Case Study #4 Competition among the North American Warehouse Clubs: Costco Wholesale vs. Sams Club vs.

BJs Wholesale Team C: Belinda Rose, Chaddrick Nevills, Keith Blum, Keith Wiltfong, and Vanessa Hill Florida Institute of Technology
Executive Summary (Belinda)
Executive summary outlining your strategic analysis and recommendations. (Guidelines for writing an executive summary can be found at: http://www.fsb.muohio.edu/fsb/content/programs/howe-writing-initiative/studentresources/Writing%20an%20Executive%20Summary.doc)

Synopsis (Chad Nevills)

Synopsis of the major case facts, key problems, and strategic issues that management needs to address

Three principal competitors: Costco Wholesale, Sams Club, and BJs Wholesale Club were a part of the nearly $125 billion discount warehouse and wholesale club segment in 2010. These companies drew consumers away from other wholesale markets because they provided lower prices and had lower operating and other costs than most retailers due to the fact that they purchased full truckloads of merchandise directly from manufacturers and displayed the merchandise on inexpensive shelving while always keeping extra inventory. Costcos markups and prices were so fractionally above the level needed to cover operating costs and interest expenses that analysts criticized management for going all out just to gain customers at the expense of charging prices that would increase profits for shareholders and maintain loyal clientele. Costcos strategy of not focusing much on marketing and advertising but relying on word of mouth strategy I believe needs to be addressed. Management believes that its emphasis on direct mail advertising kept its marketing expenses low relative to those at typical retailers, discounters, and supermarkets. Perhaps the use of social media networks such as facebook & twitter

could help the company gain more customers and maybe even implementing some sort of program that educates younger consumers the benefits of buying in bulk. An issue with Sams Clubs is that is that it operates too much like its Wal-Mart counterpart. Their operations cost for overhead items is high as compared to other warehouses wholesale clubs. Having overhead costs is unnecessary for any company in the business because it is never a guarantee that all the items in the overhead will be sold at the expected price, so having too many items on overhead is dangerous for and makes it more difficult to increase profit. Gasoline sales seems to have dropped over the past year, Id recommend management be sure that since there were a few more warehouses built and or remodeled that they be sure to also sell gas at these newer locations. BJ Wholesale needs to address the fact that it does not expand across the entire United States. Each location should be within a 10 mile radius of the Sams and Costcos. The company does not seem to have any type of strategy to keep their customers coming back, the services that they DID have were provided by outside operators in space leased from BJs. The companys decision to abandon prescription filling at their 46 in-club pharmacies should be reconsidered possibly to add more of a customer base. Strategic Analysis (Keith Blum)

Strategic analysis of those key issues utilizing tools and techniques presented in the text (using tables and charts if appropriate): o What is competition like in the North American wholesale club industry? In 2010, the nearly $125 billion discount warehouse and wholesale club industry consisted of three principal competitors: Costco, Sams and BJs.
o

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 chapter discussions on p. 57-70) to do a complete five-forces analysis of competition in the North American wholesale club industry. The five competitive forces are: Threat of New Entry

Initiate brand identity Extreme pricing in the industry Economies of scales

Distribution channels limited access

Threat of Substitute

Too many substitutes Recognises that every customer has a choice when they buy

Competitive Rivalry

Switching costs are low Several sellers are in the market Fixed cost allocation per value added Exit barriers Rate of industry growth

Supplier Power

High cost of changing suppliers Many suppliers Similar products Able to substitute

Buyer Power

Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity

Of the five competitive forces, the Competitive Rivalry seems to be the strongest because competitors can carelessly compete away any profits and perhaps even create price wars that cause long term damage to industry profitability. 1. Do all three warehouse club rivalsCostco, Sams, and BJs Wholesalehave highly similar strategies? No, all three warehouse club rivals do not have highly similar strategies. 2. What differences in their strategies are apparent?

Costco is provides the customer with items in bulk packaging at very low prices. The customer typically shops at Costco in hopes of getting the best value for their money. Sams strategy involved decreasing product costs by buying from low cost labor countries. BJs is focusing on retail shoppers offering more grocery items and smaller quantities of packaged goods to get the customer to come back more frequently.. 3. Does one rival have a better strategy than the others? At this point, I believe that Costco has a better strategy than the others. Costco uses the low margin business to boost business at their warehouse. Costco also benefits from the cost efficient distribution through the use of the cross dock distribution. 4. Does one rival have a somewhat weaker strategy than the other two? Yes. BJs does not have a good base number of customers mostly because theyre mainly located in the Eastern United States, which also allows the company to streamline distribution and marketing. Theyre also not benefiting from the economies of scales, because their margins are very thin. 5. Which of the three warehouse club rivals has been the strongest financial performer in recent years? Support your answer with calculations based on the data in case Exhibits 2, 6, and 7. It appears that Costco has been the strongest financial performer with its favorable Asset Turnover and CAGR Total Assets. 6. Use the financial ratios presented in Table 4.1 of Chapter 4 to help you with the needed number crunching. Does the data in case Exhibit 5 indicate that Costcos expansion outside North America (the U.S. and Canada) is financially successful? Why or why not? Yes, because judging from the year by year displayed in the exhibit, total revenue has consistently risen from 2005 to 2009. Compound Annual Growth Rate has a rate of about 10.22% for the total revenue. 7. Five years from now, is Costcos standing as the industry leader likely to be stronger or weaker? Are the other two rivals likely to gain or lose ground on Costco? Why or why not?

I think five years from now, Costco will still be standing as the industry leader so itll definitely be stronger. Costcos strategy of giving the consumer the best bang for their buck is not as risky as the other two rivals strategies. Of course the other two rivals could gain some ground, perhaps if BJs opens its business up to a more broader spectrum of consumers in the rest of the North America then they very well could challenge the likes of Costco. Sams Club on the other hand has more operating stores but the financials of Costco still is enough to overcome the and I believe is Costco's stiffest competition. Costco could even possibly merge with one of the two in order to eliminate competition . 8. What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take to sustain the companys growth and improve its financial performance? o Perhaps consider merging with either Sams Club or BJs in order to eliminate some of the competition o Start using advertisement and marketing techniques to gain more consumers. Venues such as social media networks can also be used to gain the attention of younger consumers. o Develop some type of marketing plan targeted towards younger consumers educating them on buying bulk and spending less money. 9. What actions do you think management at Sams Club should take to boost revenue growth and overall financial performance? o Consider the sell of gas at each and every Same Club warehouse o Use more American made vendors instead of leaning heavily on low cost labor countries. o Be more innovative o Find methods to get customers to shop at your store more often 10. What actions do you think management at BJs Wholesale should take to boost revenue growth and overall financial performance?
o o o

Definately consider expanding service across North America, not just the eastern half Move stores closer tot he competition (each store should be within a 10 mile radius of Costco and Sams Club Warehouses). Use social media websites to advertise focusing on the younger consumers.

Conclusion and Recommendations (Keith Wiltfong) Conclusion/Recommendations section which focuses on your well-supported action plan to address the strategic issues of the case

References