Costco Case Study

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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 very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories.” (Thompson, C-34) With this model, Costco is able to operate at much lower gross margins and also offer much lower prices than traditional wholesalers and retailers. This is achieved by rapid inventory turnover, large volume purchasing, and the use of no-frills, self-service facilities. “With competitive prices on everyday goods, high-quality items and brand-name products, Costco attracts bigger spenders and bigger revenue per warehouse than Wal-Mart's competing Sam's Club.” (Schmidt, 2004) Costco’s business model is appealing because having a business model that ultimately leads to lower prices draws in, not only average Americans looking for bargains, but also the very high upper class. It plays to everybody, not just who you would typically think would shop at a warehouse membership store. “William Gates II, father of Bill, the world's richest man according to Forbes noted that he was, in fact, wearing a Costco-bought shirt and socks.” (Schmidt, 2004) Using sales figures over the years, one can see how the appeal of Costco is growing every year. Dating back to 2000, net sales were $31.6 billion as stated in the textbook. Looking into the financial data available for the most recent years on the Costco investor relations website, it states that net sales for 2009 were $69.9 billion. Net sales have risen steadily each year from 2000 to 2009, each year achieving record highs, with the exception of 2009. Net sales did decrease from $70.9 billion in 2008 down to $69.9 billion in 2009, but Costco, adding to the argument of its appeal, did go from being the fifth largest retailer in the U.S. to the third largest between these two years.

2. What are the chief elements of Costco’s strategy? How good is the strategy?
The chief elements of Costco’s strategy are “low prices, a limited product line and limited selection, and a ‘treasure-hunt’ shopping environment.” (Thompson, C-35) This means that in order to appeal to customers they offer low prices, lower than other wholesale clubs and retailers. They also offer a limited selection of items. “Part of Costco's genius is its simplicity. A typical Wal-Mart stocks more than 100,000 items, Costco stocks only 4,000. Stocking only high-quality goods, Costco attracts the most affluent customers in discount retailing -- with an average income of $74,000.” (Goldberg, 2006) The treasure-hunting environment is really a sum of the other two strategies. Since there is a limited selection and such low prices, when Costco works to achieve quick turnover of inventory, it makes the deals hit or miss and people really are searching and hoping to find that great deal they are looking for. Costco’s strategy is good because it “inspires customer rabidity approaching that of Apple’s Mac faithful.” (Schmidt, 2004) It is also clear that the strategy is good when looking at the total sales increasing, with the exception of 2008 to 2009, each year as stated earlier.

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.

Jim Sinegal has been an effective CEO since he cofounded Costco in 1983. Most recently, Sinegal has been named one of the top leaders in America in 2009 by US News and World Report. His effectiveness can be seen in the phases of strategy making and executing process as presented in the text in chapter 2, figure 2.1. When it comes to developing a strategic vision, Sinegal would earn an B. He has a vision for growth and expansion in...
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