CostcoWh61e'saleCorpora tiOll:':Missi.Ol1,BusinessMó~el, and Strategy
Thompson-Slrickland-Gamble:Crafting and ExeculingSlralegy: Concepls andCases, 161hEdilion
Arthur.A. ThompsonJr~The University Of Alabama
C-2
Jim Sinegal, cofounder and CEO of Costeo 'he was prone todisplay irritation.when hedisagreedWholesale, was the driving force behind Costco's sha1]Jlywithwhat pe9ple were sayingtohim ..23-year march to become the fourth largest re- In touring aCostcOstore with the local siore man·tailer in the United States and the seventh larg-' aget, Sinegal was very much the person-in-charge. He
est in the world. He was far from the stereotypical ,functioned as producer, director, and knowlcdgeableCEO. A grandfatherly 70-year·old, Sinegal dressed critico He cut to thc9hase quickly, exhibiting;.intenseeasualIyand unpretentiously,often going to tile " ,qtt~rition to detail andpriCing;wanderit)gthroughoffiee or touring Costeo stores wearing an open- ',·~tore aisles firingabarrage ofquestions at storeman-eoJlared cotton shirt that carne from a Costco bargain agers aboutsales volumes arid stock levels of partic"rack and sporting a standard employee narrie tag that ,ul~r items, critiquing merchandising displays. or thesaid, simply, "Jim." His informal dress,mustache, positionof certai~lproductsin the stores,comment-grayhair, and unimposing appearance madeiteasy '., irigon any aspect ofstore· operations that caught hisfor Costeo shoppers to mistakehim for a storeClerk., eYe•.and asking managers to do further researeh andHe answered his own phone, once telling ABC News get báck to him with more information whenever hereporters, "If a customer's calIing and they have a foundtheiranswers tohis questions less than satisfY-gripe, don'tyou thinkthey kindofé))1joy thefaetthat . ing; H'wasreadily apparentithafSinegalhad:tremen-1pickedupthe phone and talked tothem?,,1 • ',dous merchandising savvy, tháthé demanded much
Siné)gal spent mueh of his time touring Costco -, ofstore managers and employees, arid that his viewsstores, using the companyplane to fly from location a~otit discountretailing set thetone for howthe com-to location and sometimes visiting8 to 10 storesdaiIy' pany operated,~owledgsableobserversrsgarded(the record for a single day was l2).Treated likéa Jim, Sinegal'smerchandising expertiseas.,beingcelebrity when heappeared at a store (the ne\Vs"Jim's .. 011 a par with that of the legendary Sam Walton.in the store" spread quickly), Sinegal made a pomt of· -. sIn 2006;Costco's sales totaledalmost $59 bil-greetingstore employees. He observed, "The employ- lionátA96 storesin 37 states;Puerto Rico, Canada,ees knowthatI want tosay hello tothem,becau~e theUt1itedI<.tngdom,}ai~ffil'i~apan, Ko~ea, and1 like them.We havc.saidfrom thcvery bcginning: ,·.Meiico. About26 million households and5;2 mil-'We're going to be a company that's on a firsf-liame .. 'ÚOlibusinesses had mémbe~ship cards entitling thembasis with everyone! "2 Employees genuinely seemed to shop at Costeo, generating nearly $1.2 billion into like Sinegal. He taIkedquietIy, in a COmmonsellsi- meil1bership feesforthe company. Annual salescal Ill~nnsr that suggestedwhat he:vas sayin~' Was "pere store 'lveragedabout $ I:l8 millio)1, nearly dou"no bigdeaL3 He carne across as kind yet stern, ~ut '. bJe Ihe $67 millionfigure for§am 'sCIub,Costco's
.. ehief competitor in the membership warehouse re-Copyright~' i007 by Arthur A. Thompson. Al! righis reservcde tail·segment. '
o Thompson-Slriekland-Gamble:Crafting and ExeeulingSlralegy: ConeeplS andCases, 16lh Edilion
Case 1 Costco Wholesale Corporation: Mission, Business Model, and Strategy C-3
COMPANY BACKGROUNDThe membership warehouse concept was pioneeredby discount merchandising sage Sol Price, whoopened the first Price Club in a converted airplanehangar on Morena Boulevard in San Diego in 1976.Price Club lost $750,000 in its first year of opera-tion, but by 1979 it had two stores, 900 employees,200,000 members, and a $1 million profit. Years·earlier, Sol Price had experimented with discountretailing at a San Diego store called Fed-Mart. Jiu:Sincgal got his start in retailing thcre at the age of18, loading mattresses for $1.25 an hour while at- 'tending San Diego Community College. When Sol 'Price sold Fcd-Mart, Sinegalleft with Price to helphim start the San Diego Price Club store; within afew years, Sol Price's Price Club emerged as the un- .challenged leader in member warehouse retailing,.with stores operating primarily on the West Coast.
Although he originally conceived Price Club asa place whcrc small local busincsses could obtainnccdcd merchandisc at economical prices, Sol Price .soon concluded that his f1edgling operation could 'achieve far greater sales volumes and gain buyingclout with suppliers by also granting membership toindividual s-a conclusion that launched the deep- .discount warehouse club industry on a steep growthcurve.
When Sinegal was 26, Sol Price made him themanager of the original San Diego store, which hi:1dbecome unprofitable. Price saw that Sinegal had aspecial knack for discount retailing and for spotting .what a store was doing wrong (usually either nqt .being in the right merehandise categories or not sell-ing items at the right priee points)-the very thillgSthat Sol Priee was good at and that were at the root of:the Price Club's growing success in the marketplace ..Sinegal soon got the San Diego store back into theblack. Over the next several years, Sinegal continuedto build his prowess and talents for discount merehi,ll:1~dising. He mirrored Sol Price's attention to detail and .absorbed all the nuances and subtleties of his men-tor's style of operating-constantly improving storeoperations, keeping operating costs and overheadlow, stocking items that moved quickly, and charg-ing ultra-Iow prices that kept customers coming backto shop. Realizing that he had mastered the tricks of·running a succcssful mcmbership warchouse busi-ness from Sol Price, Sinegal decided to leave PriceClub and form his own warehouse club operation.·
Costco was founded by Jim Sinegal and Seattleentrepreneur Jeff Brotman (now chairman of theboard of directors). The first Costco store began oper-ations in Seattle in 1983, the same yearthatWal-Martlaunched its warehouse membership format, Sam 'sClub. By the end of 1984, there were nine Costcostores in five states serving over 200,000 members.
, In Deeember 1985, Costeo beeame a publie eom-pany, selling shares to the public and raising addi-ti<;malcapital for expansioll. Costeo beeame the firstever U.S. eompany to reaeh $1 billion in sales in lessthan six years. In Oetober 1993, Costeo merged withPriee Club. Jim Sinegal beeame CEO ofthe mcrgedcompany, presiding over 206 PriceCostco locations,which in total generated $16 billion in annual sales.JeffBl'otman, who had functioned as Costco's chair-man sincc thc company's founding, became vice
I chairman ofPriccCostco in 1993 and was clcvated tochairman in Deccmbcr 1994. Brotman kept abreastof company operations but stayed in the backgroundand concentrated on managing the company's $9 bil-lion invcstment in real estate opcrations-in 2006,Costco owned the land and bui1dings for almost 80percent of its stores.
In January 1997, afterthe spin-off of most ofits llonwarchouse assets to Price Entcrprises Ine.,
j PriceCostco changcd its name to Costco CompaniesInc. When the company reincorporated from Delawareto Washington in August 1999, the name was changedto' Costco Wholesale Corporation. The company's
, headquarters was in issaquah, Washington, not farfrom Seattle.
Exhibit 1 contaills a financial and operatingsummary for Costco for fiscal years 2000-2006.
·COSTCO'S MISSION,BUSINESS MODEl, AND,sTRATEGYCostco's mission in thc membership warehouse busi-ness read: "To continually providc our membcrswith quality goods and services at the lowest pos-sib1e priccs.", The company's business modcl was
• to gcncrate high sales volumcs and rapid inventorytumovcr by offcring l11-cmbcrslow prices on a limitedsclection of nationally branded and selectcd private-
. label products in a wide range of merchandise cat-, egories. Management believed that rapid inventory
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Thompson-Striekland-Gamble: ICrafting and ExeeutingSlrategy: Coneepts endCases. 16th Edition
Case 1 CostcoWholesaleCorporation:Mission,BusinessModel,and Strategy c-s
Indeed, Costeo's markups and priees, were so lowthat Wall Street analysts had eriticized Costeo man-agement for going all out to please eustomers at theexpense of inereasing profits for shareholders. Oneretailing analyst said, "They eould probably get more
• money for a lot of the items they sell."8 Sinegal wasunimpressed with Wall Street ealls for Costeo toabandon its ultra-Iow prieing strategy, eommenting:"Those people are in the business of making money
· betwecnnow and next Tuesday. We're trying to buildan organization that's going to be here 50 years fromnow."9 He went on to explain why Costeo's approaehto prieing would remain unaltered during his tenure:
discounters and many supermarkets). Markups onCosteo's 400 private-Iabel (Kirkland Signature) itemseould be no higher than 15 pereent, but the sometimes
· fractionally higher markups still resulted in KirklandSignature items being prieed about 20 pereent belowcomparable name-brand items. Kirkland Signatureproduets-whieh inc1uded juice, eookies, coffce,tires, houscwares, luggagc, applianccs, c1othing, anddctergent-were designed to be of equal or bctter
, quality than national brands.Costco's philosophy was to keep customers com-
ing in to shop by wowing them with low prices. JimSinegal explained the eompany's approaeh to prieingas follows:
turnover-when combined with the operating ef-.ficiencies achieved by volume purchasing, efficip,ntdistribution, and reduced handling of merchandise inno-frills, self-service warehouse facilities-enabledCosteo to operate profitably at significantly lowergross margins than traditional wholesalers, massmerchandisers, supermarkets, and supercenters.
Examples of Costco's ineredible a11lmal salesvolumes inc1uded 96,000 earats of diamonds (2006),1.5 million televisions, $300 million worth of dig- .ital cameras, 28 million rotisserie chickens (over·500,000 weekly), 40 pereent of the Tusean olive oilbought in the United States, $16 milliOll worth.ofpumpkin pies during the fall holiday sea son, $3 bil~lion worth of gasoline, 21 million preseriptions, and52 million $1.50 hot dog/soda pop eombinations.Costeo was also the world's largest seller of finewines ($385 million out oftotal2006 fine wine salesof $805 milIion).4 At one of Costeo's largest volume •.stores, whieh had annual sales of $285 million and232,000 members, annual sales volume ran 283,000rotisserie ehiekens, 375,000 gallons ofmilk, and 8.4million rolls of toilet paper-this store had an ayer,.age customer bill per trip of $150.5
Furthermore, Costeo's high. sales volume and .rapid inventory turnover generally allowed it to selland receive cash for inventory before it had to paymany of its merehandise vendors, even when vendorpayments were made in time to take advantage of' •early payment diseounts. Thus, Costeo was able to.finanee a big percentage of its merehandise inven-tory through the payment terms provided by vendorsrather than by having to maintain sizable workingcapital (defined as eurrent assets minus current li- .abilities) to facilitate timely payment ofsuppliers.
Costco's StrategyThe cornerstones of Costeo's strategy were lowprices, Iimited selection, and a treasure-hunt shop-'ping environment.
Pricing, Costeo was known for selJing top-qualitynationaI and regional brands at prices eonsistently.below traditional wholesale or retail outlets. The .eompany stoeked only those items that eould .bepriced at bargain levels and thus provide memberswith signifieant eost savings; this was tme even if.an item was often requested by eustomers. A keyelement of Costco's pricing stratel,,'Ywas to cap its'markup on brand-name merchandise at 14 pere~nt(eompared to 20 to 50 pereent markups at other
We a1ways Iook to see how much of a gulf weean create between ourselves and the competi-
r tion. So that the eompetitors eventually say, "Theseguys are crazy. We'lI compete somewhere else."Some years ago, we were selling a hot brand ofjeans for $29.99. They were $50 in a departmentstore. We got a great deal on them and could havesold them for a higher price but we went downto $29.99. Why? We knew it would create a riot.6
At another time he said:
We're very good merchallts, and we offer value. Thetraditional retailer wiIl say: "1'm selling this for $10.1wOllderwhether we can get $10.50 or $1l." We say:"We selling this for $9. How do we get it down to$87" We understand that our members don't comeand shop with us because of the window displaysor the Santa Claus or the piano player. They comeand shop with us because we offer great values.7
When 1started, Sears, Roebuck was the Costeo of thecountry, but they allowed someone else to come inunder them. We don't want to be one of the casual-tiesoWe don't want to turn around and say, "We gotso fancy we've raised our prices, ¡mdalI of a suddena new competitor comes in and beats our prices."lO
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Thompson-Slriekland-Gamble:ICrafling and ExeeutingStrategy: Coneepts andCases, 16th Edition
l. Cosleo WholesaleCorporalion: Mission,Business Model. andStrategy
C-6 Part 2 Cases in Crafting and Executing Strategy
Product Selection. Whereas typical supermar-kets stocked about 40,000 items and a Wal-MaitSupercenter or a SuperTarget might have as manyas 150,000 items for shoppel's to choose from, Cost-co's merchandising strategy was to pl'ovide membcrswith a seleetion of only about 4,000 items.
Costco's product range did cover a bl'oadspectrum-rotisserie chicken, prime steaks, caviar,f1at-screen televisions, digital cameras, fresh f1ow-ers, fine wines, easkets, baby stroIlers, toys andgames, musical instnnnents, eeiling fans, vacuumcIeaners, books, DVDs, chandeliers, stainless-steelcookware, seat-cover kits for autos, pl'escriptiondrugs, gasoline, and one-hour photo finishing-butthe compal1Ydeliberately limited thc selection in eachproduct eategory to fast-sclling models, sizcs, andcolors. Many consumablc products like dctergcnts,canncd goods, officc supplies, and soft drinks were soldonly in big-container, case, earton, or multiple-packquantities. For example, Costeo stocked only a 325-eount bottle of Advil-a size many shoppers might findtoo large for their needs. Sinegal explained the reasonfol' the dcliberately limited seleetion as follows:
If you had ten eustomers come in to buy Advil, howmany are not going to bllY any becallse YOll justhave one size? Maybe one or tWO. We refer to thatas the intelligent loss of sales. We are prepared togive up that one customer. But if we had 1'our or fivesizes 01' Advil, as most grocery stores do, it wouldmake our business more di1'ficult to manage. Ourbusiness can only suceeed if we are efficient. Youcan't go on selling at these margins i1'you are not.ll
Costeo's selcetions of appliauces, equipmcnt, audtools often incIuded commercial and professionalmodels beeause so many of its members wel'e smaIlbusinesses. '1'he approximate percentage ofnet salesaecounted fOl"by eaeh major eategory of itemsstocked by Costeo is shown in the foIlowing table:
'1'0encourage members to shop at Costeo more.frequently, the company operated ancilIary busi-nesses within or next to most Costco warehouses;the number of ancilIary businesses at Costco ware-houses is shown in the following table:
Treasure-Hunt Merchandising. While Costco'sproduct line consisted ofapproximately 4,000 items,about one-fourth of its product offerings were con-stantly changiug. Costco's merchandise buyers re-mained on the lookout to make oue-time purchasesofitems that would appeal to the company's clienteleand that would scll out quickly. A sizable number ofthese items were high-end or name-brand products
. that carried big price tags-like $2,000-$3,500 big-screen HD'1'Vs or $800 leather sofas. The idea wasto entice shoppers to spend more than they might
.otherwise by offering irresistible deals on luxuryitems. Aceordiug to Jim Sinegal, "Of that 4,000,about 3,000 can be found on the floor all the time.The other 1,000 are the treasure-hunt stuff that's~lways changing. !t's the typc of item a customerknows they better buy because it will not be therenext ti~e, like Waterford crystal. We try to get that
',sense ofurgency in our customers."12
e I Thompson-Slriekland-Gamble: ICralting and ExeeulingSlralegy: Coneepls andCases. 16lh Edilion
Case 1 CosteoWholesaleCorporation:Mission.BusinessModel,and Strategy C-7
In many cases, Costeo did not obtain its luxury,offerings direetly frol11high-end manufaeturers likeCalvin Klein or Waterford (who were unlikely towant their merehandise l11arketed at deep diseountsat place s Iike Costeo); rather, Costeo buyers searehedfor opportunities to souree sueh items legaIly on the .gray market from other wholesalers or distressed re-tailers looking to get rid of exeess or sIow-seIIinginventory. Examples of treasure-hunt speeials in-.cluded $800 espresso machines, diamond rings andother jewelry itel11swith priee tags of anywhere from '.$5,000 to $250,000, Italian-made Hathaway shi~tsprieed at $29.99, Movado watehes, exotie eheeses.,Coaeh bags, cashmere sport s coats, $1,500 digitalpianos, and Dom Perignon champagne.
Marketing and Advertising. Costco's low pricesand its reputation for treasure-hunt shopping made itunnecessary for the COl11panyto engage in extensive ,advertising or sales campaigns. Marketing and pro-motional activities were generaIIy limited to direct·mail programs promoting selected merchandise toexisting members, occasional direct maiI marketingto prospective new members, and speciaI campaignsfor new warehouse openings. For new warehouse '.openings, marketing teams personaIIy eontactedbusinesses in the area that were potential wholesalemembers; these contaets were supplemented with di- .rect mailings during the period immediately prior to "opening. Potential Gold Star (individual) members.were contacted by direet mail or by promotions atlocal employee associations and businesses withlarge numbers of employees. After a membershípbase was established in an arca, most new member- ,ships came from word of mouth (existing members .teIling friends and aequaintanees about their shop-ping experienees at Costeo), foIlow-up messagesdistributed through regular payroIl or other organi- ;zational cOl11munications to employee groups,andongoing direct solicitations to prospective business'and Gold Star members. Management believed thatits emphasis on direet mail advertising kept its mar-keting expenses low relative to those at typical retail~ers, discounter, and supermarkets.
Growth Strategy. In recent years, Costeo hadopened an average 20-25 locations annuaIIy; mostwere in the United States, but expansion was under;way internationally as wel!. The company opened 68new warehouses in the United States in fiscal years'2002-2006; 16 new warehouses opened in the firsttour months of fiscal 2007 (between September 1
and Deeember 31, 2006), :lnd management plannedtoopen another 20-24 by the end offiseal2007. Fivenew warehouses were opened outside the UnitedStates in fiscal 2005, five more were opened in fiscal2006, and four were opened in the first four monthsof fiscal 2007. Going into 2007, Costeo had a total of102 whoIly-owned warehouses in operation outsidethe United States, including 70 in Canada, 18 in the
¡ United Kingdom, 5 in Korea, 5 in Japan, and 4 inTaiwan. Costeo was a 50-50 partner in aventure tooperate 30 Costeo warehouses in Mexieo. Exhibit 2snows a breakdown of Costeo's geographie opera-
· tions for fiscal years 2003-2006. (The data for the 30warehouses in Mexieo are not included in the exhibitbeeause the 50-50 venture in Mexico was aeeountedfor using the equity method.)
Costeo had reeently opened two freestand-ing high-end fumiture warehouse businesses ealled
¡ Costeo Home. Sales in 2005 at these two loeationsinereased by 132 pereent over 2004 levels, and prof-its were up signifieantly. So far, however, rather thanopening additional Costeo Home stores, management
· had opted to experiment with adding about 45,000square feet to the size of selected new Costeo storesand using the (extra spaee to stock a mueh biggersclection of fumiture-fumiture was one of the topthree best-selling eategories at Costco's Web site.
A third growth initiative was to expand theeompany's offerings of Kirkland Signature items.Management believed there were opportunities toexpand its private-label offerings from the present
· level of 400 items to as many as 600 items over thenext five years.
Web Site Sales. Costeo operated two Web sites-www.eosteo.eom in the United States and www.costeo.ea in Canada-both to provide another shop-
• ping alternative for members and to provide mem-bers with a way to purchase products and servicesthat might not be available at the warehouse whereth'ey customarily shopped, especiaIIy such services
· as digital photo processing, prescription fulfiIIment,and travcl and other membership services. At Cost-co's online photo center, eustomers could upload im-ages and piek up the prints at their local warehousein little over an hour; one-hour photo sales were up10 pereent in fiscal 2005, a year in whieh the in-
I dustry overall had negative sales growth. Costco'se-eommerce sales totaled $534 miIlion in fiscal 2005and $376 million in fiscal 2004. (Data for fiscal 2006
, e-commeree sales were not available.)
Thompson-Slriekland-Gamble:Crafling and ExeeulingSlralegy: Coneepls andCases. 161hEdilion
l. Cosleo WholesaleCorporalion: Mission.Business Model. andSlralegy
Warehouse OperationsIn Costco's 2005 annual report, Jim Sinegal summedup the company's approach to opcrations as follows:
Costeo is able to offer lower priccs and bcttcr valucsby eliminating virtually a1l thc friIls and costs histori-ea1ly assoeiated with eonventional wholesalers ,and
retailers, including salespeople, faney buildings, de-: livery, billing, and aeeounts reeeivable. We mn a tight.operation with cxtrcmely low overhead which ena-bles us to pass on dramatic savings to our membcrs.
Costco w~rehouses averaged 140,000 square fect.and were constlUcted incxpcnsively with concretef1oqrs. Bccausc shoppcrs werc attracted principally
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o I Thompson-Strickland-Gamble: ICralting and ExecutingStrategy: Concepts andCases, 16th Edition
Case 1 Costeo Wholesale Corporation: Mission, Business Model, and Strategy C-9
by Costeo 's low priees, its warehouses were rare-.Iy loeated on prime eommercial real estate sites.Merehandise was generally stored on raeks abovethe sales floor and displayed on pallets eontainiriglarge quantities of eaeh item, thereby redueing labor,required for handling and stocking. In-store signage 'was done mostly on laser printers, and there were noshopping bags at the eheekout eounter-merchandisewas put directly into the shopping cart or sometimesloaded into empty boxes. Warehouses generally op-erated on a seven-day, 69-hour week, typically being'open between 10:00 a.m, and 8:30 p.m. weekdays,with earlier closing hours on the weekend; the gaso;line operations outside many stores generally hadextended hours. The shorter hours of operation-as 'compared to those of traditional retailers, discount 'retailers, and supermarkets-resulted in lower laborcosts relative to the volume of sales.
Costco warehouse managers were delegatedconsiderable authority over store operations. In.effeet, warehouse managers functioned as entrepre-neurs running their own retail operation. They wpreresponsible for eoming up with new ideas aboutwhat items would sell in their stores, effectively,merchandising the ever-changing lineup oftreasure-hunt products, and orchestrating in-store prod'-uct locations and displays to maximize sales and 'quick turnover. In experimenting with what items to 'stock and what in-store merchandising techniquesto employ, warehouse managers had to know the'c1ientele who patronized their locations-for i,n-stance, big-ticket diamonds sold well at some ware.-houses but not at others. Costco's best managerskept their finger on the pulse of the members who 'shopped their warehouse location to stay in sync with ' 'what would sell well, and they had a flair for creat-ing a certain element of excitement, hum, and buzz 'in their warehouses. Such managersspurred above-average sales volumes-sales at Costco's top-volume·warehouses often exceeded $5 million a week, withsales exceeding $lmillion on many days. Successfulmanagers also thrived on the rat race of running áhigh-traffic store and solving the inevitable criscs 'of the moment.
Costco bought the majority of its merchandisedirectly from manufacturers, routing it either direct-Iy to its warehouse stores or to one of nine cross-';docking depots that served as distribution points.for nearby stores. Depots received container-basedshipments from manllfacturers and reallocatedthese goods for combined shipment to individual
warehouses, generally in less than 24 hours. Thism.aximized freight volume and handling efficien-cies. When merchandise arrived at a warehouse, itwas moved straight to the sales floor; very Iittle wasstored in locations off the sales floor, thereby lower-ing receiving costs by eliminating many of the costsassociated with multiple-step distribution channels,whichinclude purchasing from distributors as op-
• posed to mánufacturers; using central receiving,storage, and distribution warehouses; and storingmerchandise in locations offthe sales floor.
. Costco had direct buying relationships withmany producers of national brand-name mer-chandise (including Canon, Casio, Coca-Cola,Colgate-Palmolive, Dell, Fuji, Hewlett-Packard,Kimberly-Clark, Kodak, Levi Strauss, Michelin,Nestlé, Panasonic, Procter & Gamble, Samsung,Sony, KitchenAid, and Jones ofNewYork) and with
• manufacturers that supplied its Kirkland Signatureproducts. No one manufacturer supplied a sig-nificant percentage of the merchandise that Costcostocked. Costco had not experienced any difficulty in
, obtaining sufficient quantities of merchandise, andmanagement believed that if one or more of itscurrent sources of supply became unavailable, thecompany could switch its purchases to alternativemanufacturers without experiencing a substantialdisruption of its business.
• Costco warehouses accepted cash, checks,most debit cards, American Express, and a private-Iabel Costco credit cardo Costco accepted merchan-dise returns when members were dissatisfied withtheir purchases. Losses associated with dishonoredchecks were minimal because any member whosecheck had been dishonored was prevented frompaying by check or cashing a check at the point ofsale until restitution was made. The membership
• format facilitated strictly controlling the entrancesand cxits of warchouses, resuIting in limited inven-to,ry losses of less than two-tenths of 1 percent ofnet sales-well below those of typical discount re-
• tail operations.
Costco's Membership Baseand Member Demographics
• Costco attracted the most affluent customers in dis-count retailing-the average income of individualm.embers was about $75,000, with over 30 pereentof members having annual ineomes of $100,000
, or more. Many members were affluent urbanites,
Thompson-Striekland-Gamble: ICrafting and ExeeutingStrategy: Coneepts andCases, 16th-Edition
C-IO Part 2 Cases in Crafting and Executing Strategy
living in nice neighborhoods not far from Costcowarehouses. One loyal Exeeutive member, a crimi-nal defense lawyer, said, "1 think I spend over$20,000-$25,000 ayear buying all my products ,here from food to cJothing-except my suits. Ihave to buy them at the Armani stores."13 AnotherCostco loyalist said, "This is the best place in theworld. It's like going to church on Sunday. Youcan't get anything better than this. This is a reli-gious experience.''l4
Costco had two primary types of member-ships: Business and Gold Star (individual). GoldStar memberships were for individual s who did notqualify for a Business membership. Businesses-including individuals with a business license, retailsales Iieense, or other evidence of business exist-encc-qualified as Business members. Businessmembers generally paid an annual membershipfee of $50 for the primary membership eard, whiehalso ineluded a spouse membership card, and eouldpurehase up to six additional membcrship cardsfor an annual fee of $40 each for partners or as-sociates in the business; they could also purchase atransferable eompany cardo A significant number ofbusiness members also shopped at Costco for theirpersonal needs.
Gold Star members generally paid an annualmembership fec of $50, which inc1uded a spousecardo In addition, members eould upgrade to anExceutive mcmbership for an annual fce of $100;Exeeutive members were entitled an additional2 pcrccnt savings on qualified purehases at Costeo(redeemable at Costco warehouses), up to a maxi-mum rebate of $500 per year. Executive membersalso were eligible for savings and benefits on vari-ous business and consumer services offered byCostco, inc1uding merchant credit card processing,small-business loans, auto and homc insuranee,long-distance telephone servicc, check printing,and real estate and mortgage services; theseservices were mostly offered by third-party provid-ers and varied by state. In 2006, Exeeutive mem-bers represented 23 percent of Costco's primarymembership base and generated approximately 45pcreent of consolidated nct sales. Effcctive May 1,2006, Costeo increased annual mcmbcrship fees by$5 for U.S. and Canadian Gold Star, Business, andBusiness Add-on members; the $5 increase, thc firstin nearly six years, impaeted approximately 15 mil-Iion members.
At the end of fiscal 2006, Costeo had almost 48million cardholders:
Recent trends in membership are shown at bottom ofExhibit l. Members could shop at any Costco ware-house; member renewal rates were about 86.5 percent.
.Compensation and WorkforcePractices
-In September 2006, Costeo had 71,000 full-timeemployees and 56,000 part-time employees, includ-
, ing approximately 8,000 people employed by CostcoMexico, whose operations were not consolidated inCostco's financial and operating results. Approxi-matel}: 13,800 hourly employees at locations in
_California, Maryland, New Jersey, and New York,.as well as at one warehouse in Virginia, were rep-resentcd by the lntcrnational Brotherhood ofTeam-sters. AII remaining employees wcre non-union.
, " Starting wages for new Costco employees werein the $10'-$12 range in 2006; on average, Costcoemrloyees earncd $17-$18 per hour, plus bial1l1ualbonuses. Employees enjoyed the full spectrum ofbenefits. Salaried employees were eligible for ben-efits on the first of the month after the date of hire.
·.Full-time hourly employees were eligible forbenefitsofthe first ofthe month after working a probationary90 days; part-tiIile hourly employees became benefit-
_eiigible on the first of the month aftcr working 180days. The benefit package inc1uded the following:
Health and dental care plans. Full-time em-J ployees could choose from among a freedom-of-choice heaJth care plan, a managed-choicehealth care plan, and three dental plans. Amanaged-choiee health care and a core dentalplan were available for part-time employees. Thecompany paid about 90 percent of an employee'spremiums for health care (far above the morenormal 50 percent contributions at many other
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retailers), but employees did have to pick up thepremiums for coverage for family members.Convenient prescription pickup at Costco'spharmacies, with co-payments as low as $5 for .generic drugs. Generally, employees paid nomore than 15 percent of the cost for the mostexpensive branded drugs.A vision program that paid $45 for an optical .exam (the amount charged at Costco's opticalcenters) and had generous allowances for thepurchase of glasses and contact lenses.A 401(k) plan in which Costco matched houilyemployee contributions by 50 cents on the dollarror the first $] ,000 annually to a maximum com- 'pany match of $500 per year. Eligible employeesqualified for additional company contributionsbased on the employee's years of service and eli-gible earnings. The company's union employeeson the West Coast qualified for matching contri- .butions of 50 cents on the dollar to a maximumcompany match of $250 a year;eligible unionemployees qualified for additional company con-tributions based on straight-time hours worked.Company contributions for salaricd workers ran 'about 3 percent of salary during the second yearof employment and could be as high as 9 percentof salary after 25 years. Company contributionsto employee 41O(k) plans were $233.6 millionin fiscal 2006, $191.6 million in fiscal 2005, and'$169.7 million in fiscal 2004.A dependent care reimbursement plan in whichCostco employees whose families qualified couldpay for day care for children under 13 or adult 'day care with pretax doIlars and realize savings 'of anywhere from $750 to $2,000 per year.Confidential professional counseling services.Company-paid long-term disability coverage"equal to 60 percent of eamings if out for morethan 180 days on a non-worker's compensation'leave of absence.AIl employees who passed their 90-day probá-tion period and were working at least 10 hoursper week were automatically enroIled in a short- 'term disability plan covering non-work-relatedinjuries or ilInesses for'up to 26 weeks. Weeklyshort-term disability payments equaled 60 pér- ,cent of average weekly wages up to a maximum 'of $ 1,000 and were tax free.Generous life insurance and accidental death anddismemberment coverage, with benefits based
on years or service and whether the cmployceworkcd full-timc or part-timc. Employecs coulde!ect to purchase supplemental coveragc forthemselves, their spouses, or their children.An employee stock purchase plan allowing allemployees to buy Costco stock via payroll de-duction and avoid commissions and fees.
• A health care reimbursemcnt plan in which ben-efit eligible employees could arrange to havepretax money automatically deducted fromtheir paychecks and deposited in a health carereimbursement account that could be used topay medical and dental biIls.A long-term care insurance plan for employeeswith 10 or more years of service. Eligib!e em-ployees could purchase a basic or supplementalpolicy for nursing home care for themselves,their spouses, or their parents (incIuding in-laws) or grandparents (including in-Iaws).
Although admitting that paying good wages and goodbenefits was contrary to conventional wisdom in dis-count retailing, Jim Sinegal was convinced that hav-ing a weIl-compensated workforce was very impor-tant to executing Costco's strategy successfully. Hesaid, "Imagine that you have 120,000 loyal ambassa-dors out there who are constantly saying good things
• about Costco. It has to be a significant advantagefor you .... Paying good wages and keeping yourpeoplc working with you is very good business."15When a reporter asked him about why Costco treatedits workers so well compared to other retailers (par-ticularly Wal-Mart, which paid lower wages and hada skimpier benefits package), Sinegal replied: "Whyshouldn't employees have the right to good wagesand good careers .... It absolutely makes good busi-
, ness sense. Most people agree that we're the lowest-cost producer. Yet we pay the highest wages. So itmust mean we get better productivity. Its axiomaticin' our business-you get what you pay for."16
About 85 percent of Costco's employees hadsigned up for health insurance, versus about 50 per-cent at Wal-Mart and Targct. The Teamsters' chiefnegotiator with Costco said, "Thcy gave us the bestagrecmel1t of any retailer in the eountry."17 Goodwages and benefits were said to be why employee
, turnover at Costeo ral1 undcr 6 pereent after the firstyear of employment. Some Costeo employees hadbeen with the company since its founding in 1983.
, Many others had started working part-time at Costco
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while in high sehool 01' eolIege and opted to makea eareer at the eompany. One Costeo employee toldan ABC 20/20 reportcr, "It's a good place to work;thcy take good care OfUS."18A Costeo viee presidentand head baker said working for Costeo was a fam- .ily affair: "My whole family works for Costeo, myhusband does, my daughter does, my new son-in-Iawdoes."19 Another employee, a reeeiving clerk whomade about $40,000 ayear, said, "1 want to retireherc. I love it here."20 An employcc with over twoyears of scrviec eould not be fired without the ap-proval of a senior eompany offieer.
Selecting People foy Opm Positions. Costeo'stop management wanted employees to feel that theyeould have a long eareer at Costeo. It was eompanypoliey to fill at least 86 pereent of its higher-Ievelopenings by promotions from within; in aetuality,the pereentage ran close to 98 percent, whieh meantthat the majority ofCostco's management team mem-bcrs (incIuding warehouse, merchandise, administra-tive, membership, front end, and reeeiving manag-ers) were homegrown. Many of the company's vicepresidents had started in entry-Ieveljobs; aeeordingto lim Sinegal, "We have guys who started pushingshopping carts out on the parking lot for us who arenow vice presidents of our company,"21 Costco madea point of recruiting at local universities; Sinegalcxplained why: "These people are smarter than theaverage person, hardworking, and they haven't madea career ehoice."22 On another oeeasion, he said, "Ifsomeone eame to us and said he just got a master'sin business at Harvard, we would say fine, would youlike to start pushing carts."23 Those employees whodemonstrated smarts and strong people managementskills moved up through the ranks.
But without an aptitudc for the details of dis-count retailing, even up-and-eoming employeesstood no chanee of being promoted to a position ofwarehouse manager. Sinegal and other top Costeo ex-ecutives who oversaw warehouse opcrations insistedthat candidates for warehouse managers be top-ftightmerchandisers with a gift for the details of makingitems fly off the shelves; Sinegal said, "People whohave a feel for it just start to get it. Others, you lookat them and it's like staring at a blank eanvas. I'mnot trying to be unduly harsh, but that's the way itworkS."24Most newly appointed warehouse managersat Costco came from the ranks of assistant warehousemanagers who had a track record of being shrewdmerehandisers and tuned into what new or differ-ent produets might seU welI given the c1ientcle that
patronized their particular warehousc-just hav-o ing the rcquisitc skills in pcoplc management, crisismanagement, and cost-effective warehousc opera-tioqs was not enough.
Executive Compensation. Executives at Costeodid not earn thc outlandish salaries that had become
. customary over the past deeade at most large corpo-·rations. In fiscal 2005, both leff Brotrnan and JimSinegal were each paid $350,000 and earned a bonusof $ 100,000 (versus $350,000 salaries and $200,000bonuses in fiscal 2004). As of early 2006, Brotmanown~d about 2.2 million shares of Costco stock(wqrth about $110 milIion as of December 2006)and had been awarded options to purchase an addi-tional 1.35 milIion shares; Sinegal owned 2.7 millionshares' of Costco stock (worth about $140 milIion
,as of December 2006) and had also been awardedo options for an additional 1.35 million shares. Sev-eral senior officers at Costco were paid 2005 sala-ries in the $475,000-$500,000 range and bonuses of$47,000-$77,000. Sinegal explained why exeeutivecompensation at Costco was only' a fraction of themillions paid to top-level exeeutives at other corpo-rations with sales of $50 billion 01' more: "1 figuredthat if.J was making something like 12 times more
• o o than the typical person working on the floor, that·that was a fair salary."25To another reporter, he said:"Listen, I'm one of the founders of this business.I'·ve been very welI rewarded. I don't require a sal-
o ary that's 100 times more than the people who workon the sales floor."26 SincgaI's employment contraet\Vas only a page long and provided that he could beten11inated for cause.
Cosíco's Business Philosophy,'Values, and Code of EthicsJim Sinegal, who was the son of a steelworker, had
.ingrained five simple and down-to-earth businessprincipIes into Costco's corporate eulture and them:mner in which the company operated. The follow-ing' are excerpts of these principies and operatingapproaehes:
1. Obey the law-The law is irrefutable! Absento a moral imperative to chalIenge a law, we musteonduct our business in total eomplianee withthe laws of every cornmunity where we do busi-ness. ~e pledge to:• Comply with all laws and other legal
requirements.
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2.
• Respeet all publie offieials and their.positions.
• Comply with safety and security standardsfor all products sold.
• Exceed ecological standards required inevery eommunity where we do business.
• Comply with all applicable wage and hourlaws.
• Comply with all applicable anti-trust laws.• Conduet business in and with foreign eoun-,
tries in a manner that is legal and properunder United States and foreign laws.
• Not otTer, give, ask for, or reeeive any formof bribe or kiekbaek to or from any person orpay to expedite government action or other- .wise aet in violation of the Foreign ConuptPraetices Act.
• Promote fair, aeeurate, timely, and under-standable discJosure in rcports filed withthe Seeurities aod Exchange Commissionand in other public communieations by tj1eCompaoy.
Take care of our members-Costeo member- ,ship is opeo to business owners, as well as individ-uals. Our members are our reason for being-thekey to our success. Ifwe don't keep our membershappy, little else that we do will make a differ- ,eoce. There are plenty of shoppiog alternatives forour members, and if they fail to show up, we can- .not survive. Our members have extended a trust toCosteo by vi¡1ue of paying afee to shop with ús..We will succeed only if we do not violate the trustthey have extended to us, and that trust extends to 'everyarea of our business. We pledge to:• Provide top-quality products at the best
prices in the market.• Provide high-quality, safe, and wholesome '
food products by requiring that both vendors.and employees be in compliance with thehighest food safety standards in the industry.
• Provide our members with a 100 percerÚsatisfaction guaranteed warranty on every'product and service we sell, including their "membership fee. '
• Assure our members that every product wesell is authentic in make and in representa~on "of performance.
• Make our shopping environment a pleasantexperience by making our members feel wel-come as our guests.
• Provide products to our members that will beecologically sensitive.
• Provide our members with the best customerservice in the retail industry.
• Give back to our communities throughemployee volunteerism and employee aodcorporate contributions to United Way andChildren's Hospitals.
; 3. Take care of our employees-Our employeesare our most important asset. We believe we havethe very best employees in the warehouse club in-dustry, and we are committed to providing themwith rewarding chaJJenges and ample opportuni-ties for personal and career growth. We pledge toprovide our employees with:• Competitive wages.• Great benefits.• A safe and healthy work environment.• Challenging and fun work.• Career opportunities.• An atmosphere free from harassment or
discriminatian.• An Open Door Policy that allows access to
ascending levels of managemcnt to resolveissues.
• Opportunities to give back to their communi-ties through volunteerism and fundraising.
4. Respect our suppliers-Our suppliers are ourpartners in business and for us to prosper as acompany, they must prosper with uS. To thatend, we strive to:• Treat all suppliers and their representatives
as you would expect to be treated if visiting. their places of business.
• Honor all commitments.• Protect all suppliers' property assigned to
Costeo as though it were our own.• Not accept gratuities of any kind from a supplier.• Avoid actual or apparent confIiets of interest,
including creating a business in competitionwith the Company or working for or on be-half of another employer in competition with
, the Company.If we do these four things throughout OUT organization,
, then we will achieve our ultimate goal, which is to:5. Reward our shareholders-As a company with
stock that is traded public1y on the NASDAQstock exchange, our shareholders are our busi-ness partners. We can only be successful so long
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as we are providing them with a good retum onthe money they invest in our company .... Weplcdge to operate our company in such a way thatour present and future stockholders, as wellasour employecs, will be rewarded for our efforts.
COMPETITIONIn the discount warchousc rctail segment, thcre werethree main competitors-Costco Wholesale, Sam'sClub (671 warehouses in six countries-the UnitedStates, Canada, Brazil, Mexico, China, and PuertoRico), and B1's Wholesale Club (165 locations in16 states). At the end of 2006, there were just over1,200 warehouse locations across the United Statesand Canada; most every major metropolitan arcahad one, ifnot several, warehouse clubs. Costco hadclose to a 55 percent share of warehouse club salesacross thc United States and Canada, with Sam'sClub (a division of Wal-Mart) having roughly a 36percent share and BJ's Wholesale Club and severalsmall warehouse club competitors about a 9 percentshare. The wholesale club and warehouse segmentof retailing was estimated to be a $110 billion busi-ness, and it was growing about 20 percent faster thanrctailing as a whole .
Competition among thc warehouse clubs wasbased on sueh factors as priee, merchandise qual-ity and selection, loeation, and member serviee.However, warehouse clubs also competed with awide range of other typcs of rctailers, including re-tail discounters like Wal-Mart and Dollar General,supermarkets, general merehandise chains, specialtychains, gasoline stations, and Internet retailers. Notonly did Wal-Mart, thc world's largest retailer, com-pete direetly with Costeo via its Sam's Club subsidi-ary but its Wal-Mart Supereenters sold many of thesame types of merehandise at attractively low pricesas wel!. Target and Kohl's had emerged as signifieantretail eompetitors in eertain merehandise eategories.Low-cost operators selling a single eategory or nar-row range of merehandise-such as Lowe 's, HomeDepot, Offiee Depot, Staples, Best Buy, Cireuit City, ,PetSmart, and Barnes & Noble-had significantmarket share in their respective product categories.
Briefprofiles ofCostco's two primary competi-tors in North America are presented in the followingsections; Exhibit 3 shows selected financial and op-erating data for these two competitors.
Sam's Club'In 2007, Sam's Club had 693 warehouse locationsand more than 49 million members. Wal-MartStores opened the first Sam's Club in 1984, andmanagement had pursued rapid expansion of themembership club format over the next 23 years,creating a chain of 579 U.S. locations in 48 states
'"and 114 internationallocations in Brazil, Canada,China, Mexico, and Puerto Rico as of February2007. Many Sam's Club locations were adjacent to
.Wal-Mart Supercenters. The concept of the Sam'sClub format was to sell merchandise at very lowprotit margins, resulting in low prices to members.
,Sam's Clubs ranged betwcen 70,000 and190,000 square feet, with the average being about132,000 square feet. AIl Sam's Club warehouseshad concrete floors; sparse decor; and goods dis-·played on pallets, simple wooden shelves, or racksin the case of apparel. Sam's Club stocked brand-name merchandise, including hard goods, some'soft goods, institutional-size grocery items, and se-lected private-Iabel items sold under the Member'slI1ark, Bakers & Chefs, and Sam's Club brands.Gel~erally, each Sam's Club also carried software,electronics, jewelry, sporting goods, toys, tires andbatteries, stationcry and books, and most clubs
. '. had, fresh-foods dcpartments that included bakery,.meat, produce, floral products, and a Sam's Café. Asignificant number of clubs had a one-hour photoprocessing department, a pharmacy that filled pre-scriptions, an optical department, and self-servicegasoline pumps. Members could shop for a broada'ssQrtment of merchandise and services online atwww.samsclub.eom.. Like Costco, Sam 's Club stockcd about 4,000
items, 'a big fraetion of which were standard and a',small fraction ofwhieh reprcsentcd special buys andone-time offerings. The treasure-hunt items at Sam'sClub tended to be less upscale and earry lower price'tags than those at Costco. The pereentage composi-tion of sales was as follows:
'Fiscal years end in January 31; data for 2006 are for year ending January 31,2007; data for 2005 are for year ending January 31, 2006;and so on, ''."Fiscal years ending on last Saturday of January; data for 2006 are for year ending January 27, 2007; data for 2005 are for year endingJanuary 28, 2006; and so on,
'For financial reporting purposes, Wal-Mart consolidates the operations of all foreign-based stores into a "ingle "international" segmentfigure; lhus, financial information for foreign-based Sam's Club locatiorls is not separately available,
In 2006, Sam's Club launched a series of initiative$' ,.to grow its sales and market share:
Adding new lines of merchandise, with more "emphasis on products for the home as opposedto small businesses. In particular, Sam's had putmore emphasis on furniture, f1at-screen TVs and·other electronics products, jewelry, and select 'other big-ticket items.lnstituting new payment methods. StartingNovember 10, 2006, Sam's began acceptiil~payment via MasterCard credit cards; priorto then, payment was limited to cash, check,'Discover Card, and debit cards. Early result¡; '.with MasterCard were favorable; company of- "tlcials reported that in the week following the ,MasterCard acceptance, the average ticket: J,
checkout at Sam's increased by 35 percent.
Running ads on national TV. Sam's spent about$50 million annually on advertising and directmail promotions. During the 2006 holiday sea-son, Sam's ran national TV ads on high-profileTV programs like Deal or No Deal, NBC's cov-erage of the Macy's Thanksgiving Day Parade,and the Thanksgiving Day NFL matchup be-tween the Detroit Lions and Miami Dolphinson CBS. The TV ads and companion print adsfeatured Sam's Club shoppers showing off theirpurchases with a background sound track play-ing "God Only Knows" by the Beach Boys-scenes included a young man watching sharkshows on a flat-screen TV from his bathtub. awell-dressed woman buying a hot dog roaster,and a Florida couple buying a supersize inflat-able snow globe.
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Thc animal fce for Sam's Club business mem-bcrs was $35 for the primary membership card,with a spouse card availablc at no additional cost.Business members could add up to eight busi-ness associates for $35 each. The annual mem-bership fee for an individual Advantage memberwas $40, which included a spouse eard. A Sam'sClub Plus premium membership cost $100 and in-cluded hea1th care insurance, mcrchant credit cardprocessing, Web site operation, personal and finan-cial services, and an auto, boat, and recreationalvehiclc programo Rcgular hours of operations wereMonday through Friday 10:00 a.m. to 8:30 p.m.,Saturday 9:30 a.m. to 8:30 p.m., and Sunday10:00 a.m. to 6:00 p.m.
Approximately two-thirds of the merchandiseat Sam's Club was shipped from the division's owndistribution facilities and, in the case of perishableitems, from some ofWal-Mart's grocery distributioncenters; the balance was shipped by suppliers directto Sam's Club locations. Like Costco, Sam's Clubdistl'ibution centers employed cross-docking tech-niques whcreby incoming shipments wcre transfcrredimmediately to outgoing trailers destined for Sam'sClub locations; shipments typically spent less than 24hours at a cross-docking facility and in some instanceswere there only an hour. Thc Sam 's Club distributioncenter network consisted of 7 company-owned-and-operated distribution facilities, 13 third-party-owned-and-operated facilities, and 2 third-party-owned-and-operated import distribution centers. A combinationof company-owned trucks and independent truckingcompanies werc uscd to transport merchandise fromdistribution centers to club locations.
BJ's Wholesale ClubBJ's Wholcsale Club introduced the member ware-house concept to the nol'theastern United States inthe mid-1980s. Since then it had expanded to 163stol'es opcl'ating in 16 sta tes in the Nol'theast and theMid-Atlantic; it also had two ProFoods RestaurantSupply clubs and three cross-dock distribution cent-ers. BJ's had 144 big-box warehouses (averaging112,000 square feet) and 19 smaller-format ware-houses (averaging 71,000 square feet); the twoProFoods clubs averaged 62,000 squal'e feet. Clubswere Iocated in both freestanding and shoppingcentel' locations. Construction and site developmentcosts for a full-sizcd BJ's Club were in thc $5 to $8million range; land acquisition costs could run $5
to $10 million (significantly highel' in some loca-tions). Each wal'ehouse generally had an investrnent·of $3 to $4 million fol' fixtures and equipment. Pre-opening expenscs at a new club werc close to $1 mil-lion. Full-sizcd clubs had approximatcly $2 millionin i~1Ventory.Merchandise was gencrally disp1ayedon pallcts containing largc quantitics of cach item,thereby reducing labor requircd for handling, stock-
)ng, and restocking. Backup merchandise was gcner-ally stored in steel l'acks above the sales floor. Mostmerchandise was premal'ked by the manufacturer so·that it did not require ticketing at the club.
Like Costco and Sam's, BJ's Wholesale soldhigh-quality, brand-name merchandise at prices thatwere significant1y lower than the prices found ats.upermarkets, diseount retail chains, departrnentstores, drugstores, and specialty retail stores like BestBuy. Its merchandise lineup of about 7,500 items
·greeting cards, apparel, furniture, toys, scasonal items,frozen foods, tresh meat and dairy products, bever-ages, dry grocery items, tresh produce, flowers,canhed goods, and household products; about 70 per-cent of BJ's product line could be found in supermar-kets. Food catcgories and houschold items accountedfor approximately 59 percent of BJ's total food and
·generalmerchandise sales in 2005; about 12 perccntof sales consisted ofBJ's private-Iabel products, which
·-vere primarily premium quality and typically pricedwell below name-brand products. In some product as-sCl'tmcnts, BJ's had threc price catcgories for mem-bcrs to choosc from-gooel, deluxe, and luxury.
Thcre wcrc 125 BJ's locations with home im-provemcnt scrvice kiosks, 130 clubs with VerizonWirelc'ss kiosks, 44 with pharmacies, and 87 with
·self-service gas stations. Other specialty products andservices, provided mostly by outside operators thatleased warchouse spacc fi'om BJ's, inc1uded photo
·developing, full-service optical centers, brand-namefast-food service, garden and storage sheds, patiosand sunrooms, vacation packages, propane tank fill-ing'services, discountcd home heating oil, an auto-mobile buying service, installation ofhome securityservices, printing ofbusiness forms and checks, andmufflcr and brakc services.
BJ's Wholcsa1e Club had about 8.6 millionmcmbers in 2006 (see Exhibit 3). It charged $45 per
·year for a primary Inner Circle membership that in-duded one free supplemental membership; mcmbers
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in the same household could purchase additionafsupplemental memberships for $20. A businessmembership also cost $45 per year, which includedone free supplemental membership and the ability topurchase additional supplemental memberships fol"$20. B1's launched a membership rewards program in2003 that offered members a 2 percent rebate, capped .at $500 per year, on most all in-club purchases;members who paid the $80 annual fee to enroll inthe rewards program accounted for 5 percent of aIlmcmbers and 10 percent of total merchandise andfood sales in 2005. Purchases with a co-branded B1'sMasterCard earned a 1.5 percent rebate. B1's wasthe only warehouse club that accepted MasterCard"Visa, Discover, and American Express cards at alllocations; members could also pay for purchases bycash, check, and debit cards. B1's accepted returns of .most l11erchandisc within 30 days after purchase.
B1's increased customer awareness of its clubsprimarily through direct l11ail, public relations ef~'forts, marketing programs for newly-opened clubs,and a publication called BJ~' Journal. which wasmailed to members throughout the year; during theholiday season, B1's engaged in radio and TV adver- .tising, a portion ofwhich was funded by vendors.
Merchandise purchased from manufacturerswas shipped either to a B1's cross-docking facilit,Y ,or directly to clubs. Personnel at the cross-dockingfacilities broke down truckload quantity shipmentsfrom manufacturers and reaIlocated goods for ship-ment to individual clubs, generally within 24 hou¡'s.
Strategy Features that Differentiated BJ's. Topmanagement believed that several factors set B1'sWholesale operations apart from those of Costco
, and Sam's Club:
Offering a wide range of choice-7,500 itemsversus 4,000 items at Costeo and Sam's Club.Focusing on the individual consumer viamerchandising strategics that emphasized acustol11er-friendly shopping experience.Clustering club locations to achieve the benditof name recognition and maximize the efficien-cies of management support, distribution, andmarketing activities.Trying to establish and maintain the first 01'
second industry leading position in each majarmarket where it operated.
• ' Creating an exciting shopping experience formembers with a eonstantly changing mix of foodand general merchandise items and carrying abroader product assortment than competitors.Supplementihg the warehouse format with aislemarkers, express eheekout lanes, self-checkoutlanes and low-cost video-based sales aids tomake shopping more efficient for members.Being open longer hours than competitors.Offering smaller package sizes of many items.Accepting manufacturers' eoupons.Accepting more credit card payment options.
" ,
Endnotes
'As quoted in Alan S, Goldberg and Sil! Ritter, "Costeo CEO Finds Pro-Worker Means Profitability," an ASC News original report on 20/20, .August 2. 2006. bt¡¡jkl;J_cn.Qw_'>4)Q&QLnl.2.Q2í)!J:lJ.g;lDj)~$Jl1fY2Ld=1.39277\t (aeeessed November 15. 2006).'Ibid.'As deseribed in Nina 5hapiro. "Company tar the People," SeattleWeekfy, December 15, 2004, ~\y.:.§g.5}1~lewe~.!sJ.y.:_º.91.!l (accessedNovember 14, 2006) ..'2005 and 2006 annual reports,'Matthew Boyle. "Why Costeo Is 50 Damn Addietive," Fortune, Oetober30. 2006, p. 130,'As quoted in ibid .• pp, 128-29.'5teven Greenhouse. "How Costeo Seeame the Antl-Wal-Mart," NewYork Times, July 17, 2005. ww\Ywª.bQJJp",gISlli1!:!.eomin0WS(aeeessedNovember 28, 2006), .'As quoted in Greenhouse. "How Costeo Seeame the Anti-Wal-Mart."·'As quoted in 5hapiro, "Company for the People.""As quoted in Greenhouse. "How Costeo Beeame the Anti-Wal-Mart.'·"Soyle, "Why Costeo is 50 Damn Addietive:' p. 132.
•"Ibid., p. 130."As quoted in Goldberg and Ritter, "Costeo CEO Finds Pro-WorkerMeans Profitability.'·"Ibid."Ibid,165hapiro, "Company for the People.""Greenhouse, "How Costeo Beeame the Anti-Wal-Mart.""As quoted in Goldberg and Ritter, "Costeo CEO Finds Pro-WorkerMeans Profitability.'·
• "Ibid."As quoted in Greenhouse. "How Costeo Seeame the Anti-Wal-Mart.""As quoted in Goldberg and Ritter. "Costeo CEO Finds Pro-WorkerMeans Profitability."
."Boyle, "Why Costeo Is 50 Damn Addietive." p. 132."As quoted in 5hapiro. "Company for the People:'"Ibid."As quoted in Goldberg and Ritter, "Costeo CEO Finds Pro-WorkerMeans Protitability.""As quoted in 5hapiro, "Company for the People,"
