1. Managerial Economics Questions

2. Alexandra Marketing Director
Organization
Kyle Jelinek
CEO
My Father:
Craig Jelinek
Kate
CFO
Jim Supply Chain manager
Alexandra Marketing Director
I am Nash
Economist

3. About Costco
Costco is a Washington corporation, Nasdaq ticker symbol “COST”.
Operates an international chain of membership warehouses, mainly under the "Costco Wholesale" name, that carry quality, brand name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources.
The warehouses are designed to help small-to-medium-sized businesses reduce costs in purchasing for resale and for everyday business use. (Individuals may also purchase for their personal needs.) 

4. Membership Only
Costco is open only to members and offers three types of membership: Business, Gold Star (individual) and the Executive membership.
Business members qualify by owning or operating a business, and pay an annual fee ($55 in the U.S.) to shop for resale, business and personal use. This fee includes a household card. Business members may purchase up to six additional membership cards ($55 each) for partners or associates in the business.

5. What Do We Sell?
Costco's warehouses present one of the largest and most exclusive product category selections to be found under a single roof. Categories include groceries, candy, appliances, television and media, automotive supplies, tires, toys, hardware, sporting goods, jewelry, watches, cameras, books, housewares, apparel, health and beauty aids, tobacco, furniture, office supplies and office equipment.

6. Kirkland
Members can also shop for private label Kirkland Signature products, designed to be of equal or better quality than national brands, including juice, cookies, coffee, housewares, luggage, clothing and detergent.

7. Q1: If Costco raises membership fee by 5% (inflation trend), what will be the shifts in the demand curves of these three kinds of shoppers? (Please illustrate it)

8. Type 1: Small business manager – Javier/Ken Liu
Background: Ken & Javier co-own a breakfast store near NCCU. Javier Also owns a farm.
Income: NT100,000.
Frequency: once every 2 weeks.
Shop Items: bacon/toast/Ken buys PS3 and muffins for his daughter/Javier buys farming tools

9. Type 2: High income people - Kelly / Andrea
Background: Andrea and Kelly are neighbors, both their husbands run own company
Income: NT300,000 / month
Frequency: once per week
Shop items: office supplies/cereal/fresh food (premium steak/wine/ designer handbags or jewelry

10. Type 3: Young Generation, Shop in Costco for Fun
Background: Jin is a student but actually he is a party animal.
Income: NT8,000 pocket money from parents
Frequency: once per month
Shop items: salty snack/beers/shampoos and lotions (for his girlfriend)

11. Q2: Should Costco change different membership rates in countries with different income levels, to expand its business to broader geographical areas?

12. Pricing Policy

13. Membership Only Strategy
Two part pricing – soaks up higher quantities of buyers’ surplus.
Uniform Pricing combined with indirect segment discrimination.
Buyers Surplus = Membership Fee
Three types of membership:
Executive Membership – annual 2% reward - US$110
Business Membership – for managers - US$55
Gold Star Membership – individuals and households - $55

14. Why are Prices so Low?
Pay and benefits for workers are high compared to the competition – less workers turnover costs and theft by employees.
No advertising – saves them 2% of budget per year for employee pay and benefits.
Aim for upscale shoppers, especially small-business owners.

15. Why are Prices So Low?
CEO’s salary is only US$350,000 - less than 10 percent of many other chief executives. Savings translated into lower prices and higher benefits.
Typical Costco store stocks 4,000 types of items, increasing sales volume per supplier, allowing for better discounts.
CEO -Kyle

16. Why are Prices So Low? Coupons
No item can be marked up by more than 15 percent.
Before season sales – buying cheaper from suppliers.
Coupons for discounts on common use products – attract more price elastic customers.
Coupons

17. Costco Marketing Strategy
The treasure hunting shopping experience

18. Marketing 4P’s of Costco
PRODUCT
Exclusive items
Premium quality
Bulk size but easy-to -use package
PRICE
High value/ 100% refund policy
80% of competitors’ EDLP
TARGET MARKET
PLACE
Warehouse like
Ready display on pellets
Minimum signage in store
PROMOTION
Wallet program
Passport coupons
End-cap display
In-store trials

19. Box Size on the Rise, But SKUs Down
Products:
Box Size on the Rise, But SKUs Down
SKUs
Size
*Average of approximately 3,300 to 3,800 active SKUs, as reported by Costco
Source: Costco Annual Report (fiscal years ending end of August/beginning of September)

20. Place Costco never advertises, all promotion occurs through BTL.
“It costs a lot of money to make these places look cheap”
- Jim Sinegal, Costco co-founder
When a new clubs opens
We visit from door to door to recruit new members
New members are allowed to get one more free headcount
Locals gain awareness through staff recruiting activity, or media reports

21. Bulk size but smartly packaged goods
Product
Costco carried only 4000 SKUs, comparing to avg. 20,000 in other hyper markets, only 1/5 of competitors.
Value for money/ Selected items/ exclusive import items/ unique bulk size and packaging
Brand doesn’t matter, value is the key!!
Bulk size but smartly packaged goods
VALUE FOR MONEY
Efficiency & Services
Exclusive pack size, save by buying bulk volume.
Photo printing
Pharmacies
Optical department
Premium quality
Exclusive imports

22. It’s all about DISCOUNT!!!
Promotion
It’s all about DISCOUNT!!!
 ITEM
COSTCO
OTHER COMPETITOR
Mechanism
Wallet promotion
Passport program
IRC
MVM DM
In-store display
Trial packs & gifts
Frequency
Maximum 1-2 times / year
> 5 times a year
Price sensitivity
HIGH
Low
Promotion effect
6-10 times higher than average
???
Minimum in-store decoration & signage
Extensive in-store trial

23. Costco shoppers Earning about twice per capita, well-educated
Basket size is around NT (in TW)

24. Unique Shopper contributes business foundation
Costco Shopper
Shopper profile
Destination category: specialized goods (i.e. fresh meat, drugs , truffles chocolate) or volumetric goods (i.e. family size milk). Salty snacks as impulse category
Shopping, than purchasing
Impulse shopping (spend more than expected)
Sampling triggers trial
Look for premium & exotic news & willing to try newness
Look for value for money
Higher basket size ($2,000-$5,000)
Frequency: once every 3-4 weeks
Source: 2010 Nielsen Shopper trend
Shopping Behavior

25. Financial Performance
2012 Costco
Financial Performance
Financial Highlights
Net sales accounted by major category
Gross margin
Membership revenue

26. 2012 Costco Financial Highlights
Source: Costco 2012 Annual Report

27. 2012 Annual Net Sales Accounted for by Major Category of Items
Sundries 22% - candy, snack foods, tobacco, alcoholic and nonalcoholic beverages and cleaning and institutional supplies
Food 21%- dry and institutionally packaged foods
Ancillary and Other 18% - including gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and travel
Source: Costco 2012 Annual Report

28. 2012 Gross Margin
Gross margin (net sales less merchandise costs) as a percent of net sales decreased in fiscal 2012, largely due to investment in lowering prices, which is consistent with the company goal of maintaining price and value leadership.
Source: Costco 2012 Annual Report

29. 2012 Costco Membership
Two primary types of members: Business $55 and Gold Star $55 (individual) and Business add-on (Executive) $110
2012 Cardholders: Business 6,442 millions. Gold Star 26,736 millions and Executive members which is around 30,000 millions.
Member renewal rate was approximately 89.7% in the U.S. and Canada, and approximately 86.4% on a worldwide basis in
Source: Costco 2012 Annual Report

30. 2012 Membership Fee Revenue
Membership fees increased more than 11%, due to the impact of raising annual membership fees in the U.S. and Canada.
strong member renewal rates
good sign-ups at new warehouses
increased penetration of the Executive Membership program

31. Logistics, Distribution, & Supplier Relations
Integration
Warehousing & Distribution
Inventory
Supplier Relations

32. Integration Supplier compliance Minimize material handling
Efficient Packaging
Display ready PALLETS

33. Inventory
Timely shares sales data with supplier to replenish inventory
Innovative auto-reordering system

34. Distribution Minimize the steps of distribution
30% Direct-to-store from vendors
70% Cross docking operations
Warehouse design to strip in-store handling cost

35. Distribution Diagram

36. Supplier Relations Economies of Scale & Bargaining Power
Visit & work with suppliers to help them to break even or make a profit without raising prices.
Knowledge of its suppliers

37. Which group of people belongs to which diagram?

38. THANK YOU!!!
ANY QUESTIONS???