Costco employee turnover rate 2012

Conclusions & Recommendations For Costco Case Analysis

Case 17

Costco Wholesale Corporation

Ankur Anand* Charles WL Hill

A man who looks like Wilford Brimley (an American ac- tor) walks into a Costco warehouse store in the Seattle sub- urb of Issaquah, Washington, on a bright Columbus Day morning, easily blending into the throngs of shoppers pick- ing up Kellogg’s Corn akes, toilet paper, and cashmere sweaters. But as soon as Costco CEO Jim Sinegal crosses the threshold of this vast, 150,000-square-foot theater of retail, it’s abundantly clear that he’s not just a spectator— he’s the executive producer, director, and critic. “Jim’s in the building!” crackles over the walkie-talkie of warehouse manager Louie Silveira. In the apparel section, Silveira’s infectious grin morphs into a look of slight panic.1

A sudden hop in his step, Silveira, who can log 15 miles a day walking the aisles, scurries over to Sine- gal. Unsmiling, hands in his pockets, a coffee stain on his $12.99 Costco shirt, Sinegal turns out to be a no-nonsense connoisseur of detail. He greets his manager with a bar- rage of questions: “What’s new today?”

“We just moved this $800 espresso machine to an end- cap,” Silveira responds, meaning he moved it out from the middle of the aisle to a more prominent location at the end.

“How are in-stocks?”
“We’re good there.”
“What did we do in produce last week?” “$220,000.”
Wielding a barcode scanner like a six-shooter,

Silveira answers each query to Sinegal’s satisfaction, but evidently that’s not often the case.

IntroductIon

Costco Wholesale Corporation is a membership-only warehouse club that provides a wide selection of mer- chandise. As of July 2012, it is the second largest retailer in the United States, the seventh largest retailer in the

world and the largest membership warehouse club chain in the United States.2

Costco operates membership warehouses based on the concept that offering its members low prices on a limited selection of nationally branded and private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This turnover, when combined with the operating ef ciencies achieved by volume purchasing, ef cient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables Costco to operate pro tably at signi cantly lower gross margins than traditional wholesal- ers, mass merchandisers, supermarkets, and supercenters.3

Costco’s typical warehouse averages approximately 143,000 square feet; newer units tend to be slightly larger. Floor plans are designed for economy and ef ciency in the use of selling space, the handling of merchandise, and the control of inventory. Because shoppers are attracted prin- cipally by the quality of merchandise and the availability of low prices, Costco’s warehouses do not have elaborate facilities. By strictly controlling the entrances and exits of its warehouses and using a membership format, Costco has limited inventory losses (shrinkage) to less than two- tenths of 1% of net sales in the last several scal years— well below those of typical discount retail operations.

Costco’s warehouses generally operate on a 7-day, 69-hour week, open weekdays between 10:00 a.m. and 8:30 p.m., with earlier weekend closing hours. Gasoline

*This case was written by Ankur Anand under the direction of Charles W.L. Hill. Please send requests for permission to Charles Hill. (itzankur@gmail.com)

(chill@u.washington.edu), Foster School of Business, University of Washington, Seattle, WA 98195.

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Case 17 Costco Wholesale Corporation

operations generally have extended hours. Because the hours of operation are shorter than those of traditional retailers, discount retailers and supermarkets, and due to other ef ciencies inherent in a warehouse-type opera- tion, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales oor and displayed on pallets containing large quanti- ties, thereby reducing labor required for handling and stocking.

Costco’s strategy is to provide its members with a broad range of high-quality merchandise at prices con- sistently lower than they can obtain elsewhere. Costco seeks to limit speci c items in each product line to fast- selling models, sizes, and colors. Therefore, Costco car- ries an average of approximately 3,600 to 4,000 active stock keeping units (SKUs) per warehouse in its core warehouse business, as opposed to 45,000 to 140,000 SKUs or more at discount retailers, supermarkets, and supercenters. Many consumable products are offered for sale in case, carton, or multiple-pack quantities only.4

In keeping with its policy of member satisfaction, Costco generally accepts returns of merchandise. On

Positioning

The wholesale club store format is positioned as having a lower shopping frequency and less range than a conventional supermarket

certain electronic items, they generally have a 90-day re- turn policy and provide, free of charge, technical support services, as well as an extended warranty.5

the company hIstory6

Costco Wholesale Corporation and its subsidiaries (Costco or the Company) began operations in 1983 in Seattle, Washington. In October 1993, Costco merged with The Price Company, which had pioneered the membership warehouse concept. In January 1997, after the spin-off of most of its nonwarehouse as- sets to Price Enterprises, Inc., the Company changed its name to Costco Companies, Inc. On August 30, 1999, the Company reincorporated from Delaware to Washington and changed its name to Costco Whole- sale Corporation, which trades on the NASDAQ Global Select Market under the symbol “COST”.

As of December 2012, the Company operated a chain of 622 warehouses in 41 states and Puerto Rico, nine Canadian provinces (85 locations), Mexico (32 locations), the United Kingdom (23 locations), Japan (13 locations),

Major supermarket-type retail store formats by positioning model

Decreasing Shopping Frequency

Cash & Carry

Food & Drug Combo

Supermarket

Limited Assortment

Increasing Range

Metro Store

Convenience

Hypermarket / Supercenter

Wholesale Club Store

Decreasing Range

Warehouse Store

Increasing Shopping Frequency

Extended-Range Discount

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Costco Timeline

1983
First Costco warehouse opens

1993
- Shareholders approve Price

Company and Costco

merger > Price Costco - 1st UK store

2006
27 new locations opened (487 total)

1994
PriceCostco’s opens its first Asia store

1998 Costco.com is created

1970

1975

1980

1985

1990

1995

2000

2005

2010

2008
- 8th largest

world retailer
- 29th on Fortune

500

1976
1st Price Club is opened

1995 Kirkland Signature is introduced

2003
24 new Costco locations opened

1997 PriceCostco
to Costco Companies Inc.

1999 Costco Wholesale Corporation

Korea (nine locations), Taiwan (nine locations, through a 55%-owned subsidiary) and Australia (three locations). The Company also operates Costco online, electronic com- merce web sites, at www.costco.com (U.S.), www.costco .ca (Canada), and www.costco.co.uk (United Kingdom).

costco’s strategy

price

“We always look to see how much of a gulf we can create between ourselves and the competition,” Sinegal says. “So that the competitors eventually say, ‘#*** ’em, these guys are crazy. We’ll compete somewhere else.’”7

To illustrate, Sinegal recounts a story about denim. “Some years ago we were selling a hot brand of jeans for $29.99. They were $50 in a department store. We got a great deal on them and could have sold them for a higher price, but we went down to $29.99. Why? We knew it would create a riot.”8

But it is the customer, more than the competition that keeps Mr. Sinegal’s attention. “We’re very good merchants, and we offer value,” he said. “The traditional retailer will say: ‘I’m selling this for $10. I wonder whether I can get $10.50 or $11.’ We say: ‘We’re selling it for $9. How do we get it down to $8?’ We understand that our members don’t come and shop with us because of the fancy window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values.”9

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Case 17 Costco Wholesale Corporation

622 Locations as of December 31, 2012

5

ALASKA 8 5 22

9
JAPAN 26 3 13

2

NEWFOUNDLAND

5

SOUTH KOREA

222 73

UNITED

2
3 24 KINGDOM

145 4 23

4622 2 377

TAIWAN 2 29 5 233

22
17 34

3 25 22

8

2 2

leaders as well as the emerging brands to sell. Company product selection criteria include value, sales potential, how products expand their categories and price.

Costco’s focused SKU selection helps to reduce operational costs by streamlining its supply chain and simplifying in-store management. Its SKU-constrained environment also limits the freedom available to con- sumer product goods (CPG) companies—many of which are accustomed to owning prominent real estate in-store aisles.

“We only carry about 4,000 items,” says Sinegal, “compared with 40,000 in a typical supermarket and 150,000 in a Wal-Mart supercenter. Of that 4,000, about 3,000 can be found on the oor all the time. The other 1,000 are the treasure-hunt stuff that’s always chang- ing. It’s the type of item a customer knows they’d better buy because it will not be there next time, like Water- ford crystal. We try to get that sense of urgency in our customers.”

The limited-variety approach isn’t for everyone, though. Sinegal explains: “We carry a 360-count bottle of Advil for $18.49,” he says. “Lots of customers don’t want to buy 360. If you had ten customers come in to buy Advil, how many are not going to buy any because you just have one size? Maybe one or two. We refer to that as the intelligent loss of sales: We are prepared to give up that one customer. But if we had four or ve sizes of

2

4
AUSTRALIA 327 3

HAWAII

213 10223

33

2
2

2

42

2 22

8

36 3

3 10 3

22 33

14 9

3 233

3 242

PUERTO 7 RICO

MÉXICO

2 4 23

Costco buys the majority of its merchandise directly from manufacturers and routes it to a cross-docking con- solidation point (depot) or directly to its warehouses. Costco’s depots receive container-based shipments from manufacturers and reallocate these goods for shipment to their individual warehouses, generally in less than 24 hours. This maximizes freight volume and handling ef ciencies, eliminating many of the costs associated with traditional multiple-step distribution channels. Such traditional steps include purchasing from distribu- tors as opposed to manufacturers, use of central receiv- ing, storing and distributing warehouses, and storage of merchandise in locations off the sales oor.

Because of its high sales volume and rapid inven- tory turnover, Costco generally sells inventory before it is required to pay many of its merchandise vendors and thus take advantage of early payment discounts when available. Thanks to the rapid turnover, an increasingly greater percentage of inventory gets nanced through payment terms provided by suppliers rather than by Costco’s working capital.10

scarcity

A key tenet of Costco’s business strategy is to limit the number of different items on its shelves. The Company evaluates SKUs individually and selects both category

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© Cengage Learning

Advil, as grocery stores do, it would make our business more dif cult to manage. Our business can only succeed if we are ef cient. You can’t go on selling at these mar- gins if you are not.”

The more ef cient the product sourcing, the more latitude Sinegal can give his sto re managers in how they lay out those big bottles of Advil. “There are certain mer- chandise displays that all warehouses do,” he says. “TVs are always in the front, for example”.

private-Label power

Kirkland Signature is Costco’s store brand, otherwise known in the retail industry as an “own-brand,” “house brand” or “private label.” It is found at Costco’s website, Costco warehouses and on Amazon.com.

When Costco introduced Kirkland Signature as its house brand in 1995, the idea was to face private- label competition at many major retailers including Wal-Mart’s Great Value, Target’s Archer Farms and CVS’s branded product line. Costco’s strong private- label offering, Kirkland Signature, competes with brands in an ever-expanding range of categories.

Many private-label brands provide consumers with economical options for their shopping lists, and Kirkland Signature is typically 10 to 20% lower than its branded counterparts. That said, Kirkland Signa- ture also competes directly with many national CPG rms on quality. This focus on value has evolved to position Kirkland Signature products as slightly more expensive in many categories as comparable na- tional brands—including canned tuna, salsa, and pet snacks.11

Positioning Kirkland Signature as a premium-priced brand—but not the most expensive option—gives Costco the opportunity to brand itself as a quality product with a slight value (price) advantage over its CPG competitors.

marketing

Costco generally limits marketing and promotional activities to new warehouse openings, occasional di- rect mail to prospective new members, and regular direct marketing programs (such as The Costco Con- nection, a magazine that Costco publishes for our members, coupon mailers, weekly email blasts from costco.com, and handouts)to existing members pro- moting selected merchandise. These practices result in lower marketing expenses as compared to typical retailers.12

membership model

Since Costco offers steep discounts on its merchandise, it attempts to make up for it via a membership fee. The retailer charges an annual membership fee of $55 for business and business add-on membership, and $110 for executive membership.

A warehouse club’s true value lies in its ability to at- tract bulk buyers. Thus, despite low margins, a warehouse club can generate signi cant amount of dollar pro ts due to rapid inventory turnover. Such a value proposition is lucrative to customers who tend to buy large amounts of merchandise, and thus despite paying a membership fee save money due to discounts. Costco offers a variety of merchandise categories such as groceries, hardlines and softlines, and ancillary services such as gas station, pharmacy, food court etc. Groceries account for more than half of Costco’s revenues.13

Executive members, who account for about one-third of Costco’s total members, and two-third of its sales, are the most valuable customers for the retailer. These members pay around $110 annually, as opposed to $55 paid by the other members. For the higher fee, execu- tive members are given 2% redeemable reward against their annual purchases (maximum limit of $750). The percentage of executive members enrollment increased from 33% in scal 2009 to 38% at the end of scal 2012. An increase in executive members will provide strong support to Costco’s future growth. The fact that these members pay a higher membership fee implies that they tend to buy a lot more in order to take advantage of their 2% annual rewards.

Readmore:http://www.nasdaq.com/article/how-does- costco-make-money-cm205766#ixzz2UuPbWqpU

costco.com

Costco went online in November 1998 (three years af- ter Amazon). Currently, Costco.com ranks 17th14 among online retailers. Amazon ranks rst and Wal-Mart fourth (Staples is second and Apple is third)15—and both are growing faster than Costco. Costco.com sells about $2 billion worth of goods.16

Costco sells online only in the United States and Canada for now, but hopes to expand to other countries in the coming year.17

Costco offers distinct products in its stores and e-commerce site to keep its customers interested. About

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Case 17 Costco Wholesale Corporation

80 to 90% of its products offered online do not over- lap with the store inventory. This allows the retailer to operate two distinct channels without having to worry about self-cannibalization.18 Also, shipping is included in most purchases and features “white-glove delivery,” which means the item (if needed) is assembled in the room of your choice and the service covers disposal of the packaging.

However, nonmembers are required to pay a 5% fee to buy from Costco online. That means an expensive enough purchase could make the $55 standard membership fee worth the investment.

“A lot of other chain retailers, including Wal-Mart, are doing things sooner, better and quicker, including go- ing international. Wal-Mart has included Sam’s Club (a Costco competitor) in its aggressive plans for overseas online sales, including China, and Wal-Mart is buying social-media space to get hold of the always-connected buyer.”19

Mark Brohan, director of research for International Journal of Electronic Commerce.

“We don’t advertise and we don’t pay for search. We’re moving to a new platform that will be structured in a way to be picked up by search engines.”20

Ginnie Roeglin, senior vice president of Costco’s e-commerce and publishing operations.

According to Roeglin, Costco is exploring social me- dia options and is planning to expand to other countries very soon.

costco empLoyee reLatIons21

“When employees are happy, they are your very best ambassadors.”

-Jim Sinegal, CEO, Costco.

Costco enjoys a reputation for having the best bene ts in retail, a sector where labor costs account for about 80% of a typical company’s total expenses. Costco Wholesale Corp. often is held up as a retailer that does it right, pays well and offers generous bene ts.

Costco pays starting employees at least $10 an hour, and with regular raises a full-time hourly worker can make $40,000 annually within 3.5 years. Cashiers are paid $10.50 to $17.50 an hour.

Costco also pays 92% of its employees’ health- insurance premiums, much higher than the 80% aver- age at large U.S. companies. Wal-Mart pays two-thirds

of health-bene t costs for its workers. Costco’s health plan offers a broader range of care than Wal-Mart’s does, and part-time Costco workers qualify for coverage in six months, compared with two years for Wal-Mart part-timers.

“From day one, we’ve run the company with the phi- losophy that if we pay better than average, provide a sal- ary people can live on, have a positive environment and good bene ts, we’ll be able to hire better people, they’ll stay longer and be more ef cient,” says Richard Galanti, Costco’s chief nancial of cer.

Costco has several advantages over Wal-Mart that help it extend such unusually generous pay and ben- e ts. Costco has a more-upscale reputation than Sam’s Club, helping it attract shoppers with higher incomes. The average Costco store rings up $115 million in an- nual sales, almost double the Sam’s Club average. And Costco, which charges $55 to $110 for yearly mem- berships, doesn’t spend any money on advertising.

Costco says its higher pay boosts loyalty: Its em- ployee turnover rate is 24% a year. Wal-Mart’s overall employee turnover rate is 50%, about in line with the retail-industry average. Wal-Mart doesn’t break out turn- over rates at Sam’s Club. High turnover creates a sig- ni cant added expense for retailers because new workers those have to be trained and are not as ef cient.22

Probably one of the biggest differences between Costco and other discounters is that the chain pays rela- tively high wages for retail. Luxury department stores can pay higher base wages or high commissions because they can maintain big markups, but Costco’s shoppers are more price sensitive. The big advantages for Costco here are shrinkage, turnover, and public relations, but these factors don’t seem like enough to convince most discounters to pay higher wages.

Costco’s wages may have helped boost another nancial metric, net income per employee. Costco’s earning is more than twice as much pro t per employee as Wal-Mart. (Table below23)

“Wall Street grumbles that Costco cares more about its customers and employees than its shareholders; it pays workers an average of $17 an hour and covers 90% of health-insurance costs for both full-timers and part-timers. Yet revenues have grown by 70% in the past ve years, and its stock has doubled.”

-Jim Sinegal, CEO, Costco.

In 2008, Ethisphere named Sinegal one of the 100 Most In uential People in Business Ethics (ranked at #37).24

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1. Net income per employee
2. Employees covered by company health insurance
3. Insurance-enrollment waiting periods (for part-time workers) 4. % Employees covered for health insurance
5. Annual worker turnover rate

Wal-mart

$7,039 48%
2 years 66% 50%

CostCo

$17,174 82%
6 months 92% 24%

“Senegal is known as a leader who is fair to his em- ployees, and Costco has been reaping the bene ts for some time. It doesn’t appear that he’ll change his ways in 2008 amidst the nancial crisis. In fact, he’s also ramping up Costco’s sustainability initiatives such as investing in solar power and, according to one interview, changing the shape of cashew containers in order to let them stack more ef ciently and take trucks off the road.”25

Ethisphere’s analysis concluded that the emphasis on employees at Costco is the key to the Company’s suc- cess and ability to consistently provide a better shopping experience for its members. It also said that Jim Sinegal is the perfect example of how the tone at the top sets the tone for the entire company.

While talking about Costco’s employee- rst philoso- phy, Mr. Jim Sinegal said that,

“Because it’s part of the DNA of our company. It’s the culture. . . . It’s not altruistic. This is good business, hiring good people and paying them good wages and providing good jobs for them and opportunities for a career. If you accept the premise that we pay the highest wages in our in- dustry [hourly workers average more than $20 an hour, including bonuses] and have the rich- est health care and bene t plan in our industry and the lowest price on merchandise and run the lowest-cost operation, then it must follow we’re getting better productivity.”26

-Jim Sinegal, CEO, Costco.

Many executives once believed that you can’t keep prices low if a company pays high wages and bene ts. Costco is proof that this isn’t always the case. Costco executives understand the impact and importance that good employees can have in an organization. Perks such as high wages, bene ts and opportunity for growth allow Costco to attract a large pool of high-quality candidates who are committed to their jobs. A Workforce article, “Welcome to the Club“, reported that:

In addition to offering some of the best wages and bene ts in the retail industry, Costco rewards employees

with bonuses and other incentives. It promotes from within, encourages workers to make suggestions and to air grievances and gives managers autonomy to experi- ment with their departments or stores to boost sales or shave expenses as they see t.

Much of the emphasis on culture and values at Costco is attributed to the personal interests of Sinegal, its CEO. In an interview when asked for his opinion on the rising gas prices, Sinegal responded that:

“Even employees who work at Costco—who make the type of wages that we pay—are being hit at the gas pump. We’re working very hard to schedule people from the same part of town so they can drive together. We’re encouraging van pools. We’re even testing 10-hour days, something we’ve never done in the past. If we can sched- ule some employees for four 10-hour days, that’s one day they don’t have to drive to work. They’ve got a 20% savings in their gas right there.”

His response to the question shouldn’t be surprising, but it is surprising to nd a CEO who actually takes these types of external factors into consideration when planning for their business. Costco’s executives focus on putting their employees rst, which has lead to low employee turnover rates. In the long run, this increased rate of reten- tion has allowed Costco to save on labor costs while con- tinuing to provide employees with signi cant wages and bene t packages. When employees feel important and that there is value in the work that they do, it makes it harder to leave their current position and seek out new work.

Front-line employees are the ones who interact with your company’s customers each day and are ultimately the ones who communicate the values and culture of your brand to the public. When employees are not passionate about their work or their brand, their attitudes have the ability to in uence the customer’s shopping experience. Sinegal started out his retail career as a bagger27, working through the ranks to VP Merchandising and Operations at FedMart- eventually cofounding Costco in 1983. Since he has worked in a variety of retail positions throughout his career, Sinegal understands the motivators and impact that every position has on the overall success of Costco.

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In one of their articles about Costco, Tech Crunch28 dis- cussed the factors of success at Costco, stating that:

“The company’s per-employee sales are consider- ably higher than those of key rivals such as Target and Wal-Mart; customer service at the stores is phenomenal and fast; and Costco continues to expand, both in num- ber of warehouses and in products and services for busi- ness and consumer customers.”29

The Costco story teaches us all a few lessons that can be applied to our own workplaces: think of the long-term impact of your actions, reduce employee turnover and, at all times, let your employees know they matter.

competItIon

Warehouse clubs compete with each other on factors such as price, merchandise quality and selection, loca- tion, and member service. Warehouse clubs also compete with a wide range of other types of retailers, including retail discounters such as Wal-Mart and Dollar General, supermarkets, general merchandise chains, specialty chains, gasoline stations, and most recently Internet re- tailers (which now represents one of the biggest threats). Wal-Mart, the world’s largest retailer, competes directly with Costco not just via its Sam’s Club subsidiary but also through its Wal-Mart stores, which sell many of the same SKUs at attractively low prices. Target and Kohl’s have also emerged as signi cant retail competitors in certain merchandise categories. Low-cost, single cat- egory retailers, including Lowe’s, Home Depot, Of ce Depot, Staples, Best Buy, Circuit City, PetSmart, and Barnes & Noble, also compete with Costco and have signi cant market shares in their respective product categories.

There have been three main players in the whole- sale club industry—Costco Wholesale, Sam’s Club (612 membership warehouse clubs in the U.S., Brazil, China and Mexico), and BJ’s Wholesale Club (190 locations in 15 states). At the end of 2010, there were just over 1,200 warehouse locations across the United States and Canada; most every major metropolitan area had one, if not several, warehouse clubs. Costco held a nearly 55% share of warehouse club sales across the United States and Canada, with Sam’s Club (a division of Wal-Mart) holding roughly 36% share and BJ’s Wholesale Club and several small warehouse club competitors making up the remaining 9% share.

The wholesale club and warehouse retail segment is estimated to be $140 billion31 in annual revenue, and it is growing about 20% faster than retailing as a whole.32,33

Below are brief pro les of Costco’s two primary competitors in North America: Sam’s Club and BJ’s Wholesale Club.

sam’s club

Wal-Mart opened the rst Sam’s Club in 1984. In the be- ginning, many Sam’s Club locations were located adja- cent to Wal-Mart Supercenters. The concept of the Sam’s Club format was to sell merchandise at very low pro t margins (lower than Wal-Mart stores), resulting in low prices to members.

CostCo Vs. Walmart 2012

Annual Health Costs per Worker

Annual Retirement costs per worker

Labor and overhead
Net pro ts per employee
Chairman Salary (incl. bonus)
*CEO-Chairman is S. Robson Walton@33% ownership

Big Box, Big BuCks30

Costco sells more ef ciently than its low-margin peers. It even outdoes plusher names like Nordstrom, and holds its own against higher-markup “category killers” like Best Buy.

CostCo

$7,127 $1,330

Walmart

$4,750 $996

Average Hourly Wage

$17.00

$12.54

Covered by health plan

82%

49%

Employee turnover

12%

37%

9.60% $946 $548,400

19.50% $656 $1,264,775

Sales per square foot

$986

$425

Yearly operating income growth

16.10%

−0.04%

Stock Price as of 11/28/2012

101.8

70.43

Company

Nordstrom Wal-Mart* Sam’s Club* Best Buy

Source: Company data; UBS, 2009 *Estimate

sales per square foot, annual

Target

$307

$369

$438

$552

$941

Home Depot

$377

BJ’s

$445

Costco

$918

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Sam’s Club warehouses range from 70,000 to 190,000 square feet, with a typical size of about 132,000 square feet. Similar to Costco, all Sam’s Club warehouses feature concrete oors, sparse décor, with goods displayed on pallets, simple wooden shelves, or racks. Sam’s Club stocks branded merchandise, includ- ing hard goods, some soft goods, institutional-size gro- cery items, and selected private-label items sold under the Member’s Mark, Bakers & Chefs, and Sam’s Club brands.

Most Sam’s Club locations also carry software, electronics, jewelry, sporting goods, toys, tires, batter- ies, stationery and books. The majority of clubs have fresh-foods departments that include bakery, meat, pro- duce, oral products, and a Sam’s Café. Members can also shop online at www.samsclub.com. Like Costco, Sam’s Club stocks about 4,000 SKUs, most of which are standard items and a small fraction of which are spe- cial, limited time offerings. However, these limited time offerings tend to be of lesser quality and carry a lower price tag than those at Costco.

The annual fee for “Sam’s saving” members is $45 for the primary membership card, with an additional houeholdcard available at no additional cost.34

A “Sam’s Plus” membership costs $100 with an ad- ditional household card available at no additional cost. Businesses with a plus membership can have up to 16 add-ons for $45 each.35

Regular hours of operation for Sam’s Club are Monday through Friday 10:00 a.m. to 8:30 p.m., Saturday 9:30 a.m. to 8:30 p.m., and Sunday 10:00 a.m. to 6:00 p.m.

Approximately two-thirds of the merchandise at Sam’s Club is shipped from the division’s own distribution facilities and, in the case of perishable items, from some of Wal-Mart grocery distribution centers. The balance is shipped by suppliers direct to Sam’s Club locations.

Like Costco, Sam’s Club distribution centers em- ploy cross-docking techniques whereby incoming ship- ments are transferred immediately to outgoing trailers destined for Sam’s Club locations; shipments typically spend less than 24 hours at a cross-docking facility and in some instances are there for only an hour. The Sam’s Club distribution center network consisted of seven company-owned-and-operated distribution facilities, 13 third-party-owned-and-operated facilities, and two third- party-owned-and-operated import distribution centers.

A combination of company-owned trucks and ve- hicles from independent trucking companies are used to transport merchandise from distribution centers to club locations.36

BJ’s Wholesale club

BJ’s Wholesale Club, Inc., commonly referred to simply as BJ’s, is a membership-only warehouse club chain operating on the United States. Headquartered in Westborough, MA, BJ’s Wholesale Club, Inc. (www.bjs.com), is a leading operator of membership warehouse clubs in the Eastern United States. The Company currently operates over 190 Clubs in 15 states from Maine to Florida and employs more than 24,000 Team Members. BJ’s is traded on the New York Stock Exchange under the symbol “BJ.”37

On September 30, 2011, BJ’s Wholesale Club was acquired by Beacon Holding Inc., an af liate of Leon- ard Green & Partners, L.P., and funds advised by CVC Capital Partners.38

Merchandise in BJ’s is generally displayed on pallets containing large quantities of each item, thereby reduc- ing labor required for handling, stocking, and restocking. Backup merchandise is generally stored in steel racks above the sales oor. Similar to Costco and Sam’s, BJ’s sells high-quality, branded merchandise at prices that are signi cantly lower than the prices found at supermarkets, discount retail chains, and specialty retail stores such as Best Buy39. Its merchandise lineup of about 7,500 items includes consumer electronics, prerecorded media, small appliances, tires, jewelry, health and beauty aids, house- hold products, computer software, books, greeting cards, apparel, furniture, toys, seasonal items, frozen foods, fresh meat and dairy products, beverages, dry grocery items, fresh produce, owers, canned goods, and house- hold products.

Paid membership is an essential part of the ware- house club concept. In addition to providing a source of revenue it helps offer low prices and reinforces cus- tomer loyalty. BJ’s offers two types of memberships: Inner Circle® memberships and business memberships. Most Inner Circle members are likely to be homeowners whose incomes are above the average for the Company’s catchment area.

Inner Circle® memberships usually cost $50 per year for a primary member and includes one free supplemen- tal membership. Members in the same household may purchase additional supplemental memberships for $25 each. A primary business membership also costs $50 per year and includes one free supplemental member- ship. Additional supplemental business memberships cost $25 each. These fees were increased on January 3, 2011. Prior to that date, primary Inner Circle and busi- ness memberships cost $45 per year and supplemental memberships cost $20 each.

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Case 17 Costco Wholesale Corporation

Appendix

Costco Financials41

Warehouses in Operation

(622 at 12/31/12) 608

592

2008 2009 2010 2011* 2012*

At Fiscal Year End *2011 and 2012 Include Mexico

625

600

575

550

540 527

525 512 0

98,000 96,000 94,000 92,000 90,000 88,000 86,000 84,000 82,000 80,000 78,000 76,000 74,000 72,000 70,000

Net Sales

97,062 87,048

76,255

70,977

69,889
2009 2010

0
*2011 and 2012 Include Mexico

2011* 2012*

2008

Fiscal Year

1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100

Net Income*

1,462

1,709

1,283

1,303

1,096

0
2008 2009 2010 2011 2012

Fiscal Year *All Years Include Mexico

Comparable Sales Growth

10% 8% 6% 4% 2% 0% –2% –4% –6%

*2011 and 2012 Include Mexico

8%

–4%

10%

7%

7%

2008 2009 2010 2011* 2012* Fiscal Year

Gold Star Members

Business Members

Membership

27 6.5 6.442

26.736

5.5 00

2008 2009 2010 2011* 2012* All Fiscal Year End

*2011 and 2012 Include Mexico

6.335

26
25
24
23
22 21.445 21

24.845

22.539

6.3 6.1 5.9

5.7 5.594

5.789 5.719

20.181 20

2008 2009 2010 2011* 2012* All Fiscal Year End

# of Whses

15

*First year sales annualized.
2011 and 2012 Include Mexico 2000 and 2012 were 53-week years.

Fiscal Year

21 13 20 26 31 27 18 22

Average Sales Per Warehouse* (Sales in Millions)

$72 $105 117

$92 $63 81 81 99 124 132

$86 83 $76 88 92 101 118 114 95 110 116 109 121 118 138 147 141

$130 $137 $131

99 116 128 103 116 127 122 127 136 128 129 136 126 130 136 150 157 166

$139 $146 $155

$105 $115 $120 $127

$105

$103 120 $94 106 122 $100 107 130 146

Year Opened

2012

2011
2010
2009
2008
2007
2006
2005
2004
2003 & Before 415

Totals 608

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

10.50% 10.40% 10.30% 10.20% 10.10% 10.00%

9.90% 9.80% 9.70%

Selling, General and Administrative Expenses

9.80%

9.98%
9.81%

2011* 2012*

0
*2011 and 2012 Include Mexico

2008

2009
Fiscal Year

10.40%
10.29%

2010

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Percent of Net Sales

Millions

$ Millions

Percent increase/Decrease

Number of Warehouses

Millions

$ Millions

Like Costco and Sam’s, BJ’s Rewards Membership® program, is geared to high frequency, high volume mem- bers, offering a 2% rebate, capped at $500 per year, on most in-club purchases. The annual fee for a BJ’s Re- wards Membership is $100. At the end of 2010, Rewards Members accounted for approximately 7.8% of BJ’s primary members and approximately 17% of BJ’s mer- chandise sales during the year.

BJ’s top management believed that several factors set BJ’s Wholesale operations apart from those of Costco and Sam’s Club:

Offering a wide range of choice—7,500 items versus 4,000 items at Costco and Sam’s Club:

Focusing on the individual consumer via merchan- dising strategies that emphasized a customer-friendly shopping experience

Clustering club locations to achieve the bene t of name recognition and maximize the ef ciencies of manage- ment support, distribution, and marketing activities

Supplementing the warehouse format with aisle markers, express checkout lanes, self-checkout lanes and low-cost video-based sales aids to make shop- ping more ef cient for members

Offering longer working hours than competitors

Offering smaller package sizes for many items

Accepting manufacturers’ coupons

Accepting more credit card payment options40
concLusIon
Looking forward, the issue facing Costco is how to main- tain its historically high performance? As the Company has become larger, several markets have neared saturation and maintaining historic growth rates has become more challenging. Moreover, Costco faces a potentially strong challenge from online retailers, most notably Amazon, which offers a vast array of goods at low prices. Moreover, as Amazon builds out its distribution system it will soon be able to offer next day delivery to most locations within the United States. Will this be enough to draw customers away from Costco and end the Company’s impressive rise to dominance in deep discounting retailing?
notes

http://money.cnn.com/magazines/fortune/fortune_ archive/2006/10/30/8391725/

http://en.wikipedia.org/wiki/Costco

COSTCO Annual report FY 2011

4.

5. 6.

7. 8. 9.

10. 11.

12. 13.

14. 15. 16. 17. 18.

19. 20. 21.

22. 23.

24. 25. 26.

27. 28.

http://www.coriolisresearch.com/pdfs/coriolis_ understanding_Costco.pdf
COSTCO Annual report FY 2011 http://phx.corporate-ir.net/phoenix.zhtml?c=83830& p=irol-reportsannual http://money.cnn.com/magazines/fortune/fortune_ archive/2006/10/30/8391725/ http://money.cnn.com/magazines/fortune/fortune_ archive/2006/10/30/8391725/ http://www.nytimes.com/2005/07/17/business/yourmoney/ 17costco.html?pagewanted=all&_r=0

COSTCO Annual report FY 2011 http://www.lek.com/sites/default/ les/lek-why_costco_ and_other_warehouse_club_retailers_matter.pdf COSTCO Annual report FY 2011 http://www.nasdaq.com/article/how-does-costco-make- money-cm205766#ixzz2UuPFCPCq http://seattletimes.com/html/businesstechnolo- gy/2018150010_costco06.html http://netonomy.net/2013/01/30/top-5-largest-online- retailers-who-companies-how-did-they-make-it/ http://seattletimes.com/html/businesstechnology/ 2018150010_costco06.html http://www.cisco.com/web/about/ac79/docs/retail/Cost- co-com_UK.pdf http://www.forbes.com/sites/greatspeculations/2013/05/29/ costco-earnings-swelling-membership-will-fuel-its- sales-growth/ http://o.seattletimes.nwsource.com/html/businesstechnology/ 2018150010_costco06.html http://seattletimes.com/html/businesstechnology/ 2018150010_costco06.html http://www.businessweek.com/stories/2004-05-30/ online-extra-at-costco-good-jobs-and-good-wages

http://www.seattlepi.com/business/article/Costco-s- love-of-labor-Employees-well-being-key-1140722.php http://beta.fool.com/enovinson/2012/07/26/ several-ways-costco-differs-other-discounters/7886/

http://www.priceviewer.com/costco/costco_employment.htm http://reclaimdemocracy.org/costco_employee_bene ts_ walmart/ http://ethisphere.com/100-most-influential-people-in- business-ethics-2008/#37 http://ethisphere.com/100-most-influential-people-in- business-ethics-2008/#37 http://www.tlnt.com/2011/12/19/generous-benefits- costco-ceo-says-they-are-just-good-business/ http://en.wikipedia.org/wiki/James_Sinegal TechCrunch is a web publication that offers technology news and analysis, as well as pro les of startup compa- nies, products, and websites. It was founded by Michael Arrington in 2005, and was rst published on June 11, 2005.

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http://techcrunch.com/2010/03/20/integrating-ethics- into-the-core-of-your-startups-why-and-how/

http://money.cnn.com/magazines/fortune/fortune_ archive/2006/10/30/8391725/

https://www.deloitte.com/assets/Dcom-UnitedStates/ Local%20Assets/Documents/ConsumerProducts/us_ cp_Club%20Strategy_011813.pdf

http://www.lek.com/sites/default/ les/lek-why_costco_ and_other_warehouse_club_retailers_matter.pdf

https://www.deloitte.com/assets/Dcom-UnitedStates/ Local%20Assets/Documents/ConsumerProducts/us_ cp_Club%20Strategy_011813.pdf

34. 35. 36.

37. 38.

39. 40. 41.

https://m.samsclub.com/membership/join https://m.samsclub.com/membership/join http://www.walmartstores.com/sites/annualreport/ 2011/ nancials/2011_Five_Year_Summary.pdf

BJ’s 2011 Annual Report (LINK) http://www.bjs.com/company-background.content. about_background.A.about
BJ’s 2011 Annual Report (LINK)

BJ’s 2011 Annual Report (LINK) Costco 2012 Annual report

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