Conclusions & Recommendations For Costco Case Analysis

 

Ankur Anand* Charles WL Hill 

A man who looks like Wilford Brimley (an American ac- tor) walks into a Costco warehouse store in the Seattle sub- urb of Issaquah, Washington, on a bright Columbus Day morning, easily blending into the throngs of shoppers pick- ing up Kellogg’s Corn akes, toilet paper, and cashmere sweaters. But as soon as Costco CEO Jim Sinegal crosses the threshold of this vast, 150,000-square-foot theater of retail, it’s abundantly clear that he’s not just a spectator— he’s the executive producer, director, and critic. “Jim’s in the building!” crackles over the walkie-talkie of warehouse manager Louie Silveira. In the apparel section, Silveira’s infectious grin morphs into a look of slight panic.1

A sudden hop in his step, Silveira, who can log 15 miles a day walking the aisles, scurries over to Sine- gal. Unsmiling, hands in his pockets, a coffee stain on his $12.99 Costco shirt, Sinegal turns out to be a no-nonsense connoisseur of detail. He greets his manager with a bar- rage of questions: “What’s new today?”

“We just moved this $800 espresso machine to an end- cap,” Silveira responds, meaning he moved it out from the middle of the aisle to a more prominent location at the end.

“How are in-stocks?”
“We’re good there.”
“What did we do in produce last week?” “$220,000.”
Wielding a barcode scanner like a six-shooter,

Silveira answers each query to Sinegal’s satisfaction, but evidently that’s not often the case.

IntroductIon

Costco Wholesale Corporation is a membership-only warehouse club that provides a wide selection of mer- chandise. As of July 2012, it is the second largest retailer in the United States, the seventh largest retailer in the

world and the largest membership warehouse club chain in the United States.2

Costco operates membership warehouses based on the concept that offering its members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This turnover, when combined with the operating ef ciencies achieved by volume purchasing, ef cient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables Costco to operate pro tably at signi cantly lower gross margins than traditional wholesal- ers, mass merchandisers, supermarkets, and supercenters.3

Costco’s typical warehouse averages approximately 143,000 square feet; newer units tend to be slightly larger. Floor plans are designed for economy and ef ciency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted prin- cipally by the quality of merchandise and the availability of low prices, Costco’s warehouses do not have elaborate facilities. By strictly controlling the entrances and exits of its warehouses and using a membership format, Costco has limited inventory losses (shrinkage) to less than two- tenths of 1% of net sales in the last several  scal years— well below those of typical discount retail operations.

Costco’s warehouses generally operate on a 7-day, 69-hour week, open weekdays between 10:00 a.m. and 8:30 p.m., with earlier weekend closing hours. Gasoline

*This case was written by Ankur Anand under the direction of Charles W.L. Hill. Please send requests for permission to Charles Hill. (itzankur@gmail.com)

(chill@u.washington.edu), Foster School of Business, University of Washington, Seattle, WA 98195.

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Case 17 Costco Wholesale Corporation

 

operations generally have extended hours. Because the hours of operation are shorter than those of traditional retailers, discount retailers and supermarkets, and due to other ef ciencies inherent in a warehouse-type opera- tion, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales  oor and displayed on pallets containing large quanti- ties, thereby reducing labor required for handling and stocking.

Costco’s strategy is to provide its members with a broad range of high-quality merchandise at prices con- sistently lower than they can obtain elsewhere. Costco seeks to limit speci c items in each product line to fast- selling models, sizes, and colors. Therefore, Costco car- ries an average of approximately 3,600 to 4,000 active stock keeping units (SKUs) per warehouse in its core warehouse business, as opposed to 45,000 to 140,000 SKUs or more at discount retailers, supermarkets, and supercenters. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only.4

In keeping with its policy of member satisfaction, Costco generally accepts returns of merchandise. On

Positioning 

The wholesale club store format is positioned as having a lower shopping frequency and less range than a conventional supermarket 

 

certain electronic items, they generally have a 90-day re- turn policy and provide, free of charge, technical support services, as well as an extended warranty.5

the company hIstory6

Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the membership warehouse concept. In January 1997, after the spin-off of most of its nonwarehouse as- sets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to Costco Whole- sale Corporation, which trades on the NASDAQ Global Select Market under the symbol “COST”.

As of December 2012, the Company operated a chain of 622 warehouses in 41 states and Puerto Rico, nine Canadian provinces (85 locations), Mexico (32 locations), the United Kingdom (23 locations), Japan (13 locations),

 

Major supermarket-type retail store formats by positioning model