Costco Powerpoint Presentation

1. Presentation
Etienne Khoury

2. Executive Summary
Purpose: To examine Costco’s business structure
and strategy and how those relate to industry
success
Why this is worth YOUR time

3. Summary
•Revenues of 71 Billion
•550 Warehouses Today – Operates in:
–40 States
–9 Countries
•$137 million average sales/warehouse
•141,000 square feet/warehouse
•143,000 employees worldwide
•More than 1.4 million transactions/day

9. Background
CEO: James Sinegal
Headquarters: Issaquah, WA
Inception: Seattle, WA 1983
Stock Symbol: COST (NASDAQ)
Founders: James Sinegal & Jefferey
Brotman

11. Corporate Strategy
•Cost strategy
–Penetration Pricing
–Below the Line Promotion
–No frills
•“Diversion” Buying Strategy
–“Treasure hunt" shopping experience

12. Products
•Sundries which include candy, snack foods,
alcoholic and non-alcoholic beverages, and
cleaning supplies
•Hardlines which include major appliances,
hardware, electronics, and sporting goods
•Softlines including apparel, jewelry, and
small appliances
•Fresh food sales, like meat and baked
goods
•Other items which include gasoline,
pharmacy sales, and Costco's one-hour
photo development.

13. Abell’s Model

14. Customers (Who)
•Costco targets independent small business
owners who have typically $100,000 or more of
personal income
•Actual average Costco customer is women in
large householders with income of $50,000 or
more
•Most popular with Hispanic and Asian ethnic
groups
•Typically customer visits 8-11 times per year

15. Customers in Taiwan

16. Customer Needs (What)
•Quality Products
•Relatively Low Prices
•Convenience
•Reliability

17. Membership (How)
•Gold Star Member = $ 50
•Business Member = $ 50
•Executive Member = $ 100
•Membership fees allow Costco
to maintain low margins

18. Products (How)
•Costco focuses on selling products at low prices, at very
high volume.
•Goods are usually bulk-packaged
–Marketed primarily to large families and businesses.
•Does not carry multiple brands or varieties
–House brand to sell, under the Kirkland Signature
label.
•Results in high volume of sales from single vendor,
allowing further reduction in price, and reducing
marketing costs.

19. Industry Analysis
•Overview
–Warehouse Clubs and Superstores
•SWOT Analysis
•Porter Analysis
•Life Cycle

20. Industries
•Retail
–Discount and Variety Retail
•Warehouse Clubs and Superstores (primary)
–Gasoline Retailers
–Grocery Retail
–Nonstore Retail
•Internet Retail
•Consumer Services
–Optical Services
–Travel Agencies and Services
•Financial Services
–Lending
•Mortgage Banking and Related Services
•Insurance
–Property and Casualty
•Autos and Other Vehicles
•Homeowners Insurance

21. Warehouse Clubs and Superstores
•Warehouse club membership has grown
dramatically over the past couple of years
•Fees can range anywhere from $5-$100
•Costco, Sam’s Club, BJs Wholesale Club
•Great Success - “big box stores that sell
groceries as well as general merchandise at
lower costs”

22. Costco Today
•550 warehouses Worldwide
– 403 in US
–76 in Canada
–21 in UK
–6 in Korea
–5 in Taiwan
–8 in Japan
–31 in Mexico
Number of Warehouses
76%
1%
15%
1%
1%
4%2% US
Puerto Rico
Canada
Taiwan
Korea
UK
Japan
Number of Warehouses
76%
1%
15%
1%
1%
4%2% US
Puerto Rico
Canada
Taiwan
Korea
UK
Japan

23. SWOT Analysis

24. Strengths
•54.1m loyal cardholders
•Strong member renewals
•Absolute pricing authority
•Exceptional employees
•Excellent merchandise
•Quality image

25. Weaknesses
•Cannibalization
–Costco's overexpansion domestically risks
cannibalizing the sales of preexisting stores
•James Sinegal leave
•Maintaining high wages
–Costco's average pay, for example, is $17 an hour, 42
percent higher than its fiercest rival, Sam's Club
•Maintaining profit margins

26. Opportunities
•Recession has allowed Costco opportunities for luxury-item deals,
including the chance to sell prime-grade meat that used to go
almost exclusively to restaurants. With people eating out less often,
said Sinegal, "there are not as many steaks being sold in
restaurants, and we're selling them."
•To take over, merge with, or form strategic alliances with other
global retailers, focusing on specific markets such as Europe or the
Greater China Region.
•The stores are currently only trade in a relatively small number of
countries. Therefore there are tremendous opportunities for future
business in expanding consumer markets, such as China and India.

27. Threats
•Being a global retailer means that you are exposed to
political problems in the countries that you operate in.
•The cost of producing many consumer products tends to
have fallen because of lower manufacturing costs.
Manufacturing cost have fallen due to outsourcing to
low-cost regions of the World. This has lead to price
competition, resulting in price deflation in some ranges.
Intense price competition is a threat.
•Bad economic times (current recession)

28. Porter’s Five Forces
Supplier Power
•Low power
•Good relationship
•Large quantities at
lower costs
New Market Entrants
• High barriers to entry
•Costco has high competitive advantage
•Threat of new entrants is low
•Costco has wide array of products at
significant low prices, which makes it
almost impossible to compete
Competitive Rivalry
•High Competition
•Economies of scale/supply
chain management is easily
replicated
•Battle for lower costs results in
lower profit margins
Substitutes
•Low threat of substitutes
•Low cost shopping coupled
with high value
•Customer
satisfaction/member
retention is high
Buyer Power
•Bargaining power of buyers is high
•Little to no switching costs
(membership fees)
•High concentration/quantity of buyers
•Customers have high mobility
•Sell similar to same products

29. Life Cycle – Maturity Stage
•Costco is in the mature
stage
•Though profitable,
slower growth in sales
•Strong brand
awareness
•Shares market with
established
competitors

30. Competitive Analysis

31. Competitive Analysis
•Costco's main competition is Wal-Mart's Sam's Club. BJ’s, a smaller
retail warehouse chain, also competes with Costco and Sam's Club.
The three companies share a similar business model, selling high
volumes of merchandise at low prices in a membership-only
warehouse club. Each company sells a similar array of general
merchandise, including food, apparel, and gasoline.
•Sam's Club operates 591 warehouse clubs nationwide and earned
$44.4 billion in revenue in 2007.
•BJ's operates 177 warehouse clubs across 16 states in the eastern
U.S. In 2007, the company earned $9.0 billion in revenue.

32. Competitive Analysis
•Greater benefits for Costco employees
–Wages: $17/hr on average
–Health Insurance : 90% premium coverage
•Lower price margins

33. Financial Analysis
•Costco earned $71
Billion in revenue in
2008 – 12.5% increase
from 2007
•In 2008, Costco’s
operating margin
reached 2.77%
•Costco’s net income in
2008 was $1.28 billion
dollars – an 18.5%
increase from 2007

35. Financial Analysis

36. Costco Stock

37. Future Outlook
Costco's Future Outlook

38. Questions
?