Costco Mission, Business Model and Strategy

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1. INTEGRATED BUSINESS EXPERIENCE 2 - CASE STUDY ANALYSIS TRAN TRUNG HIEU - MBA29152271 NGUYEN HY MINH HOANG – MBA 29152195 NGUYEN MINH HOANG – MBA29152299

2. WARM UP

3. Rules: Same as Chiec non ky dieu Gameshow You will have 0 4 Hints to guess Point to be counted for correct answer at Hints: Hint 1: 5 points Hint 2: 4 points Hint 3: 3 points Hint 4: 2 points

4. Sample Question Hint 1: 30 % Total

5. Sample Question Hint 2:

6. Sample Question Hint 3:

7. Sample Question Hint 4 : 11:59

8. Sample Question

9. Question 1 Hint 1 :

10. Hint 2: Question 1

11. Hint 3 : Question 1

12. Hint 4: Start with letter “ R ” Question 1

13. Question 1

14. Question 2 Hint 1:

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17. Question 2 Hint 4:

18. Question 2

19. Question 3 Hint 1:

20. Question 3 Hint 2:

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22. Question 3 Hint 4:

23. Question 3

24. Retail Multinational Membership

25. Savings Too Big To Get Home

26. Costco Today

27. Costco Facts - 2 nd largest global retailer (National Retail Federation, 2015). - 18 th largest in Fortune 500 (Costco, 2015). - $71 billion market cap (Costco, 2016). - 698 locations worldwide (568 in North America) (Costco, 2016).

28. Costco Stores

29. Overall Competitive Landscape - Costco dominated Canada wholesale club industry with a 72% share of value sales and 60% of the total number of outlets ( Euromonitor , 2016). - In the US, Costco outperformed both Sam’s Club and BJ’s Wholesale club over the 2009 – 2014 period ( Euromonitor , 2015). - In 2014, Costco accounted for 52% of the total US market share ( Euromonitor , 2015).

30. Overall Competitive Landscape - Competition is based among the following factors: price, merchandise quality and selection, location and customer service ( MarketLine , 2015). - Highly competitive industry whereas Costco will have to compete against: (1) other players in wholesale club industry (2) other forms of retailing businesses such as retail discounters (Walmart and Dollar General), supermarkets, general merchandise chains, specialty chains, gasoline station and Internet retailers (Arthur, 2012)

31. COSTCO’S MISSION & BUSINESS MODEL A company mission statement describes its present business scope and purpose (“where we are, what we do, and why we are here”). According to Costco’s, its mission statement is (“ to continually provide our members with quality goods and services at the lowest possible price ”)

32. BUSINESS MODEL Overview: The plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs .

33. COSTCO’S BUSINESS MODEL High sale volume and rapid inventory turnover. Offering fee-paying members attractively low prices on a limited selection of nationally branded and selected private- label products in a wide range of merchandise categories. Allowing it to sell and receive cash for inventory before it had to pay many merchandise vendors, even when vendor payments were made in time to take advantage of early payment discount.

34. COSTCO’S BUSINESS MODEL A unique aspect of Costco’s business model: Limits marketing, advertising and promotional activities to new warehouse openings. Occasional direct mail marketing to prospective new members and regular direct marketing programs (such as The Costco Connection, a magazine we publish for our members, and coupon mailers…)

35. MARKETING AND ADVERTISING Costco has developed a reputation as a socially responsible company by its actions and not by its marketing. Costco does not have a public relations department or staff. Costco relies primarily on word-of-mouth from its members to spread its brand messages.

36. MARKETING AND ADVERTISING Using direct marketing to existing customers to promote merchandize . The executive membership program offers additional benefits on member services. Its low prices and reputation for making shopping at Costco something of a treasure-hunt made it unnecessary to engage in extensive advertising or sales campaigns. These practices result in lower marketing expenses as compared to typical retailers.

37. APPEALING BUSINESS MODEL Their mission is to provide quality goods and services at the lowest possible price. Satisfying buyer needs and requirements at a price they will consider a good value. The greater the value delivered and the lower the price to get the value, the more appealing a company’s value proposition and product offering.

38. Costco Strategy 1. Pricing: 2. Product Selection: 3. Treasure Hunt Merchandising: 4. Low Cost Emphasis:

39. Chief Elements of Costco Strategy Ultra-low prices: Keep the customers going to the shop by wowing them with low prices Low markup on brand-name merchandise at 14% (compared to 20 – 50% markups at other discounters and many supermarkets Jim Sinegal - CEO of Costco said: “ We understand that our members do not come to us because the window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values ”.

40. Product Selection

41. Product Selection The selection within each product category was restricted, in some cases to a single offering. Costco stocked only a 325 – count bottle of Advil – a size that many shoppers might find too large for their needs . Costco had opened ancillary departments within the next to most Costco warehouses , see the table on the next slide…

42. Costco’ s Strategy - Treasure Hunt Merchandising Dozens of featured specials came and went very quickly, sometimes in several days or a week – like Italian – made Hathaway shirts priced at $29.99 and $800 leather sectional sofas. The strategy was to entice the shoppers and bargain – hunting shoppers would go to Costco more frequently than for periodic “stock up” trips. The shoppers quickly learned that they need to buy treasure – hunt specials that interested them because these items would very likely not available on their next shopping trip.

43. Costco’ s Strategy Low cost emphasis Costco eliminate all the frills and costs historically associated with conventional retailers, including salespeople, fancy buildings, delivery, billing, and accounts receivable. They locate warehouses on high – traffic routes in or near upscale suburbs that were easily accessible by small businesses and residents with above – average incomes, it avoided prime real estate sites in order to contain land costs. Warehouse building material: Metal pre-engineered design, concrete floors and minimal interior décor

44. COSTCO’S WAREHOUSE

45. Costco’ s Strategy Growth Strategy Costco had opened between 14 and 34 new locations annually (most in the US). In the fiscal year 2011, Costco spent $1.3 billion to open 20 new locations, two newly relocated warehouses, and several distribution depots. In the fiscal year 2012: 4 new warehouses in the US and 2 new warehouses in Japan (first 4 months of fiscal year 2012) and planned to open an additional 12 new warehouses on September, 2012.

46. Grade the CEO

47. Game: Name Right Names By whom you are inspired?

48. Source: http:// www.cnbc.com/2009/04/24/Portfolios-Best-American-CEOs-of-All-Time.html?slide=12

49. Source: http:// www.cnbc.com/2009/04/24/Portfolios-Best-American-CEOs-of-All-Time.html?slide=14

50. "If you've got to work for the rest of your life, you'd better do something you'll enjoy” http:// www.exploringmarkets.com/2014/02/costco-founder-james-sinegal-might-have.html

51. INTELLIGENCE HONEST CREATIVE CONFIDENT DRIVEN COURAGEOUS What can you see?

52. What can you see? INTELLIGENCE HONEST CREATIVE CONFIDENT DRIVEN COURAGEOUS INTEL L IGENCE HON E ST CRE A TIVE CONFI D ENT DRIV E N COU R AGEOUS

53. Source: Textbook - Strategy: Core Concepts and Analytical Approaches – Arthur A. Thompson, The University of Alabama – Chapter 2 – Page 13

54. T a sk 1 Developing Strategic, vision, mission and core value Strategic vision indicates the paths that company takes in developing and strengthening its business as preparing for long-term future Key consideration in Deciding Company’s Future Direction: External vs. Internal What is your Slogan? Strategic vision vs. Mission Statement? Strategic vision sets company’s future direction “where are we going” Mission statement describes the present “who we are, what we do, and why we are here”

55. Back up Source: Textbook - Strategy: Core Concepts and Analytical Approaches – Arthur A. Thompson, The University of Alabama – Chapter 2 – Page 13

56. Setting Objectives T a sk 2 WHAT - “Objectives are an organization’s performance target” WHO - “Objectives reflects managerial commitment to deliver results and outcomes. WHY: Helps organization to be focus on what should be completed to deliver expected overall outcomes Considered as Benchmark to track company performance Motivates all members to deliver best possible results WHERE & WHEN? HOW???

57. Setting Objectives T a sk 2

58. https:// www.youtube.com/watch?v=biyGxEix5Zs First introduced by Kaplan and Norton, 1992, Havard Business Review Tracking Financial result while monitoring progress in building the capabilities for future growth. To integrate Long-term strategy with Short-term financial goals Not as replacement of Financial measures, but complement. Four main processes: Translating the vision Communicating and linking Business planning Feedback and learning

59. https:// www.youtube.com/watch?v=biyGxEix5Zs

60. Source: Textbook - Strategy: Core Concepts and Analytical Approaches – Arthur A. Thompson, The University of Alabama – Chapter 2 – Page 9 Back up

61. Crafting Strategy to achieve objectives and vision T a sk 3 CORPORATE STRATEGY BUSINESS STRATEGY FUNCTIONAL STRATEGY OPERATIONALSTRATEGY CEO and Other Senior Executives General Managers Functional Heads Sub-Functional Heads Two-way Influence Top down vs. Bottom Up Reproduced: Textbook - Strategy: Core Concepts and Analytical Approaches – Arthur A. Thompson, The University of Alabama – Chapter 2 – Page 14

62. Source: Textbook - Strategy: Core Concepts and Analytical Approaches – Arthur A. Thompson, The University of Alabama – Chapter 4 – Page 2 Back up

63. Source: Textbook - Strategy: Core Concepts and Analytical Approaches – Arthur A. Thompson, The University of Alabama – Chapter 2 – Page 13 Resources preparation: Human resources, Physical Resources, Financial Resources Internal process, policies and supporting systems Rewards and Recognition, Employee Engagement

64. T a sk 1 Developing Strategic, vision, mission and core value Setting Objectives Crafting Strategy to achieve objectives and vision Implementing and Executing T a sk 2 T a sk 3 T a sk 4 T a sk 5 Monitoring developments, evaluating performance, and initiating corrective actions Costco’s case

65. T a sk 1 Developing Strategic, vision, mission and core value Setting Objectives Crafting Strategy to achieve objectives and vision Implementing and Executing T a sk 2 T a sk 3 T a sk 4 Overall Grade: A- T a sk 5 Monitoring developments, evaluating performance, and initiating corrective actions Costco’s case

66. Jim Sinegal’s core values for Costco Obey the law Take care of Members Take care of Employees Respect Suppliers Reward shareholders

67. Jim Sinegal’s core values for Costco - ABCD A dhering to a strict code of ethics: taking care of our employees and members, respecting our suppliers, rewarding our shareholders B ringing the highest quality goods and services to market at the lowest possible prices C omplying to Law, seeking to be responsible corporate citizens and environmental stewards D elivering excellent customer services.

68. Porter’s Five Forces Analysis

69. Porter’ Five Forces

70. High Rivalry among Existing Competitors - Fierce competition both from dominant players in wholesale club industry and other forms of retailing businesses ( Euromonitor , 2015 ). - Minimal switching cost involved (Cal State LA, n.d . ) - No notable differentiation between the merchandise offerings of players in the market (Cal State LA, n.d. ) - Competitors compete on pricing and accessibility through frequent new stores’ openings (Arthur, 2012).

71. High Threat of Substitute Products - Various types of retailers are available that can be easily accessible, such as online retailers ( Euromonitor , 2015). - Products are not differentiated and can be easily purchased at other locations (Cal State LA, n.d . ). - Minimal switching cost, especially for members without membership (Cal State LA, n.d . ).

72. Low Supplier Bargaining Power - No single supplier who accounts for a large proportion of merchandise that the wholesale club stocks (Cal State LA, n.d . ). - Wholesale clubs are big-volume purchasers. - Dominant firms like Costco and Sam’s Club possess strong bargaining power due to their reputation in the market.

73. Moderate Buyer Bargaining Power - M any customers are individuals who buy in small quantities. - Minimal switching cost involved whereas customers can easily switch to other alternative forms of retailers without facing any substantial disadvantages (Cal State LA, n.d . ). - Undifferentiated products’ ( Cal State LA, n.d. ).

74. Low Threats of New Entrants H igh entry barriers that are derived from: - Formidable competitors with firm positions in the market that enjoy the benefits of economies of scale that are not easily accessible by new players (Cal State LA, n.d. ). - Effective competition requires sizeable capital (Cal State LA , n.d . ). - C urrent players’ popularity remain a major obstacle for newcomers to build up trust and customer relationship (MarketLine,20 15).

75. Financial Performance

76. Findings: 2011-Strong revenue growth at 14.1% and a 17.4% increase in operational profit – Flow through algorithm 2015 – Moderate revenue growth at 3.2%. However, Operating profit grow at 12.6% to maintain the flow through. Membership is the main contributors to Profit, ultra-low pricing mark-up rate

77. Source: 2015 Costco Annual Report

78. Back up

79. Profitability Ratios

80. Liquidity Ratios and Capital Structure

81. Is there any link among these ratios?

82. http ://www.investopedia.com/video/play/dupont-analysis / DuPont Analysis

83. Costco – Sam’s Club - BJ

84. Costco Wholesale Competition Costco has not only wholesale competitors but also retailers. Two main wholesale competitors are Sam’s Club, BJ’s Wholesale Club.

85. What make they are different?/ competitors? Costco Sam’s Club BJ’s Wholesale Club Position High-traffic routes in or near upscale suburb Near Wal-Mart Near Costco or Sam’s Club (within 10 miles) Items 3600 4000 7000 Treasure - hunt Treasure - hunt items are upscale Treasure - hunt items are less upscale but cheaper than Costco’s Price Lowest price Low price Low price

86. Costco Sam’s Club BJ’s Wholesale Club Added service (pharmacy, optic, gasoline...)    Beside, BJ also has some special services such as vacation and travel package, garden and storage sheds, patio and sun rooms.... Social Media Website, Facebook, Twitter Blogs which be operated by customers to share their experience. Website, Facebook, Twitter Website, Facebook, Twitter

87. Costco Sam’s Club BJ’s Wholesale Club Customer Care Service (Returns, Refunds & Exchange Policy) Payment method approve Store quality 90 days from the purchase date to return your order for a full refund. All of payment cards which include both Bill Me Later and American Express be approved in Costco Many customers feel Costco is much cleaner than BJ’s and prefer to shop at Costco for bulk items. Electronic device (90 days) other goods (30 days). American Express Card not be approved Clear Electronic device (90 days) other goods (30 days). One of the payment methods that is not accepted at BJ's Wholesale Club at this time is Bill Me Later . Less Clean

88. Costco Sam’s Club BJ’s Wholesale Club Website Security & Safety Transfer Money Delivery method. Use security and safety transfer money by third party – McAfee Only tires can be shipped to Costco stores for collections and not any others. The rates vary with service required, using UPS for its delivery services ensures smooth and timely delivery of products ordered. Use security and safety transfer money by themselves. Depend on size and weight of good, they will choose shipment method by themselves. Use security and safety transfer money by themselves . BJ’s Wholesale Club cannot ship packages to P.O. Boxes.

89. Costco Sam’s Club BJ’s Wholesale Club Member ship Business members: fee of $55 (include a supplemental card). Individual members: fee of $55 (include a supplemental card). Executive members : fee of $100. Save 2% on purchases, save on various service offered by Costco and third-party company such as insurance, loan, real estate and mortgage service... Accept goods returns Business members: fee of $35 (include a supplemental card). Individual members: fee of $40 (include a supplemental card). Premium members : fee of $100 (including health care insurance, personal and financial service, recreational vehicle program). Cash back 2% Business members: fee of $50(include a supplemental card). Individual members: fee of $50 (include a supplemental card). Rebate 2% Accept goods returns

90. Competitive Advantages Costco’s wholesale is better than Sam’s Club & BJ’s Wholesale: Low Price Good customer service. Good Customer care. Effective Social network. Costco have winning strategy to focus on customer need (Lowest price) and try to satisfy them (customer care & service).

91. Costco’s Prices Costco Prices are Lowest. (they always try to make try to make price is lower than their rivals) Focusing on customer need. (Business strategy) (Buy quality product with the best price to save money). Try to improve customer care & service better than other rival – payment, delivery methods…)

92. Compensation Policies

93. Overview - In 2015, Costco employs about 205,000 employees (88,000 are part-time employees and 117,000 full-time employees) ( Statista ,2015). Ranked as second best employer in the US (Clare, 2015). The company’s turnover rate is kept at 5% for employees who have worked at Costco for more than a year ( Aaron, 2014).

94. Overview - Craig Jelinek – the CEO of Costco believes that a more rewarding workplace will eventually lower employee turnover rate, boost their productivity and on-job performance ( Aaron, 2014 ).

95. Compensation Practices Comparison Costco Sam’s Club BJ’s Pay rate Average of $20/hour (Aaron, 2014 ) $9 – 13/hour ( PayScale , n.d. ) $9 – 13/hour ( PayScale , n.d. ) Health-based benefits Medical, Dental, Mental health and substance abuse, Pharmacy, Vision and hearing aid coverage, Personal wellness tools, care network, behavioral health (Costco, 2016) Consumer-directed health plans, Vision, Dental, Counseling services, Illness protection ( Walmart Careers, 2016) Medical, Dental, Employee assistance program (BJ’s Careers, 2016) Financial-based benefits 401(k) retirement plan, Stock purchase plan, Money management information, employee self-service (Costco, 2016) 401(k) retirement plan, Stock purchase plan, Discount cards when buying at Walmart and Sam’s club ( Walmart Careers, 2016) 401(k) retirement plan (BJ’s Careers, 2016) Other benefits Reimbursement account, Various forms of insurance (Costco, 2016) Various forms of insurance ( Walmart Careers, 2016) Flexible spending account, Various forms of insurance (BJ’s Careers, 2016)

96. COSTCO VS SAM’S CLUB VS BJ’S

97. SWOT Analysis STRENGTHS WEAKNESSES Well-perceived private label brand (Kirkland Signature) ( Euromonitor , 2015). Available gasoline and other additional services encourage more frequent shopping ( MartketLine , 2015). Higher market coverage (9 markets) compared to Sam’s Club (only 4) ( Euromonitor , 2015). Low cost operating model ( MarketLine , 2015). Healthy financial position ( Euromonitor , 2015). Dependence on North America market s ( MarketLine , 2015). Limited product choice (only 3,700 products) ( MartketLine , 2015).

98. SWOT Analysis OPPORTUNITIES THREATS International e xpansion enable Costco to access to a large customer base( Euromonitor , 2015). Multichannel retailing enables Costco to widen its reach ( Euromonitor , 2015). Face fierce competition from various types of retailers ( Euromonitor , 2015). Catered to middle-high income class but faces challenges in US as such class proportion continues to decrease ( Euromonitor , 2015). Low customers’ loyalty.

99. Recommendations Recommendation 1: Focus in developing internet retailing and multi-channel strategies - Capitalize on its strong financial position to invest in creating new retailing channels. - Allow to minimize threats posed by other retailing channels. - Stronger online presence enables Costco to reach a wider customer base.

100. Recommendations Recommendation 2: Global expansions into untapped markets - Reduce Costco’s dependence on North America market. - Partnerships with other Internet retailers can allow Costco to enter untapped markets without physical presence .

101. Revision 1. The process of crafting and executing a company’s strategy consists of : Developing a Strategic mission Setting Objectives Monitoring and corrective action to short-term fix issues. All are correct

102. Revision 2 . To improve Cash Collection Cycle, the company should: Extend DSO, Shorter DPO Extend DSO, Extend DPO Shorter DSO, Shorter DPO Shorter DSO, Extend DPO

103. Revision 3. Four main process in developing Balanced Scorecard: Translating the vision, Communicating and linking, Business planning, Feedback and learning Translating the vision, Business planning, Communicating and linking,F eedback and learning Develop mission, Business planning, Communicating and linking , Feedback and learning Develop mission, Communicating and linking , Business planning, Feedback and learning

104. Revision 4 . Which statement is TRUE: A company achieves competitive advantage when an attractive number of Buyers are drawn to purchase its products or services rather than those of competitors A company achieves sustainable advantage when the basis for buyer references for its product offering relative to the offerings of its rivals is durable, despite competitors’ efforts to nullify or overcome the appeal of its product offering Both are TRUE Both are FALSE

105. References Euromonitor International 2015, Costco Wholesale Corp in Retailing (World) . Retrieved January 25, 2016, from http://www.euromonitor.com / Euromonitor International 2016, Costco Wholesale Canada Ltd in Retailing (Canada ) . Retrieved January 25 , 2016 , from http://www.euromonitor.com/ MarketLine 2015, Costco Wholesale Corporation. Retrieved January 24 , 2016, from http ://www.marketline.com / Statista 2015. Number of Costco employees worldwide from 2011 – 2015 (in 1,000s). Statista – The Statistics Portal . Retrieved from http :// www.statista.com/statistics/284430/costco-number-of-employees-worldwide-2011-2013/ Aaron, T (2014, October 23) . Why Costco Pays Its Retail Employees $20 An Hour. Business Insider . Retrieved from http :// www.businessinsider.com/costco-pays-retail-employees-20-an-hour-2014-10

106. References Cal State LA n.d. , Sample Case Study: Costco. Retrieved January 23, 2016, from http ://web.calstatela.edu/faculty/klai/Course/497Costco.pdf Clare, C (2015, March 25). America’s Best Employers 2015. Forbes . Retrieved from http :// www.forbes.com/sites/clareoconnor/2015/03/25/americas-best-employers- 2015 /#2351e9e76ceb Costco 2016, Costco Wholesale Corp in Retailing (World) . Retrieved January 25, 2016, from http ://www.euromonitor.com/ Payscale n.d. Average Hourly Rate for Sam's Club Employees. PayScale . Retrieved from http ://www.statista.com/statistics/284430/costco-number-of-employees-worldwide-2011-2013/ Payscale n.d. Average Hourly Rate for Sam's Club Employees. PayScale . Retrieved from http ://www.payscale.com/research/US/Employer=BJ's_Wholesale_Club/Hourly_Rate Arthur A. T. Strategy: Core Concepts and Analytical Approaches . The University of Alabama, Chapter 2 , Page 13