CASE 2

In 2012: Mission, Business Model, &

Strategy

Presented By: Group

-1

Md. Rifat Mahmud

181402
Sushmita Das
181403
Shovon Routh
181404
A.B.M. Habibur Rahman 181405
Ahammed Ulla
181406

Our Presentation at a
Glance
About Costco Wholesale, Mission & Vision
Costcos Business Model, Driving Forces,
KSFs
Costcos Strategies & Objectives
Industry Analysis-SWOT, Porters 5 Forces,
Life Cycle
Competitive Analysis- Strategic Group Map
Financial Analysis
Recommendations

Purpose of this Case

Study
To examine Costcos business
structure and strategy and how
those relate to industry success

Case Summary

End of 2011
$88.9 Billion in Sales
598 warehouses world-wide

54 million members
- Average yearly income $70,000

Quality merchandise

Low price

Rapid inventory turnover

About Costco
Wholesale
Seventh Largest retailer in the
world and third largest retailer in the
U.S
CEO: James Sinegal
Headquarters: Issaquah, WA
Inception: Seattle, WA 1983
Founders: James Sinegal & Jefferey
Brotman

Mission of Costco
Wholesale
Mission:
Continually provide our members with
quality goods and services at the lowest
possible prices.

Vision of Costco
Wholesale
Vision:
Our business is to give the customer the best
value we can. Jim Sinegal, CEO & Founder of
Costco
We're going to be a company thats on a firstname basis with everyone.

Costcos Business ModelAppealing or Not

Low prices
Limited selection of quality
merchandise
+Wide range of merchandise
categories
Rapid inventory turnover

Volume purchasing
Efficient distribution
Reduced handling of merchandise
+No-frills, self-service warehouse
Operating efficiencies

Rapid inventory turnover

+Operating efficiencies
Profit at a very low gross margin

Plus membership fees

Driving Forces
Internet
Technology
green technology is a concern

Market saturation
Legislation- proposed tax on
big-box stores
Rising costs
Recession

Key Success Factors

Internet sales
Vast network of retail
locations
cross-docking
No-frills warehouse
Ongoing effort to cut costs
Only stock bargains
Treasure-hunt merchandise
No-hassle return policy
Word of mouth advertising

Corporate
Strategy
Cost strategy
Penetration Pricing
Below the Line Promotion
No frills
Diversion Buying Strategy
Treasure hunt" shopping experience

Chief Elements of
Costco's Strategy
Low prices
Limited product lines and
selection
Treasure hunt shopping
environment

Employment Objectives

Hire great people

Treat them well
Give them good jobs
Do right by them

Management Objectives
Always promote from
within
Training happens
constantly
Grow our own talent
Model what you want
from your employees

Business Objectives
Dont try to be too
much to too many
Know on what level
you compete
Know your
customers
why they do
business with you
Stay focused on
your core business

Growth Objectives
Run the business for
long-term
sustainability
Open new stores
50-60 new
locations per year
Keep Internet sales
growing

Marketing Objectives
Word of mouth only
No PR department,
ever?

Ethics Objectives
Obey the law
Treat customers right
Treat employees right
Treat suppliers right

Industry Analysis
SWOT Analysis
Porter Analysis
Life Cycle

SWOC Analysis
S

Strengths
Low Prices
Strong Brand
Operating Efficiency
Exceptional Workforce
Strong membership
High Inventory Turnover

Opportunities
Appeal to conscientious
shopper
Expand into foreign
stable markets
Mergers & Acquisitions
Massive supplier pool

Weaknesses
Burden of high wages
paid to workers
Low price margins
E-commerce activities
Small Marketing budget
compared to discount
retailers and Super
Markets
Challenges
Aggressive price
competition by rivals
Political complications in
foreign markets
Cannibalization due to
domestic market
saturation

Porters Five Forces Model for

Costco
Substitutes

Suppliers
Weak bargaining
power
Many suppliers
Low switching
cost
Many substitutes
exist
Large quantities
are needed

Strong threat
Good substitutes
everywhere
Price not significantly
higher
Comparable product
features
More variety of features
Competing
Low
switching cost

Sellers

Fierce competition
Costco is on top
Quality is slightly
better
Buyer demand is
growing
Buyers switching
Potential
New
cost is low

Entrants

Low threat
Small pool of entry
candidates
High barriers to
entry

Buyers
Weak bargaining
power
Some switching
costs
Large
membership base
Costco has the
best value

Life Cycle of Costco Maturity

Stage
Costco is in the
mature stage
Though profitable,
slower growth in
sales
Strong brand
awareness
Shares market with
established
competitors

Competitive Analysis
Costco's main competitors are Sam's Club, BJs Wholesale Club,
Other retailers. They share a similar business model, selling
high volumes of merchandise at low prices in a membershiponly warehouse club. Each company sells a similar array of
general merchandise, including food, apparel, and gasoline.
FY 2011 Costco vs. Competitors

Company
Costco
Sam's Club
BJ's Wholesale Club

Revenue
(Billions)
$70.9
$53.8
$10.0

Comparable
Net Income Operating Store Sales
(Billions)
Margin
(Decline) Locations
$1.3
2.7%
6.0%
598
N/A
3.4%
4.8%
611
$2.3
2.3%
9.4%
195

Competitive Analysis
Greater benefits for Costco employees
Wages: $17/hr on average
Health Insurance : 90% premium
coverage
Sales Breakdown
Lower price margins

Financial Analysis
Costco earned $88.9 Billion in
revenue in 2011 2.23%
increase from 2010
In 2011, Costcos operating
income (margin) reached
2.80% of sales.
Costcos net income in 2011
was $1.46 billion dollars an
12.2% increase from 2011

Financial Analysis-Key
Ratios
Costco Financial Summary
($ in millions)

2008

2009

2010

2011

ROA

6.2%

4.9%

5.5%

5.5%

ROE

14.0%

10.8%

12.0%

12.2%

FCF

$1,070

$1,773

$2,206

$2,092

EPS

$2.89

$2.47

$2.92

$3.30

Div/share

$0.61

$0.68

$0.77

$0.89

Yield

0.9%

1.3%

1.4%

1.1%

23.2

20.6

19.3

23.8

8%

-4%

7%

10%

PIE ratio
Store sales
growth

Recommendation &
Conclusion
Accept food stamps
Acquire BJs Wholesale Club
Keep expanding overseas
Be more ethical
Continue to add services
Industry Leader strategy
Better promotions

Improve e-commerce
A little good PR better than no PR