Mission,

Business Model, and Strategy

Nita Sacharissa, Sigit Wijanarko, Feby Risky

What is Costco Wholesale?

We are a membership warehouse club,
dedicated to bringing our members the
best possible prices on quality brand-name
merchandise. With hundreds of locaAons
worldwide, Costco provides a wide
selecAon of merchandise, plus the
convenience of specialty departments and
exclusive member services, all designed to
make your shopping experience a
pleasurable one.

The company's rst locaAon, opened in 1976 under the Price Club name, was in a
converted airplane hangar on Morena Boulevard in San Diego. Originally serving only
small businesses, the company found it could achieve far greater buying clout by also
serving a selected audience of non-business members. With that change, the growth
of the warehouse club industry was o and running. In 1983, the rst Costco
warehouse locaAon was opened in SeaUle. Costco became the rst company ever to
grow from zero to $3 billion in sales in less than six years. When Costco and Price
Club merged in 1993, the combined company, operaAng under the name
PriceCostco, had 206 locaAons generaAng $16 billion in annual sales.
Our operaAng philosophy has been simple. Keep costs down and pass the savings on
to our members. Our large membership base and tremendous buying power,
combined with our never-ending quest for eciency, result in the best possible
prices for our members. Since resuming the Costco name in 1997, the company has
grown worldwide with total sales in recent scal years exceeding $64 billion.

THE HISTORY OF COSTCO

First Costco and Price Club Store

Fascinating Facts about Costco

The concept for Costco was drawn up on a napkin
Like I menAoned above, the Costco we knew and love today started
out as Price Club, which was founded by legendary businessman Sol
Price*. In 1975, Price was forced out of a chain of discount
department store company he founded called FedMart**. Shortly
a`er, he drew up the concept of a "warehouse store" retail model on
a napkin.

A few of Price's friends and associates put together $2.5 million seed
money for the rst Price Club, which opened in 1976 (more below).
Their rst week's sale was downright disappoinAng. Price said, "It
was terribly slow. Our sales were only about $32,000 in our rst
week, and it got worse from there."

To make it seemed that the store was busy with customers inside,
Price made his employees park their cars near the warehouse
entrance. Luckily, sales improved and Price Club was o and running.

Costco's main layout is called "The Race Track"

Costco purposely put fresh food at the back in the store, to make sure that their
customers pass by every category of items - electronics, clothing, jewelry, amongst
others - as they wind their way down "The Race Track" to the food secAon.
This strategy obviously works because, as I menAoned above, it's impossible to get
out of Costco for less than $100.
Two types of things that Costco sells: Triggers and Treasures
A typical Costco warehouse store stocks only 4,000 types of items (in contrast, the
average supermarket sells 40,000 types items. Wal-Mart stores, on the other hand,
stock about 125,000 types of products). Want ketchup? There's only one selecAon -
you don't get to (or have to) make a choice from a variety, which is a clever
strategy to combat choice paralysis.
But don't let that fool you. Costco's product selecAon is actually very deliberate.
Three-quarters of Costco's products are what it calls "triggers" - staples such as
paper towel, detergents, and cereals. The remaining one-quarter are "treasures" -
items that make shopping an adventure. These items change frequently: one day
you can nd it's luxury watch oered at a ridiculous discount and the next day, it's
gone. This creates a sense of urgency and the thrill of shopping that hooked people
on what's been called the "Costco Craze" or the "Costco Eect."

Costco sells over 100 million pounds of fresh ground beef every year
The company is one of the largest meat purveyors in the world. It sells $4.5 billion
worth of meat every year (on top of $4 billion worth of produce). See that
roAsserie chicken roasAng in the back of the store? Costco sells 103,000 of them
every day. That's over 37 million chicken a year!
Costco buys up half of the world's supply of cashews
People sure love cashews. Costco sells $300,000 worth of them every week. If you
noAced, Costco's cashew containers are square - not round - in order to maximize
space on pallets.

When they switched to square containers, they reduced some 400 truck trips in
shipping the product to its 600+ stores every year.

The Biggest Retailers of 2014

hUp://www.forbes.com/

No. 1: Wal-Mart Stores

No. 2: CVS Caremark
No. 3: Home Depot
No. 4: Walgreen
No. 5: Target
No. 6: Costco Wholesale
No. 7: Lowe's
No. 8: eBay
No. 9: Inditex
No. 10: Richemont

Business Membership is available to all licensed businesses, nonprot

organizaAons, government agencies, farmers and ranchers. The
$55.00 annual membership fee includes one household card per
primary membership. Up to six addiAonal Business Membership cards
(add-ons) are available for $55.00 each, and include one household
card per add-on. Business idenAcaAon (business license, resale
cerAcate, or three pieces of business ID) is required when applying
for Business Membership. Business Members who wish to purchase
for resale must provide the Costco arehouse membership counter
with the appropriate resale informaAon. As a service to our Business
Members who purchase cigareUes for resale at the warehouse, we
automaAcally provide your idenAty and your cigareUe purchase
informaAon to all cigareUe manufacturers' representaAves. This
informaAon is used by cigareUe manufacturers to PAY YOU on their
incenAve programs. Please inquire at the warehouse about the
privacy policy concerning tobacco purchases.

TYPES OF MEMBERSHIP
ExecuAve, Business, and Gold Star

Costcos business model is called a subscripAon business model customers who want to
shop at the store must buy a membership (currently $55 in the U.S.) with the promise of
lower prices to make up for the iniAal upfront cost. Costco wasnt the rst company to
implement this business model newspapers, gyms and telecommunicaAon companies
also earn their money from subscripAons.

Costco is dierent in that a customer isnt subscribing for goods, but rather, for a service.
The service that Costco provides is its ability to use economies of scale to bulk buy a large
amount of goods at low prices and then to pass these savings onto its customers.

Because a service is intangible, there needs to be a certain level of condence or
percepAon that the service being subscribed to is worth the cost. With Costcos 91%
renewal rates in American and Canada and 87% renewal rates internaAonally, its clear
that customers consider the price-cuqng service well worth the membership cost.

MEMBERSHIP
ExecuAve, Business, and Gold Star

TYPES OF MEMBERSHIP
ExecuAve, Business, and Gold Star

Gold Star Membership is available for individuals who do not qualify for a Business
Membership. The Gold Star Membership is $55.00 per year, and includes one household
card per primary membership.

TYPES OF MEMBERSHIP
ExecuAve, Business, and Gold Star


ExecuAve Membership is our highest level of membership. ExecuAve Members enjoy an
annual 2% Reward on most Costco purchases, as well as addiAonal values on member
services, such as lower prices on check prinAng, payroll services and idenAty protecAon;
an account bonus for money market and online invesAng accounts; free roadside
assistance for vehicles covered through the auto insurance program; and extra travel
benets.

TYPES OF MEMBERSHIP
ExecuAve, Business, and Gold Star

What is Costcos current business model

and why is it appealing?
Costcos business model is predicated on a best-cost theme. They take the low-priced supplier
approach and mix that with creaAng price of the many stakeholders by targeAng on wonderful client
service, a severe code of beliefs, treaAng sta like family, concerning suppliers, saAsfying
shareholders, and a robust intelligence of environmental place. They need to enforce disAncAve cost-
saving methods in their producAon, operaAons, and selling that has allowed them to draw in the
foremost auent customers in discount selling. The central focus of their business model turned
around high sales volumes and fast inventory turnover by giving fee-paying members beauAfully low
costs on a restricted choice merchandise that include a mix of across the country branded and illicit
private-label products in an exceedingly wide selecAon of merchandise classes.
This is an awfully appealing business model because it provides the power to control fruitully at a lot
of lower prot margin by securing marketer volume geqng agreements, economical distribuAon, no-
frill self-service warehouse faciliAes and supplemental membership fee revenue. Another magnet is
because of the high sales volume and fast inventory turnover style of this business model, the
accelerated money conversion cycle permissible Costco to gather the funds for inventory before
marketer liabiliAes changing into due. This provided for marketer nance and also the ability to
require advantage of early payment discounts that addiAonal reduced operaAonal prices. As a
testament to the success of this business model, from 2008 through 2011, Costco was able to
increase the amount of warehouses by 15.6%, revenues by 22.6%, and earnings by 14.0%.

What are the chief elements of Costcos current strategy

and is it eective?
Costcos key strategy components consist of:
Ultra-low costs,
A restricted choice of across the country branded and private-label merchandise,
A treasure hunt searching surroundings,
Low overhead stress, and Geographic growth
Due to ultra-low costs, they need to be being able to lure a bigger populaAon of auent
customers. From 2010 to 2011 income enhanced by14. 0% and membership fee revenue
by 10.4% annual goal was 5% or addiAonal. However, once membership revenue is
systemaAcally over earnings. Therefore, while not the membership revenue, Costco
would be operaAonal within the red. Also, once reviewing ROS from 2000 to 2011,
although sales have enhanced, the price has not been contained as expediAously. This can
be proven by the gradual ROS erosion of 2000 ROS of 1.96% to 2011 ROS of 1.64%. With
such a liUle ROS, any increase in the variable value might be harmful. On the opposite
strategic components like geographic growth, restricted product choice, and providing a
treasure hunt searching surroundings, Costco was terribly undefeated.

How would you rate the eectiveness of Jim Sinegal as

the CEO?
Jim Sinegal was an awfully eecAve chief operaAng ocer. He was able to take
advantage of the membership warehouse thought that he learned from Sol worth once he
worked for worth club within the late 1970. In 1983, he developed a strategic mission and
values too frequently oer our members with quality product and services at rock
boUom costs possible. This resulted within the iniAal Costco being opened in 1983. The
cra`ed strategy objects targeted around ultra-low costs, restricted product choice, a
treasure hunt searching experAse, low operaAonal prices, and geographic growth. The
fast inventory turnover, marketer nance, low operaAonal prices, and self service faciliAes
enabled Costco to control at a considerably lower prot margin and to expire those
savings to members through lower costs and beUer quality product. By charging
members a paid fee, that supplemented overall protableness, it provided shareholders
with an appropriate comeback.

Jim had an amazing ability to line the structure tone at the highest through his acAve
approach together with treaAng his sta like business homeowners. This gave him
tremendous ability to bolster the companys mission on a day a`er day. He was
perpetually iAnerant warehouses giving aUenAon to product displays, quality of products,
and raAng. He would incessantly raise store managers to report on sales volumes and
inventory. Although he demanded a lot of managers and sta, on mulAple occasions he
took chance the chance to mentor managers by asking them to try to addiAonal analysis
once he wasn't happy with their answers or felt the experAse would funcAon a learning
opportunity.
Jims success in execuAon the corporate strategy is obvious by the 2011 10% annual sales
growth, 52extra stores, and 12.2% increase in earnings. The negaAve ramicaAons of
Costcos strategy execuAon exist because of weak protableness, low dividend yield, and
moderate liquidity compared with the wholesale discount selecAon store trade. Once
reviewing the posiAves and negaAves of Jims ability to execute strategy with success, Id
award Jim a grade of a B.

What are Jim Sinegals core values or

business principles for Costco?
Theyre square measure essenAally ve operaAonal principles that focus around moral
business pracAces and treaAng all stakeholders with the utmost respect. He was well-
known for propagaAng the thought of viewing all stakeholders as a part of the company
family. Jim wished to make sure that the corporate would be called being on a rst-
name basis with everyone. This can be evident by the subsequent principles:
Adapt the law.
Lookout of our members. This was done by abidance the trust extend by the members
by virtue of their membership fee.
Lookout of our sta. Because the most signicant plus, sta ought to be extremely
valued by providing them with appreciated challenges and opportuniAes for private
and career growth.
Respect our suppliers. As business partners, honor assurances and approach
relaAonship from a win-win perspecAve.
Reward our shareholders.

SWOT analysis

 Pricing Authority: Costcos philosophy is to provide its members with quality goods at
the most compeAAve prices. It does not focus its eorts on maximizing prices in the
short term, but instead focuses to maintain a percepAon among its members of
pricing authority, or consistently providing the most compeAAve prices. These bring
customers back to the warehouse, since they have the belief that they are in fact
geqng the best price on a wide array of products. The company also uses its gasoline
business to draw members to warehouses. While this business is relaAvely lower
margined than others, it again drives higher volumes of other higher-margined
products.
Brand Loyalty: Costcos relentless pursuit of oering high-quality products and oering
great value has allowed it to aUract a very loyal customer base. This has allowed the
company to grow market share and increase its customer base over the years.

Strengths

 Geographic Dependence: Costcos performance is highly dependent on its North

American business. Sales in the U.S. and Canada represented 87% of the total for 2014.
The company is parAcularly dependent on California, which represented 32% of U.S.
sales last year. As a result, any substanAal slowing in demand in the state, for any
number of reasons, could signicantly hurt the companys top and boUom lines.

Older Customer Base: While Costco has a fairly broad customer base, it is more skewed
toward older baby boomers. As these customers age, they tend to spend less. The
company needs to try and aUract younger customers, including GeneraAon X and Y,
who are savvier e-commerce shoppers. We discuss this opportunity in more detail
below.

Weaknesses

 AUracAng Younger Customers: In recent months, management has taken steps to aUract younger
customers to its stores. These shoppers, between the ages of 19 and 34, should help to drive
longer-term sales and earnings at Costco. The company is aUracAng these customers in several
ways. It is making it more convenient for them to shop by using services such as Google Express
and InstaCart. It is also oering beUer, higher-quality brands on the apparel side of the business.
The company has also been using promoAons, including Living Social, which should aUract a
younger customer base. It is also oering more organic foods, which will also appeal to a younger,
more health-conscious consumer. As a result of these moves, Costco has been seeing a larger
percentage of new sign-ups from these customers in recent quarters.

InternaAonal Expansion: Costco plans to conAnue to expand, both domesAcally and
internaAonally. Its current store base is around 670, but management hopes to reach 1,200
warehouses in the long term. It will likely conAnue to open about 30-35 stores a year over the
next few years. Over the next 10 years, we think roughly 60% of these stores will be opened
outside the United States, where margins are almost twice as high as they are domesAcally. The
company has recently expanded in Spain, and plans to open up in France in due Ame. We also
think Costco is planning to enter China within a couple of years, which would be a huge growth
opportunity.

Opportunities

 CompeAAon: The discount warehouse services industry is highly compeAAve. There are
several warehouse operators across the U.S. and Canada that oer similar merchandise
quality, selecAon, and price. Primary compeAtors include Sams Club and BJs Wholesale
Club. The company also competes on a worldwide basis with global, naAonal, and regional
wholesalers and retailers, including supermarkets, supercenters, department and specialty
stores, gas staAons, and internet retailers. Other regular retailers that dont require
membership, including Wal-Mart (WMT - Free Wal-Mart Stock Report) and Target (TGT),
also compete in the general merchandise category. Pressure from these companies will
likely prevent Costco from raising prices too much, for fear of losing business.

Internet Retailer Giants: While not directly compeAng with Costco, some internet retailers
like Amazon (AMZN) oer a range of low-cost, good-quality products with shipping opAons
that are hard to beat. Companies like this have the scale and fulllment processes already in
place, so Costco needs to think how to leverage e-commerce and innovate in this space to
beUer compete with these giants of industry, especially if they decide to compete more
directly with Costco in the food industry.

Threats

Costco conAnues to successfully expand its operaAons, thanks to its low prices and strong
customer loyalty. Its ability to deliver quality products, at an aordable price, should
appeal to most consumers in North America and around the world. While compeAAon in
the market remains erce, we think management is taking the right steps to lead the
company into the future. All told, we believe Costcos strengths and opportuniAes
outweigh its weaknesses and threats. Subscribers interested in learning more about
Costco should check out our full-page report in The Value Line Investment Survey.

Conclusion