CASE 1. COSTCO WHOLESALE CORPORATION ANALYSIS
The purpose of this memo is to analyze Costco's performance compared to Sam's Club and BJ's.
Costco Wholesale Corporation is a wholesale club that requires customers to purchase annual memberships in order to shop at their stores. Costco's main competitors were Sam's Club and BJ's Wholesale. Costco purchased Price Club in 1993 which enabled it to survive in the competitive wholesale industry. It also adopted a strategy that was different as compared to its major competitor, Sam's Club This enabled Costco to be the largest wholesale club in the industry in 2001.
I. Costco's Performance in Relation to BJ's
When I compared Costco's total revenues with BJ's total revenues in Exhibit 5 of FIN 197 Seminar in Finance case book, I realized that Costco's total revenue were increasing at an increasing rate with the exception of year 2000 to 2001. BJ's on the other hand, had growing revenues until 1999 when their revenues then began to grow at a declining rate.
Costco has a higher membership fee and more and this enabled Costco's total revenue to be higher than BJ's. This membership fee is very important as it is the main contributor to the company's bottom line since sales excluding membership fees barely covers operating expenses. Costco also has more warehouses and much higher sales per store. Costco has warehouses in many international locations while BJ's only have warehouses in the US. However, Costco has a lower operating and gross margin which shows that BJ's has more efficient operations and higher product prices than Costco. Costco's inventory turnover ratio is outstanding as it is much larger than BJ's. This clearly shows that Costco has an excellent operating efficiency.
II. Costco's Performance in Relation to Sam's Club
Sam's Club, on the other hand, has more members and warehouses as compared to Costco which makes it Costco's largest competitor. However, Costco had larger total revenues, sales per store and operating income due to its strategy. This is also because Costco is more internationally dispersed compared to Sam's Club as it has more warehouses in international locations. I am unable to compare Costco's financial statement performance with Sam's Club because Sam's Club data is joined with Walmart.
III. Costco's core strength and strategy
Costco pursues the strategy of focusing on lowering the unit price of goods and purchasing few Stock Keeping Units (SKUs) from its vendors which enable production savings.
Costco's core strength is designed to provide it with higher total revenues and also to create value to its customers. Their core strength can be divided into two:
• Targeting a wealthier group of small business owners and middle class shoppers which is different from Sam's Club.
• Refusing to mark up products more than 14 percent over the distributor's price
Costco's strategy is really efficient in providing it with a competitive advantage over its competitors BJ's and Sam's Club. This is definitely a long-term value enhancing strategy because Costco's main goal is to create value to their customers. They will definitely obtain many loyal and satisfied customers who do not mind paying a higher membership fee to join Costco. Costco is also a very ethical company as they are not implementing a strategy which serves to reduce their costs and cheat customers of their money in an indirect way.