Managerial Economics Questions

Kyle JelinekCEO

KateCFO

JimSupply Chain manager

AlexandraMarketing Director

Economist

Organization

My Father:

Craig Jelinek

I am Nash

• Costco is a Washington corporation, Nasdaq ticker symbol “COST”.• Operates an international chain of membership warehouses, mainly

under the "Costco Wholesale" name, that carry quality, brand name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources.

• The warehouses are designed to help small-to-medium-sized businesses reduce costs in purchasing for resale and for everyday business use. (Individuals may also purchase for their personal needs.) 

About Costco

• Costco is open only to members and offers three types of membership: Business, Gold Star (individual) and the Executive membership.

Membership Only

Costco's warehouses present one of the largest and most exclusive product category selections to be found under a single roof. Categories include groceries, candy, appliances, television and media, automotive supplies, tires, toys, hardware, sporting goods, jewelry, watches, cameras, books, housewares, apparel, health and beauty aids, tobacco, furniture, office supplies and office equipment.

What Do We Sell?

Members can also shop for private label Kirkland Signature products, designed to be of equal or better quality than national brands, including juice, cookies, coffee, housewares, luggage, clothing and detergent.

Kirkland

Q1: If Costco raises membership fee by 5% (inflation trend), what will be the shifts in the demand curves of these three kinds of shoppers? (Please illustrate it)

Type 1: Small business manager – Javier/Ken Liu

Background: Ken & Javier co-own a breakfast store near NCCU. Javier Also owns a farm.

Income: NT100,000. Frequency: once

every 2 weeks. Shop Items:

bacon/toast/Ken buys PS3 and muffins for his daughter/Javier buys farming tools

Type 2: High income people - Kelly / Andrea

Background: Andrea and Kelly are neighbors, both their husbands run own company

Income: NT300,000 / month

Frequency: once per week

Shop items: office supplies/cereal/fresh food (premium steak/wine/ designer handbags or jewelry

Type 3: Young Generation, Shop in Costco for Fun

Background: Jin is a student but actually he is a party animal.

Income: NT8,000 pocket money from parents

Frequency: once per month Shop items: salty

snack/beers/shampoos and lotions (for his girlfriend)

Q2: Should Costco change different membership rates in countries with different income levels, to expand its business to broader geographical areas?

Pricing Policy

Membership Only Strategy

Two part pricing – soaks up higher quantities of buyers’ surplus.

Uniform Pricing combined with indirect segment discrimination. Buyers Surplus = Membership

Fee

Three types of membership:

• Executive Membership – annual 2% reward - US$110

• Business Membership – for managers - US$55

• Gold Star Membership – individuals and households - $55

Why are Prices so Low? Pay and benefits for workers are

high compared to the competition – less workers turnover costs and theft by employees.

No advertising – saves them 2% of budget per year for employee pay and benefits.

Aim for upscale shoppers, especially small-business owners.

Why are Prices So Low? CEO’s salary is only US$350,000 - less than

10 percent of many other chief executives. Savings translated into lower prices and higher benefits.

Typical Costco store stocks 4,000 types of items, increasing sales volume per supplier, allowing for better discounts.

CEO -Kyle

Why are Prices So Low?

No item can be marked up by more than 15 percent.

Before season sales – buying cheaper from suppliers.

Coupons for discounts on common use products – attract more price elastic customers.

Coupons

Costco Marketing Strategy

The treasure hunting shopping experience

Marketing 4P’s of Costco

TARGET MARKET

PRICE• High value/

100% refund policy

• 80% of competitors’ EDLP

PRODUCT• Exclusive items• Premium quality• Bulk size but

easy-to -use package

PLACE• Warehouse like• Ready display

on pellets• Minimum

signage in store

PROMOTION• Wallet program• Passport

coupons• End-cap display• In-store trials

Products: Box Size on the Rise, But SKUs Down

2006 2007 2008 2009 2010 2011 2012* 2006 2007 2008 2009 2010 2011 2012*

Average Club Size (Sq. Ft)

140000

140000

142000

143000

143000

143000

143000

Average Club SKUs

4000 4000 4000 3800 3900 3600 3550

138,750

139,750

140,750

141,750

142,750

3,350

3,550

3,750

3,950 A

verag

e C

lu

b S

ize (S

q. F

t.)

Averag

e C

lu

b S

KU

s

*Average of approximately 3,300 to 3,800 active SKUs, as reported by Costco

Source: Costco Annual Report (fiscal years ending end of August/beginning of September)

Size

SKUs

“It costs a lot of money to make these places look cheap”- Jim Sinegal, Costco co-founder

Place Costco never advertises, all promotion occurs through BTL.

• When a new clubs opens We visit from door to door to recruit new members New members are allowed to get one more free headcount Locals gain awareness through staff recruiting activity, or media

reports

Product Costco carried only 4000 SKUs, comparing to avg. 20,000 in

other hyper markets, only 1/5 of competitors. Value for money/ Selected items/ exclusive import items/

unique bulk size and packaging Brand doesn’t matter, value is the key!!

Bulk size but smartly packaged goods

VALUE FOR MONEYEfficiency &

Services

Exclusive pack size, save by buying bulk volume.

Photo printing

Pharmacies Optical

department

Premium quality

Exclusive imports

Promotion

Minimum in-store decoration & signage Extensive in-store trial

It’s all about DISCOUNT!!! ITEM COSTCO OTHER COMPETITOR

Mechanism Wallet promotion Passport program IRC MVM

DM In-store display Trial packs & gifts

Frequency Maximum 1-2 times / year > 5 times a yearPrice sensitivity

HIGH Low

Promotion effect

6-10 times higher than average

???

Costco shoppers Earning about twice per capita, well-

educated Basket size is around NT. 2000-5000. (in

TW)

Unique Shopper contributes business foundation

Shopper profile1. Destination category:

specialized goods (i.e. fresh meat, drugs , truffles chocolate) or volumetric goods (i.e. family size milk). Salty snacks as impulse category

2. Shopping, than purchasing• Impulse shopping

(spend more than expected)

• Sampling triggers trial

3. Look for premium & exotic news & willing to try newness

4. Look for value for money

5. Higher basket size ($2,000-$5,000)

6. Frequency: once every 3-4 weeksSource: 2010 Nielsen Shopper trend

Shopping Behavior

Costco Shopper

2012 Costco Financial Performance

•Financial Highlights•Net sales accounted by major category•Gross margin•Membership revenue

2012 Costco Financial Highlights

Source: Costco 2012 Annual Report

2012 Annual Net Sales Accounted for by Major Category of Items

Source: Costco 2012 Annual Report

Sundries 22% - candy, snack foods, tobacco, alcoholic and nonalcoholic beverages and cleaning and institutional supplies

Food 21%- dry and institutionally packaged foods

Ancillary and Other 18% - including gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and travel

2012 Gross Margin

Gross margin (net sales less merchandise costs) as a percent of net sales decreased in fiscal 2012, largely due to investment in lowering prices, which is consistent with the company goal of maintaining price and value leadership.

Source: Costco 2012 Annual Report

2012 Costco Membership

Two primary types of members: Business $55 and Gold Star $55 (individual) and Business add-on (Executive) $110

2012 Cardholders: Business 6,442 millions. Gold Star 26,736 millions and Executive members which is around 30,000 millions.

Member renewal rate was approximately 89.7% in the U.S. and Canada, and approximately 86.4% on a worldwide basis in 2012.

Source: Costco 2012 Annual Report

2012 Membership Fee Revenue

Membership fees increased more than 11%, due to the impact of raising annual membership fees in the U.S. and Canada. ◦ strong member renewal

rates◦ good sign-ups at new

warehouses◦ increased penetration of

the Executive Membership program

Logistics, Distribution, & Supplier Relations• Integration

• Warehousing & Distribution• Inventory• Supplier Relations

Integration

Supplier compliance Minimize material handling Efficient Packaging Display ready PALLETS

Inventory Timely shares sales data with supplier to

replenish inventory Innovative auto-reordering system

Distribution Minimize the steps of distribution 30% Direct-to-store from vendors 70% Cross docking operations Warehouse design to strip in-store handling

cost

Distribution Diagram

Supplier Relations

Economies of Scale & Bargaining Power Visit & work with suppliers to help them to

break even or make a profit without raising prices.

Knowledge of its suppliers

Which group of people belongs to which diagram?

THANK YOU!!!

ANY QUESTIONS???