Costco CEO Jim Sinegal invented the wholesale club concept in 1983, and a new industry was born. Wholesale clubs were a revolution in retail. They quickly spread throughout the United States, Canada, and Mexico and are quickly expanding into other countries. By the end of 2008, there were 550 stores in 40 states and 7 countries, with 54 million members. By offering quality merchandise at a low price, they attract mostly affluent shoppers.
Business Model: Profit at very low margins is the name of the game. Low prices + Limited selection (around 4000 items) + Wide range of merchandise categories (tires to baby wipes) creates the rapid inventory turnover. Volume purchasing + efficient distribution + reduced handling of merchandise + no-frills warehouses = Operating efficiencies.
Frequent buys at Costco: Costco price for the list is $171. Grocery Store price is $538, a savings of $367.
Costco has the highest wages and the best benefits of most retailers. Employee love working at Costco. In many ways, Costco is the anti-Wal-Mart. Employee loyalty is very important part of their strategy.
Costco’s strategic vision…
From the beginning Jim wanted Costco to be on a first-name basis with everyone. Costco is about giving customers the best value possible.
The best value at the best price sums up the vision. Smaller but powerful parts are treat people right, act ethically (rememberthis for the ethics part) and the vigilance to never forget what makes your business successful.
Strategic objectives…
Employment Objectives: First, hire great people. Jim said, “If you do right by the people working for you, they will build you a successful business.”
Management objectives: Always promote from within.Training happens at all times, not just in the classroom. Model the behavior you want from employees.
Business Objectives: Don’t try to be too much to too many, you’ll dilute your business model and lose focus. Know on what level you compete – For Costco they compete on quality and price. They want the highest quality merchandise for the best value. Probably why they attract the more affluent shoppers.
Growth Objectives: Run the business for long term sustainability. Sinegalwants Costco to be here long after he’s gone. Open 50-60 new locations per year. Keep Internet sales growing.
Marketing Objectives: Jim believes that word of mouth is the most powerful marketing tool there is. It sounds better when somebody else talks about you than when you talk about yourself. Costco still has no PR department and probably never will.
Ethics Objectives: Obey the law, Treat customers right, Treat employees right, Treat suppliers right
Our biggest challenge is to stay focused on what we do. This transcends any economic challenge we may face. ()
Strategy
External Environment: The warehouse club Industry is a small but profitable part of the retail industry. In 2008 as the recession took hold, warehouse clubs saw an increase in membership and in sales of basic household items. As the dollar recovers, foreign sales are weakening. In the United States, there is at lease one store in every major metropolitan area. Many also have a Sam’s Club or a BJ’s wholesale club.
Market size and growth rate: The warehouse club Industry is a small but profitable part of the retail industry. It is still growing and the outlook is good because even though the domestic market is saturated, expansion in foreign markets is just beginning.
The “Wholesale clubs” industry is highly competitive, on factors such as price, merchandise quality and selection, warehouse location and member service. Out of 1200 clubs in North America, 473 are Costco’s. Other wholesale clubs include Sam’s Club and BJ’s Wholesale Club. Costco competes in several types of retail, including specialty, gasoline, and e-commerce
Costco is partially vertically integrated. The Kirkland brand partners with manufacturers and suppliers to provide top quality at a low price. The Kirkland brand is on hundreds of products from meat to caskets. Sam’s Club and BJ’s also have their brands but they are lower in quality.
They order massive amounts from manufacturers. Bulk packages sell larger quantities to consumers. The huge warehouse clubs eliminate the need for actual warehouses. At the same time, they reduce the need for handling. This greatly enhances distribution efficiency. Their large-scale membership base makes them strong.
The Warehouse Clubs and Superstores industry (which was invented by Costco) is very competitivelyunattractive unless you are ideally suited to compete in it. There are substitutes on every corner, and switching costs are very low and variety in size, color and options is much greater at other stores.
Driving Forces: e-commerce is still relatively new for Costco and only accounts for 3% of sales. While the domestic market is increasingly saturated, the international arena is wide open. Rising costs are a big concern for an industry that is always striving to cut costs.
Driving forces: Costco faces a tax proposal in Montana. The recession is affecting everyone’s lifestyle. Consumers are concerned about the environment and they want to shop at stores that are environmentally friendly.
The size of circle is based on revenue. Costco has the highest revenue. A lower operating margin equals a lower markup on merchandise. A lower operating margin is consistent with charging lower prices and running a leaner (no-frills) operation. Costco has the lowest operating margin and Sam’s club has the most locations.
The Competition will open more stores in foreign markets and continue to copy Costco. They will probably be starting recycling programs and installing solar systems on their roofs.
Key Success Factors: Internet sales are increasing. Vast network of retail locations with efficient distribution system, No Frills warehouse, Cost cutting efforts, only stock bargains, Treasure hunt merchandise, No-hassle return policy, word of mouth advertizing.
The industry outlook is great!
This revenue forecast for Costco looks great.
The competitive environment
These are the general industry categories that Costco competes in. Now they are into recycling used electronics too.
In 2008, Costco has a hundred less stores than Sam’s Club, but nearly double the revenue. Costco outsells nearly all stores in dollars per square foot.
Strengths: low price, strong brand name, excellent merchandise, exceptional employees, huge membership base, economies of scale, efficient distribution and operation.
Weaknesses: CEO will soon be gone, burden of high wages and benefits, plus low margins.
Opportunities: Costco has become a clearance for other retailers who can’t sell their goods (like jewelry), so more bargains for Costco buyers. More people joined to save money. There are tremendous opportunities in expanding foreign markets, such as China and India.
Threats: Fierce competition, price competition from other retailers, cannibalization due to domestic market saturation, possible political complications in foreign markets.
Conclusions from SWOT. Maybe Costco should start accepting manufacturer coupons…
On the front-burner: The man who invented this industry is 79. It was his vision alone that made Costco what it is today. There is an ongoing gender discrimination case. Improper accounting led to an ethics and compliance program which must be strictly adhered to.
Identifying Strategy
Strategy Identification overview: Generic Competitive Strategy, complementary strategic options, functional area strategy and timing
Costco only sells top-quality merchandise at the lowest price. Sometimes their items are a little more, but it will be higher in quality and still cheaper than at other stores.
Costco partners with manufacturers to make bulk packages and also to manufacture the Kirkland Signature brand (high-quality at a low price). Costco sells everything online. Some of their best deals are online.
Costco is constantly developing new ways to package products cheaper, reduce handling, and improve distribution efficiency. Costco cuts costs by not marketing to non-members. Costco owns 80% of their real-estate and buildings.
Costco was the first to open Business Centers, delivering office supplies to local business. Costco was green from the very beginning, to save money. They have always saved on things that other retailers refuse to skimp on like prime real-estate, lights in the parking areas (not necessary with shorter operating hours), and fancy merchandise displays. Costco is getting greener in ways that save them money.
Costco Mexico is a partnership. Taiwan is a subsidiary. Kirkland Signature brand forms strategic alliances with suppliers of products like auto insurance and also with manufacturers like Bumble Bee and Martha Stewart.
Costco is partnering with UST for IT support; 75 out of 100 jobs are in India and only 25 are in the United States. Shipping website orders to customers is outsourced to UPS. {The funny looking UPS vehicle is in Mexico.}
Costco uses the same basic strategy to compete everywhere, but each manager has the authority to make decisions about their own store because Mexico and Japan have different tastes.
Costco must address some macro issues: the domestic market is maturing, they are competing in a fragmented industry (retail), and in the wholesale clubs market Costco is the leader and needs to stay-on-the-offensive.
Costco Business Centers are a good example of Cross business strategic fit which will lead to higher performance and the 1+1=3 gains for shareholders.
Unrelated Diversification: travel, optical, automotive, financial services like 401(K)s Loans, insurance, Pharmacy, Recycling old electronics.
Unrelated diversification. These services help improve member loyalty. Costco can easily partner with new service providers; they just need to put their name on it and offer it to their members.
Deceptive practices: Costco was increasing the size of their “Kirkland Signature” tuna, from 6 ounces to 7 ounces. They somehow forgot to mention the price per can increased! Bottom line: the price per ounce has increased. Also, if margins are so slim, how can everything be rounded up to .99. that makes no sense.
If Costco followed their own ethic a little better (“Obey the law.”), these lawsuits would not come up. So far, they are losing a lot of revenue.
Costco’s Code of Ethics is very simple. Accomplishing 1 – 4 will lead to 5. Rewarding the shareholders is the ultimate goal. The full version of ethics is quite lengthy and wordy.
Costco has donated more than $140 million in just the past 10 years. Employees are actively involved in the community with reading programs, scholarship programs, and raising money for children’s hospitals.
Costco wants to improve the environment. They have a new recycling program. They partner with gazelle. They buy used electronics.
They have live chat. There is a list of gadgets they will buy. you can look up by zip code and find recyclers near you. They give you a map to find them.
Costco is experimenting with green packaging and they also make their own line of green cleaning products.
Energy Management and Conservation: use of skylights, control lighting based on the time of day, evaluating lighting technologies for better light at a lower cost, high efficiency heating and air conditioning, solar panels,hybrid delivery trucks. This benefits the members, shareholders, and communities where they do business.
Costco installed their first solar power system in 2006 at Lancaster, CA. It was so successful they are installed 4 more. Costco has the largest privately owned, multi-site commercial PV systems in the US. At the end of 2008, they had a total of 17 rooftop installations.
Solar Innovation: Costco is utilizing new technology to save big bucks and at the same time appealing to customers by going green.
you’ll find horrifically environment-unfriendly packaging of many small items (especially electronic items) at Costco. There are huge plastic blister packs, combination plastic and cardboard blister packs. One trip to Costco can create a huge pile of empty packaging.
The Costco website offers online tools to manage health. Notice the improved vision benefits.
Costco has a diverse work force. This can be a benefit in foreign markets.
Strategy Execution
Costco does an excellent job of recruiting the best and brightest employees. They attract them with high pay and the best benefits in the industry. The employees are loyal. All managers are hired from within so they really know the business.
Core competencies and competitive capabilities put Costco at the top, they include finding and negotiating bargains on quality merchandise, building relationships with manufacturers and suppliers, and ingenuity for cutting costs, conservation, and more.
In organizing the work effort: Costco uses a decentralized structure allowing store managers to make critical decisions about running their store. They utilize strong peer pressure on individuals to act responsibly.
Costco has an Enterprise Facility Information management system, each Costco is connected to corporate, the EFIM provides real-time information, management of control systems (like energy), and an inventory management system that allows suppliers to monitor their own stock levels at any Costco.http://www.energyvortex.com/pages/headlinedetails.cfm?id=1003&archive=1
The EFIM reduces costs related to energy consumption, maintenance, and contracted services.
Non-monetary rewards: Costco only hires the best of the best. There are employee contests with great prizes, it is fun to work there. Monetary rewards: the best pay and benefits in the industry, bi-annual bonus for hourly employees, and free membership. {Also, paid vacation, paid sick days, paid holidays.}
Costco has a high-performance culture. The work environment is fun, employees have contests focused on improving performance with the winner receiving a generous reward. Culture comes from the top down. Quality is very important. The small things are very important. Everything must look right because that’s the way Jim wants it, and you never know when Jim will fly in for a visit.
Evaluating Strategy
Costco is building new warehouses and acquiring new members. These trends are expected to continue at the same rate despite the recent recession.
Achieving financial objectives: Costco has Better net sales, better net income, and keeps expenses down year after year.
If you look at 1999 & before you can see that on the average, a Costco will perform better year after year, and each year there are more Costcos.
Costco.com earned nearly $2.0 billion and Costco.ca earned $150 million. The chart shows a steady increase in sales.
quarterly profit fell 29% because of softer sales and litigation charges (due to poor ethics), and aslump in spending on discretionary items like jewelry. Increased employee health care costs were also a factor.
At the end of 2008, there were 550 Costco’s in all. Costco is in 7 countries. One of their next goals is to expand into Europe. There are plans for 20 more Costco’s in Mexico.
US sales were down the last couple of months, but international sales look great. Too bad that 79% of our sales are from the U.S., and only 21% are international.
Inventory turnover is a biggy in the wholesale club industry. Costco has the best. Costco has a good ROI and growth rate. Costco’s goal is very low margins. They got beat by BJ’s. Perhaps because of lower pay and benefits.
Stock performance: Costco is the blue line. Shows value of stock from Jan 05 to June 09. BJ’s has been beating Costco here too, but Costco is #2!
Image and Reputation: The most recent American Customer Satisfaction Index again placed Costco at the top of the list of retailers for the fifth consecutive year, and Fortune Magazine named Costco the fourteenth most admired company in the U.S. this year.
Recommendations
We love Costco’s strategy, but we want to make some adjustments.
When Clinton was President he said, “Start excepting food stamps and educate people about food stamp eligibility.” Nationwide only 67% of eligible people take advantage of the Food Stamp Program.
People save lot’s of money with bulk prices. The savings on these food items totals $367.
Costco should attempt to acquire BJ’s Wholesale Club. They can gain 180 stores without worrying about market saturation. Then they will be ahead of Sam’s club. Costco already has a lot of stores on the east coast so their distribution network is in place. Employees would gladly trade for higher pay and better benefits.
Go Global: Get 50% income from international sales, Partnerships in more countries, and More profit sanctuaries. The Costco formula can work anywhere. As an adept first-mover, they can dominate the international markets.
Be more ethical: Costco settled some major lawsuits this year, the red ones, and they are currently involved in a large number of legal proceedings and audits that could unfavorably affect operations or require substantial amounts of money. Legal Defense is very costly, and not just in money, diversion of management’s time and talent is also costly. Just obeying rule #1 will save millions and help prevent price increases.
Change Ethics:Ethical universalism will not continue to work in the international environment. SinceCostco wants to grow there, they needs to modify their current philosophy, and begin to use the integrated social contracts theory. This will better suit foreign countries like Japan where the culture and social customs are very different from the United States. They also need to retrain the unintentionally amoral managers, and weed out the intentionally amoral managers.
Adding Services is a good way to counteract the negative effects of current market conditions. It’s very easy for Costco to place their brand name on something and offer it to their members. Adding new services like money orders and money transfers could save members time and give them one more reason to renew memberships.
Costco is the Industry leader. They need to stay on the offensive. They originate ideas (like Costco Business Centers) and the competition duplicates them. Costco has some promotions, but they need better ones like this free 60-day pass for BJ’s. BJ’s also accepts manufacturers coupons and food stamps. Costco should use BJ’s ideas that can be adapted to fit Costco.
More efficient e-commerce: There are seven Costco websites; 2 are e-commerce sites that don’t ship outside the US or Canada. We want to see one e-commerce site that has multiple-language support, and ships anywhere in the world.
Preserve Corporate Culture: Jim is 79. Costco will lose the man who invented the wholesale club industry, who had the passion and drive to make it what it is today. With a new CEO things might change. In order to reduce the impact, Costco needs to find ways to adhere to its core values. So it can keep what makes them Costco.