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Costco Case Study

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Michael Poland

on 6 December 2013

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Transcript of Costco Case Study

First Costco Warehouse- 1983 Seattle, WA
1993 Price/Costco Inc.
Costco Wholesale Corporation, "COST"
Founders: James Sinegal and Jeffrey H Brotman
CEO: Craig Jelinek , 60
CFO: Richard A. Galanti, 56
COO: Joseph P. Portera, 60
History/Executive Officers
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
Their ultimate goal is the achieve the first 4 and then reward shareholders.
Membership: Customer Loyalty - 66.5M
Quality goods paired with low prices
Customer Service (reliable return policy)
Coupon promotions
Compete with Suppliers (Kirkland)
Partnership with different companies, and local businesses
International Expansion
Major Strategies
1985 Burnaby, B.C., Canada
1992 Mexico City
1994 Seoul, Korea
2009 Melbourne, Australia
International Expansion
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
Because of the positive outcomes as mentioned, Costco should continue to keep high employee compensation uncompromised.
By changing their successful formula, their reputation they have built could be lost.
-Slow growth
-Strong brand awareness
-Share market with
established competitors

Costco’s Life Cycle
Before he retired in 2010, Jim Sengal's base salary was $350,000. Total compensation was 3.5 million.
Senegal was paid no more than 13 times the lowest paid full time employee.
New CEO Craig Jelinek's base salary is $650,000.
Executive Compensation
1st Wholesale Operator in the USA
Less locations than its largest competitor (Sam’s Club)
3rd Largest Retailer in the USA
Competition being: Wal-Mart, Target, Kohl’s, Amazon, etc.
7th Largest Retailer in the World
24th on the Fortune 500 List
Costco Industry Overview
West Coast, East Coast
Canada, Mexico, U.K., Japan, Taiwan,
S. Korea, Australia, Puerto Rico

Sam’s Club
East Coast, Midwest
Puerto Rico, Mexico, China, Brazil

East Coast
Co-founder James Sinegal gave DNC speech
Various small lawsuits
Overtime pay, discrimination, shrimp label, “organic” label
"Supplier Day" to foster strong relationships
Increased use of Kirkland brand
Merchandise purchases spread out
Roadshow program allows small vendors to sell at Costco
Bargaining Power of Suppliers
Wholesale market share (% of sales)
Costco: 57%
Sam’s Club: 36%
BJ’s: 7%
Compete on Price, Quality, and Benefits
Dozens of general and specialty retailers competing with the same products
Rivalry Among Established Firms
Ethical Issue Consequentialism
Many Small Customers
Businesses comprise 10% of memberships
Relatively High Switching Costs
$55+ membership fee
Bargaining Power of Buyers
Organizational Justice
Should Costco continue to compensate employees with above industry average salaries and provide premium healthcare plans?
In a 2010 interview CEO Craig Jelenik said, "Before CSR even had a fancy name we were already doing all that stuff".
Energy efficient stores
Cruelty Free
Treating Stakeholders and Shareholders well
Paying more for coffee because it was ethically sourced
Corporate Social Responsiblity
Warehouse Location
Member Service
High Competition!
Competitive Analysis
Indirect Competitors
Direct Competitors
Competitive Analysis
Home Depot
Sam’s Club
BJ’s Wholesale Club
Competitive Analysis
Competitive Analysis
Office Depot
Trader Joe’s
Whole Foods
Best Buy
Barnes & Noble
Code of Ethics:
External Environment Analysis
Virtues Costco Honors
Co-founder James Sinegal gave DNC speech
Various small lawsuits
Overtime pay, discrimination, shrimp label, “organic” label
#2: Carrefour (France)
#3: Metro AG (Germany)
#4: Tesco (Britain)
Dollar currently weak (Costco's favor)
Technological Dimensions
Outsource technology support from Best Buy
-Increase sales
-Improve customer satisfaction
-Provide customers with technical advise while shopping
So What?
Sociocultural Dimension
Strategic Partners
Verizon Wireless
American Express
Ameriprise Insurance
Various companies that provide cruises, cars, & more
Economic dimension
Generous salaries, benefits-low turn over
Opportunities for employers for internal development; statistics show that 63 percent of Costco’s club managers started as hourly employees (Coriolis Research).
Target economic class
How are they approaching the classes
Macro Environment
Package Size
Social Conditions
Price of Real State
Natural Forces
Energy Cost
Local Vendors
Laws and regulations growing against large retailers and warehouse clubs
EPA lawsuit over Clean Air Act
Potentially substantial penalties
Possible EPA regulation of emissions/energy
Agreement with McKesson for online prescription refill
Reduce energy consumption by using solar systems as a source of energy to operate their businesses
Technology department decreased sales 3% the last three years
Treating employees with dignity, respect, paying them a livable wage, and providing healthcare coverage.
Employees will be happy, not quit, and not steal.

Stakeholder Theory
Costco Great example of this
Directly goes along with Ed Freeman's Stakeholder theory
Costco values all stakeholders including customers who most retailers ignore.
Force suppliers to give them cutthroat prices
70% of costs goes to employee pay
Significant because the average salary at Costco is $20.83 an hour.
Sam's Club pays a little more than half that.
98% of manager jobs are promoted within.
Low level employees are given a voice in decision making.
Ethical Question
Michael Poland
Full transcript