Costco case Analysis Essay

Custom Student Mr. Teacher ENG 1001-04 6 April 2016

Costco case Analysis

1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?

Costco’s business model is focused on producing high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of national name brands and select private-label products in a wide range variety. Costco is focused in low-cost strategy is concentrated on a narrow buy segment and out competing rivals by having lower costs, therefore being able serve a niche consumers at a lower price. (Gamble, John and Thompson, Arthur (2009). Costco’s business model is appealing because they are able to continually sell to a niche market. This niche market has annual income which ranges from $75,000 to $100,000 or more a year. By offering the best products possible at lower price, they are able to have these members return. Presently there are 47,679,000 card holders which include Executive members, Business member, Primary cardholders and Add-on cardholders. Whereas Costco has offered the most popular products in order to have a rapid turn-over. Costco has proven that there business strategy has worked by continually producing higher net sale.

2. What are the chief elements of Costco’s strategy? How good is the strategy?

Strategy is the organization’s pre selected that means to achieve its goals or objectives, while keeping in view current and future external conditions. Costco’s strategy’s elements are low prices, limited product lines and selection and treasure hunt shopping environment. Costco’s is following cost leadership strategy which is good because on this base they can compete with their competitors. 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. Also it 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.

3. Do you think Jim Sinegal has been an effective CEO? What grades would you give him in leading the process of crafting and executing Costco’s strategy? What support can you offer for these grades?

Refer to figure 2.1 in Chapter in developing your answers. Jim Sinegal is an effective CEO after gone through the case study. There are various reasons which show that Mr. Jim Sinegal was responsible to lead the path of strategy effectively. First, Jim Sinegal had made a transparent and well defined planned path for the Costco to follow. He was the only person in the company for the preparation of business model and appreciated over the growth of the strategy of the company. He had know how skills and created an environment to offer treasure hunt in the stores and maintain low prices and helps in promoting large volume of store traffic that helped in building quick turnover of inventory.

He was responsible for driving the ability of the company to achieve yearly sales nearly to $130 million per store. According to the case study Sinegal had performed excellent job in the execution of the strategy process at Costco. He performed three functions in the company as producer, knowledgeable critic and director. He went to stores for investigation for checking out the performance of store managers and asked various questions from them, about the performance of stores and told them to do more work on their weak areas. In this case, when Sinegal found answers to his questions less than expected than he told store managers to do more research and come back with sufficient information.

4. What core values or business principle has Jim Sinegal stressed at Costco?

The main business principle activity of Costco is to provide high value to users by offering global and local tag products at low prices, also it integrates its employees in a very nicely way. Jim Sinegal wanted to say that these two principal activities reflected in working environment of Costco which makes them profitable throughout the world as compared to other conventional wholesalers and merchandisers.

5. (in the event you have covered Chapter 3) What is competition like in the North America wholesale club industry? Which of the five competitive forces is strongest and why?

Use the information in Figures 3.4, 3.5, 3.6, 3.7, and 3.8 (and the related discussions in Chapter 3) to do a complete five-forces analysis of competition in the North American wholesale club industry. The wholesale club industry has evolved into a common oligopoly just as other major industries have. The “big three” of this industry are Costco, Sam’s Club, and BJ’s. A five forces analysis will be examined in regards to the wholesale club industry. Force one, barriers to entry; the three companies are at an advantage because of the difficulty of new firms entering the industry. They accomplish economies of scale and scope due to the size and volume of their sales by buying and selling more goods on a larger scale with lower costs. It would take a considerable amount of time for a new entrant to achieve the benefits of economies of scale. The capital requirements are large due to the construction of buildings and acquisition of land and licenses.

Only companies with an established distribution network would have a fair chance of entering the industry. Force two, the threat of substitutes, is not a factor because the service they offer is not offered by other outside competitors. Force three, the bargaining power of buyers, is the strongest force working in the favor of the industry. This is so because buyers cannot negotiate the price. The main reason customers come to wholesale clubs is they are attracted by the already low prices and value of buying in bulk. Force four, the bargaining power of suppliers could come into play if a more favorable opportunity presents itself in the general retail industry. Wholesale clubs offer only a percentage of the products that a general retailer does. A key strategy of Costco is aimed squarely at selling top-quality merchandise at prices consistently below what other wholesalers or retailers charge. Force fifth, rivalry among existing players, is not a major factor.

Costco, the runaway leader presently, offers the “treasure hunt” deals where extreme bargains are offered for short, unannounced periods of time. This creates buzz amongst customers by enticing them to return on a consistent basis to explore what “treasures” are available. BJ’s sets itself apart by being the only club among the three to accept manufacturer’s coupons. They also are the only club to accept all four major credit cards, MasterCard, Visa, Discover, and American Express, at all locations. They also offer a broader assortment of items as compared to Sam’s and Costco.

6. Base on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that at Sam’s Club and BJ’s wholesale?

7. Does the data in case Exhibit Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially successful? Why or why not?

8. How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam’s Club? Over BJ’S Whole sale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not?

Costco has been playing very successful in the wholesaling industry as it can be seen from its business strategies. First of all, for the purpose of supporting the Costco’s business model of generating high sales volumes and rapid inventory turnover, Costco members are given a limited selection of nationally branded and select private label products in a wide range of merchandise categories. Then Costco combine its rapid inventory turnover with the operating efficiencies to run the business profitably at significant lower gross margins than traditional wholesales, mass merchandisers, supermarkets and supercenters. As a result, Costco takes advantages of its high sales volume and rapid inventory turnover to obtain the benefits of early payment discounts from merchandise vendors due to the high sales volume and rapid inventory turnover allow Costco to generate enough cash in account.

Secondly, the pricing strategy of Costco is key factors to support the low price business strategy which is to cap the margins on branded name merchandise at 14 percent so that its members can buy with low price. Thirdly, Costco focus to offer limited selection that is about 4000 items with fast selling models, sizes and colors, and target the small businesses for its commercial and professional models selling. Furthermore, advertising and sales campaigns are not being used frequently by Costco for the marketing strategy and the company only launches campaigns for new warehouse openings. In addition, Costco also use direct mail to prospective new members occasionally and direct mail programs promoting selected merchandise to members regularly.

Opening more new warehouses, building an ever larger and fiercely loyal membership base and employing well executed merchandising techniques to encourage members to shopping more frequently with big trip are the main central growth strategy of Costco. Moreover, online shopping is another alternative that Costco offered to members so as to make their shopping more convenient rather than switch to competitors. In addition, Majority of merchandise is owned by Costco, and the company also builds direct buying relationships with many producers of national brand name merchandise and manufacturers and this result in the available of flexible alternatives of suppliers for Costco in anytime to have sufficient of stocked merchandise.

Also, Costco’s membership base and member demographics contains powerful buying ability as it mainly target the individual customers with minimum income of $75000 and 30 percent of the targeted customers earn more than $100000 annually. For the purpose of executing Costco’s strategy successfully, the company offer biannual bonuses and full spectrum of benefits for its employees. More important, the promoting opportunities will consider the insiders first based on the company policy. Other factors that determine the success of Costco also include the business philosophy, values and code of ethics such as obey the law and governmental regulations, take of members, take of employees, respect suppliers and business partners, and reward the shareholders. Costco is beating both Sam’s Club and BJ’s wholesale in net sales and market share. However, Sam’s Club has launched an aggressive campaign to increase its market share.

9. Are Costco’s prices too low? Why or why not?

Yes, because the gross profit margin falls into the normal range for this industry. However, it should be trending upward and as you can see it is actually decreasing slightly. If this trend continues, steps will need to be taken to correct the problem. Another probability indicator, return on stockholder equity indicates that the company has a problem. Average returns are around 12%, which Costco was nearing in 2004 and 2005. In2006, the company experienced a sharp decline which is causing for concern. Investigate this decline. It could be due to low profits after taxes. If the pricing is too low, this can happen. Currently, Sinegal, admittedly, tries to sell products at the lowest price possible for longevity.

However, if the investors in the firm are not making appropriate returns for the risk, they will invest elsewhere. The current ratio figure is in the average range but on the decline. The debt to equity shows a strong balance sheet and low levels of debt. It is trending downward. The inventory turnover rate is slightly higher than average, indicating that Costco is outperforming competitors in moving product. Also cause for concern is the fact that the working capital is shrinking. This might indicate the inability to expand without a loan. 10. What do you think of Costco’s compensation practices? Does it surprise you that Costco employees apparently are rather well-compensated?

Costco’s compensation and benefits are higher than those at walmart. Salaried employees in Costco warehouses could earn anywhere from $30000 to $125000 anually. Costco employees enjoyed a benefit package that included the following points. Health and dental care plans.

A dependant care reimbursement plan.
Confidential professional counseling services.
Company paid long term disability coverage equal to 60%,of earning for workers that were out for more than 180 days on a non-worker’s compensationleave of absence. Generous life insurance and accidental death and dismemberment coverage. An employee stock purchase plan.

11. What recommendations would you make to Costco top management regarding how best to sustain the company’s growth and improve its financial performance?

Costco is a company that have some criticism, such as people has to wait for a long time to pay their products. However costco doeS not have big problems that desperately need to be fixed. So it should stand in the same course using the present strategy. I think Costco has the capacity to continue investing in new stores and grow sales. It can also expand sales by introducing new products line, like furniture. The company has the financial resources to keep growing its business and open more warehouse locations

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