Costco Case Study

Problem

• Net income as of a percentage of sales is decreasing

Critical Issues/Quality Evidence

See Exhibit 1: Financial Data

• Net income as of percent of sales is declining year over year. In 2005 Net Income as of percent of sales was 2.0% and it decreased to 1.5% in 2009

• Operating income as of percent of sales is relatively flat year over year with a decline in 2009 to 2.5% from 2.7% in 2008

• Gross Margins excluding fees are flat year over year with a slight increase of 35 basis points in 2009

• Sales decreased by -1.5% from 2008 to 2009

See Exhibit 2: Warehouses in Operation

• Increase sales by opening more stores but not growing in terms of profitability

See Exhibit3: Annual Revenue per Store

• The annual revenue per store decreased from 2008 to 2009 by -4.0%. The largest decline was in the international market by -8.0% and the US decreased by -2.0%

Analysis

Jim Sinegal Costco’s cofounder and CEO is the driving force behind Costco’s success. He is you’re your typical CEO; he is very open and direct to say the least. Costco is the industry leader when it comes down to warehouse wholesale club industry. Costco has about a 56% market share compared to its competitors Sam’s Club 36% and BJ’s and other 8%. Costco is considered the third-largest retailer in the US and eight largest in the world. The philosophy is to keep prices low so that members keep shopping at Costco and in turn will increase sales volumes. Costco’s growth strategy is to grow sales and profits by opening more new warehouses, building an even larger membership base and executing merchandizing techniques where members come to shop at Costco more often and purchase more per shopping trip. Although, sales have decreased from 2008 to 2009, the company’s most profitable store was in Korea and Taiwan. From a competitor standpoint Costco generates more sales in terms of dollars with fewer stores than Sam’s club and BJ’s.

Costco strategy is aimed at selling good-to-excellent quality products that are supplied by brand name manufacturers at prices consistently lower than other wholesalers and retailers. Costco product selections are limited from a 3,800 to 4,000 in order to keep costs and prices low. Costco offers “Treasure Hunt Merchandizing” atmosphere where it continues to grow both in the US and around the world. When compared to Sam’s Club they also tended to keep the selection of products to about 4,000 items, however, a large portion of the product was standard and only a small fraction included special buys