Strategic Management (64 International A)

Sheena T. Gabriela Rombang

Tarsisius Hani Handoko, Dr., M.B.A.
14/372753/PEK/1952

Costco Wholesale in 2012 : Mission, Business Model, and Strategy

Costco well to be known as the third largest retailer in the United States, the seventh largest
retailer in the world, and the clear leader of the discount warehouse and wholesale club segment of the
North American retailing industry. The success is rooted in the retailer industry effort put forth by its
owners, Jim Sinegal. Hes not the typical CEO or most unCEO-like CEO that wed ever expect. Hes
not wearing a power suit, instead, he looks totally grandfatherly, dress casually, and determine to
make Cotsco the best store for its users.
In January 2012, Costco had a total of 598 warehouses in 40 states and Puerto Rico (433
locations), nine Canadian provinces (82 locations), the United Kingdom (22 locations), Korea (7
locations), Taiwan (8 locations, through a 55 percent-owned subsidiary), Japan (11 loccations),
Australia (3 locations), and 32 warehouses in Mexico through a 50%-owned joint venture. Costcos
fiscal 2011 total revenues were a record high of $88,9 billion and net income was a record high of
$1,46 billion. About 25 million households and 6,4 million business had membership entitling them to
shop at Costco, generating nearly $1,9 billion in membership fees for the company. Annual sales per
stores averaged about $146 million, about 85 % higher than the 78 million figure for Sams Club. In
fiscal 2011, 93 of Costcos warehouses generated sales exceeding $200 million annually, up from 56
in 2010 and 4 stores had sales exceeding $300 million, including one that had more than $400 million
in sales.

Company Background
The membership warehouse concept was pionnered by discount merchandising sage Sol Price,
who opened the first Price club. Price Club lost $750.000 in its first yeaar of operation, but by 1979 it
had two stores, 900 employees, 200.000 members, and a $1 million profit. Sinegal and Seattle
enterpreuner Jeff Brotman founded Costco, and the first Costco store began operations in Seattle in
1983. In December 1985, Costco became a public company, selling shares to the public and raising
additional capital for expansion. In October 1993, Costco merged with Price Club. Jim Sinegal
became CEO of the merged company, presiding over 206 PriceCostco locations, with total annual
sales of $16 billions. In January 1997, after the spin-off of most of its non-warehouse assets to Price
Enterprise Inc., PriceCostco changed its name to Costco Companies Inc. When the company
reincorporated from Delware to Washington in August 1999, the name was changed to Costco
Wholesale Corporation. In January 2012, Jim informed to step down from CEO of the company. The
Board elected Craig Jelinek to succeed Sinegal and hold the titles of both President and Chief
Executive Officer.

Mission
Numerous company documents stated that Costcos mission in the membership warehouse
business was : To continually provide our members with quality goods and services at the lowest
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Case 1: Costco Wholesale in 2012

Strategic Management (64 International A)

Sheena T. Gabriela Rombang
Tarsisius Hani Handoko, Dr., M.B.A.
14/372753/PEK/1952
possible prices. The centerpiece of Costcos business model entailed generating high sales volumes
and rapid inventory turnover by offering fee-paying members attractively low prices on a limited
selection of nationally branded and selected private-label products in a wide range merchandising
categories. A second important business model element was that Costcos high sales volume and rapid
inventory turnover generally allowed it to sell and receive cash for inventory before it had to pay
many of its merchandise vendors, even when vendor payments were made in time to take advantage
of early payment discounts. Membership fees were a critical element of Costcos business model
because they provided sufficient supplemental revenues to boost the companys overall profitability to
acceptable levels. Costco mission statement describes the enterprises present business and pupose,
which are identifies the companys products/services, specifies the buyer needs that it seeks to satisfy
and the customer groups or market it serves, and gives the company its own identity.

Setting Objective
The managerial purpose of setting objectives is to convert the vision and mission into specific
performance targets. Objectives reflect managements aspirations for company performance in light of
the industrys prevailing economic and competitive conditions and the companys internal
capabilities.
The strategic objective is Costco wants to provide the lowest-pricet quality goods and services to the
customer coming back to shop. For the financial objective, Costco enabled to operate profitably at
significantly lower gross margins than traditional wholesalers, mass kmerchandisers, supermarkets,
and supercenters. Company objective can be broken down into performance targets for each of the
organizations seperate business.

Crafting A Strategy To Achieve The Objectives And The Company Vision

Crafting and executing strategy is a collaborative team effort in which every company manager plays
a strategy making role. The strategies that entails addresing facets of Costco, such as :
1. A strategy of Costco was ultra-low prices, which is, to keep customers coming in to shop by
wowing them with low prices. A key element of Costcos pricing strategy had been to cap
itws markup on brand-name merchandise at 14%. As a result of these low markups, Costco
prices were just fractionally above breakeven levels, producing net sales revenues that barely
covered all operating expenses and generated only a modest contribution to operating profits.
2. The next strategy of Costco was to provide members with a selection of approximately 3600
active items. Costcos product range covered a board spectrum but the selection in each
product category was deliberately limited to fast selling models, sizes and colors. As a means
of giving members reasons to shop at Costco more frequently and make Costco more of a
one-stop shopping destination.
3. The strategy that Costco implied was to entice shoppers to spend more than they might by
offering irrestible deals on big-ticket time to keep the mix of featured and treasure-hunt items
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Case 1: Costco Wholesale in 2012

Strategic Management (64 International A)

Sheena T. Gabriela Rombang
Tarsisius Hani Handoko, Dr., M.B.A.
14/372753/PEK/1952
constantly changing so that bargain-hunting shoppers would go to Costco more frequently
than for periodic stock up trips. Management believed that the practices kept its marketing
expenses low relative to those at typical retailers, discounter, and supermarkets.
4. Keeping operating costs at a bare minimum was a major element of Costcos strategy and a
key to its low pricing.
5. Costco objective was to increase sales at existing stores by 5 percent or more annually and to
open additional warehouses, both domestivally and internationally.

Executing The Strategy

Managing the implementation of a strategy is easily the most demanding and time consuming
part of the strategy management process. Managements action agenda for executing the chosen
strategy emerges from assessing what the company will have to do to achieve the targeted financial
and strategic performance.
Costcos low prices and reputation of trasure-hunt made it unnecessary to engage in extensive
advertising or sales campaigns. Marketing and promotional acivities were generally limited to
monthly coupon mailers to members, weekly e-mails to members from Costco.com, occasional direct
mail to perspective new members, and regular direct marketing programs, in-store productsampling,
and special campaign for new warehouse openings. Costco operates two websites to enable members
to shop for many in-store products online and to provide members with a means of obtaining a much
wider variety of value prices products and services that were not practical to stock at the companys
warehouses.
Costco bought the majority of its merchandise directly from manufacturers, routing it either
directly to its warehouse stores or to one of the companys cross-docking depots that served as
distribution points for nearby stores. Costco had direct buying realtionships with many producers of
national brand-name merchandise and with manufacturers that supplied its products. Costco also
attracted the most affluent customers in disount retailing. The membership format facilitated strictly
controlling the entrances and exits of warehouses, resulting in limited inventory losses of less than
two tenths of 1% of net sales. Costco warehouse managers were delegated considerable authority over
store operations. In effect, warehouse managers functioned as entrepreneurs running their own retail
operation.

Monitoring

Developments,

Evaluating

Performance,

And

Initiating

Corrective Adjustments
Monitoring new external developments, evaluating the companys progress, and making corrective
adjustmentsis the trigger point for deciding whether to continue or change the companys vision and
mission, objectives, strategy, and/or strategy execution methods. Managers are obligated to assess
whioch of the companys operating methods and approaches to strategy execution merit continuation
and which need improvements. Sinegal is an effective CEO as shown by his goals to keep Costco as
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Case 1: Costco Wholesale in 2012

Strategic Management (64 International A)

Sheena T. Gabriela Rombang
Tarsisius Hani Handoko, Dr., M.B.A.
14/372753/PEK/1952
the third largest retailer in the United States and the seventh largest wholesales in the world. Jim
effectively crafted and executed its plans and is liable to be at top ranking . All stakeholders are
motivated.

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Case 1: Costco Wholesale in 2012