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Copy of Costco strategic management Analysis

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Renee Martinez

on 8 November 2013

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Transcript of Copy of Costco strategic management Analysis

First Costco Warehouse- 1983 Seattle, WA; 1993 Price/Costco Inc.
641 warehouses
457 U.S. & Puerto Rico
85 Canada
34 Mexico
25 U.K.
18 Japan
10 Taiwan
9 Korea
3 Australia
Merchandise: hardlines, sundries, food, bakery, deli...
Ancillary: gas stations, pharmacy, optical and hearing centers
Other: travel services, car and home insurance, car buying services, funeral...
To continually provide our members with quality goods and services at the lowest possible prices.

Obey the law
Take care of our members
Take care of our employees
Respect our suppliers
Reward our shareholders

Economic Indicators
GDP trends usually indicate the health of the retail sector
Retail Categories
Differentiation on quality, quantity, price, and selection of products available
Increasing sales by opening new stores
Gross Margin
Mark ups and inventory management are vital
Retail Industry Highlights
Net Sales
FY 2013 $102.87 billion
FY 2012 $97.06 billion
$6.124 billion in cash, short-term investments
Inventory levels, % of sales:
FY 13 7.67%
FY 12 7.31%
FY 11 7.265%
Financial Conditions

Cultural, Social Values and Trends
Since 2008, 96 new warehouses
In 2012, 100% interest in its 32 warehouses in Mexico
Net sales in FY 2012, $97.062 billion
FY 2011, $87.048 billion, increase of $10.014
Primarily due to increase in comp sales
7% U.S. and 6% internationally
16 new warehouses
As of 09/01/13, 71.2 million cardholders
Increase of 4.2 million from previous year
90 % renewal rate in the U.S.
86% on worldwide basis
Gross margin decreased to 10.55%
10.69% previous year
Sales and Profits
NAICS: 452910 Warehouse Clubs/Supercenters or NAICS: Retail Trade
Discount, Variety Retail Industry: clubs, supercenters, discount stores, and merchandise stores
$360 billion industry, 137% increase from 2001-2011
common element...low prices
Financial Conditions
"Supplier Day" to foster strong relationships
Costco chooses what to stock
Increased use of Kirkland brand
Roadshow program allows small vendors to sell at Costco
Analysis of Suppliers
3 components: avg. age of inventory, avg. collection period, and avg. payment period
Time resources are tied up in the day-to-day operations
Cash Conversion Cycle
Risk of Entry by Potential Competitors
Many Small Customers
Businesses comprise 10% of memberships
Relatively High Switching Costs
$55+ membership fee
Bargaining Power of Buyers
Competitive Analysis
New Entrants & Substitution
Quality products at low prices
Value added services
Excellent customer service
Better return policies than direct rivals
Analysis of Buyers
Warehouse Location
Member Service
High Competition!
Competitive Analysis
Indirect Competitors
Five Forces Model
Home Depot
Competitive Analysis
Competitive Analysis
Office Depot
Trader Joe’s
Whole Foods
Best Buy
Barnes & Noble
Code of Ethics:
Economic Conditions/Trends
Mission and Vision
Macro Environment
Package Size
Social Conditions
Price of Real State
Natural Forces
Energy Cost

Renee Martinez

BUS 450A
Christine Tokonitz

Limited SKUs <3,800 active
Purchasing power
< 15% profit margin
Diverse product mix
Employee packages
Customer Service
Kirkland Signature penetration
Partnerships with suppliers/AmEx
Succession planning
International Expansion
Corporate Social Responsibility
Supplier Code of Conduct
Crowded Warehouse Market
Costco, Sam’s Club, BJ’s
Crowded Retail Market
Walmart, Target, Amazon
Barriers to entry – large upfront costs
Large warehouses, shipping depots
Pay above industry standards
Employees pay <10% on insurance premiums
Costco Near You?
Aug. 2013, $13.881B - property, plant & equip.
Increase of ~$1B
26 warehouses opened
Current ratio 1.19
Quick ratio 0.55
Debt-to-equity ratio 1.79
Strategies working: 6% increase in sales & $8M increase in net income
$6.124B in cash
Managing inventory well
Increase in $3.143B in debt

Centered around Mission and Code of Ethics

Well understood throughout the organization
Stock grew 16% a year in value in the past 30 years
"We know it's more profitable in the long term
to minimize employee turnover and maximize
employee productivity, commitment and loyalty"
Craig Jelinek
Strong culture
Simple: straight-line focus on Mission and Code of Ethics
Socially responsible for all stakeholders & the environment
Philosophies well understood at all levels
Sales growth, large cash reserve
Summary of Firm
Debt increase
Poor liquidity position
Increase in debt-to-equity ratio
Limited SKUs
Market Strategy
Marketing limited to new warehouse openings and The Costco Connection
The "treasure hunt"
No music or directory
Floor layout
Increase online traffic - website upgrades
IDC: online sales growth 6x to $223B before 2016
Digital watermarking in magazine

As of 10/9/13, 12 new warehouses
3 U.S., 5 Japan, 1 Mexico, 1 Taiwan
15 more by year's end
Long-term goals 150 w/in 5 yrs.
Two-third will be international locations

Strain on human resources
Cannibalization of existing warehouses
IT advancements not sophisticated
"Always mindful of not outdistancing the management team and that we have to be able to grow intelligently"
Jim Sinegal
Target Market & Marketing Mix
Affluent demographic + small business owners
Members avg. income $85,000
Next...Gen Y
4 P's of Marketing
Products: wide range (no depth) + services
Price: cost + <15% markup
Place: 641 locations + ancillary business, online
Promotion: new warehouses & magazine
Retail highly susceptible to changes
Use comparable sales to:
leverage SG&A expenses
adapt to changes through price adjustments/merchandise mix
increase penetration of Kirkland
Slow spending trend/decrease in savings
CFO Holley: "reluctance of customers to spend on discretionary items right now"
U.S. Census Bureau - consumer confidence stagnant
Financial Summary
10 Mega-Trends for 2013
Technology changing the face of retail
Consumers have more power
Gen Y (1980~early 2000)
instant gratification
80M in U.S., approx. 10,000 turn 21 every day
Continue web improvements - continue to innovate
Add e-commerce for members in Australia and Mexico
Increase expansion in international markets
India - ranked #2, 1.2 billion residents
increasing middle-income citizens
20 Walmart stores
Political & Legal
U.S. Govt shutdown, increased financial debt ceiling, fiscal future
Enactments of the Patient Protection & Affordable Health Care
Lawsuits: Title VII, fuel sales & temp. correcting dispensers, and violation of CA Health & Safety Code, handling of hazardous merchandise returned by members
M. Kors & Tiffany lawsuits
Direct Rivals
Rivalry among direct competition
Threat of entry
Supplier power
Buyer power
Threat of substitutes
Industries that comprise of Market Cap
Walmart $4.78 trillion
Costco $812.7 billion
Target $559.5 billion
Active SKUs:
142,000 approx., SG&A ~18%
SG&A <10% (Amazon 23%)
Stores avg. $160M annually, $3M weekly
$750 in revenue per SKU
Target 27 days; Walmart 10; Costco 4.5, Amazon -14 days
ROIC - in terms of size Costco doing better in managing capital
EPS - Good management . . . GREAT for shareholders!

Avg. hourly wage
Walmart $12.67
Costco $20.89 - bonus $5,000 after 5 yrs.
Turnover 6% - industry standard 24% (Hay Group).
Target $12.93
Barrier high-to-medium
economies of scale
well-established supplier and customer base
BUT new online warehouse startup companies
Boxed.com "Costco in your pocket"
ships for free/no membership
$9.95 delivery straight to into your pantry
Threat of substitutes high
buyer costs to switch to substitutes los
product differentiation low
other alternative channels to shop
stakeholders but also suppliers
changes in labor laws, affect compensation/benefits?
Merchandise supplier power low
Supplier power from workforce high
Full transcript