Presentation

Etienne Khoury

Executive Summary

Purpose: To examine Costco’s business structure and strategy and how those relate to industry success

Why this is worth YOUR time

Summary

• Revenues of 71 Billion• 550 Warehouses Today – Operates in:

– 40 States– 9 Countries

• $137 million average sales/warehouse• 141,000 square feet/warehouse• 143,000 employees worldwide• More than 1.4 million transactions/day

Background

CEO: James Sinegal

Headquarters: Issaquah, WA

Inception: Seattle, WA 1983

Stock Symbol: COST (NASDAQ)

Founders: James Sinegal & Jefferey Brotman

Corporate Strategy

• Cost strategy– Penetration Pricing– Below the Line Promotion– No frills

• “Diversion” Buying Strategy– “Treasure hunt" shopping experience

Products

• Sundries which include candy, snack foods, alcoholic and non-alcoholic beverages, and cleaning supplies

• Hardlines which include major appliances, hardware, electronics, and sporting goods

• Softlines including apparel, jewelry, and small appliances

• Fresh food sales, like meat and baked goods

• Other items which include gasoline, pharmacy sales, and Costco's one-hour photo development.

Abell’s Model

Customers (Who)

• Costco targets independent small business owners who have typically $100,000 or more of personal income

• Actual average Costco customer is women in large householders with income of $50,000 or more

• Most popular with Hispanic and Asian ethnic groups

• Typically customer visits 8-11 times per year

Customers in Taiwan

Customer Needs (What)

• Quality Products• Relatively Low Prices• Convenience• Reliability

Membership (How)

• Gold Star Member = $ 50• Business Member = $ 50• Executive Member = $ 100• Membership fees allow Costco

to maintain low margins

Products (How)

• Costco focuses on selling products at low prices, at very high volume.

• Goods are usually bulk-packaged– Marketed primarily to large families and

businesses. • Does not carry multiple brands or varieties

– House brand to sell, under the Kirkland Signature label.

• Results in high volume of sales from single vendor, allowing further reduction in price, and reducing marketing costs.

Industry Analysis

• Overview – Warehouse Clubs and Superstores

• SWOT Analysis• Porter Analysis• Life Cycle

Industries

• Retail– Discount and Variety Retail

• Warehouse Clubs and Superstores (primary)– Gasoline Retailers– Grocery Retail– Nonstore Retail

• Internet Retail• Consumer Services

– Optical Services– Travel Agencies and Services

• Financial Services– Lending

• Mortgage Banking and Related Services• Insurance

– Property and Casualty• Autos and Other Vehicles• Homeowners Insurance

Warehouse Clubs and Superstores

• Warehouse club membership has grown dramatically over the past couple of years

• Fees can range anywhere from $5-$100• Costco, Sam’s Club, BJs Wholesale Club• Great Success - “big box stores that sell

groceries as well as general merchandise at lower costs”

Costco Today

• 550 warehouses Worldwide– 403 in US– 76 in Canada– 21 in UK– 6 in Korea– 5 in Taiwan– 8 in Japan– 31 in Mexico

Number of Warehouses

76%

1%

15%

1%

1%

4% 2% US

Puerto Rico

Canada

Taiwan

Korea

UK

Japan

Number of Warehouses

76%

1%

15%

1%

1%

4% 2% US

Puerto Rico

Canada

Taiwan

Korea

UK

Japan

SWOT Analysis

Strengths

• 54.1m loyal cardholders• Strong member renewals• Absolute pricing authority• Exceptional employees• Excellent merchandise• Quality image

Weaknesses

• Cannibalization– Costco's overexpansion domestically risks

cannibalizing the sales of preexisting stores

• James Sinegal leave• Maintaining high wages

– Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club

• Maintaining profit margins

Opportunities

• Recession has allowed Costco opportunities for luxury-item deals, including the chance to sell prime-grade meat that used to go almost exclusively to restaurants. With people eating out less often, said Sinegal, "there are not as many steaks being sold in restaurants, and we're selling them."

• To take over, merge with, or form strategic alliances with other global retailers, focusing on specific markets such as Europe or the Greater China Region.

• The stores are currently only trade in a relatively small number of countries. Therefore there are tremendous opportunities for future business in expanding consumer markets, such as China and India.

Threats

• Being a global retailer means that you are exposed to political problems in the countries that you operate in.

• The cost of producing many consumer products tends to have fallen because of lower manufacturing costs. Manufacturing cost have fallen due to outsourcing to low-cost regions of the World. This has lead to price competition, resulting in price deflation in some ranges. Intense price competition is a threat.

• Bad economic times (current recession)

Porter’s Five Forces

Supplier Power

•Low power

•Good relationship

•Large quantities at lower costs

New Market Entrants• High barriers to entry

•Costco has high competitive advantage

•Threat of new entrants is low

•Costco has wide array of products at significant low prices, which makes it almost impossible to compete

Competitive Rivalry•High Competition

•Economies of scale/supply chain management is easily replicated

•Battle for lower costs results in lower profit margins

Substitutes

•Low threat of substitutes

•Low cost shopping coupled with high value

•Customer satisfaction/member retention is high

Buyer Power•Bargaining power of buyers is high

•Little to no switching costs (membership fees)

•High concentration/quantity of buyers

•Customers have high mobility

•Sell similar to same products

Life Cycle – Maturity Stage

• Costco is in the mature stage

• Though profitable, slower growth in sales

• Strong brand awareness

• Shares market with established competitors

Competitive Analysis

Competitive Analysis

• Costco's main competition is Wal-Mart's Sam's Club. BJ’s, a smaller retail warehouse chain, also competes with Costco and Sam's Club. The three companies share a similar business model, selling high volumes of merchandise at low prices in a membership-only warehouse club. Each company sells a similar array of general merchandise, including food, apparel, and gasoline.

• Sam's Club operates 591 warehouse clubs nationwide and earned $44.4 billion in revenue in 2007.

• BJ's operates 177 warehouse clubs across 16 states in the eastern U.S. In 2007, the company earned $9.0 billion in revenue.

Competitive Analysis

• Greater benefits for Costco employees– Wages: $17/hr on average– Health Insurance : 90% premium

coverage• Lower price margins

Financial Analysis

• Costco earned $71 Billion in revenue in 2008 – 12.5% increase from 2007

• In 2008, Costco’s operating margin reached 2.77%

• Costco’s net income in 2008 was $1.28 billion dollars – an 18.5% increase from 2007

Financial Analysis

Costco Stock

Future Outlook

Costco's Future Outlook

Questions

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