sold about 6 million Business memberships, about 22 million Gold Star members, and 29 million add on members for 2009. In membership fees alone, Costco made $1.6 billion. BJs made $178 million in membership fees in 2009. Sams clubs membership fees were unavailable. Membership Revenue

Membership Fees
1,800 1,600 1,400 in millions 1,200 1,000 800 600 400 200 0 2006 2007 2008 2009 BJ's, 150 BJ's, 162 BJ's, 176 BJ's, 178 Costco , 1,188 Costco , 1,313 Costco , 1,506 Costco , 1,533

Five Year Forecast

5 Year Forecast
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2010 2011 2012 2013 2014 2015

The above graph shows the five year forecast for Costco (indicated in blue) and BJs Warehouse (indicated in red). Sams Clubs information was not available hence not indicated in the graph. Costco is the clear industry leader and it seems their standing will stay true for years to come. Sams Club is not expected to gain significant ground on Costco. As of right now BJs is not an immediate threat to Costco but many years down the road, if they continue to advance at a rapid pace they may challenge Costco.

in millions