Case (2): Costco Wholesale in 2008
1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?
Costco is a membership warehouse business. It allows corporations and consumers the opportunity to buy memberships to the warehouse club. The membership allows members to buy a range of selective items, many times in bulk. These items consist of H&B, food, household items, electronics and many other item categories. The items offered through the warehouse club are in at lower prices than the average retailer, hence purchase of membership.
Costco’s business model is to generate high sales while offering club members low pricing on items. The concept of rapid inventory turnover with operating efficiencies has enabled Costco to generate profitability at a lower profit margin, especially compared to traditional wholesalers, merchandisers and supercenters.
The overall business model is innovate and effective. The model has allowed Costco to attract consumers that are eager to save money. In turn this generates high volume of sales and continued profitability.
2. What are the chief elements of Costco’s strategy? How good is the strategy?
The cornerstone of Costco’s chief strategy is to increase sales and profitability. The 3 main elements to the organization’s strategy are low prices, limited product line with a limited selection and a “treasure hunt” shopping environment.
-Pricing: The organization is well-known for offering top-quality brands at lower prices lower than their competitors, traditional wholesalers and retail outlets. Costco caps margin on brand items (14%) and on their own store brand, Kirkland (15%). The pricing philosophy keeps members coming to warehouse by continuously offering low prices.
- Product Selection: Costco provides members with a selection of about 4,000 items in comparison to their supercenter competitors, which offer about 40,000 items. The product categories are not limited to fine foods, digital electronics, musical equipment, housewares and pharmacy services.
- Treasure-Hunt Merchandising: Of the 4,000 items offered by the organization, about ¼ of the items are ever-changing. The 1,000 ever-changing items are used to entice members by offering irresistible deals on luxury items. The items are a constant surprise for Costco’s members, never knowing what deals they may find when shopping.
The organization’s strategy is effective. It offers lower prices and unique products in order to attract members, which increases the volume of sales and overall profitability. The strategy continues to make Costco a leader in the warehouse industry.
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 Singeal is an effective CEO for Costco. Singeal strategic ideas seem to aim for not just the current, but the future of the organization. Out of a scale from 1 to 10, I would grade Singeal as a 7.5 from the material and case reading. His attention to detail, such as, product pricing, management knowledge and company appeal has made him an ideal CEO for the organization; however, with every strategy and position there is always room for improvement.
4. How well is Costco performing from a financial perspective? Do some number-crunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 104-105) to help you diagnose Costco’s financial performance.
Costc’s financial performance is up to par. The total revenue is $72,483,000,000 with membership fee revenue included in the total. The estimated net income totals $1,283,000,000 and an operating margin of 2.7%. The...