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Managerial Economics Questions

Managerial Economics Questions. Organization. Kyle Jelinek CEO . My Father:. Craig Jelinek. Jim Supply Chain manager. Alexandra Marketing Director. Kate CFO. I am Nash. Economist. About Costco. Costco is a Washington corporation, Nasdaq ticker symbol “COST”.

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Managerial Economics Questions

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  1. Managerial Economics Questions

  2. Organization Kyle Jelinek CEO My Father: Craig Jelinek JimSupply Chain manager AlexandraMarketing Director Kate CFO 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.

  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. MembershipOnlyStrategy • Two part pricing – soaks up higher quantities of buyers’ surplus. • Uniform Pricing combined with indirect segment discrimination. • Threetypes of membership: • ExecutiveMembership – annual 2% reward - US$110 • Business Membership – for managers - US$55 • GoldStarMembership – individuals and households - $55 Buyers Surplus = MembershipFee

  14. Why are Prices so Low? • Payand 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’ssalaryisonly 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? • No item can be marked up by more than 15 percent. • Beforeseason sales – buyingcheaperfromsuppliers. • 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. 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. 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!! VALUE FOR MONEY Efficiency & Services Bulk size but smartly packaged goods • Premium quality • Exclusive imports • Photo printing • Pharmacies • Optical department • Exclusive pack size, save by buying bulk volume.

  22. Promotion It’s all about DISCOUNT!!! • Minimum in-store decoration & signage • Extensive in-store trial

  23. Costco shoppers • Earning about twice per capita, well-educated • Basket size is around NT. 2000-5000. (in TW)

  24. Unique Shopper contributes business foundation Costco Shopper Shopper profile Shopping Behavior • 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

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

  26. 2012 Costco Financial Highlights Source: Costco2012 Annual Report

  27. 2012 Annual Net Sales Accounted for by Major Category of Items Source: Costco2012 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

  28. 2012 Gross Margin Source: Costco2012 Annual Report 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.

  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 2012. Source: Costco2012 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. • Knowledgeof its suppliers

  37. Which group of people belongs to which diagram?

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

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