Strategic Plan

End of 2008
$71 Billion in Sales 550 stores world-wide

Quality merchandise Low price Rapid inventory turnover

54 million members
Avg yearly income $70K

Low prices Limited selection of quality merchandise + Wide range of merchandise categories Rapid inventory turnover

Volume purchasing Efficient distribution Reduced handling of merchandise + No-frills, self-service warehouse Operating efficiencies

Rapid inventory turnover + Operating efficiencies Profit at a very low gross margin

I want to retire here. I love it here.

 Our business is to give the customer the best value we can.

Jim Sinegal, Founder of Costco

We're going to be a company thats on a first-name basis with everyone.

 Give customers the best value, at the best price Treat people right, and with respect Act ethically

Most importantly never lose sight of what the purpose of your business is
Best value, best price

 Hire great people

Treat them well

Give them good jobs Do right by them

 Always promote from within

Training happens constantly

Grow our own talent Model what you want from your employees

 Dont try to be too much to too many Know on what level you compete

Know your customers

why they do business with you

Stay focused on your core business

 Run the business for longterm sustainability Open new stores

50-60 new locations per year

Keep Internet sales growing

 Word of mouth only No PR department, ever?

 Obey the law

Treat customers right

Treat employees right Treat suppliers right

 Stay focused on what we do

Our business model

Focus on our core business

 General economic condition

recession recovery
Stronger dollar = weaker foreign sales

Domestic market is maturing

Saturated
At least one store in each major metropolitan area Often going head-to-head

4,000.0 3,932

3,500.0

3,000.0

3,056

2,500.0

Retail Industry
5-yr Growth: 5.73%

$ Billions

2,000.0

1,500.0

Costco Wholesale
1,000.0

5-yr Growth: 13.28%

38.7 64.4

500.0

0.0

2002

2007

 Over 1,200 warehouse clubs in North America

only 473 Costcos

Other retailers and wholesalers

groceries general merchandise chains
Wal-Mart, Target, and Kohls

specialty chains
Barnes & Noble, Lowes, Best Buy, Staples

gas stations e-commerce

 Partially vertically integrated

Cross-dock distribution

Backward integration
Kirkland Signature brand Relationships with
Manufacturers Suppliers

 Gigantic sized orders

Bulk packaging
Largest warehouse stores Membership base (54 mil)

Substitutes
Strong threat Good substitutes everywhere Price not significantly higher Comparable product features More variety of features Low switching cost

Suppliers
Weak bargaining power Many suppliers Low switching cost Many substitutes exist Large quantities are needed

Competing Sellers
Fierce competition Costco is on top Quality is slightly better Buyer demand is growing Buyers switching cost is low

Buyers
Weak bargaining power Some switching costs Large membership base Costco has the best value

Potential New Entrants

Low threat Small pool of entry candidates High barriers to entry Expanding market Attractive profits

 Internet

Market saturation
Rising costs

 Legislation
proposed tax on big-box stores

Recession Technology
green technology is a concern

Higher

Pricesmart Inc.
P

Operating Margin

Sams Club

BJs

Costco

Lower

Few

Many

Number of Locations
Note: Circles are drawn roughly proportional to the sizes of the club chains based on revenue

 More stores in foreign markets

facing market saturation in U.S.
cannibalization

Copy Costco
Sams Club opens first Business Centers
July 22, 2008

 Internet sales Vast network of retail locations

cross-docking

No-frills warehouse Ongoing effort to cut costs Only stock bargains Treasure-hunt merchandise

No-hassle return policy

Word of mouth advertising

Growth Estimate Current Qtr. Next Qtr. This Year Next Year Past 5 Years (per annum) Next 5 Years (per annum) Price/Earnings (avg. for comparison categories) PEG Ratio (avg. for comparison categories)

COST Industry -17.40% -11.10% -7.70% 16.30% -15.10% 5.50% 8.90% 12.60% 7.70% N/A 11.30% 12.34% 18.53 1.64 15.53 1.26

Sector S&P 500 -19.20% N/A -2.90% N/A -3.80% N/A 19.60% N/A N/A N/A 11.28% N/A 15.63 1.39 N/A N/A

http://finance.yahoo.com/q/ae?s=COST

 Retail

Consumer Services
Financial Services Insurance

 Costco's main competitors

Sam's Club BJs Wholesale Club Other retailers
FY 2008 Costco vs. Competitors

Big box, big bucks Costco sells more efficiently than its low-margin peers. It even outdoes plusher names like Nordstrom, and holds its own against higher-markup "category killers" like Best Buy. Company Target Nordstrom Home Depot Wal-Mart* BJ's Sam's Club* Costco Best Buy Sales per square foot, annual $307 $369 $377 $438 $445 $552 $918 $941

Revenue Company (Billions) Costco $70.9 Sam's Club $46.8 BJ's Wholesale Club $10.0

Comparable Net Income Operating Store Sales (Billions) Margin (Decline) Locations $1.3 2.7% 6.0% 512 N/A 3.4% 4.8% 602 $2.3 2.3% 9.4% 180

 Low price

Strong brand
Excellent merchandise Exceptional employees 54 million members Economies of scale

Efficiency

 James Sinegal is 79

Maintain high wages

42% higher than Sam's Club

Maintain low margins

 Recession
Easier to find bargain luxury-items Increased popularity of Costco

Expanding foreign markets

Europe China India

 Fierce competition

Other retailers
Cannibalization Political problems in other countries

 Overall, Costco is doing great!

 Who will replace the CEO? Gender discrimination lawsuit Improper accounting
Ethics and compliance program

 Generic Competitive Strategy

Complementary Strategic Options

Functional Area Strategy

Timing

 Best-Cost Provider
Top-quality merchandise Lowest price Treasure-hunt items Kirkland Signature
Top-quality in-house brand

 Strategic alliances
Bulk packages for Costco Kirkland brand

Website strategy
Brick-and-click

 Distribution
Cross-dock

Marketing
No marketing

HR
Promote from within

Finance
Own 80% of real-estate and buildings

 Costco Business Centers

Greening of Costco warehouses

Energy conservation
No-frills Energy conservation

Finding new ways to repackage

Products Services

Partnerships Mexico 31 warehouses a

50%-owned joint venture
access to
Foreign market Key officials

Alliances Kirkland Signature is a strategic alliance with

Suppliers Manufactures
Martha Stewart Bumble Bee

Taiwan 5 locations
through a 55%-owned subsidiary

Service Providers
Payroll Services Prepaid Express Shipping Web Sites Etc.

 IT Support
US Technology Resources LLC 75 out 100 jobs are in India

Shipping from Costco.com

UPS FedEx

 Think global, act local

Same basic strategy
Low price

Tailor product offerings by

Cultural difference Local managers decide

More foreign markets

Europe China India

 Address these macro situations

Competing in Maturing Industries Competing in Fragmented Industries Strategy for Industry Leaders

 Costco Wholesale
Warehouse Clubs and Superstores

Costco Business Centers

Cross-business strategic fit
1+1=3

 Consumer Services
Travel Optical Automotive

Financial Services
401(K) Loans

Insurance Pharmacy Recycle electronics

Is diversion buying ethical?

Crocs only sell at full price to protect its brand name and price structure

Diversion Buying

Crocs did not sell to Costco, nor has it authorized any of its customers to sell to Costco.

Improper accounting practices

Ethics and compliance program
One of the conditions for dropping case

 April 2009, Costco announces

Kirkland tuna can size increases
6oz to 7oz, yeah!

Failed to mention the price increase

Price per ounce increased!!!

How can all the prices end in .99

If the margin is capped at 14% Is $10.25 just rounded up?

 April 2008
National class action gender bias suit

December 3, 2008
Costco Employee Awarded $420K

March 9, 2009
Gay Employee Sues Costco for Retaliation

May 1, 2009
Costco Settles Membership Class Action

1. 2. 3. 4.

Obey the law Take care of our members Take care of our employees Respect our suppliers

5. Reward our shareholders

The ultimate goal

Code of Ethics (full version)

 More than a figure of speech

Donating money and time is good for

memberships patronage

 Last 10 years
more than $140 million

Actively involved in community

reading programs in schools scholarship programs for the disadvantaged

Contributing and raising money

childrens hospitals

Chat

Sell

 Green packaging
Renewable paper and cardboard Not plastic clamshells

Green cleaning products

Skylights Timed lighting More efficient lighting High-efficiency heat and AC Hybrid delivery trucks Solar panels Pay employees to
Carpool

Ride bus

 2006 Costco's first 580 kW prototype system a success

Lancaster, CA

Four more systems added

600 kW (DC) per location

Largest commercial PV systems in the U.S. 17 PV systems in 2008

 Hazlet, New Jersey

500kW system
new Solyndra panels
cylindrical modules

Largest Solyndra system

 environment-unfriendly packaging of small items huge plastic blister packs

cant always be recycled

plastic and cardboard blister packs

terribly excessive packaging a crime against the planet

 Best pay

Best benefits
spouses children domestic partners

Pays a larger percentage of premiums

withheld pre-tax

 Costco is diverse with respect to

Gender Race National origin Disabled, etc.

International companies benefit from having a diverse workforce

Better communication

 Staffing the organization

Recruit the best All managers are hired internally Continuous training High pay and great benefits Fun work environment

 Building core competencies and competitive capabilities Finding and negotiating bargains
On quality merchandise

Building relationships with

Manufacturers Suppliers

Ingenuity
Cost cutting Conservation

 Organizing the work effort

Decentralized decision making Peer pressure
Honesty Good Health

 Each Costco is connected to corporate HQ EFIM provides

real-time information manage control systems Inventory management system

 Reduce operating costs related to

energy consumption maintenance contracted services

 Non-monetary rewards
Making the team Employee contests Fun and exciting workplace

Monetary rewards
The best pay Best benefits Free membership

 High-Performance Culture
Fun and exciting Continuous training Teamwork Diversity

Customer first

Honesty and frugality Value and low price Lead by example Hire from within Culture of inclusion
generous pay first name basis fun and energetic

7.3% increase 1999 & Before

 Build on success
Costco.com Costco.ca

No online shopping
Mexico UK Taiwan Japan Korea

 Foreign Sales

Litigation
Slump in luxury items Increased health care costs
30-day 52-week 3-month % change % change avg. vol.

Peer Performance
Costco Wholesale Corporation
Staples Inc. Amazon.com Inc. Bed Bath & Beyond Inc.

6.75%
6.44% 7.25% 0.07%

38.11%
17.04% 11.03% 5.89%

1.1M
1.8M 1.6M 1.3M

U.S. States & Puerto Rico Canada

77 21 5 6 31 8

United Kingdom Taiwan Korea Japan Mexico

407

 Greater international expansion

International sales are high
21.5%

U.S. Sales are down

78.5%

Inventory Turnover (TTM) Costco Industry Wal-Mart BJs Target Best Buy Sears Pricesmart 11.93 2.47 8.73 10.27 6.64 6.61 3.36 9.20

ROI 5 Yr Avg 11.01 7.59 13.80 11.11 6.48 19.74 7.17 14.12

Sales 5 Yr. Growth Rate 11.24 15.11 9.41 8.42 9.10 12.89 15.00 15.54

Gross Margin 5 Yr Avg 12.40 24.66 23.37 10.37 30.90 24.29 27.54 16.14

Net Profit Margin 5 Yr Avg 1.54 2.74 3.59 1.41 4.23 3.29 2.23 0.40

 Last 5 years

Compared to Nasdaq (yellow)

Image and Reputation

 Accept food stamps

Acquire BJs Wholesale Club

Keep expanding overseas Be more ethical

Continue to add services

Industry Leader strategy
Better promotions

Improve e-commerce
A little good PR better than no PR

 Educate consumers about food stamps Accept food stamps Only 67% of eligible people get food stamps
Missouri at 98% California at 50% New York where 63%

 BJs may soon be up for sale

Store Count
BJ's, 180 Costco, 555 Sam's Club, 624

BJs is beating Costco

Distribution network is in place Employees get
higher pay and better benefits

 50% from international sales

First-mover benefits Partnerships More profit sanctuaries

Costco is not yet in

Europe China India

Legal Proceedings and Audits

Improper accounting practices Illegally backdating memberships Hostile work environment Gender Discrimination
Hire more women managers

Code of Ethics
1. Obey the law 2. Take care of our members 3. Take care of our employees 4. Respect our suppliers 5. Reward our shareholders
The ultimate goal

Grand jury investigations Tort and other litigation

 From
Ethical universalism
One size fits all

To
Integrative social contracts theory
Universal + Local

Retrain
Unintentionally amoral managers

Weed out
Intentionally amoral managers

 Partner with services providers

Offer new services

Money orders Money transfers

Current market conditions

Maturing market
cannibalism

Fragmented market Industry Leader

 Stay-on-the-offensive strategy
First-mover
Costco Business Centers

Promotions Copy BJs

 10-20% loss of all shoppers

Intelligent loss of sale Consumer Reports said
Everyone saves at Costco

Shared memberships promotion

Any two families

 Currently 7 websites
Two e-commerce sites
U.S. and Canada

2008 Revenue in Billions

$2.00 $70.35 $0.15 U.S. Canada Non-Internet

No shipping outside
U.S. or Canada

Make one website

Multiple languages Ship to all locations
Country
United States Canada Taiwan UK Japan Mexico Korea

Website
Costco.com Costco.ca Costco.com.tw Costco.com.uk Costco.co.jp Costco.com.mx Costco.co.kr

e-commerce
Yes Yes No No No No No

 Cut visits in half

Use savings to buy PR

Greening of Costco Childrens hospitals Reading programs Etc.

Find the PR bargains

Jim is 79
Loss of intellectual capital With the next CEO
Things could change

Adhere to core values

Obey the law Respect our
Members Employees Suppliers