Costco Case Questions
09/26/2013
Question 1:
Competition in the North American wholesale club industry is high, with Costco being its leader at 56% of the market share. Main ways to compete are lower prices, more efficient operations, and reduced labor and overhead costs as well. Some of the clubs do the bare minimum in advertising while others, like BJ’s, spend more money on it (special Christmas radio advertisement and such). Out of the five competitive forces, the strongest is the rivalry between the competitors, because all of the players in this market attempt to offer high-quality products at lower prices. According to Figure 3.3, one of the reasons for rivalry amongst competitors to be strong is a relatively low cost to buyers to switch brands, and also if buyer demand is growing slowly, both of which are true in this case. All competitors in this industry are focusing on low margins on the products and high volumes of sales.
Suppliers do have some power and influence on the wholesale club members, especially in the case with Costco, which buys some of its goods on the gray market and is known to sell some big-ticket items, but with globalization happening and more and more of suppliers being available around the world, they do not present a reason for concern as high as the rivalry between market players.
Customers are always looking for lower prices and higher quality of merchandise, which Costco has been excellent at providing. BJ’s strategy is to give a better customer service and to become a convenient “one-stop-shop” with its optical health centers, photo centers, etc. However, customers don’t have much power in the case of wholesale club industry because there are not many alternatives they can turn to and because the current terms of the biggest players on the market are very good (there are low prices on high-quality goods).
Threat of new entrants is low because all of the wholesale clubs have economies of scale (according to Figure 3.5). Threat of substitutes is low because the products these wholesale clubs sell are quite similar to each other (maybe except the specialty or designer items at Costco, which is the reason why it’s doing so well: these items are different from the standard offering at other wholesale stores).

Question 2 There are several similarities between the companies, which are summarized below: 1) Individuals and businesses could purchase membership cards, with various benefits attached to those depending on the amount of shopping each potential member would do at the store 2) It’s a requirement to have membership to shop at the store, and some offer “free days” when customers can shop without a membership card 3) There is a small assortment of products within a range of product names, such as, only two-three kinds of toothpaste in the toothpaste isle compared to 10+ names at a non-discount store. 4) There are private brands and name brands sold. Private brands are sold at cheaper prices. 5) All strive to have lean operations. For example, Costco spends very little on store décor and displays items on pallets, thus reducing the need for extra labor to restock shelves when needed.
These are the differences between companies in the case: 1) Costco spent very little on advertising while BJ’s spent much more 2) Costco spent very little on customer service, while BJ’s made it one of the priorities (express check-out lanes and self-check-out lanes, longer hours when store was open) 3) Costco and Sam’s Club had about 4,000 different items, BJ’s had about 7,000 different items 4) BJ’s had aisle markers, accepted manufacturer’s coupons, accepted all 4 major credit cards and had one-hour photo processing centers and even BJ’s vacations. 5) Costco made it all about offering the best prices to customers and paying the highest wages to its workers 6) Costco’s largest source of net income was membership fees, because the margins on their products were minimal
Costco has a stronger strategy (based on the market share, at least) that is more sustainable. According to Jim Senegal, Costco is a company that “wants to be there 50 years from now”.
BJ’s appears to have a weaker strategy because their operations are not as lean and because they try to appeal to so many segments of the market and at the end of the day lose their focus. BJ’s can not remain a discount store if it continues to spend that much on marketing and social engagement with the public.

Question 3:
BJ’s has shown a steady increase in operating income for the years discussed in the case, Costco has seen some ups and downs and Sam’s Club has been increasing until 2008 and then it began to decrease. In 2010, Costco’s current ratio was 1.11 while BJ’s was 1.16, which signal’s BJ’s stronger position to pay its current liabilities in the near term. Data was not available for Sam’s Club to calculate the current ratio. Based on all of the above, BJ’s is the strongest financial performer out of the three.

Question 4:
Based on the data in Exhibit 4, Costco has been aggressively expanding overseas. The operating income went up steadily, more than doubling in three years (from 65 to 156). The company’s capital expenses were quite high and followed an upward curve over the years (increasing over the years). This can be explained by the fact that the company was building so many warehouses overseas. So based on just this information, Costco’s expansion outside North America is financially successful, but in the text it said that only 10% of operating income came from outside the U.S. Therefore, the final verdict is that the strategy is working with promise to bring in even more, and that Costco should expand internationally even more.

Question 5:
Costco will continue as a strong leader of the industry five years from now considering its plans to expand internationally and to increase its membership. The strongest competitor to Costco’s is Sam’s Club, however, pricing philosophies of the two companies are very different and Costco has an indisputably strong advantage in terms of quality of the products offered (such as leather sofas and designer jeans) and Sam’s won’t be able to compete with that. A quick check on Yahoo! Finance proves that Costco’s shares went up in prices steadily over the last five years, BJ’s went down in the last two quarters of 2012, and Sam’s shares have been steady at the same level for 3-4 years and slowly began to go up within 2013.

Question 6:
I would make the following recommendations: 1) since Costco keeps its prices so low and pays relatively high wages to its workers, there’s not much income coming from the sales of merchandise. As Wall Street experts suggested, Costco could start raising some of the prices on its products, but that might mean loss of the competitive advantage they currently have. Therefore, my recommendation is to become more aggressive about recruiting new members, since membership fees attribute quite a bit to the operating income. 2) expand its website and make more merchandise available for shipping on it. For example, I typed in the word “coffee” in Costco’s website search bar and only a few search results are actually coffee beans, most of the results were coffee makers and machines. It sounds like a wild idea but what if Costco could add more of fresh produce and foods to its online selection and offer home delivery as a subscription service? Such as, sign up to receive regular shipments of coffee and snacks to your business or home address every 4 months.