Costco Case Study and Strategic Analysis

COSTCO WHOLESALE CORPORATION PROFILE

Type

Public

Traded as

NASDAQ: COST

Industry Establishment Year

Retailing (Warehouse club) 1993

Founder

James D Sinegal, Jeffrey H. Brotman

Headquarter

Issaquah, Washington, U.S.A

No. of Locations

Total: 592 United States : 425 Canada: 82 Mexico: 32 United Kingdom: 22 Japan: 9 Taiwan: 8 Korea: 7 Puerto Rico: 4 Australia: 3

Product

Merchandise Private Brands

Revenue

$88.915 billion (2011)

Operating Income

$2.383 billion (2011)

Net income

$1.462 billion (2011)

Employees

147000

Website

Costco.com

Mission “To continually provide its members with quality goods and services at the lowest possible prices”. Costco’s mission statement is to focus on bringing high quality goods and services to the market at the lowest possible prices every day, but to do it with integrity at every level of the company while valuing the interests of the stakeholders. The mission statement of the Costco is well understood throughout the organization by the management and employees. Vision •

“Our business is to give the customer the best value we can.” – Jim Sinegal, Founder of Costco

•

“We're going to be a company that’s on a first-name basis with everyone.”

Strategic Vision •

Give customers the best value, at the best price

•

Treat people right, and with respect

Objectives Employment Objectives: •

Hire great people

•

Treat them well

•

Give them good jobs

•

Do right by them

Management Objectives: •

Always promote from within

•

Training happens constantly

•

Grow our own talent

•

Model what you want from your employees

Business Objectives: •

Don’t try to be too much to too many

•

Know on what level you compete

•

Know your customers

•

Stay focused on your core business

Growth Objectives: •

Run the business for long-term sustainability

•

Open new stores

•

50-60 new locations per year

•

Keep Internet sales growing

Ethics Objectives: •

Obey the law

•

Treat customers right

•

Treat employees right

•

Treat suppliers right

Business Model:

Business Model is used to exemplify the methods and ways which we used to generate planned revenue. The Costco’s business model is to generate high sales volume and rapid inventory turnover by offering low prices on limited selection of national branded and select private-label products in wide range of merchandise categories. Costco’s offers these products to their members

who

are

of

two

types’

business

members

and

gold

star

members.

Strategy: Strategy is the organization’s pre selected means or approach to gaining its goals or objectives, while keeping in view current and future external conditions. Costco’s strategy’s elements are: 

Low prices



increase sales and profits



Limited product lines and selection



Treasure hunt shopping environment

By keeping low prices Costco’s is following cost leadership strategy which is good because on this base they can compete with their competitors. Costco strategy to increase sales and profits largely depends on some of the key strategic components such as increase the number of new warehouse, build larger and loyal customers base and finally implement such a merchandising technique to motivate and attract members to shop at Costco more often and induce volume purchase per shopping trip. To achieve these strategic objectives, Costco frequently used business and household merchandise at money-saving prices. Beside this, Costco provides opportunities to purchase ever changing array of big merchandise at lowest possible prices. And finally they try to encourage their members to regularly visit Costco so as to not miss out on the those special best value products offering selections that would otherwise will sold out in a matter of days. By limited product lines and limited selection they are offering limited 4000 items which are less as compared to its competitors. Costco’s is adopted market development strategy by capturing new markets for existing products. By treasure hunt shopping environment they provides such product at low prices to its members which they believe will not be available in next visit. This works as an incentive and members try to take maximum advantage and therefore Costco’s sales volume increases. At Costco’s warehouse products are not offered in

every size. The strategy they followed is that by offering every size their efficiency will decrease therefore it is said intelligent loss of sales.

In the core of their strategy, Costco sells limited numbers of products in fewer varieties to keep the cost down and they rely on high volume sales. But unlike their competitors they pay well to their employees. One of the key uniqueness and strength is that they sell membership to their customers that not only generate the fixed revenue every year but also increase the brand loyalty and awareness of the customers towards Costco. They advertise very less thereby reducing the cost by two percent each year. One of the crucial factors of Costco is their pricing strategy. They have unique way or mechanism that helps them keep the price lower than that of competitors and they can still afford to pay 48 percent higher salaries to their employees than their major competitors mainly WalMart. Their membership base is growing and they are able to retain their customers. Virtually, they do everything to retain their customers. Most importantly they have very incredible return policies in hand to attract and retain customers. Furthermore, they try to find the best value pack for almost every product they sell in their location (store). For example, they have thousand packet box of Splenda (sugar free sweetener). They generally engage in bigger packages because they believe that bigger package provides better value and cost savings to their customers. Costco applies several other strategies to achieve corporate wide price leadership strategies. For example, to achieve the price leadership they reduce handling and storage cost, they maintain in-stock positions without being overstocked and transition seasonal merchandise, they utilize just-in-time principles when ordering merchandise to minimize the cost of inventory, keep best value pack product to assure low prices through volume buying, expense reduction and low gross margins etc. in addition to this, Costco doesn’t spent a lot in advertising and use word of mouth advertising for marketing which is not only one of the cheapest way to advertise but it is one of the most effective ways of advertisement. Costco offers their customers with low prices on selected private and a limited selection of nationally branded products in a wide range of merchandise categories. Businesses and families can rely on Costco to offer high quality goods and services at everyday low prices. Rapid inventory turnover, high sales volume per warehouse, leveraging an efficient operating

structure, reduced handling of merchandise, and making themselves the low cost operator in retail are all key elements that make the company so successful.

Costco’s strategic mission, vision and objective analysis

Costco Wholesale Corporation (Costco), one among the few largest wholesaler giant differentiates itself applying unique strategies relating to production and operations, and marketing which make it stand out from the rest of the retailers who are also said to be competitive in the retailing and wholesaling business globally. Costco is one of the innovative wholesalers teamed by very dynamic management team and dedicated, motivated and satisfied workforce with the mission “to continually provide its members the best quality products at the lowest possible prices”. Some of the fundamental principle of the Costco is that they obey the law, they take care of their members, they take care of their employees, they respect their suppliers, and finally they reward their shareholders.

Some of the reasons how Costco can serve those highest quality goods of national brands for the lowest possible prices is that they eliminate different cost associated with delivery expenditures, account receivable, inventory, sales people, and fancy buildings. And they successfully operate themselves in the competitive environment serving not only individual customers but also a legal customers, and small business customers.

Costco believe that society and the community is one of the key factors of their success. Therefore, they are willing to give back to their community and the society in terms of quality

goods in lowest possible prices. Not only this but also, Costco encouraged its employees to actively participate in the social welfare program by volunteering in every possible occasions in the locality wherever they are located.

SWOC Analysis: SWOC stands for strength, weaknesses, opportunities and challenges. It is a situational analysis in which internal strength and weaknesses of an organization, and external opportunities and threats faced by it are analyzed to devise a strategy. Analysis of Costco’s Wholesale is as follows: Strengths: 

Largest market share



Lowest prices



Low overhead expenses



Strong reputation of providing greater value



Satisfied and talented human resource



Loyal and affluent customer base



High inventory turnover

Weaknesses: 

Comparatively less attractive store layout for luxury items.



Weak advertisement base leading to the inability of reaching full range of membership base.



Declining or inconsistent profit margin.



Low geographical expansion.



Locations are not that much attractive.



No self checkout.



Primary focus on business customer than individual customer.

Opportunities: 

Operation is mainly targeted in countries which have high GDP and high disposable income with low inflation rate.



Serve the democratic countries with political and governmental stability.



Rapid growth in membership.



Possibility of international expansion.



Advantage of economic downturn.



Increasing brand awareness.



Positive image in terms of employees pay and social responsibility.

Challenges: 

Cannot attract people who are below poverty line due to it’s membership fees and bulk purchase.



Low geographical diversification.



High competition from Sams’s Club and BJ.



Highly dependent on U.S.A and Canadian market.



Largely dependent on vendors for timely supply of quality merchandise at reasonable price.



High market expectation in terms of price quality and financial performance.

COSTCO WHOLESALE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (dollars in millions, except per share data) (unaudited) 16 Weeks Ended

52 Weeks

Ended ------------------------

-------------

----------August 28,

August 29,

August 28,

2011

2010

2011

-----------

-----------

-----------

$

$

$

August 29, 2010 ----------REVENUE Net sales $

27,588

23,592

87,048

76,255 Membership fees

590

533

1,867

-----------

-----------

-----------

28,178

24,125

88,915

24,680

21,024

77,739

2,712

2,401

8,682

1,691 ----------Total revenue 77,946 OPERATING EXPENSES Merchandise costs 67,995 Selling, general and administrative 7,840

Preopening expenses

22

9

46

2

3

9

-----------

-----------

-----------

762

688

2,439

(36)

(34)

(116)

46

30

60

-----------

-----------

-----------

772

684

2,383

272

247

841

-----------

-----------

-----------

500

437

1,542

26 Provision for impaired assets and closing costs, net. 8 ----------Operating income 2,077 OTHER INCOME (EXPENSE) Interest expense (111) Interest income and other, net 88 ----------INCOME BEFORE INCOME TAXES 2,054 Provision for income taxes 731 ----------Net income including noncontrolling interests 1,323 Net income attributable to noncontrolling

interests

(22)

(5)

(80)

(20) -----------

-----------

-----------

$

$

$

----------NET INCOME ATTRIBUTABLE TO COSTCO $

478

432

1,462

1,303 ===========

===========

===========

$

$

$

=========== NET INCOME PER COMMON SHARE ATTRIBUTABLE TO COSTCO: Basic $

1.09

0.99

3.35

2.97 ===========

===========

===========

$

$

$

=========== Diluted $

1.08

0.97

3.30

2.92 ===========

===========

===========

436,596

437,071

436,119

443,518

444,289

443,094

=========== Shares used in calculation (000's) Basic 438,611 Diluted 445,970 Dividends per share $

0.770

$

0.240

$

0.205

$

0.890

COSTCO WHOLESALE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in millions) (unaudited) Subject to Reclassifications August 28, August 29, 2011 2010 ----------------------ASSETS Cash and cash equivalents $

$

4,009

3,214

Short-term investments

1,604

1,535 Receivables, net

965

884 Merchandise inventories

6,638

5,638 Deferred income taxes and other current assets

490

437 ----------------------Total current assets

13,706

11,708 Property and equipment, net

12,432

11,314 Other assets 793

623

----------------------TOTAL ASSETS $

$

26,761

23,815 ============

============ LIABILITIES AND EQUITY Short-term borrowings and current portion of longterm debt $

$

900

26

Accounts payable

6,544

5,947 Other current liabilities

4,606

4,090 ----------------------Total current liabilities

12,050

10,063 Long-term debt, excluding current portion

1,253

2,141 Deferred income taxes and other liabilities

885

681 ----------------------Total liabilities

14,188

12,885 -----------------------

Total Costco stockholders' equity

12,002

10,829 Noncontrolling interests

571

101 ----------------------Total equity

12,573

10,930 ----------------------TOTAL LIABILITIES AND EQUITY $

$

26,761

23,815 ============

============