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Costco-CEO-Jim-Sinegal[www.savevid.com].flv
CASE STUDY ON COSTCO WHOLESALE CORPORATIONCase study on
corporation
Introduction & Case Facts
• Costco founded by Jim Sinegal & Seattle entrepreneur Jeff Brotman.
• First store opened in 1983, the same year when Wal-Mart launched its warehouse membership format known as Sam’s Club.
• Jim Sinegal started his career in retailing at 18 with Fed-Mart, a discount retailing store started by Sol Price.
• In Dec 1985, Costco went public & also became first ever US company to reach $ 1bn in less than 6 years.
• In Oct 1993, Costco merged with Price club which was founded by his guru Sol Price.
• Changed its name from Costco Companies Inc to Costco Wholesale Corporation when company
reincorporated from Delaware to Washington in Aug 1999.
• In 2006, Costco’s sales totalled almost $ 59 bln, with 496 stores in 37 states across US & 7 other nations viz. Canada, Japan, UK, Mexico, Taiwan, Korea & Puerto Rico.
• Even at the age of 70, Jim Sinegal had
great levels of energy, enthusiasm &
dedication visiting 8, 10 or sometimes
even 12 stores in a day.
• Employees genuinely like Jim since he
spoke quietly, greets them well, listens
to their feedback, gives measured
inputs & motivates them.
• Today Costco is the 4th largest retailer
in US & 7th largest in the world.
What are the chief elements of Costco’s strategy?
How good is the strategy ?
Mission - To continually provide our members with quality goods and services at the lowest
possible prices.
Strategies -
• They planned for long term.• Ultra low pricing strategies.
14 % markups (others 20 – 50%)• Limited selection.
(4000 items compared to 150000 items
of Wal-Mart)• Treasure-hunt shopping environment• Kirkland (More sales and better quality than
other national brands)• They believed in ancillary business
and believed in “Intelligent loss of sales”.• Cross-docking
How good ?Strategy is the determination of basic long term goals and objectives
of an enterprise and the adoption of courses of action and allocation of resources for carrying out these goals.”
• Their strategy was good as their main focus was to build an organization which will be on a good position 50 years from now and they had followed good strategies like ultra low pricing, treasure hunt and 4000 product and carried out these strategies to fulfill member needs.
• Strategy, implementation and evaluation must be consistent• Low pricing strategies attracted more customers to Costco• Better bargaining power• Less inventory, faster procurement
Do you think Jim Sinegal is an effective CEO?
What grades would you give him in leading the process of crafting &
executing Costco’s strategy?
What support can you offer him in leading the process of crafting &
executing Costco’s strategy?
Yes, Jim Sinegal is an effective CEO & that is because he has:
• CUSTOMER CENTRIC APPROACH –
Personally answered customer’s phone call.
• LEADERSHIP QUALITIES –
1. Functioned as a producer, director and a knowledgeable critic
2. He was kind yet stern & always greeted his employees with a smile
• TASK ORIENTED APPROACH –
1. Exhibited intense attention to detail & pricing
2. Questioned the store managers and asked them to get back with answers
COMMITMENT
Visited 8-10 warehouse daily.
TALENT
1. Had a special knack for
discount retailing.
2. Knew how to reduce cost.
EMPLOYEE CENTRIC APPROACH –
2. Believed that employees are most important asset
3. Have the best employees and give them the best in the industry
RIGHT POLICIES – 4. Believed in framing just & fair policies.
5. Himself had only 1 page contract which said that he could be terminated for a cause
• Earned only about 12 times more than his typical average employee unlike other companies.
• Obey the law, take care of employees & members, respect the suppliers & reward the shareholders.
Keeping in mind all above points we will give him 9/10.
Points to consider for leading the process of crafting & executing costco’s strategy :-• It’s private label offering(Kirkland signature) should be
expanded from 400 to 600.
• Treasure hunt items at Sam’s club tend to carry lower price tags than those at Costco.
• Look for other types of promotion
methods apart from Direct mail.
• Dedicate a larger area for furnitures
since it is the hotseller for quite a
long time even on its website.
• Ancillary businesses.
• International expansion.
Q)How well is costco performing from financial perspective?Use the financial ratios to help you
diagnose costco’s financial performance.?ratio Year (IN MILLION $)
2002 2004 2005 2006 2007 2008 2009 2010
Profit margin ratio(rev/profit)
55.37 54.54 49.79 54.52 59.47 56.49 65.76 59.82
Avg sales/sq. foot
0.28 0.34 0.37 0.40 .41 .44 .45 .42
Inventory turnover ratio(netsales/inventory)
12 13 13 13 13.9 14.38 13.21 13.82
ROCE(ebit/ t.a-c.l)
0.158 .157 0.158 0.180 0.155 0.169 0.134 0.147
RONW(pat/n.w)
9.987 10.20 11.02 11.73 11.51 11.12 8.92 10.02
ratio Year (IN MILLION $)
2002 2004 2005 2006 2007 2008 2009 2010
Current ratio
1.04 1.16 1.22 1.05 1.78 1.8 1.83 1.83
Eps 1.48 1.85 2.18 2.30 2.37 2.89 2.47 2.92
Is costco’s expansion outside U.S financially succesful? Why or why not?
COUNTRY
Year (IN MILLION $)(SALES/WAREHOUSE)
2006 2005 2004 2003 2002
U.S 135.6
127.40
120.58
113.65
111
CANADA
119.4
103.56
95.92 85.85
78.28
OTHER COUNTRIES
111.3 105.16
97.66 81.07
75.33
• COUNTRY
Year (IN MILLION $)(OPERATING PROFIT/WAREHOUSE)2006 2005 2004 2003
U.S 3.480
3.45 3.42 3.00
CANADA 4.308
3.72 3.412 3.26
OTHER COUNTRIES
2.71 2.16 1.85 1.11
Does the data in the exhibit indicate that costco’s financial performance superior to that of sam’s club
and b.j wholesale?
ROCE (IN MILLION $)
YEAR 2002 2004 2005 2006 2007 2008 2009 2010
COSTCO
.15 0.15 .158 .180 .155 .169 .134 .147
B.J .196 .132 .180 .199 .198
OPERATING INCOME/WAREHOUSE (IN MILLION $)
YEAR 2002 2004 2005 2006
COSTCO 3.026 3.32 3.404 3.55
SAM’S CLUB
1.724 1.99 2.067 2.18
B.J WHOLESALE
1.57 1.140 1.23 .83
How well is Costco performing from a strategic perspective?
Does Costco enjoy a competitive advantage over Sam’s Club?
Over BJ’s Wholesale? If so, what is the nature of its competitive
advantage? Does Costco have a winning strategy?
Why or why not?
• Efficient employee support and satisfaction
• Competitive pricing
• Low investment cost because of warehouse location
• Majority of the merchandise was bought directly from manufacturers
Nature of competitive advantage that Costco enjoyed was because of
• Valuable capabilities.
• Rare capabilities.
• Costly to imitate capabilities.
- Historical: A unique and a valuable organizational culture or brand
name
- Social complexity: Interpersonal relationships, trust, and friendship
among managers, suppliers, and customers
Are Costcos price too low? Why or Why not?
• Costco was known for selling top
quality national and regional brands
at prices below traditional wholesale
or retail outlets.
• Costco stocked limited items that
could be priced at bargain levels.
• A key element of Costco pricing
strategy was to cap its markup
• Markup on Costcos 400 private label KIRKLAND
• Costcos philosophy was to keep
customers coming in to the shop by
wowing them with low prices.
• Whereas typical supermarket stocked • about 40,000 items and wall mart had
around 150,000 items.
• Costco limited the selection in each
product category
• Mr. Sinegal believed – Intelligent loss of
Sales and Efficiency
Does Costco pay its employees too much than its competitors? Why or Why not?
• Pay : Initial $10-12• Average $ 17-18
• Costco believed employees are their most important assets and they provided them with various Benefits and Bonuses.
• Costco admitted that they paid good wages & benefits contrary to conventional wisdom in Discounting Retailing business• Executing Strategy successfully • 120,000 loyal ambassadors • Good business sense • Less employee turnover
TYPES OF EMPLOYEE
Full time 71000
Part time 56000
Hourly 13800
• Results: About 85% of costcos
employees had signed up for
Health Insurance versus 50%
of the competitors
• People were satisfied hence gave
their best and wanted to serve the
company till their last breath
• In some of the interviews,
employees stated:
“It’s a good place to work,
they take good care of us”
“My whole family works for costco,
my husband my daughter my son in law”
“I want to retire here and love it here”
What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take sustain the company’s growth and improve its financial performance?
• Entering into China and Brazil Sam’s club exploring these markets. China is expected to have a five-fold increase
in urban consumer spending over the next 20 years to a $2.3 trillion a year.
• Continue testing furniture offerings in Costco locations rather than Costco home:
• Expand Kirkland Product Offerings:
increase from 400.
Membership Strategy Adjustments
• Non-Member Day A quarterly event that allows non-members a trial
day at the store.
• “Household” Plan Can charge $20 for every additional household member.
(increasing membership rates)
• Membership Rewards Program• $80 for annual membership and 2% rebate on every
purchase Competitors Have found this Successful BJ’s allows customers to enroll in reward club membership for
$80 Result: 5% of all membership and 10% of food sales has
increased.
Credit cardsCurrent payment methods: cash, check, debit and Costco
Credit (membership cards) Recommended: Allow the use of Credit Cards. Accept
credit cards but charge a 2-3% fee purchasing credit.
Food stamps• Definition: A stamp or coupon, issued by the
government to persons with low incomes, that can be redeemed for food at stores.
• Educate people and Accept food stamps• Only 67% of people eligible in getting food stamps:o Missouri @ 98%o California @ 50%o New York @ 63%
Expand Ancillary Business Programes
• Increase business services provided by Costco Increase the frequency of customer visits
• Making Costco a “ One Stop Shop”
Competitors offerings: Wireless carrier kiosks, Home security installation service, Break and
muffler service, Home heating oil, Vacation packages, Automobile buying,
Advertising TV brand Advertising. In northwest and West Coast regions. Seasonal TV ads and periodic direct mail promotions of Treasure
Hunt items.
• Competitors: Sam’s club spends $50 million annually on adverting.
What is Costco’s business model appealing? Why or why not?
Costco uses a Low Cost Model by
utilizing:• Rapid Inventory Turnover
• Operating Efficiencies:
created by product selectivity & volume purchases, high sales volume, efficient distribution, reduced handling
of merchandise/ stocking methods
• High Productivity: of well compensated employees
Low Prices
Limited selection of quality merchandise
Wide range of merchandise categories
Volume Purchasing
Efficient distribution
Reduced handling of merchandise
No frills, self service warehouse
Rapid inventory
+
Operating Efficiencies
Rapid Inventory Turnover Operating Efficiencies
Profit at a very low gross margin
What are the implications of this case in the Indian scenario?
Following are the implications for Indian players:
Presently only Metro follows a model somewhat similar to Costco but it is limited only to B2B & not B2C.
• Indian players should promote more internal people to higher positions like Costco.
• Floor & shop managers should be given more authority & independence in decision making.
• Indian players should make outright purchase of real estate/outlets (Costco owns 80% & that too at less prime locations)
• Majority of Indian players don’t have a efficient & full fledged e-commerce site
like Costco.
• Royalty membership programs are not meticulously designed & hence not successful.
• Only obsolete goods are pushed in India through the sale & discounts but Costco follows this for new goods as well.
• Cross-docking model has been pioneered by Costco. Follow this model.
• Hassle free return policy has still not completely taken off in India.
• Build a brand & then expand.
• Offer quality products at best possible prices & you will surely succeed(Costco takes only 14% markup)
SUDHINDRA GADAG 68
ABHISHEK VAID 106
ANKUR KOTECHA 114
HIREN.P.ZALA 115
PARTH JOSHI 116
PRAGYA BIRANI 120
THANK YOU!