Costco-CEO-JimSinegal[www.savevid .com].



Introduction & Case Facts
‡ Costco founded by Jim Sinegal & Seattle entrepreneur Jeff Brotman. ‡ First store opened in 1983, the same year when Wal-Mart launched its warehouse membership format known as Sam¶s Club. ‡ Jim Sinegal started his career in retailing at 18 with Fed-Mart, a discount retailing store started by Sol Price. ‡ In Dec 1985, Costco went public & also became first ever US company to reach $ 1bn in less than 6 years.

Canada. ‡ In 2006. Mexico. with 496 stores in 37 states across US & 7 other nations viz. Korea & Puerto Rico. Taiwan. Costco¶s sales totalled almost $ 59 bln. . Japan. ‡ Changed its name from Costco Companies Inc to Costco Wholesale Corporation when company reincorporated from Delaware to Washington in Aug 1999. Costco merged with Price club which was founded by his guru Sol Price.‡ In Oct 1993. UK.

listens to their feedback. . ‡ Employees genuinely like Jim since he spoke quietly. Jim Sinegal had great levels of energy.‡ Even at the age of 70. ‡ Today Costco is the 4th largest retailer in US & 7th largest in the world. gives measured inputs & motivates them. enthusiasm & dedication visiting 8. greets them well. 10 or sometimes even 12 stores in a day.

What are the chief elements of Costco¶s strategy? How good is the strategy ? Mission . ‡ Cross-docking . Strategies ‡ They planned for long term.To continually provide our members with quality goods and services at the lowest possible prices. ‡ Ultra low pricing strategies. 14 % markups (others 20 ± 50%) ‡ Limited selection. (4000 items compared to 150000 items of Wal-Mart) ‡ Treasure-hunt shopping environment ‡ Kirkland (More sales and better quality than other national brands) ‡ They believed in ancillary business and believed in ³Intelligent loss of sales´.

implementation and evaluation must be consistent Low pricing strategies attracted more customers to Costco Better bargaining power Less inventory.´ ‡ Their strategy was good as their main focus was to build an organization which will be on a good position 50 years from now and they had followed good strategies like ultra low pricing. treasure hunt and 4000 product and carried out these strategies to fulfill member needs. faster procurement . ‡ ‡ ‡ ‡ Strategy.How good ? Strategy is the determination of basic long term goals and objectives of an enterprise and the adoption of courses of action and allocation of resources for carrying out these goals.

Do you think Jim Sinegal is an effective CEO? What grades would you give him in leading the process of crafting & executing Costco¶s strategy? What support can you offer him in leading the process of crafting & executing Costco¶s strategy? .

Jim Sinegal is an effective CEO & that is because he has: ‡ CUSTOMER CENTRIC APPROACH ± Personally answered customer¶s phone call. He was kind yet stern & always greeted his employees with a smile ‡ TASK ORIENTED APPROACH ± 1.Yes. ‡ LEADERSHIP QUALITIES ± 1. director and a knowledgeable critic 2. Exhibited intense attention to detail & pricing 2. Questioned the store managers and asked them to get back with answers . Functioned as a producer.

2. EMPLOYEE CENTRIC APPROACH ± 1. 2. Have the best employees and give them the best in the industry RIGHT POLICIES ± 1. Believed that employees are most important asset 2. Believed in framing just & fair policies. Knew how to reduce cost. Had a special knack for discount retailing. Himself had only 1 page contract which said that he could be terminated for a cause .COMMITMENT Visited 8-10 warehouse daily. TALENT 1.

take care of employees & members. ‡ Obey the law. . Points to consider for leading the process of crafting & executing costco¶s strategy :‡ It¶s private label offering(Kirkland signature) should be expanded from 400 to 600. Keeping in mind all above points we will give him 9/10. ‡ Treasure hunt items at Sam¶s club tend to carry lower price tags than those at Costco.‡ Earned only about 12 times more than his typical average employee unlike other companies. respect the suppliers & reward the shareholders.

. ‡ Dedicate a larger area for furnitures since it is the hotseller for quite a long time even on its website.‡ Look for other types of promotion methods apart from Direct mail. ‡ International expansion. ‡ Ancillary businesses.

82 0.987 .52 2007 59.42 12 13 13 13 13.76 2010 59.w) 55.180 11.54 2005 49.12 0.51 0.45 .92 0.158 9.9 14.02 0.158 11.79 Year (IN MILLION $) 2006 54.41 .? ratio 2002 Profit margin ratio (rev/profit) Avg sales/sq.147 10.44 .21 13.49 2009 65.37 0.l) RONW (pat/n.02 .a-c.38 13. foot Inventory turnover ratio (netsales/ inventory) ROCE (ebit/ t.73 0.37 2004 54.134 8.Q)How well is costco performing from financial perspective?Use the financial ratios to help you diagnose costco¶s financial performance.157 10.82 0.169 11.155 11.20 0.47 2008 56.40 .34 0.28 0.


92 .47 2.04 1.78 Eps 1.37 2.05 1.22 1.18 2.48 1.83 2010 1.30 2.ratio Year (IN MILLION $) 2002 2004 2005 2006 2007 2008 1.85 2.16 1.89 2.83 Current ratio 1.8 2009 1.

48 3.Is costco¶s expansion outside U.45 0 3.S financially succesful? Why or why not? COUNT RY Year (IN MILLION $) (SALES/WAREHOUSE) 2006 2005 2004 2003 200 2 COUNTR ‡ Y Year (IN MILLION $) (OPERATING PROFIT/WAREHOUSE ) 2006 2005 2004 2003 3. 127. 103. R 16 7 33 COUN TRIES 1.S 3.0 75.85 1. 120.412 3.3 105.92 85.66 81. 111 6 40 8 65 119.72 8 OTHER 2. 97.5 113. 95.8 78.26 OTHE 111.11 . 4 56 5 28 U.00 U.30 3.S CANA DA 135.42 CANADA 4.16 COUNTR IES 3.71 2.

J 0.198 OPERATING INCOME/WAREHOUSE (IN MILLION $) YEAR COSTCO SAM¶S CLUB B.Does the data in the exhibit indicate that costco¶s financial performance superior to that of sam¶s club and b.155 .23 2006 3.132 .32 1.83 .J WHOLES ALE 2002 3.57 2004 3.55 2.180 .15 .026 1.147 .134 .18 .j wholesale? ROCE (IN MILLION $) YEAR 2002 2004 2005 2006 2007 2008 2009 2010 COST .199 .404 2.158 .724 1.140 2005 3.180 .169 .067 1.99 1.196 .15 CO B.

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? ‡ Efficient employee support and satisfaction ‡ Competitive pricing ‡ Low investment cost because of warehouse location ‡ Majority of the merchandise was bought directly from manufacturers .

‡ Rare capabilities.Social complexity: Interpersonal relationships. trust. ‡ Costly to imitate capabilities. suppliers. and friendship among managers.Nature of competitive advantage that Costco enjoyed was because of ‡ Valuable capabilities.Historical: A unique and a valuable organizational culture or brand name . . and customers .

‡ Costco stocked limited items that could be priced at bargain levels. ‡ A key element of Costco pricing strategy was to cap its markup ‡ Markup on Costcos 400 private label KIRKLAND .Are Costcos price too low? Why or Why not? ‡ Costco was known for selling top quality national and regional brands at prices below traditional wholesale or retail outlets.

‡ Whereas typical supermarket stocked ‡ about 40. Sinegal believed ± Intelligent loss of Sales and Efficiency .000 items and wall mart had around 150. ‡ Costco limited the selection in each product category ‡ Mr.‡ Costcos philosophy was to keep customers coming in to the shop by wowing them with low prices.000 items.

Does Costco pay its employees too much than its competitors? Why or Why not? TYPES OF EMPLOYEE Full time Part time ‡ ‡ Pay : Initial $10-12 Average $ 17-18 Hourly 71000 56000 13800 ‡ Costco believed employees are their most important assets and they provided them with various Benefits and Bonuses.000 loyal ambassadors ‡ Good business sense ‡ Less employee turnover ‡ . Costco admitted that they paid good wages & benefits contrary to conventional wisdom in Discounting Retailing business ‡ Executing Strategy successfully ‡ 120.

my husband my daughter my son in law´ ³I want to retire here and love it here´ . employees stated: ³It¶s a good place to work. they take good care of us´ ³My whole family works for costco.‡ Results: About 85% of costcos employees had signed up for Health Insurance versus 50% of the competitors ‡ People were satisfied hence gave their best and wanted to serve the company till their last breath ‡ In some of the interviews.

3 trillion a year.What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take sustain the company¶s growth and improve its financial performance? ‡ Entering into China and Brazil  Sam¶s club exploring these markets.  China is expected to have a five-fold increase in urban consumer spending over the next 20 years to a $2. . ‡ Continue testing furniture offerings in Costco locations rather than Costco home: ‡ Expand Kirkland Product Offerings: increase from 400.

(increasing membership rates) ‡ ‡  Membership Rewards Program $80 for annual membership and 2% rebate on every purchase Competitors Have found this Successful  BJ¶s allows customers to enroll in reward club membership for $80  Result: 5% of all membership and 10% of food sales has increased. . ‡  ³Household´ Plan Can charge $20 for every additional household member.Membership Strategy Adjustments ‡ Non-Member Day  A quarterly event that allows non-members a trial day at the store.

issued by the government to persons with low incomes. that can be redeemed for food at stores.Credit cards Current payment methods: cash. Accept credit cards but charge a 2-3% fee purchasing credit. debit and Costco Credit (membership cards)  Recommended: Allow the use of Credit Cards. check. Food stamps ‡ Definition: A stamp or coupon. ‡ ‡ o o o Educate people and Accept food stamps Only 67% of people eligible in getting food stamps: Missouri @ 98% California @ 50% New York @ 63% .

Advertising  TV brand Advertising. Break and muffler service. ‡ Competitors: Sam¶s club spends $50 million annually on adverting. Automobile buying. Home heating oil.Expand Ancillary Business Programes ‡ Increase business services provided by Costco  Increase the frequency of customer visits ‡ Making Costco a ³ One Stop Shop´ Competitors offerings:  Wireless carrier kiosks.  In northwest and West Coast regions.  Seasonal TV ads and periodic direct mail promotions of Treasure Hunt items. . Home security installation service. Vacation packages.

reduced handling of merchandise/ stocking methods High Productivity: of well compensated employees ‡ ‡ ‡ . efficient distribution. high sales volume.What is Costco¶s business model appealing? Why or why not? Costco uses a Low Cost Model by utilizing: Rapid Inventory Turnover Operating Efficiencies: created by product selectivity & volume purchases.

Rapid Inventory Turnover Low Prices Limited selection of quality merchandise Wide range of merchandise categories Operating Efficiencies Volume Purchasing Efficient distribution Reduced handling of merchandise No frills. self service warehouse Profit at a very low gross margin Rapid inventory + Operating Efficiencies .

What are the implications of this case in the Indian scenario? Following are the implications for Indian players: Presently only Metro follows a model somewhat similar to Costco but it is limited only to B2B & not B2C. ‡ Floor & shop managers should be given more authority & independence in decision making. ‡ Indian players should make outright purchase of real estate/outlets (Costco owns 80% & that too at less prime locations) . ‡ Indian players should promote more internal people to higher positions like Costco.

‡ Majority of Indian players don¶t have a efficient & full fledged e-commerce site like Costco. ‡ Only obsolete goods are pushed in India through the sale & discounts but Costco follows this for new goods as well. . ‡ Royalty membership programs are not meticulously designed & hence not successful.

‡ Build a brand & then expand. ‡ Hassle free return policy has still not completely taken off in India. Follow this model.‡ Cross-docking model has been pioneered by Costco. ‡ Offer quality products at best possible prices & you will surely succeed(Costco takes only 14% markup) .


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