Competition Among the North American Warehouse Clubs: Costco Wholesale vs Sam's Club vs Bj's Wholesale
Issues: Upon completion of the in depth analysis of Costco and the industry in which it operates, two major issues were identified. These issues relate to the long term sustainable growth of Costco and needs to be addressed by management. One issue that that was evident throughout the analysis was the stagnating profitability. One aspect that is causing this issue is the above-average employee compensation (relative to industry standards) offered by Costco. Being accumulated into the selling and administrative expense line on the income statement, it places a downward pressure on profitability. Much of the manual work accomplished within the store environment (cashier, stocking clerk) is not skilled and therefore does not require a premium wage. In keeping such costs to a minimum, Costco would be able to increase the productivity of its operations and increase in profitability. This will ensure that it will achieve its strategic objective. A second aspect of the profitability issue is its impact on its shareholders. As a public company, Costco has to have the maximization of shareholder wealth as one of its objectives. However, it would appear that shareholder wealth maximization is being treated as a low priority objective. When this was brought up by a Wall Street analyst, Jim Sinegal defended his position as being long term. However, this will not hold true if profitability continues to decline. Where as sales continued to increase in the 2008-2009 year-over-year (YoY) for Sam’s Club and BJ’s, Costco saw a decline. This translated into a 3% decline in ROE. While the recession of 2008-2009 would have contributed to this decline, it raises questions about Costco’s resilience to the cyclical business environment. A second issue that was identified is Costco’s reliance on the North American market (United States and Canada). In terms of geographic profitability, 90% of Costco’s operating profits are earned in the US and Canadian markets. This is