Costco-CEO-JimSinegal[www.savevid .com].

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CASE STUDY ON COSTCO WHOLESALE CORPORATION

Introduction & Case Facts

Costco founded by Jim Sinegal & Seattle entrepreneur Jeff Brotman. First store opened in 1983, the same year when Wal-Mart launched its warehouse membership format known as Sams Club. Jim Sinegal started his career in retailing at 18 with Fed-Mart, a discount retailing store started by Sol Price. In Dec 1985, Costco went public & also became first ever US company to reach $ 1bn in less than 6 years.

 In Oct 1993, Costco merged with Price club which was founded by his guru Sol Price.

Changed its name from Costco Companies Inc to Costco Wholesale Corporation when company reincorporated from Delaware to Washington in Aug 1999. In 2006, Costcos sales totalled almost $ 59 bln, with 496 stores in 37 states across US & 7 other nations viz. Canada, Japan, UK, Mexico, Taiwan, Korea & Puerto Rico.

 Even at the age of 70, Jim Sinegal had great levels of energy, enthusiasm & dedication visiting 8, 10 or sometimes even 12 stores in a day. Employees genuinely like Jim since he spoke quietly, greets them well, listens to their feedback, gives measured inputs & motivates them. Today Costco is the 4th largest retailer in US & 7th largest in the world.

What are the chief elements of Costcos strategy? How good is the strategy ?
Mission - To continually provide our members with
quality goods and services at the lowest possible prices.

Strategies They planned for long term. Ultra low pricing strategies. 14 % markups (others 20 50%) Limited selection. (4000 items compared to 150000 items of Wal-Mart) Treasure-hunt shopping environment Kirkland (More sales and better quality than other national brands) They believed in ancillary business and believed in Intelligent loss of sales. Cross-docking

How good ?
Strategy is the determination of basic long term goals and objectives of an enterprise and the adoption of courses of action and allocation of resources for carrying out these goals.

Their strategy was good as their main focus was to build an organization which will be on a good position 50 years from now and they had followed good strategies like ultra low pricing, treasure hunt and 4000 product and carried out these strategies to fulfill member needs. Strategy, implementation and evaluation must be consistent Low pricing strategies attracted more customers to Costco Better bargaining power Less inventory, faster procurement

Do you think Jim Sinegal is an effective CEO? What grades would you give him in leading the process of crafting & executing Costcos strategy? What support can you offer him in leading the process of crafting & executing Costcos strategy?

Yes, Jim Sinegal is an effective CEO & that is because he has:

CUSTOMER CENTRIC APPROACH Personally answered customers phone call. LEADERSHIP QUALITIES 1. Functioned as a producer, director and a knowledgeable critic 2. He was kind yet stern & always greeted his employees with a smile TASK ORIENTED APPROACH 1. Exhibited intense attention to detail & pricing 2. Questioned the store managers and asked them to get back with answers

COMMITMENT Visited 8-10 warehouse daily. TALENT 1. Had a special knack for discount retailing. 2. Knew how to reduce cost. EMPLOYEE CENTRIC APPROACH 1. Believed that employees are most important asset 2. Have the best employees and give them the best in the industry RIGHT POLICIES
1. Believed in framing just & fair policies.

2.

Himself had only 1 page contract which said that he could be terminated for a cause

 Earned only about 12 times more than his typical average employee unlike other companies. Obey the law, take care of employees & members, respect the suppliers & reward the shareholders. Keeping in mind all above points we will give him 9/10. Points to consider for leading the process of crafting & executing costcos strategy : Its private label offering(Kirkland signature) should be expanded from 400 to 600. Treasure hunt items at Sams club tend to carry lower price tags than those at Costco.

 Look for other types of promotion methods apart from Direct mail. Dedicate a larger area for furnitures since it is the hotseller for quite a long time even on its website. Ancillary businesses. International expansion.

Q)How well is costco performing from financial perspective?Use the financial ratios to help you diagnose costcos financial performance.?
ratio 2002 Profit margin ratio (rev/profit) Avg sales/sq. foot Inventory turnover ratio (netsales/ inventory) ROCE (ebit/ t.a-c.l) RONW (pat/n.w) 55.37 2004 54.54 2005 49.79 Year (IN MILLION $) 2006 54.52 2007 59.47 2008 56.49 2009 65.76 2010 59.82

0.28

0.34

0.37

0.40

.41

.44

.45

.42

12

13

13

13

13.9

14.38

13.21

13.82

0.158 9.987

.157 10.20

0.158 11.02

0.180 11.73

0.155 11.51

0.169 11.12

0.134 8.92

0.147 10.02

ratio

Year (IN MILLION $) 2002 2004 2005 2006 2007 2008 1.8 2009 1.83 2010 1.83

Current ratio

1.04

1.16

1.22

1.05

1.78

Eps

1.48

1.85

2.18

2.30

2.37

2.89

2.47

2.92

Is costcos expansion outside U.S financially succesful? Why or why not?

COUNT RY

Year

(IN MILLION $)

(SALES/WAREHOUSE)
2006 2005 2004 2003 200 2

COUNTR Y

Year (IN MILLION $)

(OPERATING PROFIT/WAREHOUSE )
2006 2005 2004 2003 3.00

U.S CANA DA

135. 127. 120.5 113. 111 6 40 8 65 119. 103. 95.92 85.8 78. 4 56 5 28

U.S

3.48 3.45 0

3.42

CANADA 4.30 3.72 8 OTHER 2.71 2.16 COUNTR IES

3.412 3.26

OTHE 111.3 105. 97.66 81.0 75. R 16 7 33 COUN TRIES

1.85

1.11

Does the data in the exhibit indicate that costcos financial performance superior to that of sams club and b.j wholesale?
ROCE (IN MILLION $) YEAR 2002 2004 2005 2006 2007 2008 2009 2010

COST .15 CO B.J

0.15

.158

.180 .196

.155 .132

.169 .180

.134 .199

.147 .198

OPERATING INCOME/WAREHOUSE (IN MILLION $) YEAR COSTCO SAMS CLUB B.J WHOLES ALE 2002 3.026 1.724 1.57 2004 3.32 1.99 1.140 2005 3.404 2.067 1.23 2006 3.55 2.18 .83

How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sams Club? Over BJs Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not?
Efficient employee support and satisfaction Competitive pricing Low investment cost because of warehouse location Majority of the merchandise was bought directly from manufacturers

Nature of competitive advantage that Costco enjoyed was because of Valuable capabilities. Rare capabilities. Costly to imitate capabilities. - Historical: A unique and a valuable organizational culture or brand name - Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Are Costcos price too low? Why or Why not?

Costco was known for selling top quality national and regional brands at prices below traditional wholesale or retail outlets. Costco stocked limited items that could be priced at bargain levels. A key element of Costco pricing strategy was to cap its markup Markup on Costcos 400 private label KIRKLAND

 Costcos philosophy was to keep customers coming in to the shop by wowing them with low prices. Whereas typical supermarket stocked about 40,000 items and wall mart had around 150,000 items. Costco limited the selection in each product category Mr. Sinegal believed Intelligent loss of Sales and Efficiency

Does Costco pay its employees too much than its competitors? Why or Why not?
TYPES OF EMPLOYEE Full time Part time Pay : Initial $10-12 Average $ 17-18 Hourly 71000 56000 13800

Costco believed employees are their most important assets and they provided them with various Benefits and Bonuses. Costco admitted that they paid good wages & benefits contrary to conventional wisdom in Discounting Retailing business Executing Strategy successfully 120,000 loyal ambassadors Good business sense Less employee turnover

 Results: About 85% of costcos employees had signed up for Health Insurance versus 50% of the competitors People were satisfied hence gave their best and wanted to serve the company till their last breath In some of the interviews, employees stated: Its a good place to work, they take good care of us My whole family works for costco, my husband my daughter my son in law I want to retire here and love it here

What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take sustain the companys growth and improve its financial performance? Entering into China and Brazil  Sams club exploring these markets.  China is expected to have a five-fold increase in urban consumer spending over the next 20 years to a $2.3 trillion a year. Continue testing furniture offerings in Costco locations rather than Costco home: Expand Kirkland Product Offerings: increase from 400.

Membership Strategy Adjustments

Non-Member Day
 A quarterly event that allows non-members a trial day at the store.

Household Plan
Can charge $20 for every additional household member. (increasing membership rates)

Membership Rewards Program $80 for annual membership and 2% rebate on every purchase Competitors Have found this Successful

 BJs allows customers to enroll in reward club membership for $80  Result: 5% of all membership and 10% of food sales has increased.

Credit cards
Current payment methods: cash, check, debit and Costco Credit (membership cards)  Recommended: Allow the use of Credit Cards. Accept credit cards but charge a 2-3% fee purchasing credit.

Food stamps
Definition: A stamp or coupon, issued by the

government to persons with low incomes, that can be redeemed for food at stores. o o o Educate people and Accept food stamps Only 67% of people eligible in getting food stamps: Missouri @ 98% California @ 50% New York @ 63%

Expand Ancillary Business Programes

Increase business services provided by Costco  Increase the frequency of customer visits Making Costco a One Stop Shop

Competitors offerings:  Wireless carrier kiosks, Home security installation service, Break and muffler service, Home heating oil, Vacation packages, Automobile buying,

Advertising
 TV brand Advertising.  In northwest and West Coast regions.  Seasonal TV ads and periodic direct mail promotions of Treasure Hunt items.
Competitors: Sams club spends $50 million annually on adverting.

What is Costcos business model appealing? Why or why not?

Costco uses a Low Cost Model by utilizing: Rapid Inventory Turnover Operating Efficiencies: created by product selectivity & volume purchases, high sales volume, efficient distribution, reduced handling of merchandise/ stocking methods High Productivity: of well compensated employees

Rapid Inventory Turnover

Low Prices Limited selection of quality merchandise Wide range of merchandise categories

Operating Efficiencies
Volume Purchasing Efficient distribution Reduced handling of merchandise No frills, self service warehouse

Profit at a very low gross margin

Rapid inventory + Operating Efficiencies

What are the implications of this case in the Indian scenario?

Following are the implications for Indian players: Presently only Metro follows a model somewhat similar to Costco but it is limited only to B2B & not B2C. Indian players should promote more internal people to higher positions like Costco. Floor & shop managers should be given more authority & independence in decision making. Indian players should make outright purchase of real estate/outlets (Costco owns 80% & that too at less prime locations)

 Majority of Indian players dont have a efficient & full fledged e-commerce site like Costco. Royalty membership programs are not meticulously designed & hence not successful. Only obsolete goods are pushed in India through the sale & discounts but Costco follows this for new goods as well.

 Cross-docking model has been pioneered by Costco. Follow this model. Hassle free return policy has still not completely taken off in India. Build a brand & then expand. Offer quality products at best possible prices & you will surely succeed(Costco takes only 14% markup)

THANK YOU!

SUDHINDRA GADAG ABHISHEK VAID ANKUR KOTECHA HIREN.P.ZALA PARTH JOSHI PRAGYA BIRANI

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