Costco Wholesale in 2012

Costco Wholesale in 2012:

Mission, Business Model, and Strategy

1. What are the chief elements of Costco’s strategy? How good is their strategy?

The key elements of Costco’s strategy are pricing, product selection, treasure-hunt merchandising, low cost emphasis, and growth strategy. As a leader in the wholesale market, Costco has done a great job keeping their prices low, and stocked only those items that could be priced at very low bargaining levels to provide their members with as much savings as possible. At one point Costco’s private-label Kirkland Signature items were marked up as much as fifteen percent, but this still resulted in their products to be about 20 percent lower than comparable name brand items.

Product selection is very important as one of Costco’s chief strategies, at any given point in time they only have about 3,600 active items available to purchase compared to other supercenters like Wal-Mart who may have about 150,000 products. Kirkland has been providing about 20 percent of sales for Costco, and management expects the percentage to go in the upwards of 30 percent in the coming years. They have a huge selection of specialty products from food items to pool and garden supplies.

The treasure hunt merchandising makes it a fun environment to shop in for their customers.  They are mostly referring to the big ticket items and exotic things they get in the store on occasion, every time members enter the store it is almost a guarantee there is going to be new products in there that were not there the previous time. The low cost emphasis portion of Costco’s strategy mainly focuses on keeping operating costs at a bare minimum; this was a key to their low pricing. Management of Costco makes it a point to put their locations on high-traffic routes which are also easily accessible to small businesses and residential areas.

Costco’s growth strategy was to increase sales at existing stores by 5 percent at the least annually. They also wanted to open more locations in the US and internationally. Costco has been continuously increasing the amount of stores around the US and their bottom line. All the chief strategies mentioned above are all a part of why Costco is doing so well as a low-price leader as a wholesale distributor. Having members be able to access their products anywhere in the country, and online is also helping them grow as a company. With many item options to choose from in bulk at a low price and the treasure-hunt merchandising strategy is what keeps their members renewing their membership every year.

2. Do you think Jim Sinegal has been an effective CEO? What grade would you give him in leading the process of crafting and executing Costco’s strategy?

        Jim Sinegal has had a tremendous impact on Costco’s success. His effort has helped Costco become the third largest retailer in the United States and the seventh largest retailer in the world. When considering if he has been an effective CEO, we must  analyze Costco’s ability to balance between their financial objectives and their strategic objectives. Through Sinegal’s leadership, Costco became the first U.S. company to reach $1 billion in sales in less than six years. Clearly, Costco is meeting its financial objectives. To attain these objectives, Sinegal incorporated five business principles creating their corporate culture and the manner in which it operated.  

        The first principle involved obeying the law. Sinegal believed in obeying the law above all things therefore the company is to comply with all laws and legal requirements. The second principle was directed towards members and customer service. He believed if it weren’t for the customers, Costco would not exist, therefore Costco must keep them happy and provide them with quality products at affordable prices. The third principle was intended to acknowledge the employees. Sinegal believes Costco’s greatest asset is the employees. The fourth principle was to respect their suppliers. He believed that if these first four principles were done throughout the organization, then they would achieve their ultimate goal which is the fifth principle, to reward the shareholders. The shareholder included are the stockholders of the company, the future stockholders, and the employees.

        Jim Sinegal not only created successful financial performance, he also had respect from employees throughout the organization. When he toured Costco stores, he dressed casually. He wore an open-collared cotton shirt from one of Costco’s bargain rack and wearing a standard employee name tag that simply said “Jim”. The ability to get on an employee level appearance showed people he did not value himself above everyone else, rather he was willing to work with them to help them achieve the five principles. He greeted employees as he visited Costco stores and the book mentions, “employees genuinely liked Sinegal”. He paid a lot of attention to detail and when he toured the stores, he asked a lot of questions and was a knowledgeable critic. He followed his mentor’s style of operating by constantly improving store operations, keeping operating costs and overhead low, stocking items that moved quickly, and charging ultra-low prices that kept customers coming back to shop.

        Costco’s strategy involves five key elements which are; ultra low prices, a limited selection of nationally branded and private-label products, a “treasure hunt” shopping environment, strong emphasis on low operating costs, and geographic expansion. Since Costco has grown significantly under Sinegal’s leadership, he has made a tremendous impact on the process of implementing and crafting their strategy.  

Based upon the analysis provided above, Jim Sinegal was very much a successful CEO. Through his leadership, Costco is one of the largest retailer in the United States. His efforts to craft and execute Costco’s strategy is clearly shown through the success of the company therefore he would receive a high grade.

3. Based on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that of Sam’s Club and BJ’s Wholesale? Why or why not?

           In order to analyze if Costco’s financial performance is superior to Sam’s Club and BJ’s Wholesale, we have to pay close attention to the income statement of these companies. The income statement measures the financial performance of a firm over a specific period of time. Looking at a Costco’s, Sam’s Club’s and BJ’s Wholesale’s income statements will helps us to decide if Costco’s financial performance is superior or not to that of Sam’s Club and BJ’s Wholesale. In the income statement we have to look for some specific items that will give us a big picture of the performance of the company. Some of those items are Gross Profit, Operating Income, and Net Income, along some financial ratios.