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TEACHING NOTE
CASE 4
Costco Wholesale Corp. in 2016:
Mission, Business Model, and Strategy
Overview
Four years after being appointed as Costco Wholesale’s president and chief executive officer, Craig Jelinek
was proving fully capable of cementing the company’s standing as one of the world’s biggest and best
consumer goods merchandisers. His predecessor, Jim Sinegal, cofounder and CEO of Costco Wholesale
from 1983 until year-end 2011, had been the driving force behind Costco’s 28-year evolution from a startup
entrepreneurial venture into the third largest retailer in the United States, the seventh largest retailer in the world,
and the undisputed leader of the discount warehouse and wholesale club segment of the North American retailing
industry. Jelinek was handpicked by Sinegal to be his successor. Since January 2012, Jelinek had presided over
Costco’s growth from annual revenues of $89 billion and 598 membership warehouses at year-end fiscal 2011
to annual revenues of $116 billion and 686 membership warehouses at year-end fiscal 2015. Going into 2016,
Costco ranked as the second largest retailer in both the United States and the world (behind Walmart).
As of January 2016, Costco was operating 698 membership warehouses, including 488 in the United States
and Puerto Rico, 90 in Canada, 36 in Mexico, 27 in the United Kingdom, 24 in Japan, 12 in South Korea, 11 in
Taiwan, 8 in Australia, and 2 in Spain. Costco also sold merchandise to members at websites in the United States,
Canada, the United Kingdom, Mexico, and South Korea. Over 81 million cardholders were entitled to shop at
Costco, generating over $2.5 billion in membership fees for the company. Annual sales per store averaged about
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$166 million ($3.2 million per week), some 86 percent higher than the $89 million per year and $3.4 million per
week averages for Sam’s Club, Costco’s chief competitor. In 2014, 165 of Costco’s warehouses generated sales
exceeding $200 million annually, up from 56 in 2010; and 60 warehouses had sales exceeding $250 million,
including 2 that had more than $400 million in sales.4 Costco was the only national retailer in the history of the
United States that could boast of average annual revenue in excess of $160 million per location.
The case spotlights Costco’s mission, business model, and strategy, but it also contains good coverage of
the company’s warehouse operations, compensation practices, business philosophy, core values, and ethical
standards. The company is interesting in several important respects:
Suggestions for Using the Case
This case was written to (1) illustrate the CEO’s role as chief strategist and organization leader, (2) demonstrate
how a company’s business principles and core values can link tightly to and drive a company’s strategy and
operating practices, and (3) give students practice in evaluating a company’s direction and strategy in the highly
competitive retail marketplace. The case requires that students draw upon most all of the concepts discussed in
Chapters 1 and 2 in preparing the case for class discussion.
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However, if you opt for another lead-off case, we think you will find that the Costco Wholesale case works
exceptionally well (1) as part of your business strategy module (where you want students to draw from Chapters
1-7 in doing their analysis and making action recommendations), (2) as a comprehensive written case or oral
team presentation case, or (3) as an end-of-the-course or final exam case (because the case contains issues that
cut across topics covered in many of the 12 chapters). If you want to cover Chapters 1-7 before assigning a case
for class discussion, you’ll find that the Costco case contains ample information on industry and competitive
conditions and the businesses of Costco’s two chief competitors in North America—Sam’s Club and BJ’s
Wholesale. Thus, Costco Wholesale is one of those multi-faceted cases that will work nicely in any of several
places in your lineup of case assignments—although our preference is to use it as an early case assignment or a
leadoff case.
Videos for Use with the Costco Case. As a way to set the stage for class discussion, we suggest showing
either or both of the following videos
The Connect-based Exercise for the Costco Case. We developed an exercise for the Costco Wholesale
case for inclusion in the publisher’s Connect™ Management web-based assignment and assessment platform
because
nThe case is very appropriate for use early in the course (following coverage of Chapters 1, 2, and 3).
nOne of the purposes of the Connect-based case exercises is to drill students in applying the concepts
and analytical tools discussed in the chapters to the circumstances posed in the cases.
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The Connect-based case preparation exercise for Costco Wholesale is framed around the following questions:
1. What are the chief components of Costco’s business model?
2. What are the chief elements of Costco’s strategy?
3. Draw a representative five-forces diagram for the North American wholesale club industry.
4. What is your assessment of the strength of competitive pressures stemming from rivalry among
Costco, Sam’s Club, and BJ’s Wholesale?
5. What is your assessment of the strength of competitive pressures stemming from the threat of entry of
new competitors into the North American wholesale club market?
6. What is your assessment of the strength of competitive pressures stemming from substitutes for
shopping at wholesale clubs?
7. What is your assessment of the strength of competitive pressures stemming from suppliers to the three
North America-based wholesale club competitors?
8. What is your assessment of the strength of competitive pressures stemming from the customers/
members of the three North America-based wholesale club competitors?
9. What is the collective strength of the five competitive forces facing the three North America-based
wholesale clubs?
What to Tell Students in Preparing the Costco Case for Class. To give students guidance in what to do
and think about in preparing the Costco case for class discussion, we strongly recommend two things:
1. Have class members complete the Connect-based exercise for the Costco case (in the event you have
opted to make the Connect supplement for the 21st Edition a part of the materials required for your
course).
2. Provide class members with assignment questions (in addition to what is covered in the Connect
exercise) and insist that they prepare good notes/answers to these questions before coming to class.
Our recommended assignment questions for the Costco case are presented in the next section of this
TN. Since there are 12 assignment questions, you may want to have students focus on a subset of the
questions (depending on how you want to conduct the class discussion).
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To facilitate your use of assignment questions and making them available to students, we have posted
a file of the Assignment Questions contained in this teaching note in the Instructor Resources section
of the Connect Library). (You should be aware that there is a set of assignment questions posted in the
student OLC for each of the 31 cases included in the 21st edition.)
Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have
class members read the Guide to Case Analysis that is available when you adopt the 21st edition. The content of
this Guide is particularly helpful to students if your course is their first experience with cases and they are unsure
about the mechanics of how to prepare a case for class discussion, oral presentation, or written analysis.
Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis. The
Costco case is quite suitable for both oral team presentations and a written case assignment. Our suggested
assignments for either an oral presentation or a written case assignment are as follows:
1. What is your assessment of Costco’s business model and strategy? How well is Costco’s strategy
working? What recommendations would you make to Costco management to sustain the company’s
growth and improve the company’s financial performance?
2. What is competition like in the North American wholesale club industry? Which of the five competitive
forces is strongest and why? Which of the three rivals—Costco, Sam’s, or BJ’s Wholesale—has the best
strategy? Why? Which of the three rivals has been the best performer? Five years from now, is Costco’s
standing as the industry leader likely to be stronger or weaker? Are the other two rivals likely to gain
or lose ground on Costco? Why? What recommendations would you make to Costco management to
sustain Costco’s growth and improve the company’s financial performance?
(Should time permit, you could ask for action recommendations pertaining to Sam’s Club and/or BJ’s
Wholesale. If you are using the case for oral presentations by two or more teams, then different teams could
be assigned different companies when it comes to proposing action recommendations.)
Assignment Questions
1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?
2. What are the chief elements of Costco’s strategy? How good is the strategy?
3. Do you think Jim Sinegal was an effective CEO? What grades would you give him in leading the process of
crafting and executing Costco’s strategy? What support can you offer for these grades? How well is Craig
Jelinek performing as Sinegal’s successor? Refer to Figure 2.1 in Chapter 2 in developing your answers.
4. What core values or business principles did Jim Sinegal stress at Costco?
5. (In the event you have covered Chapter 3) What is competition like in the North American wholesale club
industry? Which of the five competitive forces is strongest and why? Use the information in Figures 3.4,
3.5, 3.6, 3.7, and 3.8 (and the related discussions in Chapter 3) to do a complete five-forces analysis of
competition in the North American wholesale club industry.
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6. How well is Costco performing from a financial perspective? Do some number-crunching using the data in
case Exhibit 1 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 (pages
85-87) to help you diagnose Costco’s financial performance.
7. Based on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that at Sam’s Club
and BJ’s Wholesale?
8. Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially successful?
Why or why not?
9. How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage
over Sam’s Club? Over BJ’s Wholesale? If so, what is the nature of its competitive advantage? Does Costco
have a winning strategy? Why or why not?
10. Are Costco’s prices too low? Why or why not?
11. What do you think of Costco’s compensation practices? Does it surprise you that Costco employees
apparently are rather well-compensated?
12. What recommendations would you make to Costco top management regarding how best to sustain the
company’s growth and improve its financial performance?
Teaching Outline and Analysis
1. What is Costco’s business model? Is the company’s business model appealing? Why or why
not?
As discussed in Chapter 1, a company’s business model explains the rationale for why its business approach
and strategy will be a moneymaker. This rationale sets forth the key components of the company’s business
approach, indicates how revenues will be generated, and makes a case for why the strategy can deliver value
to customers and at the same time be profitable.
The information in the case lays out the chief components of Costco’s business model in a straightforward
manner:
nRequire the payment of membership fees to shop at Costco (Costco employs a “subscription” membership
business model)
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2. What are the chief elements of Costco’s strategy? How good is the strategy?
The cornerstones of Costco’s strategy were low prices, a limited product line and limited selection, and a
“treasure hunt” shopping environment. The company was, moreover, a low-cost operator.
n Costco is pursuing a low-cost leader strategy (as students should quickly recognize from the discussions
in both Chapter 1 and Chapter 5). Costco’s CEO Jim Sinegal left no doubt about the company’s efforts
to be a low-cost operator when he stated:
n Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs
historically associated with conventional wholesalers and retailers, including salespeople, fancy
buildings, delivery, billing, and accounts receivable. We run a tight operation with extremely low
overhead which enables us to pass on dramatic savings to our members.
n While Costco’s product line consisted of approximately 3,700 active items, some 20 to 25 percent
of its product offerings were constantly changing. Costco’s merchandise buyers were continuously
making one-time purchases of items that would appeal to the company’s clientele and that would sell
out quickly. A sizable number of these items were high-end or name-brand products that carried big
price tags—like $1,000–$2,500 big-screen HDTVs, $800 espresso machines, expensive jewelry and
diamond rings (priced from $50,000 to as high as $250,000), Movado watches, exotic cheeses, Coach
bags, $5,000 necklaces, cashmere sports coats, $1,500 digital pianos, and Dom Perignon champagne.
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Dozens of featured specials came and went quickly, sometimes in several days or a week—like Italian-
made Hathaway shirts priced at $29.99 and $800 leather sectional sofas. The strategy was to entice
shoppers to spend more than they might by offering irresistible deals on big-ticket items or name-brand
specials and, further, to keep the mix of featured and treasure-hunt items constantly changing so that
bargain-hunting shoppers would go to Costco more frequently than for periodic “stock up” trips.
n Most Costco stores were located in the upscale areas/suburbs of major metropolitan areas.
n In fiscal 2015, sales at Costco’s existing warehouses grew by an average of 3 percent, In January 2016,
Costco was operating 698 membership warehouses, including 488 in the United States and Puerto Rico,
90 in Canada, 36 in Mexico, 27 in United Kingdom, 24 in Japan, 12 in South Korea, 11 in Taiwan, 8 in
Australia, and 2 in Spain.
• Costco also sold merchandise to members at websites in the United States, Canada, the United
Kingdom, Mexico, and South Korea.
• Over 81 million cardholders were entitled to shop at Costco, generating over $2.5 billion in
membership fees for the company.
• Annual sales per store averaged about $166 million ($3.2 million per week), some 86 percent higher
than the $89 million per year and $3.4 million per week averages for Sam’s Club, Costco’s chief
competitor.