Costco Wholesale Corporation Financial Statement Analysis (a)

Costco Wholesale Corporation Financial Statement Analysis (A)

Case Study

What are the main elements of Costco's strategy? Compare and contrast its strategy with its competitors in addressing this question.

The main elements of Costco's strategy are:

* Its warehouses were smaller than SAM's (365 vs. 528). BJs Wholesale Club warehouses are all located in the United States and spent more money on flooring, lighting and signage in its warehouse facilities in an attempt to improve the shipping atmosphere in their warehouses.

* It differentiated itself from SAM's by targeting a wealthier clientele of small business owners and middle class shoppers. Although SAM's targeted the lower income members, their members are worldwide; it also had larger total revenues, sales per store and operating income. Their strategy was similar to Costco's. BJ's target small business owners and middle-class customer, include high-value goods in the product line to increase sales per customer and increase store visits through ancillary products. BJs strategy diverged from Costco's in that the stores were smaller (11,000 square feet versus 148,000 square feet). It carried more SKUs (6000 per store versus 4000 per store), and it marked up select items more than 14 percent which was Costco's limit.

* Costco did not mark-up products more than 14% over distributors' price. BJ's marked up select items more than 14 percent

* Selling in bulk allowed for operating efficiencies (delivering the lowest per unit price on the products it sold because of the bulk packing and policy of not increasing the size container unless it resulted in a lower per unit cost)

* Offered a broad distribution channel that brought increased revenues and only purchased a handful of SKUs from its vendors. This allowed manufacturers to greatly reduce production costs.

* Production savings would be passed on to itself in the form of lower prices. The result was lower profit through the supply chain.

* As a result of the savings, it drove value of membership and Costco was able to raise its fees from $25 to $45. SAM's customers tended to spend less per visit than Costco's and lacked a differentiated operating strategy. Since the SAM's clubs were located adjacent Wal-Mart store, shoppers tend to patronize Wal-Mart without seeing the need to pay a membership fee to SAM's since there was not much product differentiation. Sam's also suffered large amounts of management turnover. BJ's customers visited its stores 12 times per year versus 9 times for Costco and SAM's. BJ's membership fee was not as high as Costco's ($40.00 versus Costco's $45)

* Offered high quality brand name items for a low cost

* Added additional services such as photo development, pharmacies, gas stations, and tire changing.

* Increased its fresh food department and added high-end wines and jewelry

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Has Costco become financially more or less efficient over the time period? How has it financed its growth? How did their strategy play a role in explaining their efficiencies or inefficiencies?

Yes, Costco has become financially more efficient over the time period. It has financed its growth. Costco's strategy did play a role in explaining their efficiencies and inefficiencies.

Costco claimed to have the best operating efficiency in the business. It was essential given Cost's low gross margin. This efficiency was the result of a very low cost-conscious culture. In fact the company reported