Report to Jim Sinegal, CEO of Costco, of the competitive analysis of Costco Wholesale vs.

Sams Club and BJs Wholesale

Tony Roegiers
Roegiers Consulting Firm

October 24th, 2011

Introduction
Costco, founded by Jim Sinegal in 1983, is the third-largest retailer in the United States.
Globally they rank as the eighth-largest retailer. This discount wholesale club prides itself on
selling top-quality merchandise at the lowest possible prices. There are currently 567 total
warehouses in the world including 414 in the United States. Costco has been able to extend
membership to about six million businesses and 31 million households with an average income
of 74 thousand dollars a year. These customers have attributed to an astounding 87 percent
renewal rate.
This report will be constructed as an analysis of Costco. Furthermore there will be an
evaluation of Costcos biggest competitors, Sams Club and BJs. Company strategies will be the
main focus for this evaluation.
The next part of this report will include a breakdown of the financials as well as
recommendations for management. These recommendations will be made with the intent of
sustaining company growth and improving financial performance.
Finally, there will be a five year projection included. This projection will assess Costcos
standing as the industry leader and evaluate potential threats from competitors.
Costcos Mission
Costco's mission is to continually provide our members with quality goods and services
at the lowest possible prices. In order to achieve our mission we will conduct our business with
the following Code of Ethics in mind: Obey the law, take care of our members, take care of our
employees, and respect our vendors. If we do these four things throughout our organization, then
we will realize our ultimate goal, which is to reward our shareholders.
Costco has remained true to their mission and carried it out effectively. This mission
drives every employee of Costco, all of whom understand its importance.
Strategic Plan
Costcos strategies are laid out very well. Treasure-hunt shopping is the term that
Costco uses to describe the customers shopping experience; a technique that allows Costco to
offer high-end products at a shockingly low price, intriguing customers to take advantage of
dramatic savings. They believe in offering a limited selection of merchandise in a wide variety of
areas. The idea of offering a limited selection allows Costco to acquire the product at a
significantly lower price. This is made possible because of the lower purchasing, shipping, and
in-store handling of volume merchandise. All of these factors allow Costco to sell their products
at an extremely low price. In fact Costco will not even stock a product if they feel that it cannot
be priced low enough. The low prices of the products at Costco result in rapid turnover. The
rapid turnover paired with the operating efficiencies and membership fees equate to a high profit
with a low gross margin. Another way for Costco to cut costs is to print all of the signs in the
store on a laser printer. Also they do not keep shopping bags at the counter and sometimes even
use empty boxes that would have been disposed to load merchandise.

One Costco strategy that is widely disputed is how they compensate employees. New
Costco employees usually start out making $11 an hour and once they have been with the
company for five years that salary increases to $20 per hour. These numbers are significantly
higher than other warehouse companies and critics say that Costco can increase revenue if they
decrease employee salaries. Cutting employee salaries would be detrimental to the company
however. Costco employees start with the company and stay for a very long time. The work
atmosphere is more than favorable and a vast majority loves their job. Costco employees are
extremely productive. Furthermore Costco believes in promoting from within. A staggering 98
percent of Costco management has been promoted from within, meaning people who started
pushing shopping carts or working on a cash register are now managers for the company. Costco
can also make up for high employee salaries with their lack of marketing. Word of mouth
marketing is the technique used because of how many employees and members are already in
existence. Their marketing expenses are significantly lower than other warehouses or
supermarkets.
Competition Strategies
Costcos biggest competitors include Sams Club (a branch of Wal Mart) and BJs
Wholesale. Sams Club operates 596 warehouses in the United States. The strategies of Sams
Club are similar to Costco. Membership fees for business members at Sams Club cost $35 per
year. Business members can also add up to eight associates for another $35 each. A typical
member cost is $40 per year and a premium membership costs $100 per year. This is compared
to Costcos $50 per year business membership and typical member fee; however the premium
membership is also $100 per year. Sams Club offers brand-name, top quality merchandise at
low prices. Also they use the same method of stocking about 4,000 items. Another similarity
shared between Costco and Sams Club is how they display their items. Both warehouses stack
their inventory on the sales floor allowing for decreased labor in restocking. Although Sams
Club seems to have extremely similar strategies they do not execute with the same efficiency of
Costco. Costcos corporation is run more effectively making Sams Club an inferior competitor.
While Sams Club and Costco have similar business strategies, BJs Warehouse uses
some different techniques. The quality of merchandise and low selling price seems to be the
same as the other two competitors but the operating model is where the differences lie. BJs
offers 7,000 different items where Sams and Costco only offer 4,000. Also to make the
shopping experience better for customers BJs has added aisle markers and video-based sales
aids. Their stores operate longer hours than the other two warehouses as well. Smaller package
sizes were also offered, similar to sizes at grocery stores, contrary to industrial sized products
offered at Sams Club and Costco. Finally, BJs has set up their products into three price
categories of good, deluxe, and luxury making it easier for the customer to identify the product
they are searching for.
Costco clearly has the best strategy of the three because of its standing as the industry
leader. Although Costco and Sams Club have similar strategies it seems that Sams Clubs
strategy is weaker. BJs Warehouse has a slightly different strategy, but it has differentiated itself
effectively and could eventually challenge Costco even more than Sams Club.

Five Forces Model

Suppliers
Have weak bargaining power
Many suppliers create a low switching cost
Many substitutes exist
Large quantities required

Buyers
Have weak bargaining power
Switching costs will be a problem
Extremely larger membership base
Costco presents the best value

Rival Competators
Extremely firece competition
Costco industry leader and offers
higher quality product
Economic recession created a bigger
need for low cost distributer
Buyer's switching cost is currently
low

Substitutes
Very strong threat
Easily accessible substitutes
Other prices are not significantly higher
Competition offers comparable products
Low switching costs
Other warehouses offer more of a selection

New Entrants
Very low threat
Small pool of entry
Very high entry barriers
Expanding market
Attractive profits

Competitive Financial Analysis

Costcos financial security far exceedes Sams Club and BJs wholesale. The net sales for
Costco, in 2009, were $69,889,000,000 compared to $47,976,000,000 of Sams Club. BJs net
sales equaled $9,954,000,000.Costcos best sellers are meat with sales of $3.7 billion, seafood
with sales of $708 million, $2.2 billion in electronic (television) sales, fresh produce sales of
$3.1 billion, and Costco is the world largest seller of fine wines with $597 million.

Net sales of Costco, Sams and BJs from 2005 through 2009

Net Sales
80,000
70,000
$ in millions

60,000
50,000

Costco

40,000

Sam's Club

30,000

BJ's Wholesale

20,000
10,000
0
2005

2006

2007

2008

2009

Costcos total revenue, in 2009, totaled up to $71,422,000,000 compared to Sams Clubs

$46,710,000,000 and BJs $10,027,000,000.
Total revenue of Costco and BJs from 2006 through 2009. Sams clubs total revenue was
analyzed from 2008 through 2009.

Total Revenue
In Millions

80,000
60,000
Costco
40,000

Sam's Club
BJ's Wholesales

20,000
0
2006

2007

2008

2009

Costco also has an advantage in net income. Costcos net income comes mostly from
their membership fees due to Costco capping the margins on brand-names up to 14%. Other
retailers are at 20% to 50% on same items. Over 70% of Costcos operating profits were
attributable to membership fees.

Net Income of Costco and BJs

Net Income
1,400

in millions

1,200
1,000
800

Costco

600

Sam's Club

400

BJ's Wholesales

200
0
2006

2007

2008

2009

Costco offers two types of memberships: Business and Gold Star. The business member
pays an annual fee of $50, which includes a spouse membership card and could purchase
membership add-on cards for $40. The Gold Star is an annual payment of $50, which includes a
spouse card. A member can also purchase an Executive Membership which cost $100 annually,
which includes savings opportunities. Costco sold about 6 million Business memberships, about
22 million Gold Star members, and 29 million add on members for 2009. In membership fees
alone, Costco made $1.6 billion. BJs made $178 million in membership fees in 2009. Sams
clubs membership fees were unavailable.
Membership Revenue

Membership Fees
1,800
Costco , 1,506

1,600

in millions

1,400
1,200

Costco , 1,188

Costco , 1,533

Costco , 1,313

1,000
800
600
400
200

BJ's, 178
BJ's, 150

BJ's, 162

BJ's, 176

0
2006

2007

2008

2009

Five Year Forecast

in millions

5 Year Forecast
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2010

2011

2012

2013

2014

2015

The above graph shows the five year forecast for Costco (indicated in blue) and BJs
Warehouse (indicated in red). Sams Clubs information was not available hence not indicated in
the graph. Costco is the clear industry leader and it seems their standing will stay true for years
to come. Sams Club is not expected to gain significant ground on Costco. As of right now BJs
is not an immediate threat to Costco but many years down the road, if they continue to advance
at a rapid pace they may challenge Costco.