Costco- Management Case Analysis; Consulting
-
Upload
kate-ammerman -
Category
Business
-
view
20.601 -
download
1
description
Transcript of Costco- Management Case Analysis; Consulting
S
Presented By:
Kate Ammerman, Darien Buc,Rachel Hess, Tim Johnson andTara Van Winkle
OVERVIEW Founded by Jim Sinegal & Jeff Brotman in
1983
4th Largest retailer in the US
7th Largest in the World
Wholesale Club & Warehouse Industry:
- Industry estimated to be $110 Billion total
- Industry growing 20% faster than retailing as a whole.
OVERVIEW
Costco’s Industry Standing:
Costco has 55% share of US & Canadao Sam’s Club: 36% shareo BJ’s Wholesale Club: 9% share
Annual sales per store average $128M o Two times larger than chief competitor
Sam’s Club ($67M)
Competitor Analysis
Primary Competition:1. Sam’s Club2. BJ’s Wholesaleo Factors of Competition: price, merchandise
quality, location & membership services.
Secondary Competition:1. Retail Discounters: Wal-Mart & Dollar
General2. General Merchandise Chains: Target &
Kohls3. Low-Cost Specialty Stores: Lowe’s, Home
Depot, Staples, Best Buy, Circuit City, Barnes & Noble
OVERVIEW
Internal:
$1.2 Billion generated in membership fees
$534 Million in E-commerce Sales
In 2006 Costco owned 80% of their stores land and buildings.
Costco has almost 48 million card holders with a renewal rate of about 86.5%
MISSION& GOALSMission:
To continually provide our members with quality goods and services at the
lowest possible pricesGoals:
1. Obey the Law2. Take Care of of Members3. Take Care of our Employees4. Respect our Suppliers5. Reward our Shareholders
GOALS TOWARDS MEMEBERS
Take Care of our Members
Provide quality products at the best prices
100% satisfaction guarantee warranty on every product & membership fee.
Provide ecologically sensitive products
Provide the best customer service in the retail industry
Give back to our community through volunteerism and corporate contributions
WORK FORCE
Take Care of Our Employees• “Our employees are our most important asset”
–Sinegal• They are the key to executing the strategy
successfully.
A. Provide Competitive Wages Starting hourly wage: $12 Average hourly wage: $17-18
B. Generous Benefits
C. Career Opportunities Policy that 86% of higher lever openings are hired from
within. In actuality, the figure runs at 98%.
D. Open Door Policy- that allows ascending levels of management to resolve issues.
WORK FORCEExecutive compensation:
Salary- roughly 12 times of a person working the sales floor. (extremely lower than other CEO’s).
Plus Stock Options and Bonuses
Results of Taking Care of Employees: 120,000 employees spreading a
positive message about Costco High employee retention (6% turnover
rate) Higher productivity from workers
BUSINESS MODEL
Costco uses a Low Cost Model by utilizing:
Rapid Inventory Turn Over
Operating Efficiencies created by product selectivity & volume purchases, high sales volume, efficient distribution, reduced handling of merchandise/ stocking methods
High Productivity of well compensated employees
Direct Purchasing from Manufacturers or “Grey Market” to obtain lowest price points for products.
FUNCTIONAL STRATEGY
High Sales Volume & Rapid Inventory Turnover
Allows Costco to sell and receive cash for inventory before it had to pay many of its merchandise vendors.
Costco is able to finance a big percentage of its merchandise inventory through the payment tern provided by vendors rather than by having to maintain sizable working capital.
FUNCTIONAL STRATEGY
Low Cost Warehouses: Bought in reasonable real-estate
locations. Constructed inexpensively (concrete
floors). Merchandise stocked on racks above sales
floor. Products displayed on pallets containing
large quantities. o Reduced labor required for handling &
stocking Shorter hours of operationo Achieves lower labor costs relative to
volume of sales
FUNCTIONAL STRATEGY
Efficient Purchasing: Direct purchasing from Manufacturers in
high volume
Efficient Distribution:
Many products routed directly to warehouse stores
9 Cross-docking depots
o Receive container shipments from Manufacturer
o Reallocate goods for combined shipment to individual stores within 24 hrs.
FUNCTIONAL STRATEGY
Efficient Distribution Continued: This maximizes freight volume and
reduces receiving costs When merchandise is received it is moved
straight to the sales floor. Eliminating inventory holding costs and
Labor costs of handling and stocking merchandise
These distribution efficiencies allow Costco to lower
overhead costs and pass on savings to customers.
BUSINESS STRATEGY
Decentralized Management: Warehouse managers have very high
authority over store operationso In charge of effectively merchandising
treasure hunt items.o Orchestrate in-store product location &
displays that maximize sales and quick turn over
This ensures each store is in touch with their local clientele and offers products that appeal to them.
BUSINESS STRATEGY Pricing:
• Only stock items that can be priced at bargain levels
• 14 % Cap on the markup of brand name merchandise (compared to 20-50% at other discounters & retailers.)
• 15% Cap on the markup of Kirkland Signature products. o Designed to be equal or better quality
than national brands.
Philosophy: keep wowing customers with low prices.
BUSINESS STRATEGYProduct Selection:
• Provide members with a selection of only about 4,000 items in a wide variety of categories.o (compared to 150,000 to Wal-Mart &
Target).
• Limiting selection in each product category to only the fastest selling models, sizes, and colors.
Efficiencies obtained by volume purchasing, lowering distribution receiving costs, and reduced stocking labor.
BUSINESS STRATEGY
Treasure Hunt Merchandising
Out of the 4,000 items, about 1/4th of product offerings are constantly changing.
Entice shoppers to spend more by offering irresistible deals on luxury items because they know they won’t be there next time.
Purchased on “Grey Market” for lowest prices.
Example: HD TV’s, luxury handbags, diamond rings
Generates excitement for customers and W.O.M.
CORPORATE STRATEGY
Ancillary Businesses To encourage member to visit more frequently
To compete with other Warehouse retailers for superior Service offerings.
Costco Currently Offers:
Food Courts 1 Hr Photo Centers
Optical Dispensing Centers Pharmacies
Gas Stations Print & Copy Centers
CORPORATE EXPANSIONDomestic:
Opened 68 new warehouses in the U.S. between 2002-2006,
16 new stores in the beginning of 2007 with plans to open another 20-24 warehouses by the close of the year.
International: Opened 14 warehouses Internationally by 2007
o In 2007 Costco had 102 wholly owned warehouses outside the U.S
70 in Canada 5 in Japan
18 in the United Kingdom 4 in Taiwan
5 in Korea
o 50/50 Partnership Warehouses:30 locations in Mexico
GROWTHExpand Furniture Offerings:
2005 Opened 2 location of Costco Home: high-end furniture warehouse retailers.
Furniture is one of the Top 3 best-selling categories on their website
Shifted to building additional space within new Costco stores to be utilized for stocking a larger selection of furniture.
Expand Kirkland Product Offerings:
Management aimed to increase the Kirkland Brand assortment from 400 items to as many as 600 in 5 years.
ISSUES
Current Membership program creates limitations
Not allowing the use of Credit Cards limits customer expenditures.
Top of Mind Awareness levels decreased by lack of Brand Advertising
Competitors offer a wider variety of Ancillary Services (a significant factor of competition)
RECOMENDATIONS
1. Non-Member Day A quarterly event that allows non-
members a trial day at the store. Purpose: allowing trial raises probability of
a prospect becoming a club member
2. “Household” Plan $20 for every additional household
member Purpose: use existing relationships to
leverage new ones increasing membership rates
Membership Strategy Adjustments:
RECOMENDATIONS
3. Membership Rewards Program Pay $80 for your annual membership and
get 2% off every purchase
Competitors Have Found This Successful: BJ’s allows customers to enroll in rewards
club membership for $80 dollars. Receive a 2% rebate on purchases (capped
at$500). Results: 5% of all memberships and 10% of
all merchandise and food sales.
Memberships Strategy Adjustments:
RECOMMENDATIONS
Current payment methods: cash, check, debit, and Costco Credit
Recommended: Allow The Use Of Credit Cardso Accept credit cards but charge a 2% fee
purchasing by credit.
Competitors Have Found This Successful:o Sam’s Club: A week after the initial
acceptance of MasterCard, the average checkout sales increased 35%
Credit Cards:
RECOMMENDATIONS
TV Brand Advertisingo Awareness & Reminder Ads
In the Northeast and West Coast regions o where locations are clustered in order to receive
marketing efficiencies
Seasonal TV advertising & periodic direct mail promotions of Treasure Hunt items
Competitor Use of Advertising: Sam’s Club: spends $50 million annually on
national TV ads, companion print ads, and direct mail promotions
Advertising:
RECOMMENDATIONS
Ancillary businesses services benefit Costco by:
o Increase the frequency of customer visits
Benefit members by offering multidisciplinary services that are efficient and cost-effective
o Making Costco a “One-Stop Shop”
Competitors Offer a Wider Range of Ancillary Services:o Wireless carrier kiosks, home security
installation service, break and muffler services, home heating oil, vacation packages, and automobile buying services
Expand Ancillary Business Programs:
RECOMMENDATIONS
We recommend entering into China & Brazil next:o Sam’s Club has taken the Pioneering Costs of
introducing Warehouse Retail into these societies
o China is predicted to have a five-fold increase in urban consumer spending over the next 20 years to $2.3 trillion a year.
Continue testing furniture offerings in Costco locations rather than Costco Home.o Halo Effect achieved when furniture is offered inside
existing stores
Growth Opportunities: