Costco's Strategic Analysis: Maximizing Revenue and Market Share

Jim Sinegal and Jeff Brotman in Seattle Washington founded Costco Wholesale in 1993. Costco merged with Price Club, and doubled their market share in the wholesale industry. They became an immediate leader in the industry. Costco's sales model is to sell a wide variety of products for low prices at a high volume. These brand-name products are sold at a discounted price to their members. Customers of Costco must pay a membership fee in order to purchase their merchandise. Their focus is on customer satisfaction and a guaranteed low price for its members.

They have managed to maintain a large customer base using this balance where both small business and personal needs can be met simultaneous.

Problem Statement

Costco could increase their shareholders return on investment by making changes to their business model. They are currently doing favorably with their customers and employees, but need to maximizing their potential and increase revenue. Costco seeks to increase more of the market share in the industry from Sam's Club, their largest competitor.

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This can be accomplished by continuing with their growth strategy to open more warehouses, increase their membership, and to upgrading their merchandising techniques to motivate members to shop more often.

Analysis

* Costco currently has 429 warehouses US; 82 warehouses in Canada; and 81 warehouses internationally * They have realized an increase in comparable warehouse sales of 7% in the US and 16% internationally * 14.2% increase in net sales

* Costco currently employs 92,000 full-time employees and 72,000 part-time employees * Members include: Gold star 25,000; business 6,300; business add-on primary4,000; and additional card holders 28,700 * The gross margin has increased by 10.

69% as a percent of net sales

Alternatives

* Costco can increase revenue by raising membership fees * Revenues can also be increased by removing the 15% on product markups * Reducing the number of employees receiving health benefits will increase revenue

Recommendation

The recommendation for Costco is to implement changes in their wages for their employees, benefits packages, and raising membership fees.

Implementation

The recommended changes can be gradually implemented throughout the company. The increase in membership fees would be the easiest to do first. Negotiating new rates for employee benefits will help reduce these costs associated with providing insurance. Costco can pay their employees less to be more competitive with the wages of Sam's Club.

Summary

Costco's current growth strategy is to open warehouses, execute merchandising techniques to increase customer shopping, and to increase their membership. These efforts are an attempt to increase their shareholders return on investment. Costco has focused more on customer satisfaction and pleasing their employees. They have managed to increase their revenues annually without building many stores as Wal-Mart. Costco has 417 US warehouses while Wal-Mart has 3,800. Wal-Mart has been aggressive in pursuing international acquisition by increasing the human spirit South Africa and the UK. Strategy to attract more members relies on the members doing a larger percent of their shopping with Costco.

Chief Executive Officer Craig Jelinek has been keeping prices low and adding more service areas, such as vision centers, to increase store visits. (Townsend, 2012) They want to reward these members by allowing them the opportunity to purchase big-ticket items at a low price. The members will be motivated to return on a weekly or monthly basis in order to have the opportunity to purchase these limited deals. Costco has been using the term "treasure hunt" for years to explain why up to a fifth of its stock is limited-quantity items that are in the store for as little as a week. (Gibson, 2011) This strategy has shown some increases, but will need modifications.

Strengths

Costco currently has about 64 million cardholders and members. The company has managed to provide great customer service, which has resulted in members renewing their subscriptions. Employees receive an array of benefits within a month of their starting date. The generous benefits package that employees receive help build loyalty to the company and its mission to their customers. Members are taken care of by the employees, and employees are taken care of by the organization.

This is fostered a positive environment that has landed Costco several awards. Costco provides their customers with one-time opportunities to purchase products and services that may not be available at other warehouses. The merchandise sold to Costco's members has value to be of high quality and low price. They continue to be dominant in the retail wholesaler market because of the selection and quality of the merchandise offered.

Weaknesses

Costco faces the burden of finding adequate merchandise in the current financial crisis. Consumers are not buying large ticket items due to a decrease disposable income. The demand for large volume purchases has decreased with the increase of single-parent families. The high-volume low price model has continued to work, but the economic recession has slowed its growth. Costco's employees make a higher wage than Sam's employees do. These employees also benefit from a multitude of costly benefits. These expenses have caused the company to accrue less revenue. It will be difficult to maintain their profit margin under the circumstances. Any decline in membership renewals would decrease revenues. The plan to increase warehouses may infringe on their current stores. The expenses associated with building the warehouse could negatively affect their sales in such tough economic times. Although they are behind Sam's Club in number of facilities, this is not the best time to expand.

Opportunities

Costco has the potential to continue to expand on their diverse offerings. By refining their business model, Costco have the opportunity to ride the broader economic trends to bigger profits and take customers from their rivals. Consumers are being more selective among the discounters such as Costco and Wal-Mart. Wal-Mart has seen an increase in competition from Costco for market share.

Despite efforts by rival Sam's Club, a unit of Wal-Mart Stores Inc., to improve merchandise in its warehouse clubs, Costco continues to notch higher revenue out of fewer stores in the U.S. (Zimmerman, 2011) Providing value to its members could result in Costco stealing Sam's Club's customers. There are still opportunities for Costco to expand the number of warehouses. This is a major part of their growth strategy to assist in building a larger customer base. There are reasonable expansion ideas that will help Costco. They can increase their brand internationally through expansion and by becoming a leader in social responsibility.

Threats

A major threat for Costco is potential for continued economic downturns. Customers are being more selective with their disposable income, and have chosen to downsize. Smaller quantities products have become more attractive due to these bad economic times. Costco must continue to market to the more affluent customers. The presence of price competition amongst customers and vendors will require Costco to carefully negotiate reasonable prices for the merchandise. Costco has to walk a fine line between absorbing the costs and passing them to customers because of its positioning as a warehouse club that, while catering to generally higher-end consumers, does have a reputation for offering decent prices. Competing internationally, poses the threat of economic instability abroad. Costco does not have a global presence and Wal-Mart and Sam's Club. Sam's Club and BJ's will always pose a threat to Costco.

Solution

Our recommendation to the Costco management would be to implement an increase in the membership fees. "While the increased fees could add 20 cents to 25 cents to earnings per share over the next two years as memberships are renewed, Janney analyst David Strasser expects roughly half of the fee increase will be used to hold down prices"(Wohl, 2011). Costco employee's compensation should be adjusted competitively to their competitors. The number of employees receiving benefits reduced to relieve expenses. We recommend that Costco increased to 15% placed on the product markups to 20%. Implementing these recommendations will result in an increase in company revenue and the shareholders return on investment.

Implementation

* A 10% increase in membership fees will begin in the next quarter * Increased the product mark up from 15% to 20% * Adjust the employee compensation to 10% of the market value * Increased revenue will be added to the shareholders return on investment

References

Gibson, E. (2011, July 09). Stores find success by focusing on the bargain hunt. USA Today. Retrieved from http://usatoday30.usatoday.com/money/industries/retail/2011-07-09-stores-bar
gain-hunt_n.htm

Talley, K. (2011, May 26). Costco feels inflation's effect.WSJ. Retrieved from http://online.wsj.com/article/SB10001424052702304520804576344900721794900.html

Townsend, M. (2012, October 10). Costco profit tops estimates as low prices drive traffic. Bloomberg Businessweek. Retrieved from http://www.businessweek.com/news/2012-10-10/costco-profit-tops-analysts-estimates-as-prices-drive-traffic

Wohl, J. (2011). Costco raises membership fees; profit misses view. Reuters, Retrieved from http://www.reuters.com/article/2011/10/05/us-costco-idUSTRE7942D620111005

Zimmerman, A. (2011, September 02). Costco ceo to step down. WSJ. Retrieved from http://online.wsj.com/article/SB10001424053111903895904576544883964721042.html