Click to edit Master subtitle style

Group Members: Nureen Bano 6/26/12

BUSINESS STRATEGY DIAMOND

Staging

Speed of expansion 1983:First Costco warehouse 1984 :9 stores in 5 States serving more than 200,000 members 1985:Publicly owned company 1993: merges with Price club to Stag form Price/Costco, Inc. ing 1997: Costco Corporation Inc. 1998: The Costco.com 1999:Costco Wholesale Corporation. 2001:The B2B Web site. 2008:Owned the land & Building Sequence of initiatives Membership cards Treasure Hunt merchandise Vehicles

Are nas

Econ omic logic

Veh icle s

Arenas Private labels & national brands Individual members & small business owners 40 States, UK, Japan, Korea etc Wholesaler & Distributors Economic logic

Differenti ators

Differentiators

Partnership with Jeff Warehouse in Mexico operated in a Joint venture New stores & web site launch Kirkland signature Costco merged with Price 6/26/12

Lower price seller Very low Pricing No frills focus on service High speed to market Treasure Hunt merchandise Limited product range that covers broad spectrum

Lowest costs through large scale advantages Direct purchasing/Bulk purchasing No frills Minimal cost due to rapid inventory turnover High sales due to lower cost purchases Company owned stores Selling shares to public & raising additional capital Membership card fee

COSTCOS BUSINESS MODEL

The appealing Business model depends on high sales volume along with:
Rapid turnover Inventory

Rapidly turning over inventoryPay suppliers before the due invoice Early payment discounts Frees up capital allows Costco to finance new inventory purchases with supplier payment terms Passes these savings on to consumers in the form of low prices. No requirement to maintain high levels of working capital or take out loans, with interest to pay suppliers.

Operating Efficiencies

Uniquely handlings of Merchandise Direct arrival of merchandise from warehouse to the sales floor of the store Which reduces labor requirement for merchandise handling and

6/26/12 stocking.

The process of crafting and executing Costcos strategy

6/26/12

Phase 1 Developing a strategic vision

The first phase is to develop a strategic vision for the company. Sometimes a company doesnt state its strategic vision clearly, like Costco does. But it has company values or philosophy that is implemented on its performance. Costcos philosophy was to keep customers coming to shop by wowing them with low prices.

6/26/12

Phase 2 Setting objectives

Company determines the steps to take in order to reach its vision and sets specific, measurable goals accordingly. Costco wants to provide the lowest-price to the customers and keep the customer coming back to shop:

Net Sales Growth

12 10 8 6 4 2 0

6/26/12

Phase 3 Crafting a strategy to achieve the objectives and vision

Low Pricing Limited Product selection Treasure-Hunt merchandising Marketing and Advertising

No need to spend on advertising and sales promotion incentive

Direct mail to members

Growth Strategy

Major elements
Open new warehouses Build an ever larger and intensely loyal membership base Employee well executed merchandise technique to attract more

customers

Web Site Sales 6/26/12

Phase 4 Implementing and executing the strategy Philosophy, value and code ethics
Obey the law Respect of all public officials and their position Comply with safety and security standard for all

product sold, etc.

Take care of the members

Provide top-quality products at the best prices in

the market
Provide high-quality, and wholesome food
6/26/12

products

Phase 5 Monitoring developments, evaluating performance, and making corrective adjustment

Costco proved that the strategies was work, it looks from the loyalty of employees and customers, financial growth, warehouse expansion in other countries. Jim Sanegals personal involvement in operational activities monitoring and evaluation.

6/26/12

Costcos performing from financial prospective

Profitability Ratios Liquidity Ratios Leverage Ratios Activity Ratios Other important financial measures

6/26/12

Profitability Ratios
Profitability ratio provides information on the amount of income from each dollar of sales
2008 2007 Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets 2006 2005 2000 0.10530.10520.10550.10630.1043 0.028 0.026 0.028 0.028 0.033 0.018 0.017 0.019 0.02 0.02

0.062 0.055 0.063 0.064 0.073

Consistent GPM, OPM, and NPM show the operating efficiency of the company. Return on Stockholder's 0.14 0.13 0.12 0.12 0.15 ROA: The decreasing ratio is an indicator that one or both of the component parts is in Equity difficulty. Earnings per Share 2.9 2.4 2.3 2.2 1.3 ROE: Costco is showing unstable trend in this area. It was really high in 2000 then it shows the downward trend but it is getting stable again. EPS: Costcos earning per share ratio is indicating a constant growth of company.

6/26/12

Liquidity Ratios
2008 Current ratio Quick ratio Working capital 1.06 0.5 588 2007 1.08 0.5 742 2006 1.05 0.4 413

Liquidity ratios provide information on the companys ability to meet its short term, immediate obligations

2005 1.21 0.6 1477

2000 1.01 0.3 66

Current ratio: As CR is greater than 1, which indicates that there are sufficient assets available to pay liabilities. So Costco is doing well in this regard. Quick Ratio: Costcos quick ratio is showing a downward trend means company relies too much on inventory or other assets to pay its short-term liabilities. Working capitals: Positive working capital means that the business is able to pay off its short-term liabilities. Also, a high working capital can be a signal that the 6/26/12

Leverage Ratios
Debt to asset ratio long-term debt to capital ratio debt to equity ratio coverage ratio 2008 0.113 0.107 2.251 20.408 2007 0.11 0.108 2.274

A leverage ratio provides information on the degree of a companys fixed financing obligations and its ability to satisfy these financial obligations.

2006 0.015 0.012 1.913

2005 0.046 0.043 1.859 46.559

2000 0.093 0.091 2.036 27.974

27.719 135.692

D/A Ratio: The increasing ratio indicates that the firm will be facing potential problems in paying its debt; in case of they have to sell out their assets to pay their debts. Long-term debt to capital Ratio: indicates the portion of companys asset that is financed with long term debt. This ratio is also increasing with the period of time but as it is related to the long term creditors so it is less risky.

D/E Ratio: The ratio is continuously increasing that shows the liabilities exceed the net worth and the creditors have more stake than the share owners. 6/26/12

Activity Ratios
days of inventory inventory turnover average collection period 2008 28.5 12.81 44.9

An activity ratio relates information on a companys ability to manage its resources efficiently.
2007 30.5 11.96 47.04 2006 29.7 12.3 45.1 2005 25.6 14.25 35.8 2000 32.1 11.37 39.3

Days of inventory: The reducing trend is in favor and shows frequent sales. Inventory turnover ratio: Figures indicate the rapidity with which the Costco is able to move its merchandise, showing stable position in this regard. Avg Collection period: The figure indicates the effectiveness of the Costcos credit control department in collecting money outstanding. So increase trend shows efficient credit control.

6/26/12

Comparative financial performance (Sams club and BJs wholesale)

To compare the financial performance of three companies we have used data of 2007 (because only that was available for all the three When we want to compare the financial analysis companies) of different companies we do vertical analysis, where we take sales as a base and compare all BJ'S other as the percentage of SAM'S CLUBto have a clear sales COSTCO Sales 63088 44357 8815 idea of the companys growth. operating income 1609 1618 195 The results clearly show that Sams club is more efficient in all the three companies. They are generating high operating income means they have lowest operating expenses and efficient management of inventory.
6/26/12

Whether Costcos expansion outside the U.S is financially successful

Operating Income in Percentages

United state 2008 2007 2006 2005

Canadian 79 80 81 81

Other 15 14 14 13

Total 7 6 6 6

100 100 100 100

Sales Generation in Percentages United state

2008 2007 2006 2005

Canadian 71 76 77 79

Other 21 18 18 16

Total 8 7 5 4

100 100 100 100

Above tables shows that Canada have the largest contribution in companys total, other than United State. So expansion in Canada seems to be the good decision but other warehouses are not generating high 6/26/12 and are financially not that much profitable.

Costco strategic performince over Sams club & BJs

Strategic Performance:

Successful acquisition of new members and retention of new members. Costco is also growing its warehouse network. Financial results shows the fitness of Costco strategies over BJs and Sams club About 75% more than the $75 million per store average at Sams club. Costco has close to a 53% share of warehouse club sales across the US and Canada, Sams club having roughly a 37% share BJs whole sale and several small warehouses club

6/26/12

Competitive Advantages
Costco has two competitive advantages over Sams club and BJs warehouse.

Cost leadership: is achieved by offering lowest possible price through direct purchasing, bulk purchasing, and operational efficiencies and offering valued product Differentiation: Costco is enjoying differentiation competitive advantage by offering treasure hunt merchandise which captures the attention of members every time they shop.

6/26/12

Winning Strategy

Expansion with its profitability Value to customers and low prices According to Jim Sinegal we are very good merchant and we offer value. The traditional retailer will say I am selling this for $ 10. I wonder whether he can get $10.50 or $ 11. We say we are selling this for $9. How do we get it down to $8? we understand that our members dont come and shop with us because of window displays or the Santa Claus. They come and shop with us because we offer great value.

6/26/12

Costcos prices are too low

Costco offers lower price as compare to its main competitor Sams club and BJs. Lower prices is the resultant of overall cost leadership strategy of Costco. Attracting its member by keeping prices lower than all the competitors in the market. Costco has identified that in-spite of selling product at higher to the members, it should sell more products (in bulk) by keeping prices comparatively low in the market.

6/26/12

Low Pricing Philosophy

Costcos philosophy was to keep members coming in to shop by wowing them with low prices.

6/26/12

Costcos pay its employees better than the employees at Wal-Mart

Costco is paying more to its employees as compare the Wal-Mart/Sams club. Wal-Mart is offering lower wage and a skimpier benefit package. Jim Sinegal was convinced that having a well compensated work force is very important to execute Costco strategy successfully. To take care of the employees is one of the principles of Costcos business philosophy and values. Paying good wage and keeping your people working with you is very good business (Jim).

Costco offers good wage and good career which resulting in reducing employees turnover, reduces the cost of 6/26/12

Sinegal Business Philosophy

Employees have the right to good wages and good career. We pay high wages, it must mean we get better productivity. The more people make, the better lives they are going to have and better consumer they are going to be.

6/26/12

Recommendations

Persist to honor their business philosophy value and code of ethics. Could offer a wider range of merchandising Instituting new payment techniques Accepting manufactures coupon Being open longer hours than competitors. Geographic expansion outside United State and Canada . Need to identify the reasons that why the same strategies are not doing well in out side the US and Canada and improved strategies should be formulated according to the changed circumstances and requirements. More online opportunities to members of with in and outside United State and Canada.

This 6/26/12 way they can expand their business and will reach maximum