Thompson-Slrickland-Gamble: Crafting and Execuling Slralegy: Concepls and Cases, 161hEdilion

1. Coslco Wholesale Corporalion: Mission. Business Model. and Slrale

Case

The McGraw-Hill

Companies.2008

i .i

CostcoWh61e'sale Corpora tiOll:':Missi.Ol1, BusinessM~el, and Strategy

Arthur.A. ThompsonJr~
The University Of Alabama

im Sinegal, cofounder and CEO of Costeo Wholesale, was the driving force behind Costco's 23-year march to become the fourth largest retailer in the United States and the seventh larg-' est in the world. He was far from the stereotypical CEO. A grandfatherly 70-yearold, Sinegal dressed easualIyand unpretentiously,often going to tile offiee or touring Costeo stores wearing an openeoJlared cotton shirt that carne from a Costco bargain rack and sporting a standard employee narrie tag that said, simply, "Jim." His informal dress,mustache, grayhair, and unimposing appearance madeiteasy for Costeo shoppers to mistakehim for a storeClerk., He answered his own phone, once telling ABC News reporters, "If a customer's calIing and they have a gripe, don'tyou thinkthey kindof))1joy thefaetthat 1 pickedupthe phone and talked tothem?,,1 Sin)gal spent mueh of his time touring Costco stores, using the companyplane to fly from location to location and sometimes visiting8 to 10 storesdaiIy' (the record for a single day was l2).Treated lika celebrity when heappeared at a store (the ne\Vs "Jim's in the store" spread quickly), Sinegal made a pomt of greetingstore employees. He observed, "The employees knowthatI want tosay hello tothem,becau~e 1 like them.We havc.saidfrom thcvery bcginning: 'We're going to be a company that's on a firsf-liame basis with everyone! "2 Employees genuinely seemed to like Sinegal. He taIkedquietIy, in a COmmonsellsical Ill~nnsr that suggestedwhat he:vas sayin~' Was no bigdeaL3 He carne across as kind yet stern, ~ut
i007 by Arthur A. Thompson. Al! righis reservcde

Copyright~'

'he was prone todisplay irritation.when hedisagreed sha1]Jly withwhat pe9ple were sayingtohim .. In touring aCostcOstore with the local siore man aget, Sinegal was very much the person-in-charge. He ,functioned as producer, director, and knowlcdgeable critico He cut to thc9hase quickly, exhibiting;.intense " ,qtt~rition to detail andpriCing;wanderit)gthrough ',~tore aisles firingabarrage ofquestions at storemanagers aboutsales volumes arid stock levels of partic" ,ul~r items, critiquing merchandising displays. or the positionof certai~lproductsin the stores,comment'., irigon any aspect ofstore operations that caught his eYe.and asking managers to do further researeh and get bck to him with more information whenever he foundtheiranswers tohis questions less than satisfY. ing; H'wasreadily apparentithafSinegalhad:tremen ',dous merchandising savvy, thth demanded much -, ofstore managers and employees, arid that his views a~otit discountretailing set thetone for howthe company operated,~owledgsableobserversrsgarded Jim, Sinegal'smerchandising expertiseas.,being .. 011 a par with that of the legendary Sam Walton. -. sIn 2006;Costco's sales totaledalmost $59 billiontA96 storesin 37 states;Puerto Rico, Canada, theUt1itedI<.tngdom,}ai~ffil'i~apan, Ko~ea, and ,.Meiico. About26 million households and5;2 mil.. 'Olibusinesses had mmbe~ship cards entitling them to shop at Costeo, generating nearly $1.2 billion in meil1bership feesforthe company. Annual sales "pere store 'lveragedabout $ I:l8 millio)1, nearly dou" '. bJe Ihe $67 millionfigure foram 'sCIub,Costco's .. ehief competitor in the membership warehouse retailsegment. '

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Thompson-Slriekland-Gamble: Crafting and Exeeuling Slralegy: ConeeplS and Cases, 16lh Edilion

1. Cosleo Wholesale Corporalion: Mission, Business Model, 'and Slralegy

The McGraw-Hill Companies.200B

Case 1

Costco Wholesale Corporation: Mission, Business Model, and Strategy

C-3

COMPANY BACKGROUND

The membership warehouse concept was pioneered by discount merchandising sage Sol Price, who opened the first Price Club in a converted airplane hangar on Morena Boulevard in San Diego in 1976. Price Club lost $750,000 in its first year of operation, but by 1979 it had two stores, 900 employees, 200,000 members, and a $1 million profit. Years earlier, Sol Price had experimented with discount retailing at a San Diego store called Fed-Mart. Jiu: Sincgal got his start in retailing thcre at the age of 18, loading mattresses for $1.25 an hour while at- ' tending San Diego Community College. When Sol ' Price sold Fcd-Mart, Sinegalleft with Price to help him start the San Diego Price Club store; within a few years, Sol Price's Price Club emerged as the un- . challenged leader in member warehouse retailing,. with sto res operating primarily on the West Coast. Although he originally conceived Price Club as a place whcrc small local busincsses could obtain nccdcd merchandisc at economical prices, Sol Price . soon concluded that his f1edgling operation could ' achieve far greater sales volumes and gain buying clout with suppliers by also granting membership to individual s-a conclusion that launched the deep- . discount warehouse club industry on a steep growth curve. When Sinegal was 26, Sol Price made him the manager of the original San Diego store, which hi:1d become unprofitable. Price saw that Sinegal had special knack for discount retailing and for spotting . what a store was doing wrong (usually either nqt . being in the right merehandise categories or not selling items at the right priee points)-the very thillgS that Sol Priee was good at and that were at the root of: the Price Club's growing success in the marketplace .. Sinegal soon got the San Diego store back into the black. Over the next several years, Sinegal continued to build his prowess and talents for discount merehi,ll:1~ dising. He mirrored Sol Price's attention to detail and . absorbed all the nuances and subtleties of his menCostco's mission in thc membership warehouse busitor's style of operating-constantly improving store ness read: "To continually providc our membcrs operations, keeping operating costs and overhead with quality goods and services at the lowest poslow, stocking items that moved quickly, and chargsib1e priccs.", The company's business modcl was ing ultra-Iow prices that kept customers coming back to gcncrate high sales volumcs and rapid inventory to shop. Realizing that he had mastered the tricks of tumovcr by offcring l11-cmbcrs low prices on a limited running a succcssful mcmbership warchouse busisclection of nationally branded and selectcd privateness from Sol Price, Sinegal decided to leave Price . label products in a wide range of merchandise catClub and form his own warehouse club operation. , egories. Management believed that rapid inventory
j

Costco was founded by Jim Sinegal and Seattle entrepreneur Jeff Brotman (now chairman of the board of directors). The first Costco store began operations in Seattle in 1983, the same yearthatWal-Mart launched its warehouse membership format, Sam 's Club. By the end of 1984, there were nine Costco stores in five states serving over 200,000 members. , In Deeember 1985, Costeo beeame a publie eompany, selling shares to the public and raising additi<;malcapital for expansioll. Costeo beeame the first ever U.S. eompany to reaeh $1 billion in sales in less than six years. In Oetober 1993, Costeo merged with Priee Club. Jim Sinegal beeame CEO ofthe mcrged company, presiding over 206 PriceCostco locations, which in total generated $16 billion in annual sales. JeffBl'otman, who had functioned as Costco's chairman sincc thc company's founding, became vice I chairman ofPriccCostco in 1993 and was clcvated to chairman in Deccmbcr 1994. Brotman kept abreast of company operations but stayed in the background and concentrated on managing the company's $9 billion invcstment in real estate opcrations-in 2006, Costco owned the land and bui1dings for almost 80 percent of its stores. In January 1997, afterthe spin-off of most of its llonwarchouse assets to Price Entcrprises Ine., PriceCostco changcd its name to Costco Companies Inc. When the company reincorporated from Delaware to Washington in August 1999, the name was changed to' Costco Wholesale Corporation. The company's , headquarters was in issaquah, Washington, not far from Seattle. Exhibit 1 contaills a financial and operating summary for Costco for fiscal years 2000-2006.

COSTCO'S MISSION, BUSINESS MODEl, AND ,sTRATEGY

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Thompson-Striekland-Gamble: Crafting and Exeeuting Slrategy: Coneepts Cases. 16th Edition end

1. Costeo Wholesale Corporation: Business Strategy Mission, Model, and

Case

The McGraw-Hill
Companies, 2008

C-4

Part

Cases in Crafting and Executirig Strategy

Exhibit 1 Financial and Operating Summary, Costeo Wholesale Corporation, Fiscal

Years 2000-2006 ($ in millions, except for per share data)

.'Balance

She'~d)ata
"" .

Cash and cash equivalents Merchandise inv.~ntores ." CUrrent assets Currentliabilities \Norkingapita! ';Tota assets
~.:.. "",w"":.,,. "" .. '.

Net property andequipment. Shor,t;term borrowings

/i"::ij:',

,Eo:nrHerm debt "". ,<,,,Wi,.i:i+",.<''''1!: ... ,.,y Stockholdrs' Uit'

Businesss"f(Oo's)"c"
""V}>;'
,,'o

,ry;weWb~r~,~t'~ear-~nd . ,:x' .o':":'" ", ",," ",,":f

members ,(OOOs) 10-K reports 2006, 2005, 2002, and 2000~'
J.

jiGoldSt~r

Sources: Company

Thompson-Strickland-Gamble; Crafting and Executing Strategy: Concepts and Cases. 16th Edition

1. Costeo Wholesale Corporation; Mission. Business Mode!. and Strategy

Casa

The McGraw-Hill
Companies. 2008

Case 1 Costco WholesaleCorporation:Mission,BusinessModel,and Strategy turnover-when combined with the operating ef-. ficiencies achieved by volume purchasing, efficip,nt distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities-enabled Costeo to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters. Examples of Costco's ineredible a11lmal sales volumes inc1uded 96,000 earats of diamonds (2006), 1.5 million televisions, $300 million worth of dig- . ital cameras, 28 million rotisserie chickens (over 500,000 weekly), 40 pereent of the Tusean olive oil bought in the United States, $16 milliOll worth.of pumpkin pies during the fall holiday sea son, $3 bil~ lion worth of gasoline, 21 million preseriptions, and 52 million $1.50 hot dog/soda pop eombinations. Costeo was also the world's largest seller of fine wines ($385 million out oftotal2006 fine wine sales of $805 milIion).4 At one of Costeo's largest volume . stores, whieh had annual sales of $285 million and 232,000 members, annual sales volume ran 283,000 rotisserie ehiekens, 375,000 gallons ofmilk, and 8.4 million rolls of toilet paper-this store had an ayer,. age customer bill per trip of $150.5 Furthermore, Costeo's high. sales volume and . rapid inventory turnover generally allowed it to sell and receive cash for inventory before it had to pay many of its merehandise vendors, even when vendor payments were made in time to take advantage of' early payment diseounts. Thus, Costeo was able to. finanee a big percentage of its merehandise inventory through the payment terms provided by vendors rather than by having to maintain sizable working capital (defined as eurrent assets minus current li- . abilities) to facilitate timely payment ofsuppliers.

c-s

discounters and many supermarkets). Markups on Costeo's 400 private-Iabel (Kirkland Signature) items eould be no higher than 15 pereent, but the sometimes fractionally higher markups still resulted in Kirkland Signature items being prieed about 20 pereent below comparable name-brand items. Kirkland Signature produets-whieh inc1uded juice, eookies, coffce, tires, houscwares, luggagc, applianccs, c1othing, and dctergent-were designed to be of equal or bctter , quality than national brands. Costco's philosophy was to keep customers coming in to shop by wowing them with low prices. Jim Sinegal explained the eompany's approaeh to prieing as follows: We a1ways Iook to see how much of a gulf we ean create between ourselves and the competition. So that the eompetitors eventually say, "These guys are crazy. We'lI compete somewhere else." Some years ago, we were selling a hot brand of jeans for $29.99. They were $50 in a department store. We got a great deal on them and could have sold them for a higher price but we went down to $29.99. Why? We knew it would create a riot.6

At another time he said: We're very good merchallts, and we offer value. The traditional retailer wiIl say: "1'm selling this for $10. 1wOllderwhether we can get $10.50 or $1l." We say: "We selling this for $9. How do we get it down to $87" We understand that our members don't come and shop with us because of the window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values.7

Indeed, Costeo's markups and priees, were so low that Wall Street analysts had eriticized Costeo management for going all out to please eustomers at the expense of inereasing profits for shareholders. One retailing analyst said, "They eould probably get more money for a lot of the items they sell."8 Sinegal was The cornerstones of Costeo's strategy were low unimpressed with Wall Street ealls for Costeo to prices, Iimited selection, and a treasure-hunt shop-' abandon its ultra-Iow prieing strategy, eommenting: ping environment. "Those people are in the business of making money Pricing, Costeo was known for selJing top-quality betwecnnow and next Tuesday. We're trying to build nationaI and regional brands at prices eonsistently. an organization that's going to be here 50 years from below traditional wholesale or retail outlets. The . now."9 He went on to explain why Costeo's approaeh eompany stoeked only those items that eould .be to prieing would remain unaltered during his tenure: priced at bargain levels and thus provide members When 1started, Sears, Roebuck was the Costeo of the with signifieant eost savings; this was tme even if. country, but they allowed someone else to come in an item was often requested by eustomers. A key under them. We don't want to be one of the casualelement of Costco's pricing stratel,,'Ywas to cap its' tiesoWe don't want to turn around and say, "We got markup on brand-name merchandise at 14 pere~nt so fancy we've raised our prices, mdalI of a sudden (eompared to 20 to 50 pereent markups at other a new competitor comes in and beats our prices."lO

Costco's Strategy

~ )
I I I

Thompson-Slriekland-Gamble:I Crafling and Exeeuting Strategy: Coneepts and Cases, 16th Edition

l. Cosleo Wholesale Corporalion: Mission, Business Model. and Strategy

Casa

The McGraw-Hill
Companies. 2008

C-6

Part 2

Cases in Crafting and Executing Strategy

Whereas typical supermarkets stocked about 40,000 items and a Wal-Mait Supercenter or a SuperTarget might have as many as 150,000 items for shoppel's to choose from, Costco's merchandising strategy was to pl'ovide membcrs with a seleetion of only about 4,000 items. Costco's product range did cover a bl'oad spectrum-rotisserie chicken, prime steaks, caviar, f1at-screen televisions, digital cameras, fresh f1owers, fine wines, easkets, baby stroIlers, toys and games, musical instnnnents, eeiling fans, vacuum cIeaners, books, DVDs, chandeliers, stainless-steel cookware, seat-cover kits for autos, pl'escription drugs, gasoline, and one-hour photo finishing-but the compal1Ydeliberately limited thc selection in each product eategory to fast-sclling models, sizcs, and colors. Many consumablc products like dctergcnts, canncd goods, officc supplies, and soft drinks were sold only in big-container, case, earton, or multiple-pack quantities. For example, Costeo stocked only a 325eount bottle of Advil-a size many shoppers might find too large for their needs. Sinegal explained the reason fol' the dcliberately limited seleetion as follows:
If you had ten eustomers come in to buy Advil, how many are not going to bllY any becallse YOll just have one size? Maybe one or tWO. We refer to that as the intelligent loss of sales. We are prepared to give up that one customer. But if we had 1'our or five sizes 01' Advil, as most grocery stores do, it would make our business more di1'ficult to manage. Our business can only suceeed if we are efficient. You can't go on selling at these margins i1'you are not.ll

Product Selection.

'1'0 encourage members to shop at Costeo more .frequently, the company operated ancilIary businesses within or next to most Costco warehouses; the number of ancilIary businesses at Costco warehouses is shown in the following table:

Costeo's selcetions of appliauces, equipmcnt, aud tools often incIuded commercial and professional models beeause so many of its members wel'e smaIl businesses. '1'he approximate percentage ofnet sales aecounted fOl" by eaeh major eategory of items stocked by Costeo is shown in the foIlowing table:

Treasure-Hunt Merchandising. While Costco's product line consisted ofapproximately 4,000 items, about one-fourth of its product offerings were constantly changiug. Costco's merchandise buyers remained on the lookout to make oue-time purchases ofitems that would appeal to the company's clientele and that would scll out quickly. A sizable number of these items were high-end or name-brand products .that carried big price tags-like $2,000-$3,500 bigscreen HD'1'Vs or $800 leather sofas. The idea was to entice shoppers to spend more than they might .otherwise by offering irresistible deals on luxury items. Aceordiug to Jim Sinegal, "Of that 4,000, about 3,000 can be found on the floor all the time. The other 1,000 are the treasure-hunt stuff that's ~lways changing. !t's the typc of item a customer knows they better buy because it will not be there next ti~e, like Waterford crystal. We try to get that ',sense ofurgency in our customers."12

Thompson-Slriekland-Gamble: Cralting and Exeeuling Slralegy: Coneepls Cases. 16lh Edilion and

1. Cosleo Wholesale Corporalion: Business Slralegy Mission. Mode!. and

Case

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Case 1 Costeo WholesaleCorporation:Mission.BusinessModel,and Strategy

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In many cases, Costeo did not obtain its luxury, and Deeember 31, 2006), :lnd management planned offerings direetly frol11high-end manufaeturers like toopen another 20-24 by the end offiseal2007. Five Calvin Klein or Waterford (who were unlikely to new warehouses were opened outside the United want their merehandise l11arketed at deep diseounts States in fiscal 2005, five more were opened in fiscal at place s Iike Costeo); rather, Costeo buyers searehed 2006, and four were opened in the first four months for opportunities to souree sueh items legaIly on the . of fiscal 2007. Going into 2007, Costeo had a total of gray market from other wholesalers or distressed re102 whoIly-owned warehouses in operation outside tailers looking to get rid of exeess or sIow-seIIing the United States, including 70 in Canada, 18 in the inventory. Examples of treasure-hunt speeials in-. United Kingdom, 5 in Korea, 5 in Japan, and 4 in cluded $800 espresso machines, diamond rings and Taiwan. Costeo was a 50-50 partner in aventure to other jewelry itel11swith priee tags of anywhere from '. operate 30 Costeo warehouses in Mexieo. Exhibit 2 $5,000 to $250,000, Italian-made Hathaway shi~ts snows a breakdown of Costeo's geographie operaprieed at $29.99, Movado watehes, exotie eheeses., tions for fiscal years 2003-2006. (The data for the 30 Coaeh bags, cashmere sport s coats, $1,500 digital warehouses in Mexieo are not included in the exhibit pianos, and Dom Perignon champagne. beeause the 50-50 venture in Mexico was aeeounted for using the equity method.) Marketing and Advertising. Costco's low prices Costeo had reeently opened two freestandand its reputation for treasure-hunt shopping made it ing high-end fumiture warehouse businesses ealled unnecessary for the COl11pany to engage in extensive , Costeo Home. Sales in 2005 at these two loeations advertising or sales campaigns. Marketing and proinereased by 132 pereent over 2004 levels, and profmotional activities were generaIIy limited to direct its were up signifieantly. So far, however, rather than mail programs promoting selected merchandise to opening additional Costeo Home stores, management existing members, occasional direct maiI marketing had opted to experiment with adding about 45,000 to prospective new members, and speciaI campaigns square feet to the size of selected new Costeo stores for new warehouse openings. For new warehouse '. and using the (extra spaee to stock a mueh bigger openings, marketing teams personaIIy eontacted sclection of fumiture-fumiture was one of the top businesses in the area that were potential wholesale three best-selling eategories at Costco's Web site. members; these contaets were supplemented with di- . A third growth initiative was to expand the rect mailings during the period immediately prior to " eompany's offerings of Kirkland Signature items. opening. Potential Gold Star (individual) members. Management believed there were opportunities to were contacted by direet mail or by promotions at expand its private-label offerings from the present local employee associations and businesses with level of 400 items to as many as 600 items over the large numbers of employees. After a membershp next five years. base was established in an arca, most new member- ,

ships came from word of mouth (existing members . Web Site Sales. Costeo operated two Web sitesteIling friends and aequaintanees about their shopwww.eosteo.eom in the United States and www. ping experienees at Costeo), foIlow-up messages costeo.ea in Canada-both to provide another shopdistributed through regular payroIl or other organi- ; ping alternative for members and to provide memzational cOl11munications to employee groups,and bers with a way to purchase products and services ongoing direct solicitations to prospective business' that might not be available at the warehouse where and Gold Star members. Management believed that th'ey customarily shopped, especiaIIy such services its emphasis on direet mail advertising kept its mar as digital photo processing, prescription fulfiIIment, keting expenses low relative to those at typical retail~ and travcl and other membership services. At Costers, discounter, and supermarkets. co's online photo center, eustomers could upload imGrowth Strategy. In recent years, Costeo had ages and piek up the prints at their local warehouse opened an average 20-25 locations annuaIIy; most in little over an hour; one-hour photo sales were up were in the United States, but expansion was under; 10 pereent in fiscal 2005, a year in whieh the inway internationally as wel!. The company opened 68 dustry overall had negative sales growth. Costco's new warehouses in the United States in fiscal years' e-eommerce sales totaled $534 miIlion in fiscal 2005 2002-2006; 16 new warehouses opened in the first and $376 million in fiscal 2004. (Data for fiscal 2006 tour months of fiscal 2007 (between September 1 , e-commeree sales were not available.)
I

Thompson-Slriekland-Gamble: Crafling and Exeeuling Slralegy: Coneepls and Cases. 161hEdilion

l. Cosleo Wholesale Corporalion: Mission. Business Model. and Slralegy

Case

The MeGraw-Hill
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Part 2

Cases in Crafting and Executing Strategy

Exhibit 2

Geographic Operating Data, Costeo Wholesale Corporation, Fiscal Years 2003-2006 ($ in millions) .

So urce: Company 1O-K reports, 2004 and 2006.

Warehouse Operations
In Costco's 2005 annual report, Jim Sinegal summed up the company's approach to opcrations as follows:
Costeo is able to offer lower priccs and bcttcr valucs by eliminating virtually a1l thc friIls and costs historiea1ly assoeiated with eonventional wholesalers ,and

retailers, including salespeople, faney buildings, de: livery, billing, and aeeounts reeeivable. We mn a tight .operation with cxtrcmely low overhead which enables us to pass on dramatic savings to our membcrs.

Costco w~rehouses averaged 140,000 square fect .and were constlUcted incxpcnsively with concrete f1oqrs. Bccausc shoppcrs werc attracted principally

.,

Thompson-Strickland-Gamble: Cralting and Executing Strategy: Concepts and Cases, 16th Edition

1. Costeo Wholesale Corporation: Mission, Business Model, and Strategy

Case

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Case 1

Costeo Wholesale Corporation: Mission, Business Model, and Strategy

C-9

by Costeo 's low priees, its warehouses were rare-. Iy loeated on prime eommercial real estate sites. Merehandise was generally stored on raeks above the sales floor and displayed on pallets eontainirig large quantities of eaeh item, thereby redueing labor, required for handling and stocking. In-store signage ' was done mostly on laser printers, and there were no shopping bags at the eheekout eounter-merchandise was put directly into the shopping cart or sometimes loaded into empty boxes. Warehouses generally operated on a seven-day, 69-hour week, typically being' open between 10:00 a.m, and 8:30 p.m. weekdays, with earlier closing hours on the weekend; the gaso; line operations outside many stores generally had extended hours. The shorter hours of operation-as ' compared to those of traditional retailers, discount ' retailers, and supermarkets-resulted in lower labor costs relative to the volume of sales. Costco warehouse managers were delegated considerable authority over store operations. In. effeet, warehouse managers functioned as entrepreneurs running their own retail operation. They wpre responsible for eoming up with new ideas about what items would sell in their stores, effectively, merchandising the ever-changing lineup oftreasurehunt products, and orchestrating in-store prod'uct locations and displays to maximize sales and ' quick turnover. In experimenting with what items to ' stock and what in-store merchandising techniques to employ, warehouse managers had to know the' c1ientele who patronized their locations-for i,nstance, big-ticket diamonds sold well at some ware.houses but not at others. Costco's best managers kept their finger on the pulse of the members who ' shopped their warehouse location to stay in sync with ' ' what would sell well, and they had a flair for creating a certain element of excitement, hum, and buzz ' in their warehouses. Such managersspurred aboveaverage sales volumes-sales at Costco's top-volume warehouses often exceeded $5 million a week, with sales exceeding $lmillion on many days. Successful managers also thrived on the rat race of running high-traffic store and solving the inevitable criscs ' of the moment. Costco bought the majority of its merchandise directly from manufacturers, routing it either directIy to its warehouse stores or to one of nine cross-'; docking depots that served as distribution points. for nearby stores. Depots received container-based shipments from manllfacturers and reallocated these goods for combined shipment to individual

warehouses, generally in less than 24 hours. This m.aximized freight volume and handling efficiencies. When merchandise arrived at a warehouse, it was moved straight to the sales floor; very Iittle was stored in locations off the sales floor, thereby lowering receiving costs by eliminating many of the costs associated with multiple-step distribution channels, whichinclude purchasing from distributors as op posed to mnufacturers; using central receiving, storage, and distribution warehouses; and storing merchandise in locations offthe sales floor. . Costco had direct buying relationships with many producers of national brand-name merchandise (including Canon, Casio, Coca-Cola, Colgate-Palmolive, Dell, Fuji, Hewlett-Packard, Kimberly-Clark, Kodak, Levi Strauss, Michelin, Nestl, Panasonic, Procter & Gamble, Samsung, Sony, KitchenAid, and Jones ofNewYork) and with manufacturers that supplied its Kirkland Signature products. No one manufacturer supplied a significant percentage of the merchandise that Costco stocked. Costco had not experienced any difficulty in , obtaining sufficient quantities of merchandise, and management believed that if one or more of its current sources of supply became unavailable, the company could switch its purchases to alternative manufacturers without experiencing a substantial disruption of its business. Costco warehouses accepted cash, checks, most debit cards, American Express, and a privateIabel Costco credit cardo Costco accepted merchandise returns when members were dissatisfied with their purchases. Losses associated with dishonored checks were minimal because any member whose check had been dishonored was prevented from paying by check or cashing a check at the point of sale until restitution was made. The membership format facilitated strictly controlling the entrances and cxits of warchouses, resuIting in limited invento,ry losses of less than two-tenths of 1 percent of net sales-well below those of typical discount re tail operations.

Costco's Membership Base and Member Demographics

Costco attracted the most affluent customers in discount retailing-the average income of individual m.embers was about $75,000, with over 30 pereent of members having annual ineomes of $100,000 , or more. Many members were affluent urbanites,

Thompson-Striekland-Gamble: Crafting and Exeeuting Strategy: Coneepts and Cases, 16th-Edition

,. Costeo Wholesale Corporalion: Mission, Business Modal, and Slralegy

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At the end of fiscal 2006, Costeo had almost 48 living in nice neighborhoods not far from Costco million cardholders: warehouses. One loyal Exeeutive member, a criminal defense lawyer, said, "1 think I spend over $20,000-$25,000 ayear buying all my products , here from food to cJothing-except my suits. I have to buy them at the Armani stores."13 Another Costco loyalist said, "This is the best place in the world. It's like going to church on Sunday. You can't get anything better than this. This is a religious experience.''l4 Costco had two primary types of memberships: Business and Gold Star (individual). Gold Recent trends in membership are shown at bottom of Star memberships were for individual s who did not Exhibit l. Members could shop at any Costco warequalify for a Business membership. Businesseshouse; member renewal rates were about 86.5 percent. including individuals with a business license, retail sales Iieense, or other evidence of business existencc-qualified as Business members. Business .Compensation and Workforce members generally paid an annual membership Practices fee of $50 for the primary membership eard, whieh also ineluded a spouse membership card, and eould -In September 2006, Costeo had 71,000 full-time purehase up to six additional membcrship cards employees and 56,000 part-time employees, includfor an annual fee of $40 each for partners or as, ing approximately 8,000 people employed by Costco sociates in the business; they could al so purchase a Mexico, whose operations were not consolidated in transferable eompany cardo A significant number of Costco's financial and operating results. Approxibusiness members also shopped at Costco for their matel}: 13,800 hourly employees at locations in personal needs. _California, Maryland, New Jersey, and New York, Gold Star members generally paid an annual .as well as at one warehouse in Virginia, were repmembership fec of $50, which inc1uded a spouse resentcd by the lntcrnational Brotherhood ofTeamcardo In addition, members eould upgrade to an sters. AII remaining employees wcre non-union. Exceutive mcmbership for an annual fce of $100; , " Starting wages for new Costco employees were Exeeutive members were entitled an additional in the $10'-$12 range in 2006; on average, Costco 2 pcrccnt savings on qualified purehases at Costeo emrloyees earncd $17-$18 per hour, plus bial1l1ual (redeemable at Costco warehouses), up to a maxibonuses. Employees enjoyed the full spectrum of mum rebate of $500 per year. Executive members benefits. Salaried employees were eligible for benalso were eligible for savings and benefits on variefits on the first of the month after the date of hire. ous business and consumer services offered by .Full-time hourly employees were eligible forbenefits Costco, inc1uding merchant credit card processing, ofthe first ofthe month after working a probationary small-business loans, auto and homc insuranee, 90 days; part-tiIile hourly employees became benefitlong-distance telephone servicc, check printing, _eiigible on the first of the month aftcr working 180 and real estate and mortgage services; these days. The benefit package inc1uded the following: services were mostly offered by third-party providers and varied by state. In 2006, Exeeutive memHealth and dental care plans. Full-time embers represented 23 percent of Costco's primary ployees could choose from among a freedommembership base and generated approximately 45 of-choice heaJth care plan, a managed-choice pcreent of consolidated nct sales. Effcctive May 1, health care plan, and three dental plans. A 2006, Costeo increased annual mcmbcrship fees by managed-choiee health care and a core dental $5 for U.S. and Canadian Gold Star, Business, and plan were available for part-time employees. The Business Add-on members; the $5 increase, thc first company paid about 90 percent of an employee's in nearly six years, impaeted approximately 15 milpremiums for health care (far above the more Iion members. normal 50 percent contributions at many other
J

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retailers), but employees did have to pick up the premiums for coverage for family members. Convenient prescription pickup at Costco's pharmacies, with co-payments as low as $5 for . generic drugs. Generally, employees paid no more than 15 percent of the cost for the most expensive branded drugs. A vision program that paid $45 for an optical . exam (the amount charged at Costco's optical centers) and had generous allowances for the purchase of glasses and contact lenses. A 401(k) plan in which Costco matched houily employee contributions by 50 cents on the dollar ror the first $] ,000 annually to a maximum com- ' pany match of $500 per year. Eligible employees qualified for additional company contributions based on the employee's years of service and eligible earnings. The company's union employees on the West Coast qualified for matching contri- . butions of 50 cents on the dollar to a maximum company match of $250 a year;eligible union employees qualified for additional company contributions based on straight-time hours worked. Company contributions for salaricd workers ran ' about 3 percent of salary during the second year of employment and could be as high as 9 percent of salary after 25 years. Company contributions to employee 41O(k) plans were $233.6 million in fiscal 2006, $191.6 million in fiscal 2005, and' $169.7 million in fiscal 2004. A dependent care reimbursement plan in which Costco employees whose families qualified could pay for day care for children under 13 or adult ' day care with pretax doIlars and realize savings ' of anywhere from $750 to $2,000 per year. Confidential professional counseling services. Company-paid long-term disability coverage" equal to 60 percent of eamings if out for more than 180 days on a non-worker's compensation' leave of absence. AIl employees who passed their 90-day probtion period and were working at least 10 hours per week were automatically enroIled in a short- ' term disability plan covering non-work-related injuries or ilInesses for'up to 26 weeks. Weekly short-term disability payments equaled 60 pr- , cent of average weekly wages up to a maximum ' of $ 1,000 and were tax free. Generous life insurance and accidental death and dismemberment coverage, with benefits based

on years or service and whether the cmployce workcd full-timc or part-timc. Employecs could e!ect to purchase supplemental coveragc for themselves, their spouses, or their children. An employee stock purchase plan allowing all employees to buy Costco stock via payroll deduction and avoid commissions and fees. A health care reimbursemcnt plan in which benefit eligible employees could arrange to have pretax money automatically deducted from their paychecks and deposited in a health care reimbursement account that could be used to pay medical and dental biIls. A long-term care insurance plan for employees with 10 or more years of service. Eligib!e employees could purchase a basic or supplemental policy for nursing home care for themselves, their spouses, or their parents (incIuding inlaws) or grandparents (including in-Iaws).

Although admitting that paying good wages and good benefits was contrary to conventional wisdom in discount retailing, Jim Sinegal was convinced that having a weIl-compensated workforce was very important to executing Costco's strategy successfully. He said, "Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you .... Paying good wages and keeping your peoplc working with you is very good business."15 When a reporter asked him about why Costco treated its workers so well compared to other retailers (particularly Wal-Mart, which paid lower wages and had a skimpier benefits package), Sinegal replied: "Why shouldn't employees have the right to good wages and good careers .... It absolutely makes good busi, ness sense. Most people agree that we're the lowestcost producer. Yet we pay the highest wages. So it must mean we get better productivity. Its axiomatic in' our business-you get what you pay for."16 About 85 percent of Costco's employees had signed up for health insurance, versus about 50 percent at Wal-Mart and Targct. The Teamsters' chief negotiator with Costco said, "Thcy gave us the best agrecmel1t of any retailer in the eountry."17 Good wages and benefits were said to be why employee , turnover at Costeo ral1 undcr 6 pereent after the first year of employment. Some Costeo employees had be en with the company since its founding in 1983. , Many others had started working part-time at Costco

Thompson-Slriekland-Gamble: Crafting and Exaeuting Strategy: Coneepts and Cases, t6th Edition

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while in high sehool 01' eolIege and opted to make patronized their particular warehousc-just hava eareer at the eompany. One Costeo employee told ing the rcquisitc skills in pcoplc management, crisis an ABC 20/20 reportcr, "It's a good place to work; management, and cost-effective warehousc operathcy take good care OfUS."18 A Costeo viee president tioqs was not enough. and head baker said working for Costeo was a fam- . Executive Compensation. Executives at Costeo ily affair: "My whole family works for Costeo, my did not earn thc outlandish salaries that had become husband does, my daughter does, my new son-in-Iaw . customary over the past deeade at most large corpodoes."19 Another employee, a reeeiving clerk who rations. In fiscal 2005, both leff Brotrnan and Jim made about $40,000 ayear, said, "1 want to retire Sinegal were each paid $350,000 and earned a bonus herc. I love it here."20 An employcc with over two of $ 100,000 (versus $350,000 salaries and $200,000 years of scrviec eould not be fired without the apbonuses in fiscal 2004). As of early 2006, Brotman proval of a senior eompany offieer. own~d about 2.2 million shares of Costco stock (wqrth about $110 milIion as of December 2006) Selecting People foy Opm Positions. Costeo's and had been awarded options to purchase an additop management wanted employees to feel that they tional 1.35 milIion shares; Sinegal owned 2.7 million eould have a long eareer at Costeo. It was eompany shares' of Costco stock (worth about $140 milIion poliey to fill at least 86 pereent of its higher-Ievel ,as of December 2006) and had also been awarded openings by promotions from within; in aetuality, options for an additional 1.35 million shares. Sevthe pereentage ran close to 98 percent, whieh meant eral senior officers at Costco were paid 2005 salathat the majority ofCostco's management team memries in the $475,000-$500,000 range and bonuses of bcrs (incIuding warehouse, merchandise, administra$47,000-$77,000. Sinegal explained why exeeutive tive, membership, front end, and reeeiving managcompensation at Costco was only' a fraction of the ers) were homegrown. Many of the company's vice millions paid to top-level exeeutives at other corpopresidents had started in entry-Ieveljobs; aeeording rations with sales of $50 billion 01' more: "1 figured to lim Sinegal, "We have guys who started pushing that if.J was making something like 12 times more shopping carts out on the parking lot for us who are than the typical person working on the floor, that now vice presidents of our company,"21 Costco made that was a fair salary."25To another reporter, he said: a point of recruiting at local universities; Sinegal "Listen, I'm one of the founders of this business. cxplained why: "These people are smarter than the I've been very welI rewarded. I don't require a salaverage person, hardworking, and they haven't made ary that's 100 times more than the people who work a career ehoice."22 On another oeeasion, he said, "If on the sales floor."26 SincgaI's employment contraet someone eame to us and said he just got a master's \Vas only a page long and provided that he could be in business at Harvard, we would say fine, would you ten11inated for cause. like to start pushing carts."23 Those employees who demonstrated smarts and strong people management skills moved up through the ranks. But without an aptitudc for the details of discount retailing, even up-and-eoming employees stood no chanee of being promoted to a position of Jim Sinegal, who was the son of a steelworker, had warehouse manager. Sinegal and other top Costeo ex.ingrained five simple and down-to-earth business ecutives who oversaw warehouse opcrations insisted principIes into Costco's corporate eulture and the that candidates for warehouse managers be top-ftight m:mner in which the company operated. The followmerchandisers with a gift for the details of making ing' are excerpts of these principies and operating items fly off the shelves; Sinegal said, "People who approaehes: have a feel for it just start to get it. Others, you look 1. Obey the law-The law is irrefutable! Absent at them and it's like staring at a blank eanvas. I'm a moral imperative to chalIenge a law, we must not trying to be unduly harsh, but that's the way it eonduct our business in total eomplianee with workS."24Most newly appointed warehouse managers the laws of every cornmunity where we do busiat Costco came from the ranks of assistant warehouse ness. ~e pledge to: managers who had a track record of being shrewd merehandisers and tuned into what new or differ Comply with all laws and other legal ent produets might seU welI given the c1ientcle that requirements.
o o

Cosco's Business Philosophy, 'Values, and Code of Ethics

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Respeet all publie offieials and their. positions. Comply with safety and security standards for all products sold. Exceed ecological standards required in every eommunity where we do business. Comply with all applicable wage and hour laws. Comply with all applicable anti-trust laws. ; 3. Conduet business in and with foreign eoun-, tries in a manner that is legal and proper under United States and foreign laws. Not otTer, give, ask for, or reeeive any form of bribe or kiekbaek to or from any person or pay to expedite government action or other- . wise aet in violation of the Foreign Conupt Praetices Act. Promote fair, aeeurate, timely, and understandable discJosure in rcports filed with the Seeurities aod Exchange Commission and in other public communieations by tj1e Compaoy. 2.

Provide products to our members that will be ecologically sensitive. Provide our members with the best customer service in the retail industry. Give back to our communities through employee volunteerism and employee aod corporate contributions to United Way and Children's Hospitals. Take care of our employees-Our employees are our most important asset. We believe we have the very best employees in the warehouse club industry, and we are committed to providing them with rewarding chaJJenges and ample opportunities for personal and career growth. We pledge to provide our employees with: Competitive wages. Great benefits. A safe and healthy work environment. Challenging and fun work. Career opportunities. An atmosphere free from harassment or discriminatian. An Open Door Policy that allows access to ascending levels of managemcnt to resolve issues. Opportunities to give back to their communities through volunteerism and fundraising.

Take care of our members-Costeo member- , ship is opeo to business owners, as well as individuals. Our members are our reason for being-the key to our success. Ifwe don't keep our members happy, little else that we do will make a differ- , eoce. There are plenty of shoppiog alternatives for suppliers are our our members, and if they fail to show up, we can- . 4. Respect our suppliers-Our partners in business and for us to prosper as a not survive. Our members have extended a trust to company, they must prosper with uS. To that Costeo by vi1ue of paying afee to shop with s.. end, we strive to: We will succeed only if we do not violate the trust Treat all suppliers and their representatives they have extended to us, and that trust extends to ' as you would expect to be treated if visiting everyarea of our business. We pledge to: . their places of business. Provide top-quality products at the best Honor all commitments. prices in the market. Protect all suppliers' property assigned to Provide high-quality, safe, and wholesome ' Costeo as though it were our own. food products by requiring that both vendors. Not accept gratuities of any kind from a supplier. and employees be in compliance with the highest food safety standards in the industry. Avoid actual or apparent confIiets of interest, including creating a business in competition Provide our members with a 100 percer with the Company or working for or on besatisfaction guaranteed warranty on every' half of another employer in competition with product and service we sell, including their " membership fee. ' , the Company. If we do these four things throughout OUT organization, Assure our members that every product we sell is authentic in make and in representa~on " , then we will achieve our ultimate goal, which is to: of performance. 5. Reward our shareholders-As a company with Make our shopping environment a pleasant stock that is traded public1y on the NASDAQ experience by making our members feel welstock exchange, our shareholders are our busicome as our guests. ness partners. We can only be successful so long

Thompson-Strickland-Gamble: Crafling and Executing Strategy: Concepts and Cases, 16th Edition

1. Costeo Wholesale Corporation: Mission, Business Model, and Strategy

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as we are providing them with a good retum on the money they invest in our company .... We plcdge to operate our company in such a way that our present and future stockholders, as wellas our employecs, will be rewarded for our efforts.

Sam's Club
'In 2007, Sam's Club had 693 warehouse locations and more than 49 million members. Wal-Mart Stores opened the first Sam's Club in 1984, and management had pursued rapid expansion of the membership club format over the next 23 years, creating a chain of 579 U.S. locations in 48 states '"and 114 internationallocations in Brazil, Canada, China, Mexico, and Puerto Rico as of February 2007. Many Sam's Club locations were adjacent to .Wal-Mart Supercenters. The concept of the Sam's Club format was to sell merchandise at very low protit margins, resulting in low prices to members. ,Sam's Clubs ranged betwcen 70,000 and 190,000 square feet, with the average being about 132,000 square feet. AIl Sam's Club warehouses had concrete floors; sparse decor; and goods displayed on pallets, simple wooden shelves, or racks in the case of apparel. Sam's Club stocked brandname merchandise, including hard goods, some 'soft goods, institutional-size grocery items, and selected private-Iabel items sold under the Member's lI1ark, Bakers & Chefs, and Sam's Club brands. Gel~erally, each Sam's Club al so carried software, electronics, jewelry, sporting goods, toys, tires and batteries, stationcry and books, and most clubs . '. had, fresh-foods dcpartments that included bakery, .meat, produce, floral products, and a Sam's Caf. A significant number of clubs had a one-hour photo processing department, a pharmacy that filled prescriptions, an optical department, and self-service gasoline pumps. Members could shop for a broad a'ssQrtment of merchandise and services online at www.samsclub.eom. . Like Costco, Sam 's Club stockcd about 4,000 items, 'a big fraetion of which were standard and a ',small fraction ofwhieh reprcsentcd special buys and one-time offerings. The treasure-hunt items at Sam's Club tended to be less upscale and earry lower price 'tags than those at Costco. The pereentage composition of sales was as follows:

COMPETITION
In the discount warchousc rctail segment, thcre were three main competitors-Costco Wholesale, Sam's Club (671 warehouses in six countries-the United States, Canada, Brazil, Mexico, China, and Puerto Rico), and B1's Wholesale Club (165 locations in 16 states). At the end of 2006, there were just over 1,200 warehouse locations across the United States and Canada; most every major metropolitan arca had one, ifnot several, warehouse clubs. Costco had close to a 55 percent share of warehouse club sales across thc United States and Canada, with Sam's Club (a division of Wal-Mart) having roughly a 36 percent share and BJ's Wholesale Club and several small warehouse club competitors about a 9 percent share. The wholesale club and warehouse segment of retailing was estimated to be a $110 billion business, and it was growing about 20 percent faster than rctailing as a whole . Competition among thc warehouse clubs was based on sueh factors as priee, merchandise quality and selection, loeation, and member serviee. However, warehouse clubs also competed with a wide range of other typcs of rctailers, including retail discounters like Wal-Mart and Dollar General, supermarkets, general merehandise chains, specialty chains, gasoline stations, and Internet retailers. Not only did Wal-Mart, thc world's largest retailer, compete direetly with Costeo via its Sam's Club subsidiary but its Wal-Mart Supereenters sold many of the same types of merehandise at attractively low prices as wel!. Target and Kohl's had emerged as signifieant retail eompetitors in eertain merehandise eategories. Low-cost operators selling a single eategory or narrow range of merehandise-such as Lowe 's, Home Depot, Offiee Depot, Staples, Best Buy, Cireuit City, , PetSmart, and Barnes & Noble-had significant market share in their respective product categories. Briefprofiles ofCostco's two primary competitors in North America are presented in the following sections; Exhibit 3 shows selected financial and operating data for these two competitors.

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Exhibit 3 Selected Financial and Operating Data for Sam's Club and BJ's Wholesale
Club, 2000.,.2006

Sam'spluij~'.

<t., in milliOns) ,

Sal!'ls in United:States~($
'@"'%!~":''''

Operating.incom:($inmillions) Assets($ in mil!ibns) ' NUrllber ofI29.J'Q'fl::; atyear-end U~it,edStatesS: Inte~mltiona,I;~"

,,;reven ""',, Sellirig, general

OperatingngoT:,,~ Net income Total assets\', 'Number~fctb.s'f1t year-end ($ in millions)
31,2007; data for 2005 are for year ending January 31, 2006;

Number of,ni$rnb.er::;(OOOs) , verages:l(:s:prloct,ion

'Fiscal years end in January and so on,

31; data for 2006 are for year ending January '

"Fiscal years ending on last Saturday of January; January 28, 2006; and so on,

data for 2006 are for year ending January

'.

27, 2007; data for 2005 are for year ending segment

'For financial reporting purposes, Wal-Mart consolidates the operations of all foreign-based stores into a "ingle "international" figure; lhus, financial information for foreign-based Sam's Club locatiorls is not separately available,

In 2006, Sam's Club launched a series of initiative$' to grow its sales and market share: Adding new lines of merchandise, with more " emphasis on products for the home as opposed to small businesses. In particular, Sam's had put more emphasis on furniture, f1at-screen TVs and other electronics products, jewelry, and select ' other big-ticket items. lnstituting new payment methods. Starting November 10, 2006, Sam's began acceptiil~ payment via MasterCard credit cards; prior to then, payment was limited to cash, check,' Discover Card, and debit cards. Early result; '. with MasterCard were favorable; company of- " tlcials reported that in the week following the , MasterCard acceptance, the average ticket: checkout at Sam's increased by 35 percent.

,.

J,

Running ads on national TV. Sam's spent about $50 million annually on advertising and direct mail promotions. During the 2006 holiday season, Sam's ran national TV ads on high-profile TV programs like Deal or No Deal, NBC's coverage of the Macy's Thanksgiving Day Parade, and the Thanksgiving Day NFL matchup between the Detroit Lions and Miami Dolphins on CBS. The TV ads and companion print ads featured Sam's Club shoppers showing off their purchases with a background sound track playing "God Only Knows" by the Beach Boysscenes included a young man watching shark shows on a flat-screen TV from his bathtub. a well-dressed woman buying a hot dog roaster, and a Florida couple buying a supersize inflatable snow globe.

Thompson-Slrickland-Gamble: Cralting and Execuling Slralegy: Coneepls and Cases. 161hEdilion

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Thc animal fce for Sam's Club business membcrs was $35 for the primary membership card, with a spouse card availablc at no additional cost. Business members could add up to eight business associates for $35 each. The annual membership fee for an individual Advantage member was $40, which included a spouse eard. A Sam's Club Plus premium membership cost $100 and included hea1th care insurance, mcrchant credit card processing, Web site operation, personal and financial services, and an auto, boat, and recreational vehiclc programo Rcgular hours of operations were Monday through Friday 10:00 a.m. to 8:30 p.m., Saturday 9:30 a.m. to 8:30 p.m., and Sunday 10:00 a.m. to 6:00 p.m. Approximately two-thirds of the merchandise at Sam's Club was shipped from the division's own distribution facilities and, in the case of perishable items, from some ofWal-Mart's grocery distribution centers; the balance was shipped by suppliers direct to Sam's Club locations. Like Costco, Sam's Club distl'ibution centers employed cross-docking techniques whcreby incoming shipments wcre transfcrred immediately to outgoing trailers destined for Sam's Club locations; shipments typically spent less than 24 hours at a cross-docking facility and in some instances were there only an hour. Thc Sam 's Club distribution center network consisted of 7 company-owned-andoperated distribution facilities, 13 third-party-ownedand-operated facilities, and 2 third-party-owned-andoperated import distribution centers. A combination of company-owned trucks and independent trucking companies werc uscd to transport merchandise from distribution centers to club locations.

BJ's Wholesale Club

BJ's Wholcsale Club introduced the member warehouse concept to the nol'theastern United States in the mid-1980s. Since then it had expanded to 163 stol'es opcl'ating in 16 sta tes in the N ol'theast and the Mid-Atlantic; it also had two ProFoods Restaurant Supply clubs and three cross-dock distribution centers. BJ's had 144 big-box warehouses (averaging 112,000 square feet) and 19 smaller-format warehouses (averaging 71,000 square feet); the two ProFoods clubs averaged 62,000 squal'e feet. Clubs were Iocated in both freestanding and shopping centel' locations. Construction and site development costs for a full-sizcd BJ's Club were in thc $5 to $8 million range; land acquisition costs could run $5

to $10 million (significantly highel' in some locations). Each wal'ehouse generally had an investrnent of $3 to $4 million fol' fixtures and equipment. Preopening expenscs at a new club werc close to $1 million. Full-sizcd clubs had approximatcly $2 million in i~1Ventory.Merchandise was gencrally disp1ayed on pallcts containing largc quantitics of cach item, thereby reducing labor requircd for handling, stock)ng, and restocking. Backup merchandise was gcnerally stored in steel l'acks above the sales floor. Most merchandise was premal'ked by the manufacturer so that it did not require ticketing at the club. Like Costco and Sam's, BJ's Wholesale sold high-quality, brand-name merchandise at prices that were significant1y lower than the prices found at s.upermarkets, diseount retail chains, departrnent stores, drugstores, and specialty retail stores like Best Buy. Its merchandise lineup of about 7,500 items included consumer electronics, prerecol'ded media, snall appliances, tires, jcwclry, hcalth and bcauty aids, household products, computer software, books, greeting cards, apparel, furniture, toys, scasonal items, frozen foods, tresh meat and dairy products, beverages, dry grocery items, tresh produce, flowers, canhed goods, and household products; about 70 percent of BJ's product line could be found in supermarkets. Food catcgories and houschold items accounted for approximately 59 percent of BJ's total food and generalmerchandise sales in 2005; about 12 perccnt of sales consisted ofBJ's private-Iabel products, which -vere primarily premium quality and typically priced well below name-brand products. In some product assCl'tmcnts, BJ's had threc price catcgories for membcrs to choosc from-gooel, deluxe, and luxury. Thcre wcrc 125 BJ's locations with home improvemcnt scrvice kiosks, 130 clubs with Verizon Wirelc'ss kiosks, 44 with pharmacies, and 87 with self-service gas stations. Other specialty products and services, provided mostly by outside operators that leased warchouse spacc fi'om BJ's, inc1uded photo developing, full-service optical centers, brand-name fast-food service, garden and storage sheds, patios and sunrooms, vacation packages, propane tank filling'services, discountcd home heating oil, an automobile buying service, installation ofhome security services, printing ofbusiness forms and checks, and mufflcr and brakc services. BJ's Wholcsa1e Club had about 8.6 million mcmbers in 2006 (see Exhibit 3). It charged $45 per year for a primary Inner Circle membership that induded one free supplemental membership; mcmbers

GI

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1. Costeo Wholesale Corporation: Mission. Business Model, and Strategy

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Case 1 Costeo WholesaleCorporation:Mission.BusinessModel,and Strategy

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in the same household could purchase additionaf Strategy Features that Differentiated BJ's. Top supplemental memberships for $20. A business management believed that several factors set B1's membership also cost $45 per year, which included Wholesale operations apart from those of Costco one free supplemental membership and the ability to , and Sam's Club: purchase additional supplemental memberships fol" Offering a wide range of choice-7,500 items $20. B1's launched a membership rewards program in versus 4,000 items at Costeo and Sam's Club. 2003 that offered members a 2 percent rebate, capped . Focusing on the individual consumer via at $500 per year, on most all in-club purchases; merchandising strategics that emphasized a members who paid the $80 annual fee to enroll in custol11er-friendly shopping experience. the rewards program accounted for 5 percent of aIl Clustering club locations to achieve the bendit mcmbers and 10 percent of total merchandise and of name recognition and maximize the efficienfood sales in 2005. Purchases with a co-branded B1's cies of management support, distribution, and MasterCard earned a 1.5 percent rebate. B1's was marketing activities. the only warehouse club that accepted MasterCard" Visa, Discover, and American Express cards at all Trying to establish and maintain the first 01' locations; members could also pay for purchases by second industry leading position in each majar cash, check, and debit cards. B1's accepted returns of . market where it operated. most l11erchandisc within 30 days after purchase. ' Creating an exciting shopping experience for B1's increased customer awareness of its clubs members with a eonstantly changing mix of food primarily through direct l11ail, public relations ef~' and general merchandise items and carrying a forts, marketing programs for newly-opened clubs, broader product assortment than competitors. and a publication called BJ~' Journal. which was Supplementihg the warehouse format with aisle mailed to members throughout the year; during the markers, express eheekout lanes, self-checkout holiday season, B1's engaged in radio and TV adver- . lanes and low-cost video-based sales aids to tising, a portion ofwhich was funded by vendors. make shopping more efficient for members. Merchandise purchased from manufacturers Being open longer hours than competitors. was shipped either to a B1's cross-docking facilit,Y , Offering smaller package sizes of many items. or directly to clubs. Personnel at the cross-docking Accepting manufacturers' eoupons. facilities broke down truckload quantity shipments from manufacturers and reaIlocated goods for shipAccepting more credit card payment options. ment to individual clubs, generally within 24 hou's.
"

Endnotes
'As quoted in Alan S, Goldberg and Sil! Ritter, "Costeo CEO Finds ProWorker Means Profitability," an ASC News original report on 20/20, . August 2. 2006. btjkl;J_cn.Qw_'>4)Q&QLnl.2.Q2)!J:lJ.g;lDj)~ $Jl1fY2Ld=1.39277\t (aeeessed November 15. 2006). 'Ibid. 'As deseribed in Nina 5hapiro. "Company tar the People," Seattle
Weekfy, December 15, 2004, ~\y.:.g.5}1~lewe~.!sJ.y.:_.91.!l (accessed

November 14, 2006) .. '2005 and 2006 annual reports, 'Matthew Boyle. "Why Costeo Is 50 Damn Addietive," Fortune, Oetober 30. 2006, p. 130, 'As quoted in ibid . pp, 128-29. '5teven Greenhouse. "How Costeo Seeame the Antl-Wal-Mart," New York Times, July 17, 2005. ww\Yw.bQJJp",gISlli1!:!.eomin0WS(aeeessed November 28, 2006), . 'As quoted in Greenhouse. "How Costeo Seeame the Anti-Wal-Mart." 'As quoted in 5hapiro, "Company for the People." "As quoted in Greenhouse. "How Costeo Beeame the Anti-Wal-Mart.' "Soyle, "Why Costeo is 50 Damn Addietive:' p. 132.

"Ibid., p. 130. "As quoted in Goldberg and Ritter, "Costeo CEO Finds Pro-Worker Means Profitability.' "Ibid. "Ibid, 165hapiro, "Company for the People." "Greenhouse, "How Costeo Beeame the Anti-Wal-Mart." "As quoted in Goldberg and Ritter, "Costeo CEO Finds Pro-Worker Means Profitability.' "Ibid. "As quoted in Greenhouse. "How Costeo Seeame the Anti-Wal-Mart." "As quoted in Goldberg and Ritter. "Costeo CEO Finds Pro-Worker Means Profitability." ."Boyle, "Why Costeo Is 50 Damn Addietive." p. 132. "As quoted in 5hapiro. "Company for the People:' "Ibid. "As quoted in Goldberg and Ritter, "Costeo CEO Finds Pro-Worker Means Protitability." "As quoted in 5hapiro, "Company for the People,"