Mission, Business Model, 2 Case

Costco Wholesale in 2017

and Strategy Questions

Assignment

Assignment Questions
1. What is Costco’s business model? Is the company’s business model appealing? Why or why
not?
Costco’s business model is classified as a rapid inventory turnover by generating high sales
volumes. The company implemented their revenue through membership by offerings their
member low price product of the national selection plus their private brand also. Costco’s
business model is a great appealing because they built a strong relationship with their
customers by offering them a good quality merchandise with low price. Costco earned
customer loyalty, the number of the membership keep increasing, and they have expanding
internationally. They built a strong relationship towards their suppliers because of their rapid
inventory turnover, Costco would be able to sell their merchandises before the payment is
dues, so they would be able to take a discount form the manufacture for making an early
payment. Costco have a strong relationship toward their employees because most of their
employees want to work with them until they’ve reach their retirement.
2. What are the chief elements of Costco’s strategy? How good is the strategy?
The chief element of Costco’s strategy is ultra-low-price by limited merchandise selections
(about 3700 active items compare to Super Walmart or Target might having 125000 to
150000 items for customers to choose from) at the bargain level price. Approximately 80%
of Costco merchandises were quality brand name, 20% were Costco’s private label brand,
Kirkland Signature. Kirkland have a wide range of selections to compete with others famous
brand with an attractive price plus the quality of their private brand.
 Since pricing is a major strategy at Costco, their merchandises offer large quantities count of
items because it would be more efficient and easier to manage. Costco had open ancillary
departments in or around its center to attract customers like pharmacy, gas station, optical
centers, copy/print center etc., which make Costco more of a one-stop shopping destination. I
think it’s good strategy because even though the COGS just fractionally above break-even
level, but they’re generate profits through membership fees.

3. Do you think Jim Sinegal was 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? How well is Craig Jelinek performing as Sinegal’s successor? Refer to Figure 2.1 in
Chapter 2 in developing your answers.

Jim Sinegal was an effective CEO in my opinion because he was the co-founder of
Costco. Sinegal had a great personality which help him to build a relationship between
employees and customers. I would give him grade A because he can develop a vision and
mission by putting together the winning strategy plans like ultra-low price by keeping operating
costs and overhead low. He’s involved personally by observing the operations of the stores,
having a discussion with managements to fix the problem and monitoring the outcomes. Under
Sinegal’s successor, Jelinek follow the basic strategic and core values of Sinegal but willing to
implementing the strategy as needed.

4. What core values or business principles did Jim Sinegal stress at Costco?

 Obey the law –compliance with the law in every aspect of operating the business
 Take care of our members – they are the reason for the company key to success
 Take care of our employees – they are the most important asset
 Respect our suppliers – they are the business partners to the company and for the
company to prosper, the suppliers must prosper with the company
 Reward our stockholders – the company can only be successful if they’re providing the
stock holder with a good return, so they would invest more money in the future to help
the company continue to growth

5. (In the event you have covered Chapter 3) What is competition like in the North American
wholesale club industry? Which of the five competitive forces is strongest and why? Use the
information in Figures 3.4, 3.5, 3.6, 3.7, and 3.8 (and the related discussions in Chapter 3) to do a
complete five-forces analysis of competition in the North American wholesale club industry.

There are two main competitors for Costco in North America region are Sam’s Club and BJ’s
Wholesale Club. Below are five competitive forces analysis:
 Rivalry among competing sellers-this is considered high force with jockeying for better
market position and market share. All three of them are focus on low price strategy to
gain more members.
 Offering Substitute products-considered high force since there are many options and
places to substitute for the same items that the company need.
 Supplier bargaining power-considered low force since those wholesales have high
inventory turnover rate in their store.
  Buyer bargain power from customers-considered weak force because of member buying
power not involve with how many members they have.
 New entrant-considered low force since those three have a good standing in the market
with low price products.

6. 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.

Costco seems to maintain steady improvement in its operations from the financial standpoint.
The number warehouse and profit increasing annually. Costco current ratio equal 0.98 (2016),
and this ratio measure Costco liquidity, which is the ability for Costco to pay their current
abilities by using its own asset to convert to cash. Ratio should be higher than one but Costco
ration only 0.98, which mean the company less able to pay their liabilities in a timely manner.
The 7% ROA is proved that Costco asset are well-being used to generating revenue. The ROE is
0.19, which mean the company profit is 0.19 for every dollar of the net assets. I think Costco is
still doing well base on the all information was given compare.

7. Based on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that
of Sam’s Club and BJ’s Wholesale?

Compare to Sam’s Club and BJ’s Wholesale Club financial performance, Costco financial is
superior toward their competitor but Sam’s Club still has better performance in few areas like
groceries.

8. Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially
successful? Why or why not?

Base on the data in Exhibit 2, it indicated that Costco’s expansion outside the U.S. is financially
successful because the number of warehouses, operating income, total revenue keeps increasing
since Costco went global.

9. 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?

I think Costco is doing well with their strategy. Costco enjoy the competitive advantage, and it
has proven from their work by continue to build many locations across the world, growing
membership, and increasing profit. Costco’s winning strategy is the treasure-hunt merchandising
because it attracts bargain-hunting shoppers would go to Costco more frequently. Costco
outperformed Sam’s Club and BJ’s financially but Costco doesn’t enjoy a clear competitive
advantage over Sam’s because there are few areas Sam’s still performing better. In fact, Costco
enjoy competitive over BJ’s because BJ’s offer wide range of choice (about 7000 items) which
make rapid inventory turnover more difficult to achieve.

10. Are Costco’s prices too low? Why or why not?

I don’t think the price is too low because the company strategy is built on low-pricing to attract
their members and to keep them coming back for more often. Costco is low-cost operators, so
they’re run tight operations with high inventory turnover, low overhead, and that how they
enable to pass the saving toward their members. By looking at Costco’s financial statement, they
are meeting their goals and they’re enjoy their competitive advantage with more warehouse
expansion across the globe.

11. What do you think of Costco’s compensation practices? Does it surprise you that Costco
employees apparently are rather well-compensated?

Costco compensation package is much better compare to its competitor. Costco offer a great
benefit package towards their employees while the top executives are being offer a smaller
compensation package compare to other retailers. Costco value their employees are the most
important asset, and the employees can take advantage of a larger package that includes health,
401k, and so much more options. I’m not surprise that Costco has earned employees’ loyalty
because while other competitors go through many employees, Costco employees turnover rate is
low.

12. What recommendations would you make to Costco top management regarding how best to
sustain the company’s growth and improve its financial performance?

I think Costco’s management team are doing very well overall. There is one suggestion that I
would recommend Costco’s management is its international expansion, especially Canada.
Canada only have 91 warehouses (2016) but they’re generate more profits (17028 million)
compare to other international warehouse (15112 million).