Costco Wholesale in 2018 Mission Business Model & Strategy Case Study Paper This is a case analysis and i should be easy, because the professor required it

Costco Wholesale in 2018 Mission Business Model & Strategy Case Study Paper This is a case analysis and i should be easy, because the professor required it to be “easy to read.” As well, there will be an example provided below! It also, requires an excel spread sheet to support the conclusion! Final PDF to printer
CASE 4
Costco Wholesale in 2018: Mission,
Business Model, and Strategy
Arthur A. Thompson Jr.,
The University of Alabama
S
ix years after turning the leadership of Costco
Wholesale over to then-president, Craig Jelinek,
Jim Sinegal, Costco’s co-founder and chief executive officer (CEO) from 1983 until year-end 2011,
had ample reason to be pleased with the company’s
ongoing revenue growth and competitive standing as
one of the world’s biggest and best consumer goods
merchandisers. Sinegal had been the driving force
behind Costco’s 35-year evolution from a startup entrepreneurial venture into the third largest retailer in the
United States, the seventh largest retailer in the world,
and the undisputed leader of the discount warehouse
and wholesale club segment of the North American
retailing industry. Since January 2012, when Craig
Jelinek took the reins as Costco Wholesale’s president
and CEO, the company had prospered, growing from
annual revenues of $89 billion and 598 membership
warehouses at year-end fiscal 2011 to annual revenues
of $126.2 billion and 741 membership warehouses
at year-end fiscal 2017. Costco’s growth continued
in the first nine months of fiscal 2018; 9-month revenues were $95.0 billion, up 12.0 percent over the first
9 months of fiscal 2017, and the company had opened
four additional warehouses. As of June 2018, Costco
ranked as the second largest retailer in both the United
States and the world (behind Walmart).
COMPANY BACKGROUND
The membership warehouse concept was pioneered
by discount merchandising sage Sol Price, who
opened the first Price Club in a converted airplane
hangar on Morena Boulevard in San Diego in 1976.
Price Club lost $750,000 in its first year of operation, but by 1979 it had two stores, 900 employees,
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200,000 members, and a $1 million profit. Years earlier, Sol Price had experimented with discount retailing at a San Diego store called Fed-Mart. Jim Sinegal
got his start in retailing at the age of 18, loading mattresses for $1.25 an hour at Fed-Mart while attending
San Diego Community College. When Sol Price sold
Fed-Mart, Sinegal left with Price to help him start
the San Diego Price Club store; within a few years,
Sol Price’s Price Club emerged as the unchallenged
leader in member warehouse retailing, with stores
operating primarily on the West Coast.
Although Price originally conceived Price Club
as a place where small local businesses could obtain
needed merchandise at economical prices, he soon
concluded that his fledgling operation could achieve
far greater sales volumes and gain buying clout with
suppliers by also granting membership to ­individuals—a
conclusion that launched the deep-discount warehouse
club industry on a steep growth curve.
When Sinegal was 26, Sol Price made him the
manager of the original San Diego store, which had
become unprofitable. Price saw that Sinegal had a
special knack for discount retailing and for spotting
what a store was doing wrong (usually either not
being in the right merchandise categories or not selling items at the right price points)—the very things
that Sol Price was good at and that were at the root
of Price Club’s growing success in the marketplace.
Sinegal soon got the San Diego store back into the
black. Over the next several years, Sinegal continued
to build his prowess and talents for discount merchandising. He mirrored Sol Price’s attention to detail and
absorbed all the nuances and subtleties of his mentor’s
Copyright ©2019 by Arthur A. Thompson. All rights reserved.
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Cases in Crafting and Executing Strategy
style of operating—constantly improving store operations, keeping operating costs and overhead low,
stocking items that moved quickly, and charging ultralow prices that kept customers coming back to shop.
Realizing that he had mastered the tricks of running a
successful membership warehouse business from Sol
Price, Sinegal decided to leave Price Club and form
his own warehouse club operation.
Sinegal and Seattle entrepreneur Jeff Brotman
founded Costco, and the first Costco store began
operations in Seattle in 1983—the same year that
Walmart launched its warehouse membership format, Sam’s Club. By the end of 1984, there were
nine Costco stores in five states serving over 200,000
members. In December 1985, Costco became a public
company, selling shares to the public and raising additional capital for expansion. Costco became the first
ever U.S. company to reach $1 billion in sales in less
than six years. In October 1993, Costco merged with
Price Club. Jim Sinegal became CEO of the merged
company, presiding over 206 PriceCostco locations,
with total annual sales of $16 billion. Jeff Brotman,
who had functioned as Costco’s chairman since
the company’s founding, became vice chairman of
PriceCostco in 1993 and was elevated to chairman of
the company’s board of directors in December 1994,
a position he held until his unexpected death in 2017.
In January 1997, after the spin-off of most of its nonwarehouse assets to Price Enterprises Inc., PriceCostco
changed its name to Costco Companies Inc. When the
company reincorporated from Delaware to Washington
in August 1999, the name was changed to Costco
Wholesale Corporation. The company’s headquarters
was in Issaquah, Washington, not far from Seattle.
Jim Sinegal’s Leadership Style
Sinegal was far from the stereotypical CEO. He dressed
casually and unpretentiously, often going to the office
or touring Costco stores wearing an open-collared cotton shirt that came from a Costco bargain rack and
sporting a standard employee name tag that said, simply, “Jim.” His informal dress and unimposing appearance made it easy for Costco shoppers to mistake him
for a store clerk. He answered his own phone, once telling ABC News reporters, “If a customer’s calling and
they have a gripe, don’t you think they kind of enjoy the
fact that I picked up the phone and talked to them?”1
Sinegal spent considerable time touring Costco
stores, using the company plane to fly from location
to location and sometimes visiting 8 to 10 stores daily
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(the record for a single day was 12). Treated like a
celebrity when he appeared at a store (the news “Jim’s
in the store” spread quickly), Sinegal made a point of
greeting store employees. He observed, “The employees know that I want to say hello to them, because
I like them. We have said from the very beginning:
‘We’re going to be a company that’s on a first-name
basis with everyone.’”2 Employees genuinely seemed
to like Sinegal. He talked quietly, in a commonsensical manner that suggested what he was saying was
no big deal.3 He came across as kind yet stern, but
he was prone to display irritation when he disagreed
sharply with what people were saying to him.
In touring a Costco store with the local store
manager, Sinegal was very much the person-incharge. He functioned as producer, director, and
knowledgeable critic. He cut to the chase quickly,
exhibiting intense attention to detail and pricing,
wandering through store aisles firing a barrage of
questions at store managers about sales volumes and
stock levels of particular items, critiquing merchandising displays or the position of certain products in
the stores, commenting on any aspect of store operations that caught his eye, and asking managers to
do further research and get back to him with more
information whenever he found their answers to his
questions less than satisfying. Sinegal had tremendous merchandising savvy, demanded much of store
managers and employees, and definitely set the tone
for how the company operated its discounted retailing business. Knowledgeable observers regarded Jim
Sinegal’s merchandising expertise as being on a par
with Walmart’s legendary founder, Sam Walton.
In September 2011, at the age of 75, Jim Sinegal
informed Costco’s Board of Directors of his intention
to step down as CEO of the company effective January
2012. The Board elected Craig Jelinek, President and
Chief Operating Officer since February 2010, to succeed Sinegal and hold the titles of both President and
CEO. Jelinek was a highly experienced retail executive
with 37 years in the industry, 28 of them at Costco,
where he started as one of the Company’s first warehouse managers in 1984. He had served in every
major role related to Costco’s business operations and
merchandising activities during his tenure. When he
stepped down as CEO, Sinegal retained his position
on the company’s Board of Directors and, at the age
of 79, was re-elected to another three-year term on
Costco’s board in December 2015; he retired from
Costco’s Board at the end of his term in January 2018.
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Case 4
Costco Wholesale in 2018: Mission, Business Model, and Strategy
COSTCO WHOLESALE IN 2018
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members per day. Annual sales per store averaged
about $170 million ($3.3 million per week) in 2017,
over 70 percent higher than the $99.2 million per year
and $1.9 million per week averages for Sam’s Club,
Costco’s chief competitor. In 2014, 165 of Costco’s
warehouses generated sales exceeding $200 million
annually, up from 56 in 2010; and 60 warehouses had
sales exceeding $250 million, including two that had
more than $400 million in sales.4 In 2018, Costco was
the only national retailer in the history of the United
States that could boast of average annual revenue in
excess of $170 million per location.
Exhibit 1 contains a financial and operating
summary for Costco for fiscal years 2000, 2005, and
from 2014 through 2017.
In June 2018, Costco was operating 750 membership
warehouses, including 520 in the United States and
Puerto Rico, 98 in Canada, 38 in Mexico, 28 in the
United Kingdom, 26 in Japan, 14 in South Korea, 13
in Taiwan, 9 in Australia, 2 in Spain, 1 in France, and
1 in Iceland. Costco also sold merchandise to members at websites in the United States, Canada, the
United Kingdom, Mexico, South Korea, and Taiwan.
Over 90 million cardholders were entitled to shop at
Costco as of January 2018; in fiscal year 2017, membership fees generated over $2.85 billion in revenues
for the company. Headed into 2018, on average, traffic at Costco’s warehouse locations averaged 3 million
EXHIBIT 1?Selected Financial and Operating Data for Costco Wholesale Corp., Fiscal
Years 2000, 2005, and 2014–2017 ($ in millions, except for per share data)
Fiscal years ending on Sunday closest to August 31
Selected Income
Statement Data
Net sales
Membership fees
?Total revenue
Operating expenses
?Merchandise costs
?Selling, general and
administrative
?Preopening expenses
?Provision for impaired assets
and store closing costs
Total operating expenses
Operating income
Other income (expense)
?Interest expense
?Interest income and other, net
Income before income taxes
Provision for income taxes
Net income
Diluted net income per share
Dividends per share (not including
special dividend of $7.00 in
2017 and $5.00 in 2015)
Millions of shares used in
per share calculations
2017
2016
2015
2014
2005
2000
$126,172
?? 2,853
129,025
$116,073
?? 2,646
118,719
$113,666
?? 2,533
116,199
$110,212
?? 2,428
112,640
$51,862
?? 1,073
52,935
$31,621
?? 544
32,164
111,882
12,950
102,901
12,068
101,065
11,445
98,458
10,899
46,347
5,044
28,322
2,755
82
?? ?? ———
78
———
65
———
63
———
53
16
42
7
124,914
4,111
115,047
3,672
112,575
3,624
109,420
3,220
51,460
1,474
31,126
1,037
(134)
?? 62
4,039
1,325
$ 2,714
$???
6.08
$???
1.90
(133)
?? 80
3,619
1,243
$ ?? 2,350
$5.33
$1.70
(124)
??? ?? 104
3,604
1,195
$ 2,377
$5.37
$1.51
(113)
?? 90
3,197
1,109
$????2,058
$4.65
$1.33
(34)
?? 109
1,549
??486
$??? 1,063
$2.18
0.43
(39)
?? 54
1,052
??421
$?? ??631
$?? ??1.35
0.00
440.9
441.3
442.7
442.5
492.0
475.7
??
??
(Continued)
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Cases in Crafting and Executing Strategy
2017
2016
2015
2014
2005
2000
$ 4,546
9,834
17,317
17,485
18,161
36,347
6.573
10,778
$ 3,379
8,969
15,218
15,575
17,043
33,163
4,061
12,079
$ 4,801
8,908
16,779
16,539
15,401
33,017
4,852
10,617
$ 5,738
8,456
17,588
14,412
14,830
33,024
5,093
12,515
$ 2,063
4,015
8,238
6,761
7,790
16,514
711
8,881
$??525
2,490
3,470
3,404
4,834
8,634
790
4,240
$ ??6,726
$ 3,292
$ 4,285
$3,984
$ 1,773
$ 1,070
715
686
663
634
417
292
28
33
26
30
21
25
(2)
(4)
(3)
(1)
(5)
(4)
741
$???170
715
$???162
686
$???166
663
$???166
433
$???120
313
$??? 101
4%
4%
7%
6%
7%
11%
10,800
10,800
10,600
10,400
5,000
4,200
38,600
49,400
42,600
36,800
47,600
42,600
34,000
44,600
40,200
31,600
42,000
34,400
16,200
21,200
n.a.
10,500
14,700
n.a.
90,300
86,700
81,300
76,400
?? ———
———
Balance Sheet Data
Cash and cash equivalents
Merchandise inventories
Current assets
Current liabilities
Net property and equipment
Total assets
Long-term debt
Stockholders’ equity
Cash Flow Data
Net cash provided by operating
activities
Warehouse Operations
Warehouses in operation at
beginning of yeara
?New warehouses opened
(including relocations)
?Existing warehouses closed
(including relocations)
Warehouses at end of year
Net sales per warehouse open at
year-end (in millions)
Average annual growth at
warehouses open more than a year
(excluding the impact of changing
gasoline prices and foreign
exchange rates)
Members at year-end
Businesses, including add-on
members (000s)
Gold Star members (000s)
Total paid members
Household cardholders that both
business and Gold Star members
were automatically entitled to
receive
Total cardholders
a
At the beginning of Costco’s 2011 fiscal year, the operations of 32 warehouses in Mexico that were part of a 50 percent-owned joint venture were consolidated and reported as part of Costco’s total operations.
Note: Some totals may not add due to rounding and to not including some line items of minor significance in the company’s statement of
income.
Sources: Company 10-K reports for fiscal years 2000, 2005, 2015, 2016, and 2017.
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Case 4
Costco Wholesale in 2018: Mission, Business Model, and Strategy
COSTCO’S MISSION,
BUSINESS MODEL, AND
STRATEGY
Costco’s stated mission in the membership warehouse
business was: “To continually provide our members
with quality goods and services at the lowest possible
prices.”5 However, in a “Letter to Shareholders” in
the company’s 2011 Annual Report, Costco’s three
top executives—Jeff Brotman, Jim Sinegal, and Craig
Jelinek—provided a more expansive view of Costco’s
mission, stating:
The company will continue to pursue its mission of
bringing the highest quality goods and services to market at the lowest possible prices while providing excellent customer service and adhering to a strict code of
ethics that includes taking care of our employees and
members, respecting our suppliers, rewarding our shareholders, and seeking to be responsible corporate citizens
and environmental stewards in our operations around
the world.”6
In the company’s 2017 Annual Report, Craig
Jelinek elaborated on how environmental sustainability fit into Costco’s mission:
Sustainability to us is remaining a profitable business
while doing the right thing. We are committed to lessening our environmental impact, decreasing our carbon
footprint, sourcing our products responsibly, and working with our suppliers, manufacturers, and farmers to
preserve natural resources. This will remain at the forefront of our business practices. 7
The centerpiece of Costco’s business model was
a powerful value proposition that featured a combination of (1) ultra-low prices on a limited selection
of nationally branded and Costco’s private-label
Kirkland Signature products in a wide range of merchandise categories, (2) very good to excellent product quality, and (3) intriguing product selection that
included both everyday items and ongoing special
purchases from a big variety of merchandise suppliers that turned shopping at Costco into a moneysaving treasure hunt. Ever since the company’s
founding, Costco management had strived diligently
to ensure that shopping at Costco delivered enough
value to keep existing members returning frequently
to a nearby warehouse and spur membership growth
every year, thereby generating high sales volumes and
rapid inventory turnover at each warehouse and creating opportunities to open new warehouses.
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Big sales volumes and rapid inventory ­turnover—
when combined with the low operating costs achieved
by volume purchasing, efficient distribution, and
reduced handling of merchandise in no-frills, selfservice warehouse facilities—enabled Costco to operate profitably at significantly lower gross margins
than traditional wholesalers, mass merchandisers,
supermarkets, and supercenters. Membership fees
were a critical element of Costco’s business model
because they provided sufficient supplemental revenues to boost the company’s overall profitability
to acceptable levels. Indeed, Costco’s revenues from
membership fees typically exceeded 100 percent of
the company’s net income, meaning that the rest of
Costco’s worldwide business operated on a slightly
below breakeven basis (see Exhibit 1)—which translated into Costco’s prices being exceptionally competitive when compared to the prices that Costco
members paid when shopping elsewhere.
Another important business model element was
that Costco’s high sales volume and rapid inventory
turnover generally allowed it to sell and receive cash
for inventory before it had to pay many of its merchandise vendors, even when vendor payments were
made in time to take advantage of early payment
discounts. Thus, Costco was able to finance a big
percentage of its merchandise inventory through the
payment terms provided by vendors rather than by
having to maintain sizable working capital (defined
as current assets minus current liabilities) to enable
timely payment of suppliers.
Costco’s Strategy
The key elements of Costco’s strategy were ultralow prices, a limited selection of nationally branded
and top-quality Kirkland Signature products covering diverse merchandise categories, a “treasure
hunt” shopping environment that stemmed from a
constantly-changing inventory of about 900 “whilethey-last specials,” strong emphasis on low operating
costs, and ongoing expansion of its geographic network of store locations.
Pricing Costco’s philosophy was to keep customers coming in to shop by wowing them with low
prices and thereby generating big sales volumes.
Examples of Costco’s 2015 sales volumes that contributed to low prices in particular product categories included 156,000 carats of diamonds, meat
sales of $6.4 billion, seafood sales of $1.3 billion,
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Cases in Crafting and Executing Strategy
television sales of $1.8 billion, fresh produce sales of
$5.8 billion (sourced from 44 countries), 83 million
rotisserie chickens, 7.9 million tires, 41 million prescriptions, 6 million pairs of glasses, and 128 million
hot dog/soda pop combinations. Costco was the
world’s largest seller of fine wines ($965 million out
of total 2015 wine sales of $1.7 billion).
For many years, a key element of Costco’s pricing strategy had been to cap its markup on brand-name
merchandise at 14 percent (compared to 25 percent
and higher markups for other discounters and most…
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