Costco Wholesale Corporation: Mission, Business Model, and Strategy 1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? Costco’s business model revolves around being a low cost provider. Combing high sales volumes and quick inventory turnover they can move products from supplier to consumer without the bloat of high interest purchasing agreements. This unique strategy allows Costco to mark up products by no more that 15% compared to the industry average of over 25% Their family oriented culture with all employees through providing a living wage, excellent benefits and career opportunities creates an environment that customers are feel welcome in. The combination of value and environment encourages customers to pay membership fees just to access the store despite Costco’s modest mail only advertising. This business model creates value for shareholders without compromising Costco’s core values and makes it a very appealing. 2. What are the chief elements of Costco’s strategy? How good is the strategy? -Membership Fees -Narrow inventory with rapid turnover -Ultra low prices -Treasure hunt environment This strategy is very effective. Low prices on name brand items have allowed Costco to attract more affluent customers. By targeting limited quantities of these items Costco is able to turn the inventory quickly keeping them from financing inventory. Of the approximately 3600 items you can find at an average Costco approximately 20-25% are constantly changing. This changing inventory gives customers a “treasure hunt” experience when they are strolling though the isles. This strategy is effective because it rewards both customers and suppliers. Customers know they are getting a good deal and suppliers know they can move the merchandise. Additionally keeping their prices on these items so low gives customers rewarding feeling for their memberships. These memberships help Costco maintain a profit. 3. Do you think Jim Sinegal has been 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. 4. What core values or business principles has Jim Sinegal stressed at Costco? 5. (In the event you have covered Chapter 3) What is competition like in the North American wholesale club industry? Which of the five competitive forces is strongest and why? Use the information in Figures 3.4, 3.5, 3.6, 3.7, and 3.8 (and the related discussions in Chapter 3) to do a complete five-forces analysis of competition in the North American wholesale club industry. 6. How well is Costco performing from a financial perspective? Do some number-crunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 83-86) to help you diagnose Costco’s financial performance. 7. Based on the data in case Exhibits 1, 5, and 6, is Costco’s financial performance superior to that at Sam’s Club and BJ’s Wholesale? 8. How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam’s Club? Over BJ’s Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not? 9. Are Costco’s prices too low? Why or why not? 10. What do you think of Costco’s compensation practices? Does it surprise you that Costco employees apparently are rather wellcompensated? Better compensated than employees at Sam’s Club or BJ’s? 11. What recommendations would you make to Costco top executives regarding how best to sustain the company’s growth and improve its financial performance?