Costco Wholesale Corp. in 2016 - Mission, Business Model, and Strategy

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High rivalry within the wholesale market is fierce. The amount of cost that is takes to switch between to competitors is so minimal that it provides for not resistance to change. The product lines offer basically the same items, with the exception of the special buys that are here one day gone the next.

With the competitors having their own brand of items and also the name brand products to offer, this provides for a high substitution threat in this industry.

Wholesale clubs have the stigma of buying in bulk, so they are able to entertain the deep discounts that come with such large purchases. This provides for large bargaining power on the side of these mass products giants.

The threat of entry to this industry is low, in that, the big companies that are stable and secure already have great economies of scale to their advantage. To enter this market you must have deep pockets to just get started and there is no guarantee that you will claim much of a market share.

Buyers bargaining power is moderate at best. To switch to another company, the consumer would not have to pull much out of his pocket in terms of cost. There is no real differentiation within the products, except for their name brand.

- How well is Costco performing from a financial perspective? Do some number-crunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 66-68) to help you diagnose Costco’s financial performance.

In 2015, Costco continues to show growth in its brand. They are achieving increases on a yearly basis and continue to add value for the shareholders by providing them with growth in their equity as well.

Gross profit margin 13%

Current ratio 4.5%

Return on Stockholders Equity 21.9%

Net profit margin 2.04%

Net return on total assets 7.1%

- Based on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that at Sam’s Club and BJ’s Wholesale? Costco is definitely superior with regards to the financial data stated in the exhibits. Costco had Net Sales of $113,666 in 2015, in comparison to the $58,020 of Sam’s Club and $10,633 of BJ’s. The total assets of Costco was $33,440, Sam’s had $13,995 and BJ’s had $2,322. There is a definite break away in sales by Costco compared to the competition that is in the market.

- Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially successful? There has been significant growth since the expansion overseas. From Year 2005, (including the Canadian, and other international markets), the sales were $9,887 and have grown to $31,848 in 2015. This is a 127.5% growth increase in 10 years. This is a significant increase for this company.

- How well is Costco performing from a strategic perspective? Very well. Costco had a great strategy from the start and has continued to develop it and move to the next level. They have enlisted the help and buy in of their employees to make their company what it is today, a wholesale giant.

Does Costco enjoy a competitive advantage over Sam’s Club? Costco looks for prime locations for its membership clubs. It sets itself apart from Sam’s and BJ’s by offering the higher priced Treasure-Hunt items that appeal to the more sophisticated buyer. They strive and obtain great customer service which appeals to the membership base. Over BJ’s Wholesale? Most definitely. BJ’s does not offer the quality of merchandise that Costco does. Their customer service is subpar to the premier service of the employees at Costco. If so, what is the nature of its competitive advantage? In my analysis, I found that labor efficiency from the employees adds to the competitive advantage that Costco has. With the low rate of turnover for the company, the learning curve for new people is not there. The wages for its team are representative of the skill set that the employees have and Costco appreciates the team in various ways to keep the employees there and happy. With a happy group of employees, customer service increases and so do sales. Does Costco have a winning strategy? Yes, they do. Why or why not? Costco has stood by their core strategies from the beginning. They have used these strategies as a foundation in which to grow and expand its position within the market. They stand by their social and environmental obligations as well making them shine in the communities in which they operate.

- Are Costco’s prices too low? No. Why or why not? Costco originally decided that they were going for a low cost/low price strategy for the company. They use the success of the customer service and the products that they offer to gain its members. With gaining new members, membership fees increase which is the basis for the profit that they maintain.

- What do you think of Costco’s compensation practices? Costco is standing by it original mission of taking care of their employees. They want to compensate their employees and let them share in the success of the company as well. Does it surprise you that Costco employees apparently are rather well-compensated? No. With taking care of your employees, they in turn will take care of you. This extends out to taking care of the members, products and services that the company has to offer. It is a win-win to make sure that they are seeing benefits in the increased business.

- What recommendations would you make to Costco top management regarding how best to sustain the company’s growth and improve its financial performance? Continue to develop technological advances with respect to in club and also on line. People now days are very tech savvy and want to have the conveniences but not take much time out of the day to do the menial tasks like shopping. They are more set on going to their children’s baseball, volleyball or swim meets, not stuck in a line at the club. Continue the focus of developing the employees that they have and also prepare for the aging workers. What can be done to keep them employed but still remain productive for the club? Another item that might be helpful, look to continue growth by grabbing a possible retail side to this industry. This includes increasing the available channels in which the company ventures.

Bibliography

Ruggeri, A. (2009, October 22). Jim Sinegal: Costco CEO Focuses on Employees. Retrieved from U.S. News: https://www.usnews.com/news/best-leaders/articles/2009/10/22/jim-sinegal-costco-ceo-focuses-on-employees

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