Central Michigan University
1. Describe Costco Business Model.
According to CMU (2010), the Costco business model was “to generate high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories” (p.388). * Rapid inventory turnover – When combined with efficiencies gained through bulk purchasing, sound logistics, and minimal product handling, Costco is able to operate profitably at a lower gross margin than its competitors. (Central Michigan University, 2010, p. 389) * Generating high sales volumes - When combined with rapid inventory turnover, Costco is able to take advantage of early payment discounts from its vendors since the company is ably to sell and receive cash for inventory before payment was required. (Central Michigan University, 2010, p. 389)
2. Describe Costco’s strategy a) Identify strategy elements; include specifics that communicate how Costco employs each element. b) What each is designed to accomplish. c) Identify and describe Costco’s two primary internal core principles.
The foundation of Costco’s strategy was based on the three key elements: “Low prices, limited selection, and a treasure hunt shopping environment” (Central Michigan University, 2010, p. 389).
Low Prices – Over the years, Costco has developed a reputation of providing top quality goods at consistently low prices. The company reinforced this reputation by developing a pricing strategy that limits the mark up of its brand name merchandise to 14 percent. Its competitors routinely enforce a mark up of 20-50 percent on comparable products. (Central Michigan University, 2010)
Limited Selection – Costco limits its merchandise offerings to quick selling models, sizes, and colors. Consumables are sold only in bulk-sized quantities. These selection limits prevents the business from becoming unmanageable and allows the company to seek low gross margins through extreme efficiency (Central Michigan University, 2010).
Treasure Hunt Merchandising – Costco creates an exciting shopping experience with a constantly changing shopping mix of food and merchandise items (Central Michigan University, 2010).
3. How well is Costco performing from a financial perspective? Use case financial statements and other financial data. a) Provide the following (minimum) key financial factor detail covering years 2000- 2006 (list each year and relevant detail – as available in the case)
Total revenue Net Income Net cash from operating activities Return on Equity Ratios General & administrative expenses as % of total revenues Operating income as % of total revenues (operating profit margin) Net income as % of total revenue (net profit margin) b) Interpret the above. Provide specific assessments important to making decisions about strategies and business model. c) Compare with Sam’s Club and BJ’s Wholesale – provide judgment based on financial data.
According to the 2000-2006 Costco 10-K reports, investors should expect a consistent amount of profit generated by their investment. With a Return of Equity measuring a consistent 12 percent, shareholders should expect a steady platform for profit generation. Investors should expect operating expenses to rise year after due to the increase cost of merchandising and administration, but should expect profits to remain steady due to consistent yearly revenue gains of 9 percent (Central Michigan University, 2010).
In comparison to their chief competitors Sams Club and BJ Wholesale, Costco has an Operating Profit Margin (OPM) of 4 percent that is well in line with market expectations. The potential is there for Costco’s OPM to increase, but the company runs the risk of loosing consumer value since its traditional…