1. What is Costco's business model? Is the company's business model appealing?

Why or
why not?

Costco’s business model is to generate high sales volumes and rapid inventory turnover by
offering members low prices on a limited selection of nationally branded and selected private
label products in a wide range of merchandise. Costco’s business model is built upon customer
memberships, who join and renew annually. This directly shows customer loyalty as satisfied
customers will renew annually. Costco’s business model is great, all customers want to find
good quality bargains and Costco is setup to keep their customers coming back to find them.

2. What are the chief elements of Costco's strategy? How good is the strategy?

Costco’s strategy is built on the principle strategy of low prices, limited selection, and a
treasure-hunt shopping environment. Costco uses their brand Kirkland, which is designed to be
equal or better quality than national brands. Treasure-Hunt merchandising consists of a
constantly changing selection of luxury items on the floor enticing shoppers to spend more than
they might otherwise by offering irresistible deals. Costco’s buyers purchase these items from
wholesalers which enables them to offer discounts to their customers.

3. Do you think Jim Sinegal is an effective CEO? What grades would you give him in
leading the process of crafting and executing Costco's strategy? What support can you
offer for these grades? Refer to figure 2.1 in chapter 2 in developing your answers.

I believe that Jim Sinegal is an effective CEO as he leads Costco into strategic courses in
preparing for the future. He functions as a producer, director and knowledgeable critic. Sinegal
exhibits attention to detail and pricing and leads a very active role in management as CEO.

4. How well is Costco performing from a financial perspective? Do some number-

crunching using the data in case exhibit 1 to support your answer. Use the financial
ratios presented in "A Guide to Case Analysis" and in table 4.1 of the text to help you
diagnose Costco's financial performance. How does the company compare to Sam's
Club and BJ's Wholesale?

A current ratio of 1:05 shows that Costco should be able to meet its current liabilities. Profit is
increased by not having to store inventory. The Asset turnover of 11.54 shows that consistent
with what was described by the case study, Costco holds onto inventory for under 12 days.
Utilizing profitability measures, Costco is doing well financially. A 2% profit margin illustrates
Costco’s pricing policies and the ability to offer ultra-low prices. The 6% Return on Assets
percentage shows that Costco’s assets are being well-used to generating revenue. The ROE
demonstrates $0.13 of profit for every dollar of net assets. Based upon the data driven from
the case, Costco is doing very well.

5. Does the data in case exhibit 2 indicate that Costco's expansion outside the United
States is financially successful? Why or why not?

The data in Exhibit 2 indicates that Costco’s expansion outside the U.S. is financiall y successful.
Revenue, warehouses and operating income have steadily increased since Costco went global.
The revenue to warehouse ratio has also increased.

6. Perform a SWOT analysis and complete a strategic group map for Costco. What do
these tell you about the company's strategy and performance? How well is Costco
performing from a strategic perspective? Does Costco enjoy a competitive advantage
over Sam's Club? Over BJ's Wholesale?

Strengths

Costco Wholesale offers its customers and consumers lowest prices on a wide range of national
and international branded products and goods, in a wide arrange of merchandise categories.

The products and services of the Costco Wholesale are reliable as the company deals in best
available quality products at competitive prices.

The company pays attention to details and has various strengths that add to its success. These
factors include rapid turnover of the inventory, running an efficient operating structure,
reduced cost of handling of merchandise and generation of high sales volume at each of its
store.

Costco Wholesale gives preferences to it customers and provides them best value for the
money.

Other than offering highly competitive prices on best-quality goods and a range of convenience
services, Costco Wholesale does its best to be a valuable quality provider for every community
where they operate. This also includes providing good jobs at good pay, continuous
involvement in community activities and charities.

Costco Wholesale is one of the top wholesale clubs in the United States. It is currently present
in 38 states operative through its 375 clubs.
Costco Wholesale also operates several consumer and business services, ranging from financial
planning to health insurance. By providing top quality goods and services, Costco has been able
to increase its market share a great deal over the past several years.

Weaknesses

Costco’s business conditions constantly change because external and internal forces make
other business participants to alter their actions. The driving forces in this sector are the major
underlying causes changing business and competitive conditions.

Operating on a large scale means difficulty in bringing changes to grass root levels.

Opportunities

Costco Wholesale is one of the first companies to have a growing acceptance of internet
shopping. Costco created a website in the United States as well as website in Canada to be
more effective and competitive in the internet market.

The company is constantly working to make its distribution channels stronger and enter new
potential markets.

By offering value and working more towards developing a strong loyal customer base the
company can gain more market share.

Threats

Warehouse clubs not only compete in one sector or market but it competes with a wide range
of other types of retailers which include Wal-Mart Dollar General, supermarkets, general
merchandise chains, specialty chains, fuel stations and internet retailers. Their competitiveness
changes because the different types of products they deal in.

Due to its tremors growth and growing market share, the company has caught the attention of
many of the market leaders and its competitors.

The industry of wholesale has a number of individual companies that are highly competitive
and have very effective strategies. They have developed loyal customer bases and very one is
relentlessly fighting for the greatest market share. Costco’s major competitors include Wal -
Mart’s Sam’s Club.
Costco’s financial growth and capital structure evolved from its company motto: “Sell big and
Sell Fast” (Schmidt, 2004). The company operates on two basic ideas: 1)”Sell a limited number
of items in a broad range of categories, sell them in large quantities and sell them fast,” 2) “Pay
good wages and you will get good people and good productivity (Schmidt, 2004).” Selling
items in bulk, results in reduced operating costs and high inventory ratios. On that note, most
of Costco’s inventory items are placed on palettes, which minimizes labor costs because
stocking is not required. Additionally selling in bulk allows inventory turnover ratio to be higher
than retail industry averages and lowers the Days Inventory Outstanding ratio in the Cash
Conversion Cycle.

Costco’s brand image and excellent financial position, represents a distinctive competitive
advantage for the company and has evolved from the precise execution of several of the
company’s strengths, Costco’s brand image has developed an excellent reputation.

7. Does Costco pay its employees too much? Does it make sense for Costco to
compensate its employees so much better than the employees at Wal-Mart or Sam's
Club? Why or why not?

Costco’s reputation has evolved due to superb employee compensation and low compensation
for executives. Among employees who have been with the company for at least a year, just 6%
leave annually. Sinegal believes if you compensate your employees well, you will get good
production from them.

8. What recommendations would you make to Jim Sinegal regarding the actions that
Costco management needs to take to sustain the company's growth and improve its
financial performance?

I would recommend that Jim Sinegal continue to look for opportunities to grow the overall
quality of their merchandise. This does need to be balanced with competitive pricing and
excellent customer service.

References

Schmidt, Julie. 2004. Costco wins loyalty with bulky bargains. USA Today.

Crafting and Executing Strategy: The Quest for Competitive Advantage—Concepts and Cases,
17th ed., by Arthur A. Thompson Jr, A. J. Strickland III, and John E. Gamble New York: McGraw-
Hill/Irwin, 2010