William Shonk, Danny Anders, Brytnie Miller Miñiel

April 2016

Danny Anders
Brytnie Miller Miñiel
William Shonk

Team 1 - Costco Wholesale Corporation Case Analysis

Costco Wholesale Corporation is an American membership only warehouse club that provides a
wide selection of merchandise. They are currently the largest membership only warehouse club
in the United States, and as of 2014, Costco was the third largest retailer in the U.S. and the
second largest in the world behind Walmart. Costco was founded in 1983 and its headquarters
are in Issaquah, Washington. Costco operates an international chain of membership warehouses,
mainly under the "Costco Wholesale" name, that carry quality, brand name merchandise at
substantially lower prices than what are typically found at conventional wholesale or retail
sources. Costco offers three types of memberships: Business, Gold Star (individual), and the
Executive membership. Business members qualify by owning or operating a business and pay an
annual fee of $55 in the U.S. to shop for resale, business, and personal use. The Gold Star
membership is for individuals who do not own a business and is available for a $55 annual fee in
the U.S. This fee includes a free household membership. The Company also has a third
membership level, called the Executive Membership.
_____________________________________________________________________________________________

Costco’s Mission:

“To continually provide our members with quality goods and services at the lowest possible
prices.”

Costco’s mission statement shows that the business focuses on quality as a selling point. Quality
is integral because there are many other firms that compete against Costco on the basis of low
prices. The company’s mission statement also indicates low prices as a major selling point.
Customers are drawn to the discounts and low prices available at Costco. Moreover, the mission
statement shows that these offers are always available at Costco warehouses to members. One
key strategic objective linked to this mission statement is to develop a supply chain that supports
cost minimization and high quality. The strategic objective of the company’s intent is to sustain
and improve the company’s competitive strength and long-term market position through
customer value. While financial objectives focus on achieving acceptable profitability in a
company’s pursuit of its mission and survival in revenues. Costco’s mission will help to achieve
our vision.

Costco’s Vision:

“A place where efficient buying and operating practices give members access to unmatched
savings.”

The vision statement shows Costco’s need to ensure efficiency in its operations. Efficiency is
critical because it minimizes the costs that effect pricing. Cost minimization leads to the next
point of the vision statement: unmatched savings. Costco’s customers can expect such savings
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

through discounts based on membership status or by using Costco Cash Cards. Access through
membership is the component of the vision statement that indicates Costco Wholesale’s
membership only warehouse club model. Cost minimization is central to the company’s
competitive low pricing strategy. It is this low pricing strategy that ensures the discounts
necessary to attract customers to Costco’s warehouses.
_____________________________________________________________________________________________

What is Costco’s business model? Is the company’s business model

appealing? Why or why not?

Costco’s business model is called a subscription business model and entails generating high sales
volumes and rapid inventory turnover by offering fee paying members attractively low prices on
a limited selection of nationally branded and selected private label products in a wide range of
merchandise categories. Rapid inventory turnover when combined with the low operating cost
achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in
nor frills, self-service warehouse facilities enable Costco to operate profitably at significantly
lower gross margins than other wholesalers.

Costco is measured by its performance variable Return on Net Operating Assets (RNOA). In this
case Costco’s RNOA, is calculated by:

Net Operating Profit after Taxes (NOPAT)/Average Net Operating Assets (NOA), which for
2015 was 2,454/10,571 = 23.21%.

Compared to Walmart’s RNOA, which was 1124/9329=12.01%. Costco’s RNOA is greater than
Walmart’s due to the company’s high sales volume and rapid inventory turnover. This also
allows the company to sell and receive cash for inventory before it must pay many of its
merchandise vendors.

Costco's warehouses present one of the largest and most exclusive product category selections to
be found under a single roof. Costco’s provides its members with a selection of approximately
3,600 active items. Of these, about 85% are quality brand name products and 15% carry the
company’s private label, Kirkland Signature, which is designed to be of equal or better quality
than national brands. A typical retailer carries about 125,000 to 150,000 items for shoppers to
choose from. Costco operates self-service gasoline stations at a number of its locations in the
U.S., Canada, Australia, Japan, Spain, and United Kingdom. Costco is known for carrying top
quality national and regional brands, with 100% satisfaction guaranteed, at prices consistently
below traditional wholesale or retail outlets. Additionally, Costco Wholesale Industries, a
division of Costco, operates manufacturing businesses such as: special food packaging, optical
laboratories, meat processing, and jewelry distribution. These businesses share the common goal
of providing members with high quality products at substantially lower prices.
Costco makes most of its profit from membership fees, not margins on product sales. This means
the company can sell its products at cost, or sometimes even at loss, which allows it to charge
amazingly low prices and provide a crucial source of competitive advantage in the discount retail
industry. Costco continues to grow in size. It gains purchasing power with suppliers, which
allows it to negotiate better prices and more flexible financial conditions for its products.
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

A company is said to enjoy economies of scale whenever it gains operating efficiency and is able
to reduce the total cost of making successive goods. In addition to the operating efficiency
needed for economies of scale, the supply chain efficiencies generate additional cost savings as
sales volume expands. Costco’s large warehouses and large sales volume of bulk items are due in
part to economies of scale. In essence, the more products the company sells, the bigger the scale
and cost advantages. Therefore, it is logical to infer that Costco becomes better and more
competitive as it grows in size over time.

Costco is also well known for paying its employees high wages, about $21 per hour, health
benefits, ample vacation time and a 401K. Costco’s high employee wages are part of its cost
savings plan. That is, when employees earn a decent wage they are more productive and less
likely to quit. Employee turnover can be a huge cost to any business. Costco has a policy of
carrying less product selection than other retailers with the purpose of cataloging fewer SKUs.
Having fewer products to order, track, and display means cost savings and in turn increases its
purchasing power. Costco induces cost savings and while increasing its purchasing power.
______________________________________________________________________________

What are the chief elements of Costco’s strategy? How good is the
strategy?

The Five P’s for Strategy: Plan, Ploy, Pattern, Position, and Perspective:

Costco accomplishes its business model with a low-cost leader strategy that strives to be the
overall low-cost provider of a product or service that appeals to a broad range of customers.
Costco’s plan has been to offer ultra-low prices, a limited selection of nationally branded and
private label products, a “treasure hunt” shopping environment, strong emphasis on low
operating costs, and geographic expansion. Costco’s ploy is its philosophy to keep customers
coming in to shop by wowing them with low prices. Costco has disrupted their competitors by
only stocking those items that could be priced at bargains levels and thus provide members with
significant cost savings. Costco emphasis low cost by offering lower prices and better values by
eliminating virtually all the frills and costs historically associated with conventional wholesalers
and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable.
This ploy has become a pattern within their business strategy. Costco caps their margins at a
steady 10.6%. This means that for every $100 that Costco spends to buy its products, it’s selling
them, on average, for $110.60. Costco has decided to position itself in the market place through
product selection. Costco’s supply chain efficiency is the cross dock distribution (depot) facility.
Costco purchases the majority of its merchandise directly from manufacturers and routes it
through a network of cross-docking facilities which act as vendor consolidation points to move
goods in full truckload volumes to the stores.

Costco’s merchandising strategy is to provide members with a selection of approximately 3,600

active items. As mentioned previously, about 85% are quality brand name products and 15%
carry the company’s private label Kirkland Signature. A typical retailer carries about 125,000 to
150,000 items for shoppers to choose from. The choices an organization makes about its strategy
rely heavily on its culture – just as patterns of behavior can emerge as strategy, patterns of
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

thinking will shape an organization's perspective, and the things that it is able to do well. The
CEO is quoted with an example of Costco’s culture perspective:

“If you had ten customers come in to buy Advil how many are not going to buy any because you
just have one size. Maybe one or two. We refer to that as the intelligent loss of sales. We are
prepared to give up that one customer. But if we had four or five sizes of Advil, as most grocery
stores do, it would make our business more difficult to manage. Our business can only succeed if
we are efficient. You can’t go on selling at these margins if you are not.”

Costco runs a tight operation with extremely low overhead which enables the company to pass
on dramatic savings to its members. Costco can only succeed if they are efficient. Costco growth
strategy has been to increase sales at existing stores by 5% or more annually and to open
additional warehouses both domestically and internationally. Their marketing objective has been
strictly by word of mouth only and has never use a public relations department.

Strategic Fit:

Strategic fit aims for consistency, reinforcement or optimization of business activities. We are
starting to see the 7-S framework for strategic fit that supports Costco’s operation. Costco’s
business strategy succeeds because there is a close fit between its competitive strategies and
business model as we see below they are all moving in one direction:

Old 7s Breakdown:

Strategy. Costco offers ultra-low prices, a limited selection of nationally branded and private
label products, a “treasure hunt” shopping environment, strong emphasis on low operating costs,
and geographic expansion.

Structure. The main advantage of Costco’s business structure is that the functional grouping
characteristic supports organization-wide control. The company can easily implement new
policies and strategies to take effect in all geographic divisions. Also, the geographic divisions
are a characteristic of Costco’s organizational structure that presents the advantage of flexibility
to adjust to regional market conditions.
Systems. Costco runs a tight operation with extremely low overhead which enables them to pass
on dramatic savings to their members. Costco Wholesale’s strategy involves service quality
control through HR training and development, as well as co-branding using the Kirkland
Signature brand to indicate high quality.

Shared values. Costco’s culture is rich and successful because it is supported by four values 1.
Obey the law 2. Take care of your customers 3. Take care of your employees 4. Practice the
intelligent loss of sales

Skills. Costco runs top notch training and development programs that enable the company to
attract and retain knowledgeable and friendly employees. It is the employees that implement the
Costco experience.
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April 2016

Style. Innovation and flexibility creates the style of the organization. Management style is more
of an inspirational management. The workforce can be effectively motivated for higher
performances with less financial resources.

Staff. Benefits packages and comprehensive training help retain highly qualified employees. This
helps minimize turnover. Only capable and promising candidates are employed by Costco.

New 7s Breakdown:

Superior stakeholder satisfaction. This is the key to winning with competitors. Costco has loyal
customers and they are the ones that create value. Costco has one of the lowest profit margins
among major U.S. corporations. In its 2013 fiscal year, Costco posted a pretax margin of 3% and
an after-tax margin of 1.9%. However, Costco has a very efficient business model that allows it
to consistently generate a strong return on invested capital. Consumers continue to flock to its
stores to take advantage of its industry-leading prices, and the company has significant global
growth opportunities. As a result, Costco shares have more than tripled in the last 10 years.

Strategic soothsaying. Costco mastered this by learning what the customers wanted through
research and development. Costco goes after a certain type of customer: the small business
owners who is status conscious and who has money to spend on bargain-priced premium items.
The reason why Costco decided to focus on small business owners is that they realized that these
people are often some of the wealthiest people in their communities.

Positioning for speed. Costco plans to continue to expand, both domestically and internationally.
Its current store base is around 670, but management hopes to reach 1,200 warehouses in the
long term. It will likely continue to open about 30-35 stores a year over the next few years. Over
the next 10 years, we think roughly 60% of these stores will be opened outside the United States.

Positioning for Surprise. Costco out preforms their competitors by building a leading brand.
Costco makes most of its profit from membership fees, as opposed to profit margins on product
sales. This means Costco can sell its products at cost, or sometimes even at a loss, which allows
the company to charge amazingly low prices, a key competitive advantage in the discount retail
sector, where price competitiveness is a central factor for success. Their brand is about social
class.

Shifting the rules of competition. Costco, apart from offering slightly lower price points on
certain key products, is trying to improve its customer experience by implementing consumer
friendly return policies, accepting several payment methods, and adding gift prizes. More
importantly, Costco is always changing its brands and introducing new products in order to
provide customers with a pleasant "treasure hunt" experience.

Signaling strategic intent. Costco’s aggressive international expansion announcements,

establishing a strong online presence and ensuring that the strong membership renewal rate
continues is part of their strategic intent.
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

Simultaneous and sequential strategic thrusts. Costco has used several moves over the years to
try and get one up on its competitors. Costco has a worldwide niche market that focuses on small
business owners because they realized that these people are often some of the wealthiest people
in their communities.
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Use the information in chapter 3 to do a complete five-forces analysis of

competition in the North American wholesale club industry. Which of the
five competitive forces is strongest and why?
A five forces analysis is a strategic model that identifies and analyzes the five fundamental
forces that shape every industry and determine its attractiveness. These five industry shaping
forces are as follows:

1. Rivalry/competition in the industry

2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitutes

The attractiveness of an industry is directly related to its profitability. Perfect competition

eventually drives profits to zero, therefore, the least amount of competition, the more attractive
the industry. However, perfect competition is not experienced in the real world. This allows the
companies to utilize the five forces model to analyze the internal and external influences to
define and modify their company’s strategy to gain a competitive advantage. In the end, the main
goal is to increase stakeholder value, which is primarily to increase company profitability.
Below we will explore the individual five forces Costco faces in the American wholesale club
industry.

Rivalry/Competition in the Industry:

The wholesale club industry attracts consumers through discounted prices on a wide variety of
retail products at large warehouse locations. Nevertheless, in order for consumers to gain access
to these discounted warehouse locations, consumers are charged yearly membership fees. The
industry business model is based on discounted warehouse pricing which makes competition
extremely high. The top three major players in the American wholesale club industry, according
to total U.S sales are: (1) Costco, (2) Sam’s Club, and (3) BJ’s Wholesale Club. Due to low
profit margin and competitive pricing, the power of rivalry is extremely high.

 Consumers are exceedingly price elastic in this industry. This creates hyper pricing
competition among the top three competitors. Competitors offer the lowest prices to
attract consumers.
 The industry is maturing as market saturation increases and efforts to increase foot traffic
in new and existing stores intensifies.
 Competitors offer little differentiation as they offer similar products and services at
comparable prices.
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April 2016

 Rivalry differentiation is low due to similar product offerings and pricing. Consumers can
take their business from one competitor to another with ease due to the weak switching
costs and weak differentiation.

Potential of New Entrants into Industry:

Barriers of entry are high in the industry due to the large economies of scale needed to drive
down costs to sufficiently competitive yet profitable prices. The likelihood of new threatening
entrants is minimal. Competitor mergers and acquisitions could play an effective means for
rivalry to expand and steal market share from competitors.

 Companies must build an adequate membership base that supports sustained large
volume sales for competitively discounted and low profit margin products. As a
consequence, entrants will be met with aggressive incumbent competitors and low profit
margins that would make entry very costly and unappealing.
 Sam’s Club, Costco and BJ’s Wholesale are already consumer known brands that
command high sales volumes that would be difficult and costly to replicate to new
unknown and unexperienced entrants.
 The current incumbents, especially Costco and Sam’s Club are already established
nationwide and to compete on a nationwide level, It would require extensive capital
expenditure to create an at par image.

Power of Suppliers:

Suppliers are the vendors that manufacture the inventories sold by the wholesale clubs for resale.
Agreeing on mutually beneficial contracts that demand competitive pricing for both suppliers
and wholesalers requires a massive volume of sales. These contracts offer large exposure to the
consumer markets that would significantly increase sales revenue. Nevertheless these contracts
are determined by the wholesaler who wishes the meet the expected low price demands of the
consumer. This makes the power of suppliers low.

 The wholesaler reflects the aggregate consumer price demands and therefore the supplier
has little bargaining power over the price. If a supplier can’t meet the highly elastic
consumer price demands, a more competitive supplier that meets the price demands will
consequently be selected.
 Due to the large sales volumes generated by wholesalers, vendors can’t afford the
opportunity cost to forgo supplying wholesalers with inventory. Suppliers do not have
significant access to the end consumers and therefore the bargaining power primarily
favors the wholesaler who does have direct and ample access to the end consumer via
their warehouses.

In the end, the consumer demands competitive pricing, the wholesaler creates the market for the
consumer and the supplier, and the supplier must compete to satisfy the consumers with expected
wholesale prices mirrored in the consumer market.
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

Power of Customers:

Market demands are what must be met if a company desires to remain in business. On a
microeconomic level, the individual consumer’s purchases have virtually no weight with the
large sales volume that wholesalers produce. Due to the relatively insignificance sales volume
purchased by individual customers, individual customers have essentially no bargaining power.
Wholesalers may price match competitors to add value to individual customers. Nevertheless,
this is insignificant and competitors are already tightly matched over pricing. This makes the
power of aggregate consumers very high.

 Individual customers have no bargaining power compared to the aggregate sales volume.
They leverage no bargaining power other than switching to competitors.
 Consumers will switch but prolonged switching trends reflect consumer market demands
and these demands choose how a business will evolve. If prolonged market trends are not
met, the company will forgo business as competitors evolve to said trends.

Threat of Substitutes:

The wholesale club industry is at odds with discount retailers and grocers that offer comparable
prices without the need for membership fees. Aside from discount retailers there are also online
discount retailers, such as Amazon, that offer comparable pricing with greater convenience. This
makes the threat of substitutes high.

 Competitive discount retailers are more abundant than wholesale club warehouses.
 Product differentiation from substitute products found at large retailers and grocers are
abundant and price competitive with wholesale club products.
 Online shopping grows in popularity due to increasing competitive pricing, shipping
options and convenience.
 Wholesale club warehouses may save costs in bulk, but they offer less selection than non-
wholesale club retails.
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How well is Costco performing from a financial perspective? Use the

financial ratios to help you diagnose Costco’s financial performance.
From the surface level perspective of Costco’s financial statements, their financial performance
is strong and continuously improving. Year after year, Costco has expanded its operations
successfully and have recently met record highs in total revenues ($88.9 billion in 2011) and net
income ($1.46 billion). With the exception of decreased performance from 2008 to 2009, all of
Costco’s performance has increased across the board for the last ten years. Costco’s sales
increased by over $10 million from 2010 to 2011 and their net income increased by almost 11%.
The following profitability, liquidity, leverage, and activity ratios are a quick snapshot that
shows the strong financial performance of Costco Wholesale Corporation:
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

 Return on Assets grew from 5.69% in 2010 to 5.78% in 2011. This shows that Costco is
increasing their efficiency in managing investments in assets and generating profits.
 Return on Equity remained at 12.50% from 2010 to 2011.
 Return on Investments grew from 10.34% in 2010 to 10.56% in 2011. With this increase
Costco is increasing their ability to reward customers and attract providers of funds.
 Total Asset Turnover increased from 3.33 in 2010 to 3.44 in 2011, which reflects the
company’s ability to effectively generate sales from their investment in total assets.
 The Current Ratio remained about the same. It was 1.16 in 2010 and 1.13 in 2011. This
ratio positively shows Costco’s ability to meet short-term obligations as they come due
because the ratio is greater than one.
 The Quick Ratio remained about the same, being 0.32 in 2010 and 0.33 in 2011. This
means that Costco has $0.33 of liquid assets to cover each $1.00 of current liabilities.
Costco does not have a high amount of immediate liquidity in its company.
 The Debt Ratio decreased from 54.52% in 2010 to 53.02% in 2011. A 50% debt ratio
represents a more stable company, and Costco is almost at that mark.
 The Debt-to-Equity Ratio for Costco decreased from 119.92% in 2010 to 112.84% in
2011. A ratio of one would mean that investors and creditors have an equal stake in the
business assets. Currently, creditors have more.
 The Equity Ratio increase from 45.47% in 2010 to 46.98% in 2011. This increase is
favorable for Costco because it means that the investment level of shareholders is
increasing.
 Costco’s Average Days’ Sales in Inventory decreased from 29.64 days in 291 to 28.82
days in 2011, which reflects the company’s ability to efficiently manage their inventory.
 The Inventory Turnover Ratio increased from 12.31 in 2010 to 12.66 in 2011, which is
another example of managing inventory efficiently.

After analyzing these key financial ratios, there is solid evidence to show that Costco Wholesale
Corporation is a healthy company that is showing success in all areas of financial performance.
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Does the data in case Exhibit 2 indicate that Costco’s expansion outside
the U.S. is financially successful?
Exhibit 2 does not provide enough information to determine if expansion outside of the U.S. is
financially successful. Exhibit 2 merely segregates the total sales into five categories. The dollar
amounts, necessary for benchmarking, are not provided.
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

Exhibit 2 continued, as seen below, does show an upward trending increase in warehouse
locations from 2007–2011. One could infer that unit expansion is a result of increased revenues.
However, the exhibit does not segregate locations by geographic region, which is necessary for
accurately benchmarking the geographic expansion, i.e. international expansion.

Exhibit 2 (continued)

In order to answer question 5, regarding the financial soundness of international expansion

outside of the U.S., we must refer to exhibit 4 which includes actual dollar amounts.
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

Exhibit 4

The above numbers were manually put into Excel in order to create a few graphs to correctly
understand the trends associated with international expansion compared to U.S. expansion. The
following four graphs (figures 1 – 4) were produced from the exhibit 4 metrics.
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

Figure 1

Costco International Expansion 2005-2011

$450
$400
$350
$300

in millions
$250
$200
$150
$100
$50
$-
2005 2007 2009 2010 2011
year

Operating Income Capital Expenditures

Figure 1 compares the operating income compared to the capital expenditures of international
operations of Costco. The operating income has an increasingly upward sloping trend. As of
mid-2009, the capital expenditures were less than operating income, producing a net positive
operating income. In 2005 and 2009, the capital expenditures were greater than operating
income, and produced a net negative operating income. These may have likely been incurred
from heavy investment in new warehouse construction, and from purchasing large volumes of
inventory to fill the new warehouses. In the end, these investments were necessary and greatly
increased operating income after 2009.

Figure 2

Costco U.S. Expansion 2005-2011

$1,600
$1,400
$1,200
in millions

$1,000
$800
$600
$400
$200
$-
2005 2007 2009 2010 2011
year

Operating Income Capital Expenditures

William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

Figure 2 compares the operating income and capital expenditures of the U.S. only. In 2007, there
was a rise in capital expenditures, likely to invest in the infrastructure and inventory necessary to
increase revenues. However, the added increase in operating income afterwards was not
bolstered and U.S. operating income had a much slower growth rate compared to the
international operating income seen the previous exhibit, Figure 1. Due to the nominal growth
rate of U.S. operating income, it seems that the U.S. market is maturing. Two possibilities are:

1. Over expansion and cannibalization of warehouses (not enough information to deduce)

2. Aggressive rivalry reducing profitability (more plausible due to increased expansion of
competition)

Figure 3

Operating Margin (Total Rev. / Opeating Income) 2005-2011

5.00%
4.50%
4.00%
3.50%

in millions
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2005 2007 2009 2010 2011
year
US Op Margin Intl. Op. Margin Canada Op Margin

Figure 3 compares U.S. and international operating margins (which manifest return on sales). Per
Figure 3, the U.S. operating margin is on a decline, which infers possible industry maturity and
aggressive competition. However, international operating margin is upward sloping. This
manifests operating income increasing with positive linear slope. All things held constant, the
increased international operating income likely implies that there are less competitive forces to
reduce profitability when compared to the U.S. market.

In 2011 the international operating margin was 97% greater than U.S. operating margin. When
comparing the Canadian operating margin, the international operating margin has maintained a
positive linear growth rate. In 2011 the Canadian operating margin growth rate plateaued, while
the international operating margin growth rate remained constant, signifying continued
attractiveness for the international market.
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April 2016

Figure 4

Operating Income per Warehouse 2005-2011

$8.00
$7.00
$6.00

in millions
$5.00
$4.00
$3.00
$2.00
$1.00
$-
2005 2007 2009 2010 2011
year
US Op Income / unit Canada Op Income / unit Intl Op Income / unit

Figure 4 explains the operating income per warehouse, i.e. unit. From 2005–2011, U.S. operating
income experienced no gains in operating income per unit. While the Canadian and international
operating income per unit nearly doubled from 2005 to 2011. According to Figure 4, it is
reasonable to assume that the international and Canadian warehouses are significantly more
profitable than the U.S. warehouses due to their greater operating income per unit.

In conclusion, because of Costco’s upward sloping operating income and operating margin per
unit experienced internationally from 2005-2011, the international expansion has been a
successful financial decision for the company.
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How well is Costco performing from a strategic perspective? Does Costco

enjoy a competitive advantage over Sam’s Club? Over BJ’s Wholesale? If
so, what is the nature of its competitive advantage? Does Costco have a
winning strategy? Why or why not?

Costco is performing extremely well from a strategic perspective. As discussed in detail in the
response to Question 2, Costco’s strategy is to provide ultra-low prices, a limited selection of
nationally branded and private-label products, a “treasure hunt” shopping environment, strong
emphasis on low operating costs, and geographic expansion.

The wholesale club and warehouse segment of retailing in North America in 2011 consisted of
three main competitors – Costco Wholesale, Sam’s Club, and BJ’s Wholesale Club. At this time,
Costco had just over a 57% share of warehouse club sales across the United States and Canada,
Sam’s Club had 35%, and BJ’s Wholesale had 8%. Competition among these competitors is
based on factors such as price, merchandise quality and selection, location, and member service.
Costco enjoys a competitive advantage over Sam’s Club in terms of their product offerings,
which are narrower. Although both companies tend to offer the same types of products, Costco
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

offers 3,600 items whereas Sam’s Club offers 4,000 items. Although the difference in quantity
between the two doesn’t seem large, Costco has shown that with the right planning and
management, having a narrower product offering can lead to more than one advantage. Costco
deliberately limits each product category to fast-selling models, sizes, and colors, which means
they usually offer only one or two brands or sizes per item which essentially makes the decision
for the member as to what they will by. This leads to efficiency in management because there are
fewer products to inventory, and it also leads to increased sales because customers are more
likely to go ahead and buy a product even if it is not the brand they were wanting or the product
is being sold in a larger quantity than what they were wanting. Costco is also able to create a
competitive advantage over Sam’s Club with their treasure-hunt items. Treasure-hunt items are
high-end or brand-name product offerings that carry big price tags offered at a low price.
Costco’s strategy is to entice shoppers to spend more than they might by offering irresistible
deals on big-ticket items or name-brand specials and, further, to keep the mix of featured and
treasure-hunt items constantly changing so that bargain-hunting shoppers would go to Costco
more frequently than for periodic “stock up” trips. This will draw members to the store more
often with the item of leading to more frequent purchases. The treasure-hunt items at Sam’s Club
tend to be less upscale and carry lower price tags than those at Costco, which is not always a
positive representation of value that customers are looking for.

Costco enjoys a competitive advantage over BJ’s Wholesale in the same way that they enjoy a
competitive advantage over Sam’s Club in regards to their product offerings. BJ’s Wholesale has
a product offering of about 7,000 items, which is significantly higher than Costco’s product
offering of only 3,600. Costco has found their competitive advantage in offering minimal
variation within each specific product category, but offering a range of products that meet all of
their members’ needs. Costco’s product range covers a broad spectrum that includes rotisserie
chicken, all types of fresh meats, seafood, fresh and canned fruits and vegetables, paper products,
cereals, coffee, dairy products, cheeses, frozen foods, flat-screen televisions, iPods, digital
cameras, fresh flowers, fine wines, caskets, baby strollers, toys and games, musical instruments,
ceiling fans, vacuum cleaners, books, apparel, cleaning supplies, DVDs, light bulbs, batteries,
cookware, electric toothbrushes, vitamins, and washers and dryers. Costco has managed to offer
a wide range of products that creates a one-stop shopping experience for their members. While
BJ’s Wholesale offers a significantly higher amount of products, their range is not are varied.
Costco also enjoys a competitive advantage over BJ’s Wholesale in their geographical
expansion. Costco has made it a strategic goal to increase sales at existing stores by 5 percent
annually and open additional warehouses. In recent years, Costco has opened between 14 and 34
new locations (total domestically and internationally) each year. BJ’s Wholesale does not appear
to have a strong expansion strategy in place, which is affecting their market share.

Costco has a winning strategy that is carefully made up of five sub-strategies that allow them to
touch on all market opportunities. Costco has found a way to successfully implement each of the
five sub-strategies that each attribute to their overall goal of generating high sales volume and
rapid inventory turnover. Because Costco’s sub-strategies align and have been successfully
implemented, they are able to win in their industry.
______________________________________________________________________________
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016
After completing a SWOT analysis, what recommendations do you have
for Costco?
Internal
Strengths
1. Its Kirkland brand of private label
brands is successful and offers high
profit margins
2. Low product and services
3. Internal (home grown) top
management team in majority
4. Employee’s turnover within a year of
recruitment is just six percent
5. Unique ability to keep overhead cost
low resulting in low prices of goods
and services
6. Loyal and affluent customer base
7. High inventory turnover compared to
its competitors
8. Consistent return on sales and return
on assets
9. Incredible return policy
10. Very attractive low prices
External
Opportunities
1. E-commerce could win some
business away from the likes of
Amazon and Sam's Club
2. Costco has said it plans to
significantly expand its international
presence.
3. Costco’s operations are mainly
targeted in countries where there is
high GDP and high disposable
income of the consumers (Canada,
U.S.A and Japan) with low inflation
rate in said countries
4. Serves the democratic countries with
political and governmental stability
5. Rapid growth in membership
Weaknesses
1. High geographic concentration of
stores (30% of sales come from in
California)
2. About 10% of sales come from gas,
and if prices remain low, Costco's
cheap gas becomes less of an
incentive for shoppers to come in
3. Comparatively less attractive store
layout for luxury items
4. Weak advertisement base leading to
the inability of reaching full range of
membership base.
5. Not widely scattered around the
world than its competitors
6. Location is not attractive in terms of
real-estate
7. No self-checkout
8. Primary focus on business customers
rather than individual customers
9. Membership only warehouses club
retail business model
10. Limited selection of goods and
services.
Threats
1. Sam's Club has been aggressively
expanding its services to business
members and has plans to improve its
private label brands
2. Shoppers could tire of Costco's
limited e-commerce and gravitate
more to its online competition
3. Costco cannot attract people who are
below poverty line due to its
membership fees and bulk purchase
4. Not well diversified in terms of
geography (presence)
5. High competition from Sam’s Club
and BJ
6. Highly dependent on United States
William Shonk, Danny Anders, Brytnie Miller Miñiel
April 2016

6. Possibility of international expansion and Canadian market.

7. Advantage of economic downturn
8. Increasing brand awareness
9. Positive image in terms of employees
pay and social responsibility
7. Largely dependent on vendors for
timely supply of quality merchandise
at reasonable price
8. High market expectation in terms of
price, quality and financial
performance

SWOT Analysis Summary Recommendations

S-O Strategy: Costco can pursue opportunities that are a good fit for its strengths.
Costco can expand in e-commerce. This could expand its already Loyal and affluent
customer base by reaching more customers that aren’t just in high GDP areas. This
will also help it to expand outside the United States and take away customers from its
competitors.
W-O Strategy: Costco can overcome weaknesses to pursue opportunities. High
geographic concentration of stores (30% of sales come from in California) and weak
advertisement leads to the inability of reaching full range of membership base which
primarily focuses on business customers rather than individual customers. If Costco
focuses more on e-commerce and its online presence it could win some business away
from the likes of Amazon and Sam's Club and have a rapid growth in membership.
S-T Strategy: Costco can identify ways to leverage its strengths to reduce its
vulnerability to threats. By using its high profit margins with its brand, Kirkland, it
can further exploit the already attractive low prices and reduce its membership fees to
help attract people who are below poverty line.
W-T Strategy: Costco can establish a defensive plan to prevent the firm’s
weaknesses from making it highly susceptible to threats. Its current weak
advertisement leads to its inability for reaching its full range of potential membership
base. It can concentrate on attracting people who are below poverty level by
advertising its low prices in areas that are outside it current geographic presence in
terms of high GDP. It can focus membership fees based on income so its primary
focus on it not only business customers but also on individual customers.