1. What is Costco’s business model? Is the company’s business model appealing?

Why or
why not?
Costco’s business model revolves around being a low cost provider.Combing high sales
volumes and quick inventory turnover they can move products from supplier to consumer without the
bloat of high interest purchasing agreements. This unique strategy allows Costco to mark up products
by no more that 15% compared to the industry average of over 25%. Their family oriented culture
with all employees through providing a living wage, excellent benefits and career opportunities
creates an environment that customers are feel welcome in. The combination of value and
environment encourages customers to pay membership fees just to access the store despite Costco’s
modest mail only advertising. This business model creates value for shareholders without
compromising Costco’s core valuesand makes it a very appealing.

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

- Membership Fees
- Narrow inventory with rapid turnover
- Ultra low prices
- Treasure hunt environment.
This strategy is very effective. Low prices on name brand items have allowed Costco to attract
more affluent customers. By targeting limited quantities of these items Costco is able to turn the
inventory quickly keeping them from financing inventory.Of the approximately 3600 items you
can find at an average Costco approximately 20-25% are constantly changing. This changing
inventory gives customers a “treasure hunt” experience when they are strolling though the isles.
This strategy is effective because it rewards both customers and suppliers. Customers know they
are getting a good deal and suppliers know they can move the merchandise. Additionally keeping
their prices on these items so low gives customers rewarding feeling for their memberships. These
memberships help Costco maintain a profit.

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?

Yes, Jim Sinegal is an effective CEO. Jim Sinegal must get A grade for leading the process of
crafting and executing Costco’s strategy.

What support can you offer for these grades?

* 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.

* Sinegal 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.
* Sinegal had performed excellent job in the execution of the strategy process at Costco. +Sinegal
had helped the company by spending more time in the stores, checked out various layouts and
converse with employees to get to know how the things are going in the company.

+He helped the company by taking out various actions in stores to improve the condition of the
stores.

+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. His
tremendous savvy skills show that he managed the company excellently in order to achieve high
profitability. At last, it can be concluded that Sinegal had performed extraordinary in managing the
strategic leadership.

4. What core values or business principles is Jim Sinegal stressing at Costco?

There were two core values or business principles appear to place out 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.

It is observed that the human resource management of the Costco was coordinating and integrating
its employees very nicely.

It can be seen from the case that comments of Jim Sinegal’s made it very apparent that he was
very committed to capture these values as division of Costco’s organization culture. 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.

From the standpoint of warehouse club retail, Costco clearly is the leader in this market.
Their strategy has been effective in making them the choice of consumers. Costco’s winning
strategy are keeping prices lower than the competition, treasure-hunt merchandising and
compensation for their workforce.

Cost co has been performing very well from a strategic perspective; by focusing on
competitive pricing, a sizeable selection of products and treasure-hunt merchandising and higher
inventory turnover, Costco has developed a franchise that has surpassed its competition like Sam’s
club and BJ Wholesale.
 Cost co’s competitive advantage is due to its distinctive competencies which are
culmination of successful execution of competencies over the last ten years, brand image,
excellent financial position, developing a niche market and also by its ability to read regional
customers tastes and preferences. It has been able to bring high quality goods and services to the
market at the lowest possible prices every day, and done it with integrity at every level of the
company while valuing the interests of the stakeholders. They have both the business strategy and
operational capacity that allows them to perform remarkably well in passing along savings to their
customers. Costco's low prices help the retailer maintain positive growth during tough economic
times. Narrowing the number of options increases the sales volume of each product. These are just
few of the winning strategies that have made it a success.

5. (In the event you have covered Chapter 3) What is competition like in the North
American 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

* Rivalry among wholesale club competitors—a strong to fierce competitive force

The rivalry among Costco, Sam’s Club, and BJ’s Wholesale is vigorous and likely to remain so.
All 3 competitors are striving to attract more members and to offer merchandise selections and a
shopping experience that will cause members to make more store visits and/or spend larger sums
per visit. Rivalry is centered on two main factors:
• Low prices (consistently below retail price levels and the prices charged by retail discounters)—
prices had to be at “bargain levels” in order to attract members and provide them with
considerable cost savings (enough to more than cover membership fees)

• Product quality and selection

o Merchandise was generally of good to excellent quality and often included name
brand products supplemented with an assortment of private-label products
o Warehouse clubs stocked 3,500 to 4,500 items, a portion of which were ever-
changing as company purchasing personnel ran upon one-time buying
opportunities. Typical supermarkets stocked about 40,000 items and a Wal-Mart
Supercenter or SuperTarget might have as many as 150,000 items for shoppers to
choose from..
o The product lineup included such items as appliances, electronics, office and
restaurant supplies, auto supplies, toys and games, light bulbs, batteries, cookware,
tools, apparel, DVDs, books, canned and frozen foods, fresh meats and seafood,
fresh fruits and vegetables, bakery items, beverages, wines, vitamins and personal
care products, cleaning supplies, and paper products.
o Selection within each category was limited (usually to fast-selling models, colors,
and large- quantity sizes).
To encourage members to shop more frequently and create a bit more of a one-stop
shopping appeal, both Costco and Sam’s Club operated ancillary businesses within or
next to most warehouses—gas stations, optical centers, photo centers, print and copy
centers, pharmacies, food courts, and the like.
To a much lesser extent, rivalry also revolved around attracting members/shoppers by means
 of convenient store locations, a comparatively pleasant big-box shopping environment, and
maybe even satisfactory checkout speeds.
+ Factor intensifies:

• All 3 club rivals are aggressively pursuing top-line revenue growth (chiefly by opening
new stores, attracting more members at both new and existing stores, and endeavoring
to grow sales revenues and shopper traffic at existing stores). The industry is becoming
somewhat mature (which strengthens rivalry); achieving fast revenue growth is heavily
dependent on the speed with which rivals open new stores and grow sales at existing
stores.
• Low switching costs on the part of consumers (membership fees were very similar
from club to club). In large metropolitan areas with stores of two or more of the 3
competitors, it is easy for households and businesses to switch their memberships from
one club to another (or to belong to both and then shop at whichever club had the best
deals).
• Weak to modest degrees of product line differentiation from club to club. There is
considerable similarity in the merchandise offerings of all three clubs (which enhances
rivalry).
+ Factor weaken:
The differentiation that exists from club to club (as concerns product selection, shopping
ambience, and convenient access to store locations)—this differentiation poses a barrier to
switching to the extent that some bargain-hunting shoppers prefer shopping at one club
versus another when there are multiple clubs to choose from in their shopping area, thus
acting to weaken rivalry.
But this one factor is not powerful enough to overcome the combination of factors acting
to strengthen rivalry

* Threat of entry into the warehouse club industry in North America—a weak competitive
force
The barriers to a new entrant are quite high:
• Costco and Sam’s have to be considered formidable competitors and enjoy sizable scale
economies not easily accessed by a newcomer.
• Capital requirements are sizable—if an entrant wishes to compete on a scale comparable
to the industry incumbents.
The marketing and advertising costs to attract members and build a significant volume of sales
(and otherwise overcome the loyalty of existing warehouse club members) would seem to be
significant.
Moreover, the three industry incumbents are in a strong position to vigorously contest a
newcomer’s entry.
In short, the pool of candidates for fresh entry into warehouse club industry is small and the
likelihood of fresh entry in 2012 and beyond is equally small, making the competitive pressures
from the threat of new entry virtually non-exừtent.
* Competition from substitutes—a strong to fierce competitive force
The substitutes for being a member of and shopping at wholesale clubs are a relatively strong
competitive force, given that
 • Acceptable substitutes are readily available.
• Buyer costs to switch to substitutes are minimal (except for the higher prices that may
have to be paid).
• Many consumers are familiar with and comfortable with shopping at substitute
retailers/discounters.
• The merchandise that can be purchased at substitute retailers/discounters is quite
comparable to the merchandise sold by wholesale clubs.

* The bargaining power and leverage of suppliers to the warehouse club industry—a moderate
to weak competitive force.
The suppliers consist mainly of the manufacturers of the products that warehouse clubs elect to
stock. While a big fraction of these manufacturers are undoubtedly large enterprises with well-
recognized brand names and good reputations among consumers, they are not necessarily in a
strong bargaining position that allows them to dictate the terms and conditions on which they will
sell theừ wares to the warehouse clubs.
Costco and Sam’s, in particular, have considerable buying power and bargaining leverage in
obtaining the merchandise they desire to stock. If a particular manufacturer chooses not to sell to
the wholesale clubs at an attractively low price (such that the clubs can, in turn, charge what are
perceived by members as “bargain prices” and save their members money), they can purchase
goods for their stores from other more willing and price competitive sources. In Costco’s case, no
single manufacturer supplied a large percentage of the merchandise that Costco stocked (which
lessens any one manufacturer’s bargaining power). Moreover, because the items that the wholesale
clubs stock produce high volumes of sales for manufacturers, manufacturers tend to be anxious to
sell their goods to the wholesale clubs—in other words, the wholesale clubs are big volume buyers
and thus have substantial bargaining clout with their suppliers. Costco management believed that
if its current sources of supply became unavailable (for reasons of high supply prices or whatever),
the company could switch its purchases to alternative manufacturers without experiencing a
substantial disruption of its business—such ease of switching suppliers weakens supplier
bargaining power and strengthens the bargaining power of a wholesale club.
Conclusion: The suppliers to the wholesale clubs tend to be a relatively weak competitive force—
weak in the sense of being unable to put much pressure on their wholesale club customers in
negotiating for better/ higher prices and other more favorable terms of sale.

* The bargaining power and leverage of customers (the members of wholesale clubs)—a very
weak competitive force.
Wholesale club members buy in relatively small quantities; no single member accounts for a
meaningful fractions of a wholesale club’s total sales. Consequently, individual members of
wholesale clubs have essentially no power or leverage to bargain with a wholesale club over the
prices they will pay or over other terms and conditions of sale. A member can certainly not
purchase a particular item (and obtain it for another retailer/discounter) and can also choose not to
renew their membership, but this does not convey any bargaining power of consequence (any
customer of any company in any industry can always refuse to purchase and take their business
elsewhere). So even though a member’s switching costs are relatively low, it does not result in
having the clout to go to the Customer Service desk and bargain down a club’s posted price on an
item or otherwise obtain any benefit beyond what their membership card provides.
• Buyers/members are small, numerous, and buy in relatively small quantities.
• There’s no evidence indicating that clubs are frequently so overstocked with certain
merchandise that a single member is able to bargain down the posted price of
overstocked items.
 **** Conclusions concerning the overall strength of competitive forces: Competitive
pressures associated with rivalry and substitutes are definitely the two strongest of the
five competitive forces. Competitive pressures from the other three competitive forces are
weak. On the whole, competitive pressures confronting wholesale clubs are “normal” or
reasonable—not so strong as to unduly crimp profit margins but certainly strong enough
to prevent wholesale clubs from earning well above-average profits and attracting
outsiders to entry the industry. To some large extent, the competitive market success of a
wholesale club is a function of keeping its costs to buy goods and operate its stores low
enough to be able to charge “bargain prices ”, attract new members, and still achieve
acceptable profitability.

6. How well is Costco performing from a financial perspective? Do some number-crunching

using the data in case Exhibit 1 to support your answer. Use the financial ratios
presented in Table 4.1 of Chapter 4 (pages 83-86) to help you diagnose Costco’s
financial performance.
The financial and operating summary in case Exhibit 1 indicate that Costco’s financial
performance during the 2000-2011 period has been good.

Net sales increased from $31.6 billion in fiscal2000to $87.0 billion in fiscal 2011, equal to a
compound average growth rate (CAGR) of 9.6% since 2000; this growth rate is respectable
given the tough economic conditions that existed in 2008-2011.
Total revenues (sales plus membership fees) increasedfrom$32.2billioninfiscal2000to
$88.9billion in fiscal 2011, equal to an average annual compound rate of 9.7% from 2000
through 2011.
Net income rose from $631 million in 2000 to $ 1.46 billion in 2011, a compound average
growth rate of7.9%.
Diluted net income per share increased from $1.35 in 2000 to $3.30 in 2011, a compound
average growth rate of 8.5 %.
Costco’s profitability and expense ratios are shown below:

2011 2010 2009 2008 2005

Merchandise costs as a % of net 89.3% 89.2% 89.2% 89.5% 89.4%
sales
9.8% 10.1% 10.2% 9.6% 9.5%
Selling, general, and
administrative expenses as a %
of total revenues
Operating income as a % of total 2.7% 2.7% 2.5% 2.7% 2.8%
revenues (operating profit
margin)
1.6% 1.7% 1.5% 1.8% 2.0%
Net income as a % of total
revenues (net profit margin)
11.6% 12.0% 10.8% 14.0% 12.0%
Return on equity (net income as
a % of stockholders’ equity)
Return on assets (net income as a 5.5% 5.5% 4.9% 6.2% 6.4%
% of total assets)
Current ratio 1.14 1.16 1.11 1.07 1.22
Days of inventory 31.2 30.3 31.6 29.0 31.6

• Operating income as a % of total revenues (operating profit margin) has remained stable
during the 2005-2011 fiscal year period, dipping only slightly during the depth of the
recession in fiscal 2009; but the operating margin is materially lower than in fiscal 2000.
• Net income as a % of total revenues (net profit margin) has eroded slightly as compared to
the levels in 2000, 2005, and 2008—but the fiscal 2009-2011 percentages still seem decent in
light of the unusually weak economic conditions that prevailed.
• Return on equity dropped from 14.9% in fiscal 2000 to 12.0% in fiscal 2005, climbed back to
14.0% in fiscal 2008, and bounced around in the 10.8% to 12.0% range in fiscal years 2009-
2011.
• Return on assets declined from 7.3% in fiscal 2000 to 6.4% in fiscal 2005, to 6.2% in fiscal
2008, to 4.9% in fiscal 2009, and then rose marginally to 5.5% in both fiscal 2010 and 2011.
• The company’s liquidity is adequate, as indicated by the slightly above 1.0 current ratio
levels in fiscal years 2005-2011.
• Days of inventory at Costco have remained quite stable in the 29-32 days range; inventories
of about 1-month seem very reasonable. Costco management appears to have done a good
job of inventory control.
• In fiscal 2011, Costco’s long-term debt was $2.15 billion and has stayed about $2.2 billion
for the past four fiscal years; long-term debt as a percentage of stockholders’ equity in fiscal
2011 was a modest 17.1%. The company does not have a debt problem.
+ Net cash provided by operating activities at Costco has trended upward over the past fiscal
11 years, climbing from $ 1.07 billion in fiscal 2000 to $ 1.77 billion in fiscal 2005 and to
$3.20 billion in fiscal 2011.

Conclusions regarding the data in case Exhibit 1: Costco’s financial performance, while
acceptable, could certainly be better. Profit margins, return on equity, and return on assets
have gotten skimpier since 2000 and SG&A expenses as a % of total revenues seem to be
creeping upward. None of the performance measures show an alarming deterioration in light
of the weak economic environment that confronted the company throughout fiscal years
2009-2011.

Costco’s biggest geographic market and also its biggest source of profit (from a total dollar
standpoint) is the United States.
In fiscal 2011, Costco’s operating profit margin (operating income as a % of total revenue,
including membership fees) was 2.1 % in the U.S., 4.4% in Canada, and4.2% in all other
countries.
In fiscal 2010, Costco’s operating profit margin) was 2.2% intheU.S., 4.4% in Canada, and
3.5% in all other countries.
From fiscal2005 through fiscal 2011:
• Total revenues grew at a CAGR of 7.1% in the United States
 • Total revenues grew at a CAGR of 13.5% in Canada
• Total revenues grew at a CAGR of 21.2% in all other countries with warehouse

From fiscal 2005 through fiscal 2011:

• Operating income grew at a CAGR of 3.0% in the United States
• Operating income grew at a CAGR of 17.0% in Canada
• Operating income grew at a CAGR of 26.8% in all other countries with warehouses
Costco spent $876 million on capital expenditure in the u.s. in fiscal 2011; in Canada capital
expenditure were$ 144 million, and elsewhere capital expenditures were $270million. In both
fiscal 2011 and fiscal 2009, Costco spentover$200million on capital expenditures outside
theU.S. and Canada—warehouse expansion outside North America is a Costco priority
 7. Based on the data in case Exhibits 1, 5, and 6, is Costco’s financial performance superior
to that at Sam’s Club and BJ’s Wholesale?

Financial performance is the level of performance of a business over a specified period of time,
expressed in term of overall profits losses during that time and they were shown clearly at the
exhibit 1,5 and 6. From the exhibits, we can see that Costco’s financial performance superior to
that at Sam’s Club and BJ’s Wholesale, two of its largest competitors. First is the net sales,
Costco has $31,621 million sales in 2000 and it increased to $87,048 million in 2011. With the
Sam’s club, they had $26,798 million in 2001 and only $53,795 million in 2012. BJ’s Wholesale
had the poorest financial performance, compared to 2 above companies. They had $8,280 mil
sales in 2007 and $10,633 in 2011. We can also concern about the average annual growth at
warehouse open more than a year. With Costco, except for the year 2009 with -4%, they all made
a positive growth, even 10% in 2011. Sam’s Club and BJ’s Wholesale also had some positive
growth rate year, but it’s much more lower, 5.2% and 4.4% relatively

8. How well is Costco performing from a strategic perspective? Does Costco enjoy a
competitive advantage over Sam’s Club? Over BJ’s Wholesale? If so, what is the
nature of its competitive advantage? Does Costco have a winning strategy? Why or
why not?
From the standpoint of warehouse club retail, Costco clearly is the leader in this market. Their
strategy has been effective in making them the choice of consumers. Costco’s winning strategy
are keeping prices lower than the competition, treasure-hunt merchandising and compensation
for their workforce.

Cost co has been performing very well from a strategic perspective; by focusing on
competitive pricing, a sizeable selection of products and treasure-hunt merchandising and higher
inventory turnover, Costco has developed a franchise that has surpassed its competition like
Sam’s club and BJ Wholesale.

Cost co’s competitive advantage is due to its distinctive competencies which are
culmination of successful execution of competencies over the last ten years, brand image,
excellent financial position, developing a niche market and also by its ability to read regional
customers tastes and preferences. It has been able to bring high quality goods and services to the
market at the lowest possible prices every day, and done it with integrity at every level of the
company while valuing the interests of the stakeholders. They have both the business strategy
and operational capacity that allows them to perform remarkably well in passing along savings to
their customers. Costco's low prices help the retailer maintain positive growth during tough
economic times. Narrowing the number of options increases the sales volume of each product.
These are just few of the winning strategies that have made it a success.

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

Yes, the price of Costco’s are too low.

At Costco, one of Mr. Sinegal’s cardinal rules is that no branded item can be marked up by more
than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets
generally mark up merchandise by 25 percent, and department stores by 50 percent or more.

“They could probably get more money for a lot of items they sell,” said Ed Weller, a retailing
analyst at ThinkEquity.

But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might
slip down a dangerous slope and lose discipline in minimizing costs and prices.

Mr. Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. “On
Wall Street, they’re in the business of making money between now and next Thursday,” he said.
“I don’t say that with any bitterness, but we can’t take that view. We want to build a company
that will still be here 50 and 60 years from now.”

Costco understands its customer. Rather than trying to maximize profits, it focuses on lowering
prices by applying a maximum 15% markup to the goods it sells even when it could get more. In
Sinegal’s words, “Many retailers look at an item and say, “I’m selling this for 10 bucks. How can
I sell it for 11?” We look at it and say, “How can we get it to nine bucks? And then, How can we
get it to eight? We understand that our customers don’t come and shop with us because of the
Santa Claus or the piano player. They come and shop with us because we offer great values”.

Many people think Costco is in the business of selling products at low prices. While its prices are
indeed low, that’s not its ultimate goal. Mark Zuckerberg stated in Facebook’s IPO prospectus,
“We don’t build services to make money, we make money to build services.” At Costco, that
translates to “we sell products inexpensively not to generate revenue but to gain loyal members.”

Remember, Costco is in the business of selling memberships. With an 86% renewal rate
worldwide, it doesn’t have to sell too many new memberships to keep revenues rising.

Summary

Yes, they have the policy of maximizing the marked price that is much lower than supermarkets
and department stores.

They try to get customers’ loyal rather than taking part in competitions.

They get money from renewal customers at the rate of 86% globally.

Also focus on servicing, they make money to build services and aim at long-term plan.
 10. What do you think of Costco’s compensation practices? Does it surprise you that
Costco employees apparently are rather well-compensated? Better compensated
than employees at Sam’s Club or BJ’s?

From my point of view, i think that Costco’s compensation practices are very impressive
move to attract potential and talent people to come and work for the company. The salaries that
the company payes their workers is pretty high in compared to other retailer such as Walmart (the
number one rank in fortune 500 board) but still a lots customers have recommended that the
Costco Corporation is one of the lowest-cost producer. In the other hand, they give their
employees the benefit package which included health care, insurance and incentive for not only
the staffs but also their family.

It is not a very big surprise that Costco employees are rather well-compensated because
it’s one strategic that the corporation used to gain the loyalty of long-term employees and expand
the labor force. Jim Sinegal, the Costco co-founder, convinced that having a well-compensated
workforce was very important to excuting Costco’s strategy sucessfully. He said,” imagine that
you have 120000 loyal ambassadors out there who are constantly saying good thing about
Costco, it will be a significant advantage for you…. Paying good wages and keeping your people
working with you is very good business.” Good wages and benefits were said to be why
employee turnover at costco typically ran under 6 to 7 percent after the first year of employment.

Costco staffs are better compensated than at Sam’s Club or BJ’s. Costco’s average wage
is $17 an hour, and while Sam’s Club didn’t release the wages of their employees, but still I
found said that Sam’s Club employees make anywhere from 8-11$ an hour and so is BJ’s
Wholesale, depending on experience and job. Costco's actually pays their people a living wage
and provides decent benefits, unlike Sam's, being the warehouse version of Wal-Mart.

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

* Use social network like Facebook, Twitter to attract and market to younger customers.

* Provide online shopping opportunities to their customers who are outside from US and Canada.

* Costo should invest on acquiring BJ’s Wholesale.

* Sell more gasoline for customers not only members.

* Open up more locations.

* Implement a stronger advertising campaign which will create a stronger customer base.

* Keep evolving their current business strategy to the current economic characteristics.
* Expand the market share by exploring untapped market in US and outside US.

* Maintain the good reputation of providing greater value to its customers.

* Continue their effective strategies like high compensation to employees, low price and
reliable quality products…

* Increase price fractionally.