STRATEGIC MANAGEMENT 4315-01

TEAM 3

EDUARDO CHAIREZ, JAMES FORREST, DUSTIN HUME,

YEN LAM, STEPHEN PLANER, AND ALEXIS STRAND

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EXECUTIVE SUMMARY

Costco is a company that values low costs and high inventory turnover. They also value
their customers and their employees exceedingly. Costco positions their stores mostly in
newer, upper-class neighborhoods as they cater to the primarily to upper-class individuals.
Costco has several competitors such as Sam’s Club and Wal-Mart, however they set themselves
apart through the savings their customers receive through their memberships. The company
also impacts their customers through the shopping experience by making the shopping
experience a treasure hunt for savings and deals on products. Also, Costco is has a unique
advertising strategy in that they hold special campaigns for new warehouse openings and direct
mail marketing to prospective new members to make customers aware about their company.
Generally, Costco relies more on their low prices and word-of-mouth advertising to attract
customers to their store.
As a company, Costco has exhibited several strengths. These strengths include, but are
not limited to hiring from within the company and having a low employee turnover, using
minimal amounts of advertising, and engaging in rapid inventory turnover. On the other hand,
the company also displays weaknesses such as slow growth of their private labels and limited
choices of products for customers.
Furthermore, Costco has opportunities available that if implemented would allow great
benefits. These opportunities open to the company include demonstrating a positive outlook
for Internet sales, increasing home improvement expenditures, and expanding the company’s
electronic equipment section. Conversely, the company also has several threats that could be
detrimental to the organization. Some of these threats include the decline in the housing
market due to a decrease in the purchase of homes, and an increase in retail rental rates, which
could result in an increase in Costco’s costs of operation.
Seeking to address the alternative application, there are several choices that Costco has
to choose from in order to increase its profits and potentially reduce costs. One such choice
would be opening smaller stores in smaller markets, therefore allowing Costco to exonerate
their exclusion of customers in rural areas. The company could also begin offering a larger
product selection. As Costco currently offers a low variety of products, customers must seek
several products they are looking for at other retail outlets. By increasing their inventory,
though there will be additional costs, Costco will increase its revenue due increased customer
purchases. Costco could also provide tools to customers in order to better allow them to serve
themselves. These tools, such as aisle markers and self-checkout lanes, would allow a better
shopping experience for customers by relieving frustration while shopping.
The recommended alternative that Costco should implement in order to ensure growth
is to expand their product offerings. In order to do this, Costco must research the needs of
customers and see what products their customers most commonly purchase from their
competitors. Once Costco has determined the needs of their customers, they should begin
phasing in the new products. The company should implement this over the course of five years
in order to not interrupt normal business processes. Costco should increase their overall
inventory by 1000 products per store, therefore increasing product availability by 20%. After
implementing this strategy, the company should evaluate this alternative and determine if the
benefits received are enough to continue this course of action.
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INTRODUCTION

Costco’s mission statement, “Costco's mission is to continually provide our members

with quality goods and services at the lowest possible prices…” provides an insight to the goals
of the company, which are providing low cost items to consumers (Farfan, n.d.). The remainder
of the mission statement also addresses Costco’s intention to adhere to the law, to care for
employees and customers, and to respect vendors. By understanding Costco’s mission
statement, one can further understand the company’s goals and daily business operations.

SITUATION ANALYSIS

With Costco, the general environmental analysis is that of low prices and high inventory
turnover. While Costco caters to a high-end clientele and small business owners, they are
accessible to anyone who pays for a membership. Their stores are usually in newer, upper-class
neighborhoods and seem to almost ignore most economic trends. They have a presumed value
of savings and, without regard to economic situation, people will spend about the same year in
and year out. The company also has a great concern for their customers and shows this by
making them top priority. In addition, because the company favors high turnover, if a product is
not selling Costco will replace it with another product to allow for an increase in sales and
revenue. The firm also takes care of its employees by offering various incentives and career
opportunities, showing that they value human capital.
The industry Costco competes in is fairly new, having started in the mid 1970s. Costco’s
main competition are Sam’s Club (a branch of Wal-Mart) and BJ’s Wholesale, a smaller
wholesaler. All companies must give the customer a sense of value and big savings in order to
keep them renewing their memberships. While Sam’s Club sells everyday name brand items in
a basic way, Costco only carries a certain number of items that are not as generic as Sam’s Club.
Along with the sense of value, to be successful in this industry Costco must be able to turnover
inventory quickly and cannot allow product to sit on the shelves. This means there is a need for
a strong supply chain and the buying power to get the goods for the right price and the right
amount of it. Costco uses their buying power to offer their members special deals on certain
items, which keeps their customers coming back for more. They also need to be a low cost
provider, and with smaller margins than other industries, the competitive advantage goes to
the ones that can maximize these margins.
Costco Wholesale has been in business for 25 years, becoming the world’s eighth largest
retailer in the world. Within these 25 years of retailing, Costco has had some serious
competitors such as Sam’s Club and BJ’s Wholesale. Two of the aspects that made Costco one
of the top competitors in the retailing business are their low prices and that their growth
strategy is clear, concise, and simple for their business to stick to and achieve. In reality, their
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low prices help them compete with Sam’s Club, but with Sam’s Club’s background they have
still achieved greater success than Costco. Costco’s advertising is very unique. To advertise, they
generally have limited it to special campaigns for new warehouse openings and direct mail
marketing to prospective new members. When they open new warehouses they personally
contact businesses in the area that are potential wholesale members. Some of the core values
Costco has consist of making the shopping environment a treasure hunt. Costco wants to keep
its buyers on the lookout for one-time purchases and special deals.
Costco is like every other company in that they have their various strengths and
weaknesses. One of their strengths is their strong, loyal membership base. This serves as a key
component in keeping their customers and making them loyal to the business for a long time.
By offering products to their members for being a Gold Star Member or a Business Member, it
makes customers appreciate Costco and helps Costco contract an edge on other businesses
that do not have a strong membership. Their strong membership base is also one of their main
core competencies. Another strength Costco has is their low prices. Customers generally desire
low prices, and when they can purchase an item they typically need for a lower price, they will
be more willing to purchase that item. Referring to weaknesses, an important weakness that
Costco protrudes is their product selection. Typical supermarkets stock about 40,000 different
items, but Costco only stocks about 4,000. The company could have a much larger customer
base if they offered more items that appeal to the population. A potential drawback of
increasing inventory is a decrease in profits due to slower turnover on less popular items.

SWOT ANALYSIS

It is important that companies experience strengths in order to grow. Costco has

several strengths that allow their company to continue growing, such as:
 Hiring from within the company and lower employee turnover
o Costco has established a company policy to fill at least 86 percent of higher-level
opening by promoting existing employees; the actual value is close to 98
percent. Because of this “home grown” attitude possessed by top management
officials, employees at Costco feel like they have something to live up to and are
therefore less likely to pursue alternative employment opportunities. Employee
turnover at Costco is typically under 6 percent after the first year of
employment, compared to Wal-Mart and Target at nearly 50 percent.
 Minimal Required Advertising
o Although Costco’s advertising activities are very minimal, over the past 10 years
the company has seen a steady increase in comparable store sales and, in turn, a
strong steady increase in net profits. Due to the fact that 25 percent of the
products of each store are continuously changing, Costco has been able to
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facilitate a unique shopping experience where customers have to “hunt” for new
bargains. This “treasure hunt” aspect of the store makes shopping fun for
customers while also encouraging them to browse parts of the store that they
typically would not. In order to attract new customers, the company primarily
depends on word-of-mouth advertising. These unique marketing strategies
prevent the company from having to participate in ongoing marketing activities,
thereby reducing costs.
 Rapid Inventory Turnover
o Costco’s high sales volume and rapid inventory turnover present a number of
opportunities for the company. When purchasing a very large quantity of a
product, Costco has much greater buying power with the supplier. The supplier
will usually be much more willing to work the company to make sure the
transaction happens and the buyer is satisfied. In addition to buying power, the
rapid inventory turnover generally allows Costco to obtain cash for the inventory
before having to pay the vendors, while still being able to take advantage of
early-payment discounts. Both of these strengths allow the company to stick to
their mission of providing “the lowest possible prices” by passing these savings
directly on to consumers.

Though Costco has several strengths and has a well-established brand image, they have
also experienced several setbacks as well. These weaknesses are outlined here:
 Slow growth of private labels
o Costco has its own private label known as “Kirkland Signature” and offers several
different products under this label. However, the company has seemed to be
slow with the growth of this product label. Kirkland Signature has only
accounted for about 17 percent of Costco’s total sales. If Costco is able to
increase customer interest in purchasing more of their private label products,
they will help them become even more successful in their industry due to the
higher rate of return on these products.
 Limited choices for customers
o Even though Costco is a successful company, one of the issues that may have set
their competitors ahead of them is Costco’s extremely limited product selection.
Costco stocks a total of 4,000 products in a typical store whereas Wal-Mart
stocks over 100,000 different household items. This limitation can set Costco
back because if customers are dissatisfied with the product Costco has to offer,
they will typically be forced to look to a competitor such as Wal-Mart for the
product they are looking for. Just because Costco is huge in size, it does not
necessarily translate to a large variety of products.

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As a company, Costco has several opportunities available to assist with growth. These
opportunities are discussed in detail as follows:
 Positive outlook for internet sales
o Since technology has grown, more people have been drawn to using the Internet
as a form of making purchases. In the U.S., online retail sales were $104 billion
in 2005 and were expected to increase by 17 percent annually through 2008.
Costco has created an interactive online web environment that allows customers
easy access to information, pricing, and images of products that they offer. In
addition to product information, Costco also has membership and location
information, as well as information about the company available to existing and
potential members.
 Increases in home improvement expenditures
o Homeowner remodeling expenditures have grown approximately six percent
annually in the last 25 years. This could be a great opportunity for Costco to
focus on and possibly offer more products that could help homeowners in the
remodeling process. Costco currently sells furniture, appliances, hardware,
household items, and most of the basic essentials necessary for remodeling.
Costco could expand and sell more intricate items needed for specific tasks to be
accomplished in the remodeling process.
 Expanding electronic equipment
o With the technological advancements that have taken place throughout the
years, this has given Costco a great opportunity and could continue to give them
even better opportunities for the future. The value of electronic equipment
produced worldwide is expected to approach $1.6 trillion by the year 2010. The
demand for electronic products is still increasing. Costco is one of the leading
retail consumer electronics and appliances company and could benefit from this
increase in the demand.

As a company that is established in the retail industry, there are several threats that are
open to Costco. These threats are explored as follows:
 Decline in housing market
o Recently, there has been a decline in the sales of both new and existing homes.
This poses a threat for Costco because the demand for their products could
decline which could result in a decrease in sales.
 Increasing retail rates
o Since 2004, rent has increased by more than 5 percent and is expected to
continue rising. Although a large part of Costco’s property assets are wholly
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owned, still some of them are leased or rented. With this recent trend in rising
rental costs, Costco could begin to notice an increase in operating expenses and.
Consequently, a decrease in company profit.

STRATEGIC FORMULATION

Although Costco is currently a very successful company with a straightforward vision,

focus, and strategy, there are a few things that could be changed or implemented in order to
further increase the company’s success.
 Open additional smaller stores in smaller markets
o Currently Costco warehouses are concentrated only in large metropolitan areas
that are capable of supporting these very large wholesale stores. By limiting the
market to only these large areas, Costco is potentially excluding an extremely
large number of customers from having access to their products. If smaller
Costco warehouses were opened in markets with less than 300,000 people but
more than 100,000 people, this loss of customers in more rural areas would
diminish. These smaller stores would still need to be in close proximity to central
distribution centers in order to facilitate quick deliveries and fresh products.
 Offer a larger product selection
o In order to lower costs and increase inventory turnover, Costco stores have a
very limited number of products available to customers. Due to this lack of
selection, many customers are forced to seek other retail outlets to fulfill their
needs. By increasing the number of products in the stores by 20% (1000 items)
customers will have a broader selection and will be less likely to be forced to
obtain the products they need from competitors. This option does come with
additional inventory related expenses but will also bring additional customers to
Costco and increase sales.
 Provide the tools to allow customers to better serve themselves
o Although Costco provides a number of tools that encourage customers to shop
at their stores, they do not currently have very many tools that allow customers
to better serve themselves while in the stores. By implementing in-store
navigational items, such as aisle markers, customers will be able to locate the
products they are looking for much easier, which can reduce frustration and
create a better shopping experience. In addition to such navigational items,
Costco should also consider installing self-checkout lanes alongside full-service
checkout lanes in all stores. Although these lanes cause frustration for some
shoppers, it gives all individuals a choice of how to checkout. In addition to giving
customers more control over their shopping experience, these lanes can also
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reduce cost by decreasing the number of employees that are needed at full-
service checkout lanes.

STRATEGIC ALTERNATIVE IMPLEMENTATION

It is recommended that Costco implement the second stated alternative, which is to

expand its current available product selection by 1000 items. By doing this, the company will
increase its product availability in a single store by 20%, which consequently will attract more
customers and retain current ones because they will be less likely to obtain the products they
need from competitors. As mentioned previously, this option does come with additional
inventory cost, but will also bring additional sales.
To implement this strategy, Costco will need to begin phasing in more products. The
company should begin this process by doing research as to the types of products customers
need, especially those they are seeking from companies besides Costco. Once Costco has
established the correct products to begin offering, they should make them available to
customers. Costco could also explore offering these products through Kirkland Signature, the
company’s private label brand. By doing this, not only would the company be able to increase
popularity in its private label brand, but, due to the increased profit margin on this private
label, Costco will also see an increase in profits. The company should also phase the products
into the stores over the course of five years in order to ensure that normal business operations
are not disturbed. Once the company has performed these actions, they should evaluate the
outcome to ensure the company is headed in the right direction, and, if the result is positive,
the company should continue offering the additional product selection.

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REFERENCES

Costco Wholesale. (n.d.). Buckmaster. Retrieved February 27, 2011, from

buck.com/annual_report?nam=DEMO2&pw=DEMO2&co=COST

Farfan, B. (n.d.). Costco Wholesale Warehouse Mission Statement. About.com. Retrieved

February 27, 2011, from
http://retailindustry.about.com/od/retailbestpractices/ig/Company-Mission-
Statements/Costco-Stores-Mission-Statement.htm

Thompson, A., Gamble, J., & III, A. S. (2009). Crafting & Executing Strategy: The Quest for
Competitive Advantage: Concepts and Cases. n.d.: The McGraw-Hill Companies.