Presentation on theme: "Managerial Economics Questions. Kyle Jelinek CEO Kate CFO Jim Supply Chain manager Alexandra Marketing Director Economist Organization My Father:Craig."— Presentation transcript:
Managerial Economics Questions
Kyle Jelinek CEO Kate CFO Jim Supply Chain manager Alexandra Marketing Director Economist Organization My Father:Craig Jelinek I am Nash
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.) About Costco
Costco is open only to members and offers three types of membership: Business, Gold Star (individual) and the Executive membership. Membership Only
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. What Do We Sell?
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. Kirkland
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)
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
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/fres h food (premium steak/wine/ designer handbags or jewelry
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)
Q2: Should Costco change different membership rates in countries with different income levels, to expand its business to broader geographical areas?
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
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.
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
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.
The treasure hunting shopping experience
TARGET MARKET PRICE High value/ 100% refund policy 80% of competitors’ EDLP PRODUCT Exclusive items Premium quality Bulk size but easy-to -use package PLACE Warehouse like Ready display on pellets Minimum signage in store PROMOTION Wallet program Passport coupons End-cap display In-store trials
Products: Box Size on the Rise, But SKUs Down *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) Size SKUs
“It costs a lot of money to make these places look cheap” - Jim Sinegal, Costco co-founder Costco never advertises, all promotion occurs through BTL. 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
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
Minimum in-store decoration & signage Extensive in-store trial It’s all about DISCOUNT!!! ITEM COSTCO OTHER COMPETITOR Mechanism Wallet promotion Passport program IRC MVM DM In-store display Trial packs & gifts FrequencyMaximum 1-2 times / year> 5 times a year Price sensitivity HIGHLow Promotion effect 6-10 times higher than average ???
Earning about twice per capita, well-educated Basket size is around NT (in TW)
Unique Shopper contributes business foundation Shopper profile 1.Destination category: specialized goods (i.e. fresh meat, drugs, truffles chocolate) or volumetric goods (i.e. family size milk). Salty snacks as impulse category 2.Shopping, than purchasing Impulse shopping (spend more than expected) Sampling triggers trial 3.Look for premium & exotic news & willing to try newness 4.Look for value for money 5.Higher basket size ($2,000- $5,000) 6.Frequency: once every 3-4 weeks Source: 2010 Nielsen Shopper trend Shopping Behavior Costco Shopper
2012 Costco Financial Performance Financial Highlights Net sales accounted by major category Gross margin Membership revenue
Source: Costco 2012 Annual Report
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
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
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
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