Costco Case Analysis

What is Cost’s business model? Is the company’s business model appealing? 3 2. What are the chief elements of Cost’s strategy? How good is the strategy? 43. What two core values or business principles has Jim Senegal stressed at Cost? 6 4. How well is Cost performing from a financial perspective? 7 5. What recommendations would you make to Cost top executives regarding how best to sustain the company’s growth and improve its financial performance? 8 6. Evaluate the recommendations you made in Q and select one or two optimal ones. Recommendation 18 Recommendation 2 8 Recommendation 3 9 7. Generate an implementation plan for the one or two optimal recommendations. 9 8. Summarize this case by developing a brief SOOT analysis for Cost. 1 1 References 12 appealing? In defining Cost’s business model we should first go over their value proposition. A company’s value proposition is the cluster of tangible and intangible items or services that are believed to offer marketable utility to prospective customers (Kettle & Keller, 2009, p. 123).

Cost is an international chain of discount warehouses whose value to their customers resides in their ability to offer buyers a rather formidable array of brand name and private label products at prices well below supermarket or department store averages. In the textbook “Strategy; Core Concepts and Analytical Approaches”, Arthur A. Thompson defines a company’s business model as the blueprint management uses to achieve successful delivery of a product or service to its customers while simultaneously making a profit.

Cost’s business model has two critical elements which are The Profit Proposition and The Customer Value Proposition (Thompson, 2014, p. 2-3). The Profit Proposition segment of Cost’s business model is concerned with he company’s ability to offer suitable products to their customers, while still earning an equitable profit margin. This portion of the business model focuses mainly on issues such as the company’s solvency, profit, debt, cash flow and owner’s equity. On the other side of the business model is the Customer Value Proposition.

Although part of the same model, this portion is concerned with the needs of the customer. In other words, what products do Cost customers want the most and what is the highest level of quality product deliverable to those customers that also is inside their range of affordability (Thompson, 2014, p. )? This business model has found tremendous appeal among the Cost faithful. Entrance and shopping privileges at Cost are granted by showing your membership card, an item that can be purchased as a yearly subscription for under 560. Customer memberships (business and personal combined), grew from $48. Million in 2008 to $64 million in 201 1. That represents a 32% growth in customers over a three year span (Thompson, 201 2, p. C-8). Successfully combining these elements of Cost’s business model allows the company to move merchandise in and out of their warehouse stores in such regularly fluid intervals that product turnover often occurs before suppliers demand payment. They are able to avail themselves of early payment discounts offered by their suppliers, thus realizing tremendous inventory cost savings. 2. What are the chief elements of Cost’s strategy? How good is the strategy?

The principle elements of Cost’s strategy involve (Thompson, 201 2, p. ICY -14): A. Maintaining the lowest possible prices on their Kirkland (store brand) products as well as the nationally recognized brands the store carries. Cost’s pricing strategy has been so dramatic that they have come under fire or it by Wall Street. In fact, founder and former CEO Jim Senegal took great pride in pointing out that their company has always had the option of raising prices. Cost’s intention has been to place their rivals in to a no win/can’t compete situation wherein they are forced to move on to Other venues of competition.

B. Continuing the national and international expansion of their warehouse store locations. Looking at the warehouse operations section of Exhibit 1 in the Cost case study, Thompson (2012, p. C-8) the number of new store openings, closings, relocations and total stores can be seen. In the three year span from 2005 to 2008, Cost opened 79 new stores. Likewise, between 2008 and 2011 there were 80 new store openings. The difference here is that each of the two-three year spans doesn’t feature the same economic conditions. In 2008, there was a considerable economic downturn.

Although there were ten store closings in 2008, there were also 15 new stores open. This doesn’t suggest at all that Cost stores are recession proof but in the wake Of the economic adversity of the time, net sales were at an all time high of $71 billion. In much the someway, the year 2010 to 201 1 of the case duty shows an increase in new stores opens of 52 and a record high in sales of $87 billion. The company’s net income for 2014 was record in the annual report as $1 10 Billion. The growth in the number of warehouses from the previous year was 26 and the number of openings was 30 for the year (2014, Cost annual report, p. 4). C. Cost supplies their 64 million+ members with a variety of goods that is considerably limited compared to those available at department stores and supermarkets. The average warehouse has about 3600 select items in inventory as opposed to 40-150 thousand at some grocery and department stores (Thompson, 201 2, p. C-10). These products range from electronics to cookware. Fewer items carried in-store stock equates to fewer items to manage. In the final analysis, less store personnel are required, less purchasing decisions have to be made and there is a decrease in materials handling in general.

It should still be noted that Cost attempts to deliver its customers only the items that are highly valued, which leads to a continuous expulsion of products that are slow movers while creating a fresh infusion of unfamiliar goods to frequent shoppers. D. A foray into Cost has been characterized by the owners and store enthusiasts s a shopping treasure hunt. With some of their indirect or third party purchases, the bargains that are available on brand name merchandise can be tantamount to finding treasury.

Large screen televisions, brand name jewelry, custom handbags and many other items can be had for a fraction of their original sales price. An additional factor that makes these items even more deserving of the treasure label is the fact that many of the products in question may appear in the store on a limited bases, perhaps one time only (Thompson, 2012, p. CLC 1-12). 3. What two core values or business principles has Jim Senegal stressed at Cost? The first of Jim Signal’s cornerstone business principles is high sales volume of low priced merchandise to customers who have purchased memberships.

This formula produces high rates of inventory turnover of national brand and private label merchandise. Nearly every subtopic in the Cost case study has a passage about price and the company’s dedication to winning at that level. A trip to one of their warehouse stores does reveal something that the case study only alludes to but never describes in any detail. The price per unit purchased may be the lowest found anywhere, but on many items it may be necessary to purchase ore units than needed to obtain such an extraordinary discount.

Cost plays down this issue stating that its only a concern to a small number of customers, which they are prepared to lose. Our opinion is that a greater number of potential customers are turned away by this assumption and the company doesn’t cares to admit it. This may be one instance of where some frills, say a little advertisement, could serve to bolster sales beyond the cost of the promotion. The second cornerstone principle is financing the bulk of Cost merchandise by utilizing the funds generated through early vendor aments discounts, thus eliminating the need to maintain high levels of operating capital (2012, Thompson, p.

C-9). This is one of the best conceived financing plans any corporation could execute. It is very much dependent upon streamlining inventory but not to the point of stock outs. Each store manager must be an expert tactician at knowing what merchandise his customer will purchase and removing other low performers from their store inventory list. Perhaps the collection of survey data could prove a very expeditious aid. The inducement of added discounts to cooperative card holders would be just the right enticement. . How well is Cost performing from a financial perspective? Cost is performing quite well from a financial perspective.

The profitability ratios associated with Cost from 2008-2011, show a lot of stability, but not as much growth as shareholders would like to see. Gross profit margin, operating profit margin, and the return on assets all appear to grow very slight from 2009 on, but there is a noticeable drop off that can be seen from the previous years before the macroeconomic challenges hit North America. The most noticeable upward trend can be seen with the operating profit margin. This margin increased from 2. 9% in 2009 to 2. 66% in 2010. It then increased to 2. 74% in 2011. Return on equity dropped from 13. 96% in 2008 to 10. 84% in 2009.

This rate has fluctuated slightly but has not been as low as it was after the macroeconomic issues. The liquidity ratios determined from analyzing the financial and operating data also concluded that Cost is in a good position. The current ratio was consistently above 1, but it never reached a level of higher than 1 . 2. Increasing this ratio higher than the minimal growth seen would give Cost a better ability to pay current liabilities using assets that can be converted to ash. The working capital showed high growth from 2008-2011 increasing from $588 million to $1 ,656 million. This growth allows for Cost to expand. . What recommendations would you make to Cost top executives regarding how best to sustain the company’s growth and improve its financial performance? Cost management needs to sustain the company’s growth and improve its financial performance by continuing to honor their business philosophy, values and code of ethics. Cost could consider the following options: Recommendation 1: increase the number of warehouses that include ancillary products Recommendation 2: offer a wider range of private-label products Recommendation 3: invest in additional advertising/incentives to increase member-base 6.

Evaluate the recommendations you made in Q and select one or two optimal ones. Recommendation 1 Cost introduced new product lines and services to its warehouses to compete as the one-stop destination. Ancillary departments included food courts, gas stations, car washes, pharmacies, print shops and many more. Exhibit 2 shows the top five major product categories. We can see that Cost saw a higher increase in sales in Ancillary departments, a significant increase room 10 percent in 2003 to 18 percent in 201 1 (Thompson, 2014, p. 6).

Because it was the only other department that experienced an increase in sales, next to the Food category, we recommend increasing the number of warehouses that include such categories. Recommendation 2 Cost sells many products under its private-label brand Kirkland Signature. Kirkland products were designed to be of equal or greater value when compared to popular brands; however, their prices are about 20 percent lower. In 201 1, Cost’s merchandise selection was at 85 percent name- brands and 15 percent private-label; yet, Kirkland Signature items accounted or 20 percent of sales (Thompson, 2014, p. 5).

This shows great potential for the private label products. Cost should offer a greater selection of Kirkland products to increase market penetration and be able to compete with name- brands. As stated in the case, it is believed that sales from Kirkland products may increase to 30 percent in the next few years (Thompson, 2014, p. 5). By adding more products to the private-label selection, the total sales potential increases. Recommendation 3 Last but not least: Membership and Advertising. Cost is and has been a price leader due to its strategy of offering limited amount but highly emended nationally-branded products to its members.

With 57 percent market share in 201 2, Cost was able to stay on top of its competitors, Cam’s Club and Bi’s Wholesale Club (Thompson, 2014, p. 5). However, because of its low-price offerings, sales revenues contributed to the company at just above the breakable level, barely covering all operating expenses. However, as Exhibit 1 shows, over 70 percent of Cost’s profits came from membership fees (Thompson, 2014, p. 5). Thus, the importance of continuing to focus on increasing its member base and why one of our top recommendations is to invest in more advertising and incentives to increase member acquisition is very clear. . Generate an implementation plan for the one or two optimal recommendations. Our optimal recommendation is for Cost to invest more in advertising and incentives to increase member acquisition. Today, Cost has very limited advertising and sales campaigns, due to their low- price and good quality/service reputation. Most of their member acquisition comes from word of mouth and direct mail invitations. Because membership fees are so important to Cost’s net profit, we want to increase the base by implementing a member incentive plan.

The incentive is 20 percent off the entire first purchase for new members and 20 percent off entire the next purchase for existing members who refer their families/friends (after the person referred successfully becomes a member). This campaign should occur between the months of April and June, as we have seen slightly lower revenues in Q of 2014 (201 5, Yahoo Finance). Below is a summary of the incentive campaign: Purpose: This acquisition campaign aims to attract more prospects/members to become part of the Cost family and to promote spend.

Offer 1 : Join Cost Club and get 20% off your entire first purchase. Offer 2: Refer a family member/friend to join Cost Club and get 20% off your entire next purchase. Campaign Dates: 60 days/two month period Fulfillment: New members receive the coupon at the time of successful enrollment. If the new member was referred by a family member/friend, they must have supplied their name at time of application for the existing member to pick up their coupon in store or receive it via email.