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Costco Case Analysis

Costco Case Analysis. INDIA. Overview. Costco’s Business Model Costco’s Value Proposition Review of India Economy Government Infrastructure Real Estate Cost Real Estate Availability / Partners Conclusion on Costco in India Citations. Costco Business Model.

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Costco Case Analysis

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  1. Costco Case Analysis INDIA

  2. Overview • Costco’s Business Model • Costco’s Value Proposition • Review of India • Economy • Government • Infrastructure • Real Estate Cost • Real Estate Availability / Partners • Conclusion on Costco in India • Citations

  3. Costco Business Model • Factory direct purchasing, high velocity resale. • Manufactures ship containers directly to Costco consolidation depot’s. • Allocation of product to warehouse locations is fast (<= 24 hrs) • Cost reductions realized from fast inventory sales. • SKU’s on hand limited to fast-selling models, sizes and colors. • Efficient sales floor layouts – more product, less wasted space = more sales. • Customers must pay to shop at Costco. • Provides another source of revenue. • Builds customer loyalty. • Helps reduce shrink.

  4. Costco Value Proposition • Very low marketing, labor and a targeted discount model • Coupon/Sales blasts sent to a limited target audience – members only. • Reduction in marketing dollars over competitors equals lower costs for goods. • Labor costs reduced via larger volumes of stock on hand, in pallets and ready for customer distribution with low labor required. • Hours of operation limited to core shopping times and light need for overnight stocking staff. • Return policy highly favorable in the market, most goods accepted back without receipts and with extended warranty options.

  5. India - Economy • Gross Domestic Product (GDP) • 2010 - $4.06 trillion (5th in the world) • $3.44 Trillion in 2008 • $3.67 Trillion in 2009. • Inflation • 2010 - 12% - High (206th in the world) • 10.9% in 2009 • GDP Growth Rate • 10.4% (5th in the world) • 6.2% in 2008 • 6.8% in 2009 • Foreign Reserves • $287.1 Billion (7th in the world) • GDP Per Capita • $3,500 (262nd in the world) • $3,000 in 2008 • $3,200 in 2009 • Currency Stability • The Indian Rupee is trading around 43 - 49:1 USD in the last 52 weeks.

  6. India - Government • Ruling Party and Leader • Pratibha Devisingh Patil – (2007 – Current) • Party: Indian National Congress • Government Stability • Democratic Nation • Harsh relations with China over allegations of munitions being traded with Pakistan and China’s oversized military footprint. • Subsidies • 14% of Indian GDP is subsidized. • Majority of Indian subsidies are oil of which 39% of subsidized kerosene is stolen.

  7. India - Market Access • Tariffs and import barriers • Indian Tariffs vary largely depending on what type of goods you are importing. The fees are not percentage based, rather flat fees. • Member of World Trade Organization • India has been a member of the WTO since 1995. • Level of corruption. • India has high levels of corruption. In 2010 $19B USD in illicit funds left the country. • Acceptance of imported products • There are some items now allowed to be imported into India, namely unprocessed Ivory products, however this would not impact Costco’s ability to do business in India. • Local competition • No competition for Costco in India.

  8. India – Imports • India is one of the largest importers of fossil fuels in the world. • Pearls and precious stone imports are important as a large portion of India’s revenue comes from the export of handicrafts. • These two represent 50% of all imported goods into India from 2009 to now. • Growth from 2009 - 2011 • Fuels – 20.6% • Pearls – 66.35%

  9. India - Infrastructure • Indian Transport and Fuel Infrastructure • Airports – 353 (249 with paved runways) • Heliports – 40 • Pipelines • Condensate/Gas – 2km • Gas – 9,596km • Liquid Petroleum Gas – 2,152km • Oil – 7,448km • Refined Products – 10,486km • Railways – 63,974km (4th in the world) • Roadways - 3,320,410km (3rd in the world) • Waterways – 14,500km (9th in the world) • Merchant Marine – 324 (29th in the world) • Air and sea import/export is generally considered to be sufficient in India. The recent thread of pirates from Somalia have reduced the efficiency of waterway capability and have added risk of shipping/freight contains being compromised. • Road and railway conditions are poor in India. Public investment has been insufficient to correct this condition and India is seeking private investments to help improve these two. • Energy infrastructure in India is sufficient for sustaining retail business operations.

  10. India – Real Estate Cost • Indian Real Estate Cost • India-wide real estate prices have increased 21.3% in Q2 2011. • Ranked 2nd out of 50 countries for annual growth • High Growth - Compared to 2010 by City • Bhopal +46.41% • Faridabad +44.74% • Chennai +35.52% • Bengaluru +35.29% • New Delhi +33.64% • Low Growth – Compared to 2010 by City • Kolkata +10.23% • Surat +9.56% • Jaipur +4.92%

  11. India Real Estate – Avail/Partners • Real Estate Availability • Moderate availability due to financial situations in India. • High cost is a big detractor in Indian Real Estate Sales. • Cost of land post Indian 2001 Economic Bubble exceed that of the median home sales prices. • 65% of flats sold in Delhi and 35% of flats sold in Mumbai have sold to speculators. • Booming growth in Indian GDP may result in more availability over 2013-2015 at affordable prices. • Jones Lang LaSalle remains the largest partner for real estate sales and coverage in India.

  12. Costco in India - Conclusion We do not believe Costco should seek India as a market to move into over the course of the next 3 years. The following points highlight how we came to this decision: • Indian land prices are too high • High land prices now make moving into India in the short term less attractive. • Continued GDP growth over the next 1-2 years may help lower land prices. • Indian Inflation too high • Continued growth in Inflation would make doing business in India risky. • GDP Per Capita shows the standard of living is improving in India, however not at a rate fast enough to make India an attractive market to enter. • Indian Infrastructure is poor and threats loom • Indian road conditions would not support the Costco business model of central delivery and distribution within 24 hours. • Higher costs would be incurred by Costco by moving product slower than they do in the US, Canada and Mexico markets. • The presence of pirates from nearby Somalia makes importing of goods via sea risky.

  13. APA Citations • The following Web Content was used for this presentation. • The United States Central Intelligence Agency, Retrieved 10/6/2011 from https://www.cia.gov/library/publications/the-world-factbook/geos/in.html • Yahoo! Finance, Retrieved 10/6/2011 from http://finance.yahoo.com/q/bc?s=USDINR=X&t=5y&l=on&z=m&q=l&c • Wikipedia, Retrieved 10/6/2011 from http://en.wikipedia.org/wiki/Energy_policy_of_India http://en.wikipedia.org/wiki/Real_Estate_in_India • Global Property Guide, Retrieved 10/6/2011 from http://www.globalpropertyguide.com/Asia/India • Costco Investor Relations, Retrieved 10/6/2011 from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-sec • World Trade Organization, Retrieved 10/10/2011 from http://www.wto.org/english/tratop_e/tpr_e/s249_sum_e.pdf • India Department of Commerce, Retrieved 10/10/2011 from http://commerce.nic.in/eidb/Icomq.asp • India Imports, Trade Chakra, Retrieved 10/10/2011 from http://www.tradechakra.com/indian-economy/imports/index.html • India, Speaking up for Integrity. (2011, 08 26). Retrieved 10/10/2011 from http://www.transparency.org/news_room/in_focus/2011/india_speaking_up_for_integrity

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