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Warehouse Clubs Case Study
Penny Dyaron 19 September 2012
Transcript of Warehouse Clubs Case Study
Warehouse Clubs Mike Miller, T.J. Hall, Penny Dyar,
Meghan Dennewitz, & Josiah Williams What is the Competition like in the North American wholesale club industry? Which of the five competitive forces is strongest and why? (1) Do all three warehouse club rivals --- Costco, Sam's , & BJ's Wholesale ---- have highly similar strategies? What differences in their strategies are apparent? Does one rival have a better strategy than the others? Does one rival have a somewhat weaker strategy than the other two? (2) Which of the three warehouse club rivals has been the strongest financial performer in recent years? (3) Does the data in case Exhibit 5 indicate that Costco's expansion outside North America (U.S. & Canada) is financially successful? Why or why not?? (4) (5) Five years from now, is Costco's standing as the industry leader likely to be stronger or weaker? Are the other two rivals likely to gain or lose ground on Costco? Why or why not?? (6) What recomendations would you make to Jim Sinegal regarding the actions that Costco management needs to take to sustain the company's growth and improve its financial performance? (7) What actions do you think management at Sam's Club should take to boost revenue growth and overall financial performance? (8) What actions do you think management at BJ's Wholesale should take to boost revenue growth and overall financial performance? • Sam’s Club is similar to Costco
Also, there business strategies are comparable
• Sam’s Club needs to implement a stronger advertisement campaign as build a stronger customer base and expand their current market share
• Sam’s Club should work with Walmart to try and obtain further financing and strategic methods to boost their revenues
Ex. adapt their current business strategy towards Costco’s since they have the strongest market share
• Finally, Sam’s Club should increase their membership fee to generate stronger profits • Costco created a niche market
Costco provides the most economical prices with a limited product selection to reduce expenses
• Senegal should focus on improving Costco’s long-term financial performance
• As well, keep evolving their current business strategy to the current economic characteristics
• Senegal should implement a stronger advertisement campaign to create a stronger customer base Costco’s standing as the industry leader will likely be stronger five years from now.
Costco has a more complex growth strategy with 3 main elements:
open more warehouses
build a large, loyal membership base
induce members to shop at Costco more often
Costco plans to grow not just domestically, but internationally as well
With a growth strategy that includes opening more, bigger warehouses, it is reasonable to conclude that Costco will further increase its standing as the industry leader. BJ's management should try and continue to expand, building new stores and focusing on gaining a stronger customer base.
Must market themselves better to take a larger portion of the market share.
Management should continue to price products accordingly to compete with Costco and Sam’s Club, but they must gain market share to boost their revenue and overall profit to help with expansion. • Costco’s expansion outside North America has been quite successful from 2005 to 2009.
• Costco’s total revenue has increased from $43,064,000 in 2005 to $56,548,000 in 2009 while the total revenue from their Canadian and other international operations increased from $9,887,000 in 2005 to $14,874,000 in 2009
• The company’s sales in Taiwan alone nearly tripled between 2004 with $250 million to $749 million in 2009.
• Costco did experience a slight decline in total revenue from 2008 to 2009. If the decline was more significant then it might be a cause for concern but because the total revenue is still quite substantial, Costco should not make any dramatic changes. • The warehouse industry operates on the idea that by customers buying memberships to shop at their locations, the companies can afford to lower their prices beyond that of major retailers.
• The idea of having a membership to shop somewhere not only allows the company to lower prices but also creates a loyal customer base that tends to come back year after year.
• Costco and Sam’s Club opened in 1983 to immediate success. By the end of 1984, Costco had nine stores and over 200,000 members and became the first company to reach over $1 billion in sales within the first six years. Sam’s Club (a subsidiary of Wal-Mart) had sales in excess of $12.3 billion within 10 years. Both companies rely on a low-cost strategy. •BJs is considerably smaller than Costco and Sam’s Club but has still maintained success behind a best cost strategy. While BJs has fewer locations, their stores offer over 7,000 products compared to 4,000 at both Costco and Sam’s Club.
•Together these three companies cover nearly 100% (Costco 56%, Sam’s Club 36% and BJs with 8%) of the industry.
•Their strategies are not perfect, however, and their sales have seen slight declines in revenue from 2008-2009 with the exception of BJs. Costco has built up a substantial amount of long-term debt and in January 2010 Sam’s Club CEO announced that ten underperforming warehouses would be closed. We intend to address these issues and recommend some alternative actions in this analysis. Recommendations for Costco • Fairly similar strategies amongst the three warehouse clubs
• Costco and Sam’s Club strive to be the lowest cost provider
• Efficiency and high sales volume
• All use cross-docking increases efficiency
• Low overhead and production costs
• BJ’s focuses on low cost, but also incorporates some best cost factors
“Inner circle” focus
Larger product assortment
More efficient shopping experience
Excess amount of store hours
More buying options – other than bulk
Manufacturer’s coupons accepted
Variety of payment options
• Costco’s strategy is the strongest 56% of market
• Sam’s Club’s strategy is the weakest in the shadow of Costco
• BJ’s strategy still provides success for the small business We recommend that Costco should divert more of their costs toward marketing through social media. They tend to rely more on their small business owners and word of mouth to represent the company and handle the marketing. If Costco was to spend more on mainstream media then their customer base could expand exponentially. Costco has a significant amount of long-term debt that they should focus on paying off. They should try to reduce their debt/equity ratio to provide liquidity for the company. If they issued more stock then it would increase their capital provide from equity, which could help alleviate some of their debt. Recommendations for Sam's A recommendation for Sam’s Club could be to offer more freestanding warehouse locations. Many Sam’s clubs are located adjacent to a Wal-Mart shopping center. Consumers are faced with a decision to either take two trips to both Wal-Mart and Sam’s club or to just choose one to shop at. Two trips can be a hassle to consumers and because Sam’s Club sells in bulk, consumers may be inclined to only shop at Wal-Mart if they are not in need of such high quantities of products. Since Sam’s Club is a subsidiary of Wal-Mart, the corporation is still generating revenue if consumers decide to only shop at Wal-Mart instead of Sam’s club while posed with the decision. With more free standing locations, Sam’s Club will be able to attract more consumers that who could have possibly just went to shop at Wal-Mart if they were adjacent to each other. Recommendations for BJ's BJ's should continue what they have been doing which is exploiting their niche in the market through the use of differentiation. BJ's is the only one of the three companies that has seen an increase in total revenue each year and they continue to thrive BJ’s Wholesale Club was the only company whose profit margin continued to increase from 2007-2010 Sam’s Club is a subsidiary of Wal-Mart, and there for they do not release certain financial data BJ’s had a current ratio of 1.17 Costco's current ratio, 1.11 current ratio shows how liquid the company is and their ability to pay short term obligations Current ratio over 1 is ideal Current Ratio= current assets/current liabilities Operating Profit Margin = Operating Income/ Revenue Operating profit margin show how much profit is earned on each dollar of sales, before paying interest charges and income taxes Costco's profit margin has been up and down every year since 2006 Sam's operating profit margin has continued to slowly decrease since 2007