Managerial Economics Questions
Organization
Kyle Jelinek
CEO
My Father: Craig
Jelinek
Kate
CFO
Jim
Supply Chain
manager
Alexandra
Marketing
Director
I am
Nash
Economist
About Costco
• Costco is a Washington corporation, Nasdaq ticker symbol “COST”.
• Operates an international chain of membership warehouses, mainly
under the "Costco Wholesale" name, that carry quality, brand name
merchandise at substantially lower prices than are typically found at
conventional wholesale or retail sources.
• The warehouses are designed to help small-to-medium-sized
businesses reduce costs in purchasing for resale and for everyday
business use. (Individuals may also purchase for their personal needs.)
Membership Only
• Costco is open only to members and offers three types of
membership: Business, Gold Star (individual) and the Executive
membership.
What Do We Sell?
Costco's warehouses present one of the largest and most exclusive
product category selections to be found under a single roof. Categories
include groceries, candy, appliances, television and media, automotive
supplies, tires, toys, hardware, sporting goods, jewelry, watches,
cameras, books, housewares, apparel, health and beauty aids, tobacco,
furniture, office supplies and office equipment.
Kirkland
Members can also shop for private label Kirkland Signature products,
designed to be of equal or better quality than national brands, including
juice, cookies, coffee, housewares, luggage, clothing and detergent.
Q1: If Costco raises
membership fee by 5%
(inflation trend), what will
be the shifts in the demand
curves of these three kinds
of shoppers? (Please
illustrate it)
Type 1: Small business manager –
Javier/Ken Liu
 Background: Ken &
Javier co-own a
breakfast store near
NCCU. Javier Also
owns a farm.
 Income: NT100,000.
 Frequency: once every
2 weeks.
 Shop Items:
bacon/toast/Ken buys
PS3 and muffins for
his daughter/Javier
buys farming tools
Type 2: High income people Kelly / Andrea
 Background: Andrea
and Kelly are
neighbors, both
their husbands run
own company
 Income: NT300,000
/ month
 Frequency: once per
week
 Shop items: office
supplies/cereal/fres
h food (premium
steak/wine/
designer handbags
or jewelry
Type 3: Young Generation, Shop in Costco
for Fun
 Background: Jin is a student
but actually he is a party
animal.
 Income: NT8,000 pocket
money from parents
 Frequency: once per month
 Shop items: salty
snack/beers/shampoos and
lotions (for his girlfriend)
Q2: Should Costco change
different membership rates
in countries with different
income levels, to expand its
business to broader
geographical areas?


Two part pricing – soaks up higher quantities
of buyers’ surplus.
Uniform Pricing combined with indirect
Buyers Surplus = Membership
segment discrimination.
Fee
Three types of membership:
• Executive Membership – annual 2% reward
- US$110
• Business Membership – for managers US$55
• Gold Star Membership – individuals and
households - $55



Pay and benefits for workers are
high compared to the competition
– less workers turnover costs and
theft by employees.
No advertising – saves them 2%
of budget per year for employee
pay and benefits.
Aim for upscale shoppers,
especially small-business owners.

CEO’s salary is only US$350,000 - less than
10 percent of many other chief executives.
Savings translated into lower prices and
higher benefits.
CEO Kyle

Typical Costco store stocks 4,000 types of
items, increasing sales volume per supplier,
allowing for better discounts.



No item can be marked up by more than 15
percent.
Before season sales – buying cheaper from
suppliers.
Coupons for discounts on common use
products – attract more price elastic
customers.
The treasure hunting shopping experience
PRODUCT
PRICE
•
•
•
•
Exclusive items
Premium quality
Bulk size but
easy-to -use
package
High value/
100% refund
policy
80% of
competitors’
EDLP
•
TARGET
MARKET
PLACE
•
•
•
Warehouse like
Ready display on
pellets
Minimum
signage in store
PROMOTION
•
•
•
•
Wallet program
Passport
coupons
End-cap display
In-store trials
Products:
Box Size on the Rise, But SKUs Down
143,500
4,100
143,000
4,000
142,500
Average Club Size (Sq. Ft.)
142,000
3,800
141,500
141,000
3,700
140,500
3,600
140,000
3,500
139,500
3,400
139,000
138,500
2006
2007
2008
2009
2010
2011 2012*
Average Club Size (Sq. Ft) 140,000 140,000 142,000 143,000 143,000 143,000 143,000
Average Club SKUs
4,000 4,000 4,000 3,800 3,900 3,600 3,550
*Average of approximately 3,300 to 3,800 active SKUs, as reported by Costco
Source: Costco Annual Report (fiscal years ending end of August/beginning of September)
3,300
Average Club SKUs
3,900
Costco never advertises,
all promotion occurs through BTL.
“It costs a lot of money to make these places look cheap”
- Jim Sinegal, Costco co-founder
•



When a new clubs opens
We visit from door to door to recruit new members
New members are allowed to get one more free headcount
Locals gain awareness through staff recruiting activity, or media
reports



Costco carried only 4000 SKUs, comparing to avg. 20,000 in
other hyper markets, only 1/5 of competitors.
Value for money/ Selected items/ exclusive import items/
unique bulk size and packaging
Brand doesn’t matter, value is the key!!
VALUE FOR MONEY
 Premium
quality
 Exclusive
imports
Efficiency &
Services
 Photo
printing
 Pharmacies
 Optical
department
Bulk size but smartly
packaged goods
 Exclusive pack
size, save by
buying bulk
volume.
It’s all about DISCOUNT!!!
ITEM
COSTCO
Mechanism  Wallet promotion
 Passport program
 IRC
 MVM
Frequency Maximum 1-2 times / year
Price
HIGH
sensitivity
Promotion 6-10 times higher than
effect
average


Minimum in-store decoration & signage
Extensive in-store trial
OTHER COMPETITOR
 DM
 In-store display
 Trial packs & gifts
> 5 times a year
Low
???


Earning about twice per capita, well-educated
Basket size is around NT. 2000-5000. (in TW)
Costco
Shopper
Unique Shopper contributes
business foundation
Shopper profile
Source: 2010 Nielsen Shopper trend
Shopping Behavior
1.
Destination category:
specialized goods (i.e. fresh
meat, drugs , truffles
chocolate) or volumetric
goods (i.e. family size milk).
Salty snacks as impulse
category
2.
Shopping, than purchasing
•
Impulse shopping
(spend more than
expected)
•
Sampling triggers trial
3.
Look for premium & exotic
news & willing to try newness
4.
Look for value for money
5.
Higher basket size ($2,000$5,000)
6.
Frequency: once every 3-4
weeks
2012 Costco
Financial Performance
•
•
•
•
Financial Highlights
Net sales accounted by major category
Gross margin
Membership revenue
Source: Costco 2012 Annual Report



Source: Costco 2012 Annual
Report
Sundries 22% - candy,
snack foods, tobacco,
alcoholic and
nonalcoholic beverages
and cleaning and
institutional supplies
Food 21%- dry and
institutionally packaged
foods
Ancillary and Other 18%
- including gas stations,
pharmacy, food court,
optical, one-hour photo,
hearing aid and travel

Source: Costco 2012 Annual
Report
Gross margin (net sales
less merchandise costs) as
a percent of net sales
decreased in fiscal 2012,
largely due to investment
in lowering prices, which
is consistent with the
company goal of
maintaining price and
value leadership.



Source: Costco 2012 Annual
Report
Two primary types of members:
Business $55 and Gold Star $55
(individual) and Business add-on
(Executive) $110
2012 Cardholders: Business
6,442 millions. Gold Star 26,736
millions and Executive members
which is around 30,000 millions.
Member renewal rate was
approximately 89.7% in the U.S.
and Canada, and approximately
86.4% on a worldwide basis in
2012.

Membership fees increased
more than 11%, due to the
impact of raising annual
membership fees in the U.S.
and Canada.
◦ strong member renewal
rates
◦ good sign-ups at new
warehouses
◦ increased penetration of the
Executive Membership
program
Logistics, Distribution, &
Supplier Relations
•
•
•
•
Integration
Warehousing & Distribution
Inventory
Supplier Relations




Supplier compliance
Minimize material handling
Efficient Packaging
Display ready PALLETS


Timely shares sales data with supplier to
replenish inventory
Innovative auto-reordering system




Minimize the steps of distribution
30% Direct-to-store from vendors
70% Cross docking operations
Warehouse design to strip in-store handling
cost



Economies of Scale & Bargaining Power
Visit & work with suppliers to help them to
break even or make a profit without raising
prices.
Knowledge of its suppliers
Which group of people
belongs to which diagram?
THANK YOU!!!
ANY QUESTIONS???