2Alexandra Marketing Director OrganizationKyle JelinekCEOMy Father:Craig JelinekKateCFOJim Supply Chain managerAlexandra Marketing DirectorI am NashEconomist
3About CostcoCostco 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.)
4Membership OnlyCostco 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.
5What 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.
6KirklandMembers 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.
7Q1: 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)
8Type 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
9Type 2: High income people - Kelly / Andrea Background: Andrea and Kelly are neighbors, both their husbands run own companyIncome: NT300,000 / monthFrequency: once per weekShop items: office supplies/cereal/fresh food (premium steak/wine/ designer handbags or jewelry
10Type 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 parentsFrequency: once per monthShop items: salty snack/beers/shampoos and lotions (for his girlfriend)
11Q2: Should Costco change different membership rates in countries with different income levels, to expand its business to broader geographical areas?
13Membership Only Strategy Two part pricing – soaks up higher quantities of buyers’ surplus.Uniform Pricing combined with indirect segment discrimination.Buyers Surplus = Membership FeeThree types of membership:Executive Membership – annual 2% reward - US$110Business Membership – for managers - US$55Gold Star Membership – individuals and households - $55
14Why 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.
15Why 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
16Why 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
17Costco Marketing Strategy The treasure hunting shopping experience
18Marketing 4P’s of Costco PRODUCTExclusive itemsPremium qualityBulk size but easy-to -use packagePRICEHigh value/ 100% refund policy80% of competitors’ EDLPTARGET MARKETPLACEWarehouse likeReady display on pelletsMinimum signage in storePROMOTIONWallet programPassport couponsEnd-cap displayIn-store trials
19Box Size on the Rise, But SKUs Down Products:Box Size on the Rise, But SKUs DownSKUsSize*Average of approximately 3,300 to 3,800 active SKUs, as reported by CostcoSource: Costco Annual Report (fiscal years ending end of August/beginning of September)
20Place Costco never advertises, all promotion occurs through BTL. “It costs a lot of money to make these places look cheap”- Jim Sinegal, Costco co-founderWhen a new clubs opensWe visit from door to door to recruit new membersNew members are allowed to get one more free headcountLocals gain awareness through staff recruiting activity, or media reports
21Bulk size but smartly packaged goods ProductCostco 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 packagingBrand doesn’t matter, value is the key!!Bulk size but smartly packaged goodsVALUE FOR MONEYEfficiency & ServicesExclusive pack size, save by buying bulk volume.Photo printingPharmaciesOptical departmentPremium qualityExclusive imports
22It’s all about DISCOUNT!!! PromotionIt’s all about DISCOUNT!!! ITEMCOSTCOOTHER COMPETITORMechanismWallet promotionPassport programIRCMVMDMIn-store displayTrial packs & giftsFrequencyMaximum 1-2 times / year> 5 times a yearPrice sensitivityHIGHLowPromotion effect6-10 times higher than average???Minimum in-store decoration & signageExtensive in-store trial
23Costco shoppers Earning about twice per capita, well-educated Basket size is around NT (in TW)
24Unique Shopper contributes business foundation Costco ShopperShopper profileDestination category: specialized goods (i.e. fresh meat, drugs , truffles chocolate) or volumetric goods (i.e. family size milk). Salty snacks as impulse categoryShopping, than purchasingImpulse shopping (spend more than expected)Sampling triggers trialLook for premium & exotic news & willing to try newnessLook for value for moneyHigher basket size ($2,000-$5,000)Frequency: once every 3-4 weeksSource: 2010 Nielsen Shopper trendShopping Behavior
25Financial Performance 2012 CostcoFinancial PerformanceFinancial HighlightsNet sales accounted by major categoryGross marginMembership revenue
272012 Annual Net Sales Accounted for by Major Category of Items Sundries 22% - candy, snack foods, tobacco, alcoholic and nonalcoholic beverages and cleaning and institutional suppliesFood 21%- dry and institutionally packaged foodsAncillary and Other 18% - including gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and travelSource: Costco 2012 Annual Report
282012 Gross MarginGross 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
292012 Costco MembershipTwo primary types of members: Business $55 and Gold Star $55 (individual) and Business add-on (Executive) $1102012 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 inSource: Costco 2012 Annual Report
302012 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 ratesgood sign-ups at new warehousesincreased penetration of the Executive Membership program