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Costco Case Analysis

Costco Case Analysis

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Published by blockeisu
A case analysis of Costco.
A case analysis of Costco.

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Published by: blockeisu on Apr 30, 2010
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BLLSeptember 8, 2008Costco CaseCostco, a discount warehouse based in Issaquah, Washington,specializes in selling quality products at low prices. The company operatesas a membership retailer, focusing its business on small businesses andconsumers with incomes averaging $75,000 a year. While the company hasstrong competition with Sam’s Club and BJ’s Warehouse, net income forCostco surpasses $1.6 billion in 2006, $100 million more than Sam’s Club.By focusing on competitive pricing, a sizeable selection of products, andtreasure-hunt merchandising, Costco has developed a franchise that hassurpassed its competition. The pricing strategy that Costco has implemented focuses on theprice-sensitivity of its consumers. The company has excelled in keeping itsprices low by capping the markup on its merchandise. By keeping themarkup 6% lower than its competitors, Costco has provided its customerswith deep discounts on over 4000 products within its stores. Sam’s Club,which offers the same number of products within its stores, earns half theincome that Costco does at each store. Though Sam’s Club has more than200 additional stores than Costco, Costco generated almost $20 million morein revenue in 2006. Sales per location at Costco are triple that at BJ’sWarehouse, which stocks 3500 additional products. Sales per square foot atCostco in 2006 were almost $920, while BJ’s and Sam’s Club lagged behindby more than $450 per square foot. Costco has been very efficient at
 
utilizing its floor space, generating high revenues from its products within itsstores.Merchandise at Costco includes a “broad spectrum” of productsranging from groceries, to media, to appliances. The company sold 96,000carats of diamonds in 2006, focusing on upper-middle class consumers. Though Costco sells products spanning 5 product categories, the percentageof sales per category has been stagnant or decreasing. Costco hassuccessfully entered another market, creating two furniture stores, whichsaw an increase in sales of 132% between 2004 and 2005. The companyhas successfully offered diverse services compared to Sam’s Club and BJ’s,introducing more ancillary businesses before its competition. Costcoincreased the number of food courts, vision centers and pharmacies by 20each year between 2004 and 2006. Almost every store now includes a foodcourt and photo center, providing an opportunity for Costco to increase itssales within this category of items. Costco has ignored many of itscustomers’ requests to stock certain goods in order to only sell products thatwill sell quickly. Though the company does say that it focuses on itscustomers’ demands, it has disregarded demands of certain items. It isunderstandable that the company would do this, since products are sold atlow margins, allowing consumers to purchase more during each visit.Costco has been very successful in opening stores more frequentlythan its competitors. The company has opened an average of 20 to 25stores each year, while BJ’s Warehouse and Sam’s Club have only managed
 
to open about 10 stores annually. Costco has successfully kept theirproperty taxes low, focusing on real estate which is located in areas moresecluded from other retailers. BJ’s Warehouse, however, builds its storescloser to each other and closer to other retailers, where property costs aremuch higher.While the company has taken a bold strategy to keep prices low byhaving a high turnover of inventory, some financials have been counter-intuitive of the company’s goal. The company saw a significant drop in thegrowth of net income from 2005 to 2006. Growth between those years wasslightly over 3%, when prior years had seen growth of more than 20%. Onefactor that this can be attributed to is the 33% increase in income taxesCostco paid in 2006. The prior year, Costco was able to decrease its netincome taxes by more than 6%. Changes in total revenue have seenincreases of at least 10% during the past several years. Though revenuesare increasing, increasing taxes and overhead have prevented Costco fromsignificantly increasing net income. Costco has been very inconsistent inkeeping its cash flows stable, with cash flows increasing only 3% in 2006, butfell 15% in 2005. Though some of the high variance has to do withinvestments in its furniture business, Costco has not developed a steadyincrease in cash flows to appease shareholders.Costco values its treasure-hunt merchandising strategy by sellingproducts that are expected to be sold quickly. This high inventory turnoverhas allowed the company to stabilize its current assets between 2005 and

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