BUAD 441 Individual Written Case Analysis Costco Wholesale has proven to be a successful business since its first

store opened in 1983. While stores have expanded into all parts of the United States and even internationally there is always room for more growth and change. After doing an in-depth analysis of Costco Wholesale there are a few recommendations that I suggest Jim Sinegal and his executives should take into consideration. Recommendation #1 The first recommendation is to increase the selection of both brands and products offered online. This would supplement the shorter hours Costco has compared with other retailers and make up for the lack of product and brand selection in the store. As indicated in Exhibit 5, limited product selection and limited hours are some weaknesses of Costco, yet also help them keep low costs. However, many more customers are doing more of their shopping online and increasing product and service selection may boost sales. As indicated in the case, Costco carries little inventory as one of their ways to reduce costs. Therefore increasing the product selection in-store may increase inventory and the costs associated with storing it. However, items that are sold on their website do not need to be stored because they can be shipped directly to the customer instead of the warehouse. Additionally, online sales do not require additional labor from employees which allows Costco to keep their hours the same thereby keeping labor costs low. This would also help keep very low inventory losses since it is extremely difficult for people to steal from a website. All of these factors help Costco stay consistent with their low cost-low price strategy. (See Exhibit 3)

Offering more brands of products would also give Costco a competitive advantage over Sams Club. Like Costco, Sams Club offers about 4000 items and lacks selection of brands. Currently Costco and Sams Club are very similar in their product offerings and operations of the company which allows for little distinction between the two. However, if Costco sold brands or different packages of items that Sams Club did not offer this would give them a competitive edge. Recommendation #2 The next recommendation is to continue to expand internationally and conduct advertising campaigns emphasizing quality products at low prices. Costco has proven to be successful in their international developments using the wholly owned method thus far which is shown by the constant increase in revenues and assets. Expanding into more European countries and other developed nations could give Costco an advantage over their competitors in these regions. Sams Club does have international locations but none are in Europe or the Middle East and BJs has not yet chosen to expand beyond the United States. As shown in Exhibit 1 this is also consistent with their growth strategy. It would be most beneficial for Costco to use a multi-domestic approach when expanding internationally because of cultural differences and varying customer preferences. Having a different subsidiary for each region would eliminate the costs of researching local customs and preferences. European countries do have many similarities but they all have their own distinct culture and taste preferences. While forces for global integration are important, forces for national responsiveness have much more of an impact and are much higher due to the fact that

there are very strong differences in food preferences and consumer packaged goods. (See Exhibit 6) An increase in marketing and advertising would be necessary if the company chose to expand internationally. Currently Costco only uses limited advertising and depends mostly on word-of-mouth; however in countries that are not familiar with Costco it is important to create brand awareness. When conducting advertising campaigns, the message should be altered to most effectively reach the specific region or demographic. As shown in Exhibits 4 and 5, Costco can use their available funds to finance the increase in advertising. Recommendation #3 A final recommendation would be that Costco should not acquire BJs Wholesale. After going through the three tests of an acquisition I believe it is in the companys best interest to walk away. As shown in Exhibit 7, BJs Wholesale is only a fairly attractive company. Gross margins have been decreasing and they only own a small share of the market. $6.7 billion is over 30 times their earnings which makes it a very expensive acquisition. In addition, Costco would not gain much even though synergies would be possible. The Attractiveness Test shows that neither the industry nor the company is attractive. Exhibit 2 shows that competition is strong in the wholesale club industry and customers have low switching costs. Currently Costco is operating well on its own with 53% market share and over 53 million members. Warehouses are spread all over the country as well as internationally. In contrast, BJs has fewer than 9 million members and only operates warehouses along the East Coast; therefore it could not help Costco expand geographically which they are seeking to do. BJs gross profit margins are lower than Costcos and have been declining which means either

their revenues have decreased or their operating expenses have increased; either way this is not attractive. (Exhibit 4) Although acquiring BJs would eliminate a competitor for Costco and could produce synergies amongst the two companies, they have less than 10% of the market share and there isnt overcapacity in the industry. The acquisition would not help with market extension or research and development. Essentially there is no reason to pay over 33 times the earnings of the target company to acquire BJs. The idea does not fit with Costcos strategy, as explained in Exhibit 1. Costco aims to keep costs low for their customers; therefore I see no need to spend such a huge amount of money on something that is not necessary and feel that Costco would be better off if the company did not acquire BJs Wholesale.
In conclusion, I believe the recommendations I have made will benefit Costco in the long run. They are consistent with their current strategy and aim to keep prices low for customers while providing them with the best quality products. Overall Costco is a solid company and should continue to grow to maintain its large market share while still keeping with their low cost-low price strategy.

Exhibit 1 Strategy Diamond Arenas- where will we be active? y All over the United States and Canada o Suburban and metropolitan areas but in locations where real estate prices aren t too high y Mexico, United Kingdom, Japan, Korea, Taiwan y Products- clothing, food, furniture, automotive products, electronics, toys, books, flowers and alcohol y Services- photo centers, pharmacies, gas stations, food courts, print and copy centers, and optical dispensing centers y Market segment- middle to high income families and small businesses Vehicles- how will we get there? y Merged with Price Club in 1993 y Expand locally and internationally y Joint ventures in Mexico Differentiators- how will we win? y High quality products y Low prices y Wide product selection y Good customer service Staging- what will be our speed? y Expand nationally and internationally by opening new warehouses each year y Expand stores to add a bigger selection of furniture Economic Logic- how will we make a profit? y Buy merchandise directly from manufacturers y Keep low levels of inventory y Require membership y Limited marketing budget- rely on good word-of-mouth due to low prices and high quality products Conclusion: Costco aims to provide families and small businesses with the opportunity to purchase quality goods at a low price. Although Costco already has warehouses in much of the United States they continue to expand nationally and internationally.

Exhibit 2 Five Forces Analysis Industry Rivalry- Strong y Strong, capable competitors y Industry is growing y Product differentiation is low among wholesale clubs y Customer switching costs are moderate since they must join for a specified amount of time Potential New Entrants- Weak y Strong competition in the industry already y Those in the industry have already developed close relationships with suppliers y High entrance barrier due to capital requirements Substitutes- Moderate y Prices are higher y Equal quality y Buyer s cost of switching are low y More selection within product categories Bargaining Power of Suppliers- Weak y Can easily switch manufacturers y Wholesale clubs purchase a large quantity of their items therefore they depend on these purchases y No one manufacturer supplies a significant percent of merchandise Bargaining Power of Buyers- Moderate y Mostly families or small businesses so not buying in bulk y Buyers have flexibility to purchase from other retailers y Low switching costs Conclusion: The wholesale club industry is not very attractive. There is strong rivalry between the 3 main competitors and substitutes such as Target and Kohls are always an option. Buyers have low switching costs giving them the option to shop where they choose. Since the wholesale club industry does not specialize in any one product or service, customers may choose to go to a store that does to get more information and assistance from a knowledgeable source. Industry Characteristics y Wholesale club and warehouse segment about $120 billion business y Growing at 20% faster than retailing as a whole y 3 main competitors: Costco Wholesale, Sam s Club, and BJ s Wholesale y Competition based on price, product and service quality and selection, and location Drivers of Industry Change y Changes in industry growth rate y New competition y Industry consolidation or fragmentation Key Success Factors y Market share y Relationship with manufacturers y Location y Product and service breadth y Quality of products

Exhibit 3 Value Chain Analysis General Management/Firm Infrastructure y Jim Sinegal cofounder and CEO of Costco back-bone to the company (adds value) o He s merchandising savvy and has know-how experience o Forms personal relationships with both employees and customers HR Management y Recruit at local universities y Candidates for managers and top executive positions have to be top-notch merchandisers y Promote from within (lowers cost) Supply Chain Management y Direct buying relationship with producers of national name brand merchandise (lowers costs) y Buys merchandise directly from manufacturers routing it directly to the store or cross-docking stations (lower costs) y Keep little inventory (lower costs) y Merchandise is put directly on the sales floor (lower costs) Operations y Shorter hours than other retailers (lower costs) y Membership format allows for strict control over warehouse entrance and exits resulting in very low inventory losses (lowers costs) Marketing/Sales y Limited to special campaigns for new openings and direct mail programs (lower costs) y Rely heavily on word-of-mouth Distribution y Products are available in the store and online y Certain products only sold in bulk quantities Service y Provide 100% satisfaction guarantee warranty on all products (adds value) Conclusion: Overall Costco aims to lower costs.

Exhibit 4 Financial Analysis Gross Profit Margin 2008 2007 2006 Costco 10.53% 10.52% 10.55% BJ s 7.98 8.24 8.67 Costco s gross margins are higher than BJ s and have been pretty consistent over the 3-year period. On the other hand, BJ s gross margins have decreased meaning that they either their revenues have decreased or operating expenses have increased. Operating Profit Margin 2008 2007 2006 Costco .027 .025 .027 BJ s .022 .017 .028 Both companies saw a dip in 2007. Costco has remained relatively consistent while BJ s has fluctuated slightly. These margins are generally low but given the industry are appropriate. Net Profit Margin 2008 2007 2006 Costco .018 .017 .019 BJ s .014 .009 .017 Once again there is a significant dip in BJ s 2007 margin but Costco has remained pretty constant. Margins are low but it is expected given the industry. Return on Assets Costco BJ s Current Ratio 2008 2007 2006 Costco 1.066 1.086 1.053 BJ s 1.210 1.0234 The current ratio for both companies remained over 1 during this 3 year period indicating that they have more assets than liabilities. Debt-Asset Ratio 2008 2007 2006 Costco .107 .108 .012 BJ s .058 .050 Both companies have low debt-asset ratios meaning there is no overuse of debt and money to finance the firm has come from within. Debt-Equity Ratio Costco 2008 .24 2007 .244 2006 .024 2008 .062 .06 2007 .055 .036 2006 .063 -

BJ s .122 .098 Low debt-equity ratio is low which means both companies have little debt. COGS/Sales

2008 2007 2006 Costco .895 .895 .895 BJ s .92 .918 .913 COGS is constant for both companies and under 1 meaning that they re making more money than it takes to produce their products. SG&A/Sales Costco BJ s 2008 .098 .079 2007 .099 .08 2006 .097 .079

Competitive Strength Assessment Key Success Weight Factors Market share .20 Relationship with .20 manufacturers Location .10 8 .8 10 1 6 .6 Quality of Products .25 9 2.25 7 1.75 8 2 Product and .25 7 1.75 7 1.75 9 2.25 Service Breadth Total Score 1.0 8.6 7.9 7.65 BJ s has the lowest score due mainly to the fact that they have few locations and limited market share. Costco Rating Weighted Score 10 2 9 1.8 Sam s Club Rating Weighted Score 8 1.6 9 1.8 BJ s Rating Weighted Score 5 1 9 1.8

Exhibit 5 TOWS Matrix Strengths -Large market share -low costs -Good relationship with manufacturers -rapid inventory turnover -high membership renewal rates -upscale treasure-hunt items -more assets than liabilities -constant increase in sales Opportunities -continue to expand internationally -expand selection of brands in product lines -accept more credit cards -growing industry -customers increasingly shopping online -improve customer s experience with technological innovations such as self-check out counters Threats -strong substitutes and rivals -competitors offer larger product selection -global economic recession -competitors advertising budget is larger -competitors offer lower membership fees -use available funds to expand internationally -good relationship with manufacturers and rapid inventory turnover can be used to introduce new brands in product lines Weaknesses -limited product/brand selection compared to substitutes -lack of specialization in products -limited hours -don t accept all major credit cards -limited marketing

-increase selection of brands in product lines online to supplement limited choices in the store and limited store hours -continue to expand internationally and conduct advertising campaigns emphasizing quality products at low prices

- continue to provide upscale treasure-hunt items at low costs to deter people from going to competitors or substitutes -focus advertising budget on low costs to entice customers to shop at Costco over other retailers that are more expensive in times of a global recession

-increase marketing budget to gain more brand awareness -advertise online to reach Internet users

Exhibit 6 Competing Internationally Costco has 102 wholly owned warehouses outside the United States and is a 50-50 partner in a venture to operate 31 warehouses in Mexico. Costco should continue to expand internationally to gain new customers and use the wholly-owned method as with the other international stores. A multi-domestic approach would be the most beneficial since products choices and preferences vary from country to country based on culture and the geographic areas. I-R Grid Global Integration

National Responsiveness Forces for Global Integration y Government drivers o Few trade barriers on these products o Imported food must meet government standards y Cost drivers o Potential from significant economies of scale Forces for National Responsiveness y Very strong differences in customer preferences o Different food and product preferences o Different geographic areas can affect clothing, outdoor supplies o Different shopping habits y Difference in development of countries o Some countries may find these products to be necessities while others find them to be a luxury Costco, and the wholesale club industry in general, is placed higher on national responsiveness than global integration. Culture and taste preferences are huge factors in the products and services that are to be sold in international stores. While cost drivers and government drivers to play a role, they do not have as big of impact as cultural differences.

Exhibit 7 Mergers & Acquisitions The Attractiveness Test Industry- not attractive -strong competition - high start-up costs Company- unattractive -small percent of the market -lower margins and decreasing gross margin Cost of Entry Test Costco can acquire BJ s for $6.7 billion Cost of acquisition/EBITDA= 6,700,000,000/199,033,000= 33.66 33.66>12 The Better-Off Test While there is the possibility for synergies both companies are operating well on their own. BJ s might be better off if Costco acquired it but Costco would not gain much from the acquisition.