Costco_Analysis

Costco’s business model 1. What is Costco's business model' Is the company's business model appealing' Why or why not' Costco’s business model depends on high sales volume coupled with quick inventory turnover. Costco operates as a membership warehouse that is based on the concept of offering members the lowest prices on a limited selection of national brands and select private-label products that cover a broad and wide range of categories. This business model is very appealing and appropriate for this type of chain and has many benefits. For one, quicker inventory turnover combined with efficient inventory management systems reduce Costco cost of selling goods. Quick inventory turnover combined with high sales volume allows Costco to sell and receive cash for goods before it has to pay for any of its merchandise, this allows Costco to finance a large percentage of its inventory through the payment terms provided by its vendors rather than having to maintain a sizeable working capital to pay for its merchandise . These saving in its operation enable Costco to pass these saving on to the consumer in the form of low prices. Another reason it’s appealing is because Costco targets high end products thus bringing in high-end consumers into its stores. 1. What are the chief elements of Costco's strategy' How good is the strategy'  Costco uses the competitive strategy the best-cost provider in the wholesale club membership category. The Best-cost strategy combines the drive to be the industry’s low-cost provider and differentiation strategy. This strategy is aligned with Costco’s unique abilities and resources. They are purchasing power, high sale volumes, quick inventory turnover, and excellent customer service. The chief elements of Costco strategy are Pricing, Limited Product Selection and what the company calls “treasure-hunt merchandising”, this is high end products that were acquired in the grey markets from other wholesalers or distressed retailers and then sold at low prices to the consumer. These approaches work well to obtain Costco’s target market. Sinegal affirms this approach by stating” We understand that our members don’t come and shop with us because of the window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values.” (C-36 Thompson,Jr., Strickland III, & Gamble, 2010) While Costco strives to compete on lowest- price it also delivers exceptional value in its high end products as well as great customer service giving Costco customers more for their dollar. This strategy works great for Costco. Costco’s current customers include middle to upper middle class income families. The average income of individual members is about $75,000., with over 30 percent having incomes of $100,000 or more annually. However, these customers are also concerned with value as evidence that members can join an executive membership club, although it costs more per year you get an additional 2% discount on most purchases. This membership has additional savings at various business and consumer services offered by Costco including mortgages and credit card processing. (C-42 Thompson,Jr., Strickland III, & Gamble, 2010). 1. Do you think Jim Sinegal is an effective CEO' What grades would you give him in leading the process of crafting and executing Costco's strategy' What support can you offer for these grades' Refer to Figure 2.1 in Chapter 2 in developing your answers. The process of crafting and executing strategy is done in 5 steps. Below, I will discuss the different steps and evaluate the performance of this company’s CEO, Jim Senegal in the process of strategy making, as well as discuss areas for improvement. Phase 1- Developing a strategic vision. Costco current strategic vision is to provide members with a broad range of high quality merchandise at prices lower than they can obtain elsewhere. To enhance this vision Costcos growth strategies are to open more new warehouses, build a larger and fiercely loyal membership base, and employ well-executed merchandising techniques to entice shoppers to shop more frequently. Costco has opened 127 new warehouses in the years from 2005-2008. Management plans to open another 20-24 stores by the end of 2009. (C-38 Thompson,Jr., Strickland III, & Gamble, 2010) It also experimented by opening two exclusive high end furniture warehouses called Costco home in 2004. These stores performed so well that now Costco has added; more square feet to the size of its stores to stock and sell a higher selection of furniture. In fact on Costco.com furniture ranked third in all sales. (C-38 Thompson,Jr., Strickland III, & Gamble, 2010 In addition to the operational stores Costco based on the Kirkland signature brands current success Costco is planning on increasing this private brand from 400 items to as many as 600 items by 2009. Based on the Costco’s share price increase and the increase in dividend payments investors are confident in Sinegal performance as a CEO. As far as the direction the company is heading and why Sinegal a performance as CEO gets a grade of B. Phase2- Setting Objectives Costco doesn’t have what appears to be a concise strategic vision. During this phase of setting objectives this is where a company determines the steps in order to reach its vision and this is where the company sets specific, measurable goals. Considering that Costco hasn’t yet formulated a strategic vision. I would rate Sinegal a C for setting objectives. Costco stated strategies includes low margins and competitive pricing to maintain what their current customers have come to expect from Costco while appealing to new customers. Costco is committed to sell its products at the lowest possible price. This seems to be the only measure that Costco CEO is concerned with. In fact when criticized by Wall Street for their markups and prices saying they where to low that Costco was going too far for the customer and forgetting their shareholders. Sinegal comment on this saying “Were trying to build an organization that’s going to be here 50 years from now.” (C-36 Thompson,Jr., Strickland III, & Gamble, 2010) As far as bench marks for creating sales goals or timelines for completion of projects all I could see was that Costco plans to open 20-24 stores in 2009. A remedy for this dilemma with setting objectives could be fixed with the creation of measurable, attainable goals with a set timeline. Once this is done then the Costco will not only know its current position but where Costco wants to go next and the actions that need to be taken in order to get there. Phase3-Crafting a strategy to achieve the objectives and vision Into days global market place to survive a business needs to be constantly adapting to changes such as industry evolving and unstable economic state a business cannot operate as it has always done in the past because if it does it won’t be there for long competition will eventually settle in and compete for your business in an industry with room for growth such as Costco’s to retain or gain your market share you need to be open to change and innovation. At this time until Sinegal sets up a formulated vision with clear cut sales goals and objectives he receives a grade of D. Perhaps instead of just relying on the merchants to always carry goods that Costco could sell maybe Costco could reach out and form contracts with companies like Coca-Cola, Panasonic, or Sony to ensure that certain products will remain on the shelves at its stores. This would help Costco to ensure they have a vendor supply to guarantee they have access to new products and also could help to make sure they lock in sale prices and pricing from vendors. Phase 4-Implementing and executing the strategy. Phase 5- Monitoring developments evaluation performance, and making corrective adjustments 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' Use the financial ratios presented in Table 4.1 of Chapter Financial Measures At this time Costco financial performance Gross Profit Margin 2007 2006 0.017 0.018 Current Ratio 1.08 1.05 Return on Stockholders 0.12 0.12 . Costco current Profit margin has decreased slightly this shows that the percentage of revenues available to cover operating expenses and still make a profit is decreasing from 2006 to 2007. Costco current ratio has increased in 2007 from the years before. This shows that Costco has the ability to pay its current liabilities using its current assets that could be converted to cash if they need to be. Return on stockholder’s equity has remained stag net from 2006 to 2007. This could pose a problem for future investors. If the investors aren’t seeing the return they would like they could potentially invest elsewhere. Competitive outlook. In today’s society a business needs to be unique and offer a one of a kind value to keep its customers coming in and purchasing its products. An industry such as retail can experience at times high growth what sets Costco apart from its competitors to gain an competitive advantage is its three components of the company’s strategy that were mentioned earlier, low pricing, limited selection and treasure-hunt merchandising. Is this enough to ensure that future prospects will purchase items at your store' Costco’s main competitors are Sam’s Club and BJ’s Wholesale and both are similar to Costco’s way of doing business. Costco is exceeding both Sam’s Club and BJ’s in terms of net sales and market share. Nevertheless, Sam’s Club has recognized its market share and is aggressively launching new initiatives to grow its sales and market share. One way they plan to increase its market share is by emphasizing new products for the home instead of products for small businesses. They also are using national TV ads to make consumer more aware of their stores. They also are attracting a new group of prospective buyers by setting up a collegiate membership. BJ differentiates its self from both Costco and Sam’s Club by offer a wide range of items in fact 7,300. Another way they differ from the competition is they offer aisle markets and express lanes, and low cost video-based sales aids to help make the shopping experience better. What recommendations would you make to Jim Sinegal regarding the actions that Costco management needs to take to sustain the company's growth and improve its financial performance' To sustain growth and improve Costco’s financial performance the following recommendations are recommended for the management team. 1. Demographics and its product selection could be damaging for Costco. Costco’s main product selection choice is made up of large volume single size packaging such as canned goods, soft drinks are only sold in these large container quantities. This combined with its main demographic of individual members who are more affluent customers in the discount retailing sector could be a potential problem. Competitors like Sam’s Club and BJ’s Wholesale offer goods or various degrees and varying sizes of products allows for more customers to want to shop at their stores to buy goods cause not everyone wants to buy a luxury item or a bulk sizes. The solution might be to offer more products at smaller quantities. This will allow more buyers in who previously might not have shopped a Costco because they are divorced or have a smaller family or just single. 2. Another are Costco could improve on is its direct buying relationships. As mentioned earlier Costco could ensure a stocking of certain items on their shelves so they can avoid stock outs and lose sales. To help its profit margin and reduce dependence on other manufacturers it could increase its brand Kirkland private brand products beyond to current 600 products. 3. A final suggestion is that Costco could consider additional international expansion. They could place more warehouses in Canada. This is where they have been well received. It is the second largest revenue stream behind that of the United States.