Costco Case Study

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Costco Wholesale Case Study
David Barker

Author Note
David Barker is a student of Business at Thomas Nelson Community College.

Costco’s business model is “to generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories” (Thompson, 2008). Buying name brand and high quality products at the lowest prices available is very appealing to consumers. A good shopper is always on the lookout for getting the ‘most bang for the buck’ and stretching the dollar to get the best deal. The chief elements that make up Costco’s strategy are low prices, a limited selection of certain highly-sought out products, and a “treasure hunt” experience. Keeping markup prices limited to less than 20% of retailer competition is definitely an attractive offering to all consumers. Maintaining a smaller selection than most retailers offered was maintained by offering a smaller selection of products that was expected to be highly sought after by shoppers and reducing the number of choices of a particular product. Approximately 25% of all merchandise was not restocked, thus enticing returning customers to be on the lookout for new and exciting bargains. Much of these sought after, yet limited offered products are considered luxury bargain deals that Costco hopes people won’t pass up on. Jim Sinegal honed his skills for discount merchandising early on while working for Price Club. The simple vision of Sinegal had of “Our business is to give the customer the best value we can” (SlideShare, 2011) is the basic outlook that went into setting the company’s objectives. Utilizing the basic vision and objectives, as well as his experience while working under his mentor, Sol Price, Costco crafted and implemented their strategy which allowed them to become “the first U.S. company ever to reach $1 billion in sales in less than six years” (Thompson, 2008). Jim Sinegal has proven himself as an effective CEO when he co-founded Costco, and as they continue to make corrective adjustments over time. From a financial perspective, Costco is maintaining fairly steady, even during the recent recession. Table 1 shows important key financial data for the years of 2000 to 2008. The gross profit margin, operating project margin, and net profit margin has remained very close. The current ratio also remained fairly steady, but earnings per share has seen a slight increase over the years (Thompson, 2008). Table 2 shows similar financial data for Costco Wholesale, Sam’s Club, and BJ’s Wholesale Club for 2000 and 2005 through 2007. Total sales for each have steadily increased for all three similar wholesalers, as well as the number of stores each company owns. Costco has a definitive advantage in average sales per location, however the average annual growth for Costco did decline from 2006 to 2007 (Thompson, 2008). Costco’s expansion outside of the United States has proven to be financially successful for the company. Table 3 shows key financial data for the geographic areas for the United States, Canada, and other countries. The operating project margin has actually decreased slightly from 2005 to 2008 in the United States, whereas there is a noticeable increase during the same period of time in Canada and in other countries. Average annual growth in the United States warehouses have remained fairly constant with a slight decrease in the year from 2006 to 2007, however both Canada and in other countries have seen increases for each year (Thompson, 2008). Costco has a good strategy in place that will allow them to continue to grow, and perform competitively. Costco is finding great success with their stores outside of the United States and will find the greatest opportunity to grow. As shown in Table 3, Costco has a competitive edge over BJ’s Wholesale, but is trailing behind Sam’s Club. Sam’s Club has...
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