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Report Layout Structure Table of Contents Executive Summary Cover Page Title/Student Name/Professor Name/Section/Date Issue #1 with justification that references the Appendix Recommendations (must be implementable) Issue #2 with justification that references the Appendix Issue #3 with justification that references the Appendix External Analysis Appendix A: PESTEL Analysis Appendix B: Dominant Economic Characteristics Appendix C: Five Forces Analysis Appendix D: Drivers of Change Appendix E: Competitor Analysis Internal Analysis Appendix A: Weighted Competitor Strength Analysis Appendix B: SWOT Analysis Appendix C: Financial Analysis Appendix D: Current Strategy .1 2 3 4 5 Executive Summary, Issues & Recommendation (25% of Total Grade) Executive Summary Identify and Describe 3 Major Issues: Issue #1 + justification (reference to appendix) Issue #2 + justification (reference to appendix) Issue #3 + justification (reference to appendix) Form 1 Key Recommendation: Recommendation (including implementation; can cover more than one issue) Appendix: Industry and Competitive Analysis (75% of Total Grade) 1 2 3 4 5 .1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 External Analysis: Analysis of the Macro environment, Industry, & Competitors A. PESTEL Analysis..... .1 2 3 4 5 .1 2 3 4 5 B. Dominant Economic Characteristics Market Size and Growth Rate Scope of Competitive Rivalry Product Innovation Economies of Scale Learning/Experience Curve Effects .1 2 3 4 5 6 7 8 9 10 C. Five Forces Analysis (Weak/Moderate/Strong)........ 1. Threat of New Entrants 2. Competition from Substitutes 3. Buyer Power 4. Supplier Power Rivalry 5. 1 2 3 4 5 D. Drivers of Change in the Industry.... Identify at least 3 Drivers of Change; name the industry E. Competitor Analysis Competitor Identification & Strategy (generic plus individual strategies).. Key Success Factors (at least 5)...... Strategic Group Map (+ takeaway) 1 2 3 4 5 .1 2 3 4 5 .1 2 3 4 5 Internal Analysis: Analysis of the Firm A. Weighted Competitor Strength Analysis (+ takeaway) 1 2 3 4 5 6 7 8 9 10 B. SWOT Analysis (+ takeaway)..... . 1 2 3 4 5 C. Financial Analysis (choose 2 from each category: profitability - gross profit margin, operating profit margin, net return on total assets, ROE; liquidity current ratio, working capital; leverage total debt to assets, debt to equity, times interest earned; activity (if appropriate) - days of inventory, inventory turnover) Describe/calculate/discuss last three years. Show all of your work. What is the takeaway for each plus the company as a whole? 1 2 3 4 5 6 7 8 9 10 D. Current Strategy (generic plus at least 5 individual strategies.......... .1 2 3 4 5 6 7 8 9 10 Deductions for Writing Deficiency..... Content not clearly labeled to match rubric, Excessive Mechanical errors, language and word choice, content not presented professionally C-18 PART 2 Cases in Crafting and Executing Strategy style of operating-constantly improving store opera- tions, keeping operating costs and overhead low, stocking items that moved quickly, and charging ultra- low prices that kept customers coming back to shop. Realizing that he had mastered the tricks of running a successful membership warehouse business from Sol Price, Sinegal decided to leave Price Club and form his own warehouse club operation. Sinegal and Seattle entrepreneur Jeff Brotman founded Costco, and the first Costco store began operations in Seattle in 1983-the same year that Walmart launched its warehouse membership for- mat, Sam's Club. By the end of 1984, there were nine Costco stores in five states serving over 200.000 members. In December 1985, Costco became a public company, selling shares to the public and raising addi- tional capital for expansion. Costco became the first ever U.S. company to reach $1 billion in sales in less than six years. In October 1993, Costco merged with Price Club. Jim Sinegal became CEO of the merged company, presiding over 206 PriceCostco locations, with total annual sales of $16 billion. Jeff Brotman, who had functioned as Costco's chairman since the company's founding, became vice chairman of PriceCostco in 1993 and was elevated to chairman of the company's board of directors in December 1994, a position he held until his unexpected death in 2017. In January 1997, after the spin-off of most of its non- warehouse assets to Price Enterprises Inc., PriceCostco changed its name to Costco Companies Inc. When the company reincorporated from Delaware to Washington in August 1999, the name was changed to Costco Wholesale Corporation. The company's headquarters was in Issaquah, Washington, not far from Seattle. Jim Sinegal's Leadership Style Sinegal was far from the stereotypical CEO. He dressed casually and unpretentiously, often going to the office or touring Costco stores wearing an open-collared cot- ton shirt that came from a Costco bargain rack and sporting a standard employee name tag that said, sim- ply, "Jim." His informal dress and unimposing appear- ance made it easy for Costco shoppers to mistake him for a store clerk. He answered his own phone, once tell- ing ABC News reporters, "If a customer's calling and they have a gripe, don't you think they kind of enjoy the fact that I picked up the phone and talked to them?"! Sinegal spent considerable time touring Costco stores, using the company plane to fly from location to location and sometimes visiting 8 to 10 stores daily (the record for a single day was 12). Treated like a celebrity when he appeared at a store (the news "Jim's in the store" spread quickly), Sinegal made a point of greeting store employees. He observed, The employ- ees know that I want to say hello to them, because I like them. We have said from the very beginning: 'We're going to be a company that's on a first-name basis with everyone."" 2 Employees genuinely seemed to like Sinegal. He talked quietly, in a commonsensi- cal manner that suggested what he was saying was no big deal. He came across as kind yet stern, but he was prone to display irritation when he disagreed sharply with what people were saying to him. In touring a Costco store with the local store manager, Sinegal was very much the person-in- charge. He functioned as producer, director, and knowledgeable critic. He cut to the chase quickly, exhibiting intense attention to detail and pricing, wandering through store aisles firing a barrage of questions at store managers about sales volumes and stock levels of particular items, critiquing merchan- dising displays or the position of certain products in the stores, commenting any aspect of store opera- tions that caught his eye, and asking managers to do further research and get back to him with more information whenever he found their answers to his questions less than satisfying. Sinegal had tremen- dous merchandising savvy, demanded much of store managers and employees, and definitely set the tone for how the company operated its discounted retail- ing business. Knowledgeable observers regarded Jim Sinegal's merchandising expertise as being on a par with Walmart's legendary founder, Sam Walton. In September 2011, at the age of 75, Jim Sinegal informed Costco's Board of Directors of his intention to step down as CEO of the company effective January 2012. The Board elected Craig Jelinek, President and Chief Operating Officer since February 2010, to suc- ceed Sinegal and hold the titles of both President and CEO. Jelinek was a highly experienced retail executive with 37 years in the industry, 28 of them at Costco, where he started as one of the Company's first ware- house managers in 1984. He had served in every major role related to Costco's business operations and merchandising activities during his tenure. When he stepped down as CEO, Sinegal retained his position on the company's Board of Directors and, at the age of 79, was re-elected to another three-year term on Costco's board in December 2015; he retired from Costco's Board at the end of his term in January 2018. CASE 4 Costco Wholesale in 2018: Mission, Business Model, and Strategy C-19 COSTCO WHOLESALE IN 2018 In June 2018, Costco was operating 750 membership warehouses, including 520 in the United States and Puerto Rico, 98 in Canada, 38 in Mexico, 28 in the United Kingdom, 26 in Japan, 14 in South Korea, 13 in Taiwan, 9 in Australia, 2 in Spain, 1 in France, and 1 in Iceland. Costco also sold merchandise to mem- bers at websites in the United States, Canada, the United Kingdom, Mexico, South Korea, and Taiwan. Over 90 million cardholders were entitled to shop at Costco as of January 2018; in fiscal year 2017, mem- bership fees generated over $2.85 billion in revenues for the company. Headed into 2018, on average, traf- fic at Costco's warehouse locations averaged 3 million members per day. Annual sales per store averaged about $170 million ($3.3 million per week) in 2017, over 70 percent higher than the $99.2 million per year and $1.9 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 two that had more than $400 million in sales. In 2018, Costco was the only national retailer in the history of the United States that could boast of average annual revenue in excess of $170 million per location. Exhibit 1 contains a financial and operating summary for Costco for fiscal years 2000, 2005, and from 2014 through 2017. EXHIBIT 1 Selected Financial and Operating Data for Costco Wholesale Corp., Fiscal Years 2000, 2005, and 2014-2017 ($ in millions, except for per share data) Fiscal years ending on Sunday closest to August 31 Selected Income Statement Data 2017 2016 2015 2014 2005 2000 $116,073 2.646 118,719 $113,666 2,533 116,199 $110,212 2,428 112,640 $51,862 1,073 52,935 $31,621 544 32,164 102,901 12.068 101,065 11,445 98,458 10,899 46,347 5,044 28,322 2.755 78 65 63 42 53 16 7 115,047 3,672 112,575 3,624 109,420 3,220 51,460 1,474 Net sales $126,172 Membership fees 2,853 Total revenue 129,025 Operating expenses Merchandise costs 111,882 Selling, general and 12,950 administrative Preopening expenses 82 Provision for impaired assets and store closing costs Total operating expenses 124,914 Operating income 4,111 Other income (expense) Interest expense (134) Interest income and other, net 62 Income before income taxes 4,039 Provision for income taxes 1,325 Net income $ 2,714 Diluted net income per share $ 6.08 Dividends per share (not including $ 1.90 special dividend of $7.00 in 2017 and $5.00 in 2015) Millions of shares used in 440.9 per share calculations 31,126 1,037 (133) 80 (124) 104 3,604 1,195 2,377 $5.37 3,619 1,243 $ 2,350 $5.33 $1.70 (113) 90 3,197 1,109 $ 2,058 $4.65 $1.33 (39) 54 1,052 421 (34) 109 1,549 486 $ 1,063 $2.18 0.43 $ 631 $ $ 1.35 0.00 $1.51 441.3 442.7 442.5 492.0 475.7 (Continued) C-20 PART 2 Cases in Crafting and Executing Strategy 2017 2016 2015 2014 2005 2000 Balance Sheet Data $ 3,379 Cash and cash equivalents Merchandise inventories Current assets Current liabilities Net property and equipment Total assets Long-term debt Stockholders' equity $ 4,546 9.834 17,317 17,485 18,161 36,347 6.573 10,778 8,969 15,218 15,575 17,043 33,163 4,061 12,079 $ 4,801 8,908 16,779 16,539 15,401 33,017 4,852 10,617 $ 5,738 8,456 17,588 14,412 14,830 33,024 5,093 12,515 $ 2,063 4,015 8,238 6,761 7,790 16,514 711 8,881 $ 525 2,490 3,470 3,404 4,834 8,634 790 4,240 Cash Flow Data $ 6,726 $ 3,292 $ 4,285 $3,984 Net cash provided by operating activities $ 1.773 $ 1,070 Warehouse Operations 715 686 663 634 417 292 28 33 26 30 21 25 (2) (4) (3) (1) (5) (4) Warehouses in operation at beginning of year New warehouses opened (including relocations) Existing warehouses closed (including relocations) Warehouses at end of year Net sales per warehouse open at year-end (in millions) Average annual growth at warehouses open more than a year (excluding the impact of changing gasoline prices and foreign exchange rates) 741 $ 170 715 $ 162 686 $ 166 663 $ 166 433 $ 120 313 $ 101 4% 4% 7% 6% 7% 11% Members at year-end 10.800 10,800 10,600 10,400 5,000 4,200 38,600 49,400 42,600 Businesses, including add-on members (000s) Gold Star members (000s) Total paid members Household cardholders that both business and Gold Star members were automatically entitled to receive Total cardholders 36,800 47,600 42,600 34,000 44,600 40,200 31,600 42,000 34,400 16,200 21,200 10,500 14,700 n.a. n.a. 90,300 86,700 81,300 76,400 "At the beginning of Costco's 2011 fiscal year, the operations of 32 warehouses in Mexico that were part of a 50 percent-owned joint ven- ture were consolidated and reported as part of Costco's total operations, Note: Some totals may not add due to rounding and to not including some line items of minor significance in the company's statement of income. Sources: Company 10-K reports for fiscal years 2000, 2005, 2015, 2016, and 2017 CASE 4 Costco Wholesale in 2018: Mission, Business Model, and Strategy C-21 COSTCO'S MISSION, BUSINESS MODEL, AND STRATEGY Costco's stated mission in the membership warehouse business was: "To continually provide our members with quality goods and services at the lowest possible prices. However, in a "Letter to Shareholders" in the company's 2011 Annual Report, Costco's three top executives-Jeff Brotman, Jim Sinegal, and Craig Jelinek-provided a more expansive view of Costco's mission, stating: The company will continue to pursue its mission of bringing the highest quality goods and services to mar- ket at the lowest possible prices while providing excel- lent customer service and adhering to a strict code of ethics that includes taking care of our employees and members, respecting our suppliers, rewarding our share- holders, and seeking to be responsible corporate citizens and environmental stewards in our operations around the world." In the company's 2017 Annual Report, Craig Jelinek elaborated on how environmental sustainabil- ity fit into Costco's mission: Sustainability to us is remaining a profitable business while doing the right thing. We are committed to less- ening our environmental impact, decreasing our carbon footprint, sourcing our products responsibly, and work- ing with our suppliers, manufacturers, and farmers to preserve natural resources. This will remain at the fore. front of our business practices. The centerpiece of Costco's business model was a powerful value proposition that featured a combi- nation of (1) ultra-low prices on a limited selection of nationally branded and Costco's private-label Kirkland Signature products in a wide range of mer chandise categories, (2) very good to excellent prod- uct quality, and (3) intriguing product selection that included both everyday items and ongoing special purchases from a big variety of merchandise suppli- ers that turned shopping at Costco into a money- saving treasure hunt. Ever since the company's founding, Costco management had strived diligently to ensure that shopping at Costco delivered enough value to keep existing members returning frequently to a nearby warehouse and spur membership growth every year, thereby generating high sales volumes and rapid inventory turnover at each warehouse and cre- ating opportunities to open new warehouses. Big sales volumes and rapid inventory turnover- when combined with the low operating costs achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self- service warehouse facilities enabled Costco to oper- ate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters. Membership fees were a critical element of Costco's business model because they provided sufficient supplemental rev- enues to boost the company's overall profitability to acceptable levels. Indeed, Costco's revenues from membership fees typically exceeded 100 percent of the company's net income, meaning that the rest of Costco's worldwide business operated on a slightly below breakeven basis (see Exhibit 1)-which trans- lated into Costco's prices being exceptionally com- petitive when compared to the prices that Costco members paid when shopping elsewhere. Another important business model element was that Costco's high sales volume and rapid inventory turnover generally allowed it to sell and receive cash for inventory before it had to pay many of its mer- chandise vendors, even when vendor payments were made in time to take advantage of early payment discounts. Thus, Costco was able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than by having to maintain sizable working capital (defined as current assets minus current liabilities to enable timely payment of suppliers. Costco's Strategy The key elements of Costco's strategy were ultra- low prices, a limited selection of nationally branded and top-quality Kirkland Signature products cov- ering diverse merchandise categories, a "treasure hunt" shopping environment that stemmed from a constantly changing inventory of about 900 "while- they-last specials," strong emphasis on low operating costs, and ongoing expansion of its geographic net- work of store locations. Pricing Costco's philosophy was to keep custom- ers coming in to shop by wowing them with low prices and thereby generating big sales volumes. Examples of Costco's 2015 sales volumes that con- tributed to low prices in particular product cat- egories included 156,000 carats of diamonds, meat sales of $6.4 billion, seafood sales of $1.3 billion, C-22 PART 2 Cases in Crafting and Executing Strategy compete somewhere else." Some years ago, we were sell- ing a hot brand of jeans for $29.99. They were $50 in a department store. We got a great deal on them and could have sold them for a higher price but we went down to $29.99. Why? We knew it would create a riot. At another time, he said: We're very good merchants, and we offer value. The tra- ditional retailer will say: "I'm selling this for $10. I won- der whether we can get $10.50 or $11." We say: "We're selling this for $9. How do we get it down to $8?" We understand that our members don't come and shop with us because of the window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values. television sales of $1.8 billion, fresh produce sales of $5.8 billion sourced from 44 countries), 83 million rotisserie chickens, 7.9 million tires, 41 million pre- scriptions, 6 million pairs of glasses, and 128 million hot dog/soda pop combinations. Costco was the world's largest seller of fine wines ($965 million out of total 2015 wine sales of $1.7 billion). For many years, a key element of Costco's pric- ing strategy had been to cap its markup on brand-name merchandise at 14 percent (compared to 25 percent and higher markups for other discounters and most supermarkets and 50 percent and higher markups for department stores). Markups on Costco's private- label Kirkland Signature items were a maximum of 15 percent, but the sometimes fractionally higher mark- ups still resulted in Kirkland Signature items being priced about 20 percent below comparable name-brand items. Except for Walmart, Costco's prices for fresh foods and grocery items ranged 20 to 30 percent below of the leading supermarket chains. Aside from being lower-priced, Costco's Kirkland Signature products- which included vitamins, juice, bottled water, coffee, spices, olive oil, canned salmon and tuna, nuts, laundry detergent, baby products, dog food, luggage, cookware, trash bags, batteries, wines and spirits, paper towels and toilet paper, and clothing-were designed to be of equal or better quality than national brands. As a result of its low markups, Costco's prices were just fractionally above breakeven levels, produc- ing net sales revenues (not counting membership fees) that exceeded all operating expenses (mer- chandise costs + selling, general and administrative expenses + preopening expenses and store relocation expenses) by only $1.0 billion to $1.2 billion in fiscal years 2017, 2016, and 2015 and by just $400 million to $800 million dollars in fiscal years 2014, 2005 and 2005. As can be verified from Exhibit 1, Costco's revenues from membership fees accounted for 69 to 75 percent of the company's operating profits in fis- cal years 2014 to 2017 and exceeded the company's net income after taxes in every fiscal year shown in Exhibit 1 except for fiscal year 2000-chiefly because of the company's ultra-low pricing strategy and prac- tice of capping the margins on branded goods at 14 percent and private-label goods at 15 percent. Jim Sinegal explained the company's approach to pricing: We always look to see how much of a gulf we can cre- ate between ourselves and the competition. So that the competitors eventually say, "These guys are crazy. We'll Indeed, Costco's markups and prices were so fractionally above the level needed to cover company- wide operating costs and interest expenses that Wall Street analysts had criticized Costco management for going all out to please customers at the expense of increasing profits for shareholders. One retailing analyst said, They could probably get more money for a lot of the items they sell." 10 During his tenure as CEO, Sinegal had never been impressed with Wall Street calls for Costco to abandon its ultra-low pric- ing strategy, commenting: Those people are in the business of making money between now and next Tuesday. We're trying to build an organization that's going to be here 50 years from now."! He went on to explain why Costco's approach to pricing would remain unaltered during his tenure: When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them. We don't want to be one of the casualties. We don't want to turn around and say, "We got so fancy we've raised our prices, and all of a sudden a new com- petitor comes in and beats our prices."12 Product Selection Whereas typical supermar- kets stocked about 40,000 items and a Walmart Supercenter or a SuperTarget might have 125,000 to 150,000 items for shoppers to choose from, Costco's merchandising strategy was to provide members with a selection of approximately 3,800 active items that could be priced at bargain levels and thus provide members with significant cost savings. Of these, about 75 percent were quality brand-name products and 25 percent carried the company's private label Kirkland Signature brand. The Kirkland Signature label appeared on everything from men's dress shirts to laundry detergent, pet food to toilet paper, canned CASE 4 Costco Wholesale in 2018: Mission, Business Model, and Strategy C-23 foods to cookware, olive oil to beer, automotive prod- ucts to health and beauty aids. According to Craig Jelinek, The working rule followed by Costco buyers is that all Kirkland Signature products must be equal to or better than the national brands, and must offer a savings to our members. Management believed that there were opportunities to increase the number of Kirkland Signature selections and gradually build sales penetration of Kirkland-branded items to at least 30 percent of total sales-in 2017 Kirkland-brand sales exceeded 27 percent of total sales. Costco exec- utives in charge of sourcing Kirkland Signature prod- ucts constantly looked for ways to make all Kirkland Signature items better than their brand name coun- terparts and even more attractively priced. Costco members were very much aware that one of the great perks of shopping at Costco was the opportunity to buy top quality Kirkland Signature products at prices substantially lower than name brand products. Costco's product range covered spectrum-rotisserie chicken, all types of fresh meats, seafood, fresh and canned fruits and vegetables, paper products, cereals, coffee, dairy products, cheeses, fro- zen foods, flat-screen televisions, iPods, digital cam- eras, fresh flowers, fine wines, caskets, baby strollers, toys and games, musical instruments, ceiling fans, vacuum cleaners, books, apparel, cleaning supplies, DVDs, light bulbs, batteries, cookware, electric tooth- brushes, vitamins, and washers and dryers-but the selection in each product category was deliberately limited to fast-selling models, sizes, and colors. Many consumable products like detergents, canned goods, office supplies, and soft drinks were sold only in big- container, case, carton, or multiple-pack quantities. In a few instances, the selection within a product category was restricted to a single offering. For example, Costco stocked only a 325-count bottle of Advil-a size many shoppers might find too large for their needs. Sinegal explained the reasoning behind limited selections: If you had 10 customers come in to buy Advil, how many are not going to buy any because you just have one size? Maybe one or two. We refer to that as the intel- ligent loss of sales. We are prepared to give up that one customer. But if we had four or five sizes of Advil, as most grocery stores do, it would make our business more difficult to manage. Our business can only succeed if we are efficient. You can't go on selling at these margins if you are not, 13 a broad In the last several years, organics had become a fast-growing category in both the fresh produce section and the grocery items section, and Costco buyers were devoting increased attention to growing the selection of organic items. In the fresh meats cat- egory, Costco was pursuing increased vertical inte- gration, constructing a meat plant in Illinois and a poultry plant in Nebraska. The approximate percent- age of net sales accounted for by each major category of items stocked by Costco is shown in Exhibit 2. Costco had opened ancillary departments within or next to most Costco warehouses to give reasons EXHIBIT 2 Costco's Sales by Major Product Category, 2005-2017 2017 2016 2010 2005 35% 36% 33% 30% 20% 21% 23% 25% 16% 16% 18% 20% Food (fresh produce, meats and fish, bakery and deli products, and dry and institutionally packaged foods) Sundries (candy, snack foods, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies) Hardlines (major appliances, electronics, health and beauty aids, hardware, office supplies, garden and patio, sporting goods, furniture, cameras, and automotive supplies) Softlines (including apparel, domestics, jewelry, housewares, books, movie DVDs, video games and music, home furnishings, and small appliances) Ancillary and Other (gasoline, pharmacy, food court, optical, one-hour photo, hearing aids, and travel) 12% 12% 10% 12% 17% 16% 16% 13% Source: Company 10-K reports, 2005, 2011, 2016, and 2017. C-24 PART 2 Cases in Crafting and Executing Strategy to shop at Costco more frequently and make Costco more of a one-stop shopping destination. Some loca- tions had more ancillary offerings than others: 2015 2010 2007 680 534 482 530 480 Warehouses having stores with Food Court One-Hour Photo Centers Optical Dispensing Centers Pharmacies Gas Stations Hearing Aid Centers 656 662 523 472 480 429 606 472 581 343 279 357 237 mattresses, and Dom Perignon champagne. Many of the featured specials came and went quickly, some- times 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 rather than only for periodic "stock up" trips. Costco members quickly learned that they needed to go ahead and buy treasure-hunt specials that interested them because the items would very likely not be available on their next shopping trip. In many cases, Costco did not obtain its upscale treasure hunt items directly from high-end manu- facturers like Calvin Klein or Waterford (who were unlikely to want their merchandise marketed at deep discounts at places like Costco); rather, Costco buy- ers searched for opportunities to source such items legally on the gray market from other wholesalers or distressed retailers looking to get rid of excess or slow-selling inventory. Management believed that these practices kept its marketing expenses low relative to those at typical retailers, discounters, and supermarkets. Note: The company did not report the number of ancillary offerings for its warehouses at year-end 2016 and 2017, but the company did increase the number of gas stations to 508 in 2016 and to 536 in 2017. Costco did not sell gasoline at its warehouses in France and South Korea, Source: Company 10-K reports, 2007, 2011, 2015, and 2017. Low-Cost Emphasis Keeping operating costs at a bare minimum was a major element of Costco's strategy and a key to its low pricing. As Jim Sinegal explained: Costco's pharmacies were highly regarded by members because of the low prices. The company's practice of selling gasoline at discounted prices at those store locations where there was sufficient space to install gas pumps had boosted the frequency with which nearby members shopped at Costco and made in-store purchases (only members were eligible to buy gasoline at Costco's stations). Almost all new Costco locations in the United States and Canada were opening with gas stations, globally, gas stations were being added at locations where local regulations and space permitted. Treasure Hunt Merchandising While Costco's product line consisted of approximately 3,800 active items, some 20 to 25 percent of its product offerings were constantly changing. Costco's merchandise buy- ers were continuously making one-time purchases of items that would appeal to the company's clientele and likely to sell out quickly. A sizable number of these featured specials were high-end or luxury-brand prod- ucts that carried big price tags; examples included $1,000 to $4,500 big-screen Ultra HD LCD and LED TVs, $800 espresso machines, expensive jewelery and diamond rings (priced from $10,000 to $200,000+), Omega watches, Waterford Crystal, exotic cheeses, Coach bags, cashmere sports coats, $1,500 digi- tal pianos, $800 treadmills, $2,500 memory foam 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 dra- matic savings to our members. 14 While Costco management made a point of locat- ing warehouses on high-traffic routes in or near upscale suburbs that were easily accessible by small businesses and residents with above-average incomes, it avoided prime real estate sites in order to contain land costs. Because shoppers were attracted principally by Costco's low prices and merchandise selection, most warehouses were of a metal pre-engineered design, with concrete floors and minimal interior dcor. Floor plans were designed for economy and efficiency in use of selling space, the handling CASE 4 Costco Wholesale in 2018: Mission, Business Model, and Strategy C-25 of merchandise, and the control of inventory. Merchandise was often stored on racks above the sales floor and/or displayed on pallets containing large quantities of each item, thereby reducing labor required for handling and stocking. In-store signage was done mostly on laser printers, there were no shopping bags at the checkout counter-merchandise was put directly into the shopping cart or sometimes loaded into empty boxes. Costco warehouses ranged in size from 73,000 to 205,000 square feet; the aver- age size was about 145,000 square feet. Newer units were usually in the 150,000 to 205,000-square-foot range, but the world's largest Costco warehouse was a 235,000 square-foot store in Salt Lake City that opened in 2015. Images of Costco's warehouses are shown in Exhibit 3. Warehouses generally operated on a 7-day, 70-hour week, typically being open between 10:00 a.m. and 8:30 p.m. weekdays, with earlier closing hours on the weekend; the gasoline operations out- side many stores usually had extended hours. The shorter hours of operation as compared to those of traditional retailers, discount retailers, and super- markets resulted in lower labor costs relative to the volume of sales. By strictly controlling the entrances and exits of its warehouses and using a membership format, Costco had inventory losses (shrinkage) well below those of typical retail operations. Growth Strategy Costco's growth strategy was to increase sales at existing stores by 5 percent or more annually and to open additional warehouses, both domestically and internationally. Average annual growth at stores open at least a year was 10 percent in fiscal 2011, 6 percent in both fiscal 2013 and 2014, 7 percent in fiscal 2015, and 4 percent in 2016 and 2017 (see Exhibit 1). Costco had been aggressive in opening new warehouses and entering new geographic areas. As of December 2000, the Company operated a chain of 349 warehouses in 32 states (251 locations), 9 Canadian provinces (59 locations), the United Kingdom (11 locations, through an 80 percent- owned subsidiary), South Korea (four locations), Taiwan (three locations, through a 55 percent-owned subsidiary) and Japan (two locations), as well as 19 warehouses in Mexico through a 50 percent joint venture partner. Ten years later, in December 2010, Costco was operating 585 warehouses in 42 states (425 locations), 9 Canadian provinces (80 loca- tions), Mexico (32 locations), the United Kingdom (22 locations), Japan (9 locations), South Korea (7 locations), Taiwan (6 locations), and Australia (1 location). Since then, Costco had opened an addi- tional 165 warehouses and entered 2 more states and 3 additional countries. In 2017, Costco opened 28 new warehouses, including its first ones in Iceland and France. Costco expected to open 20 to 25 new warehouses and relocate up to six warehouses in fis- cal year 2018 beginning September 4, 2017. Exhibit 4 shows a breakdown of Costco's geo- graphic operations for fiscal years 2005, 2010, 2015, 2016, and 2017 Marketing and Advertising Costco's low prices and its reputation for making shopping at Costco something of a treasure-hunt EXHIBIT 3 Images of Costco's Warehouses Cosiohobib/Shutterstock Co kota/Shutterstock C-26 PART 2 Cases in Crafting and Executing Strategy EXHIBIT 4 Selected Geographic Operating Data, Costco Wholesale Corporation, Fiscal Years 2005-2017 ($ in millions) United States Operations Canadian Operations Other International Operations Total $18,775 841 $93,889 2,644 1,714 518 $16,361 626 511 130 $129,025 4,111 2,502 746 277 98 $86,579 2,326 1,823 501 $17,028 778 299 91 $15,112 568 527 123 $118,719 3,672 2,649 715 Year Ended September 3, 2017 Total revenue (including membership fees) Operating income Capital expenditures Number of warehouses (as of December 31, 2017) Year Ended August 30, 2016 Total revenue (including membership fees) Operating income Capital expenditures Number of warehouses Year Ended August 29, 2015 Total revenue (including membership fees) Operating income Capital expenditures Number of warehouses Year Ended August 29, 2010 Total revenue (including membership fees) Operating income Capital expenditures Number of warehouses Year Ended August 28, 2005 Total revenue (including membership fees) Operating income Capital expenditures Number of warehouses $84,451 2,308 1,574 487 $17,341 771 148 $14,507 545 671 120 $116,199 3,624 2,393 697 90 $59,624 1,310 $12,501 547 $ 6,271 220 $ 77,946 2,077 1,055 540 804 162 89 416 79 45 $ 6,732 242 $ 3,155 65 $43,064 1,168 734 338 $ 52,952 1,474 995 433 140 122 65 30 Note: The dollar numbers shown for the "Other International" categories represent only Costco's ownership share, since all foreign opera- tions were joint ventures (although Costco was the majority owner of these ventures). Countries with warehouses in the Other International category as of year-end 2017 included Mexico (37), United Kingdom (28), Japan (26), South Korea (13), Taiwan (13), Australia (9), Puerto Rico (2), Spain (2), Iceland (1), and France (1); Costco's two warehouses in Puerto Rico were included in the United States Operations cat- egory. The warehouses operated by Costco Mexico in which Costco was a 50 percent joint venture partner were not included in the data for "Other International" until Fiscal Year 2011. Source: Company 10-K reports, 2017, 2016, 2015, 2010, and 2007. made it unnecessary to engage in extensive advertis- ing or sales campaigns. Marketing and promotional activities were generally limited to monthly coupon mailers to members, weekly e-mails to members from Costco.com, occasional direct mail to prospective new members, and regular direct marketing pro- grams (such as The Costco Connection, a magazine published for members), in-store product sampling, and special campaigns for new warehouse openings. For new warehouse openings, marketing teams personally contacted businesses in the area that were potential wholesale members; these contacts were supplemented with direct mailings during the period immediately prior to opening. Potential Gold Star CASE 4 Costco Wholesale in 2018: Mission, Business Model, and Strategy C-27 (individual) members were contacted by direct mail or by promotions at local employee associations and businesses with large numbers of employees. After a membership base was established in an area, most new memberships came from word of mouth (exist- ing members telling friends and acquaintances about their shopping experiences at Costco), follow-up messages distributed through regular payroll or other organizational communications to employee groups, and ongoing direct solicitations to prospective busi- ness and Gold Star members. delivery times. New offerings were added at Costco Travel, and the company introduced hotel-only book- ing reservations. Costco Travel's rental car rates were consistently some of the lowest in the marketplace and in 2017 car rentals became available to members in Canada and the United Kingdom. Additionally, the annual 2 percent reward for Executive members was extended to apply to Costco Travel purchases in the United States and Canada. Lastly, the company launched Costco Grocery, a two-day delivery on dry grocery items, and a same-day delivery offering both fresh and dry grocery items through partnering with Instacart. Website Sales Costco operated websites in the United States, Canada, Mexico, the United Kingdom, Taiwan, and South Korea-both to enable members to shop for many in-store products online and to provide mem- bers with a means of obtaining a much wider vari- ety of value-priced products and services that were not practical to stock at the company's warehouses. Craig Jelinek was committed to a website strategy that provided exceptional service and value to Costco members who wanted to shop online. In recent years, online merchandise offerings had expanded signifi- cantly, and the company was continuously explor- ing opportunities to deliver added value to members via a broader array of online offerings. Examples of value-priced items that members could buy online included sofas, beds, mattresses, entertainment cen- ters and TV lift cabinets, outdoor furniture, office furniture, kitchen appliances, billiard tables, and hot tubs. Members could also use the company's websites for such services as digital photo process- ing, prescription fulfillment, travel, the Costco auto program (for purchasing selected new vehicles with discount prices through participating dealerships), and other membership services. In 2015, Costco sold 465,000 vehicles through its 3,000 dealer part- ners; the big attraction to members of buying a new or used vehicle through Costco's auto program was being able to skip the hassle of bargaining with the dealer over price and, instead, paying an attractively low price pre-arranged by Costco. At Costco's online photo center, customers could upload images and pick up the prints at their local warehouse in little over an hour. Website sales accounted for 4 percent of Costco's total net sales in fiscal 2017 and 2016, versus 3 percent in 2015 and 2014. In 2017, Costco made improvements in web- site functionality, search capability, checkout, and Supply Chain and Distribution Costco bought the majority of its merchandise directly from manufacturers, routing it either directly to its warehouse stores or to one of the company's cross-docking depots that served as distribution points for nearby stores and for shipping orders to members making online purchases. In early 2018, Costco had 24 cross-docking depots with a combined space of approximately 11 million square feet in the United States, Canada, and various other interna- tional locations. Depots received container-based shipments from manufacturers, transferred the goods to pallets, and then shipped full-pallet quantities of several types to goods to individual warehouses via rail or semi-trailer trucks, generally in less than 24 hours. This maximized freight volume and handling efficiencies. Depots were also used to ship bulky merchandise to members that had been ordered online; members typically picked up online orders that would fit in their vehicles at nearby warehouses. When merchandise arrived at a warehouse, fork- lifts moved the full pallets straight to the sales floor and onto racks and shelves (without the need for multiple employees to touch the individual packages/ cartons on the pallets)-the first time most items were physically touched at a warehouse was when shoppers reached onto the shelf/rack to pick it out of a carton and put it into their shopping cart. Very little incoming merchandise was stored in locations off the sales floor in order to minimize receiving and handling costs. Costco had direct buying relationships with many producers of national brand-name mer- chandise and with manufacturers that supplied its Kirkland Signature products. Costco's merchandise buyers were always alert for opportunities to add C-28 PART 2 Cases in Crafting and Executing Strategy products of top quality manufacturers and vendors on a one-time or ongoing basis. No one manufacturer supplied a significant percentage of the merchandise that Costco stocked. Costco had not experienced dif- ficulty in obtaining sufficient quantities of merchan- dise, and management believed that if one or more of its current sources of supply became unavailable, the company could switch its purchases to alternative manufacturers without experiencing a substantial dis- ruption of its business. Costco's Membership Base and Member Demographics Costco attracted the most affluent customers in discount retailing-the average annual income of Costco members was approximately $100,000 (in 2015 Costco management believed the 8.6 million subscribers to the company's monthly Costco Connection magazine had an average annual income of $156,000). Many members were affluent urban- ites, living in nice neighborhoods not far from Costco warehouses. One loyal Executive member, a criminal defense lawyer, said, "I think I spend over $20,000 to $25,000 a year buying all my products here from food to clothing-except my suits. I have to buy them at the Armani stores." Another Costco loyalist said, "This is the best place in the world. It's like going to church on Sunday. You can't get anything better than this. This is a religious experience."17 Costco had two primary types of memberships: Business and Gold Star (individual). Business mem- berships were limited to businesses, but included indi- viduals with a business license, retail sales license, or other evidence of business existence. A business membership also included a free household card (a significant number of business members shopped at Costco for their personal needs). Business members also had the ability to purchase "add-on" member- ship cards for up to six partners or associates in the business. Costco's current annual fee for Business and Gold Star memberships was $60 in the United States and Canada and varied by country in its Other International operations. Individuals in the United States and Canada who did not qualify for business membership could purchase a Gold Star member- ship, which included a household card for another family member additional add-on cards could not be purchased by Gold Star members). All types of members including household card members) could shop at any Costco warehouse. Business, Business add-on, and Gold Star mem- bers in the United States and Canada could upgrade to Executive membership for an additional $60 (an annual membership fee of $120); upgrade fees to Executive memberships elsewhere varied by country. The primary appeal of upgrading to Executive mem- bership was eligibility for a 2 percent annual reward (rebate) on qualified pre-tax purchases. Reward certificates were issued annually and could be used toward purchases of most merchandise at the front- end registers of Costco warehouses-rebate awards could not be used to purchase alcohol and tobacco products, gasoline, postage stamps, and food court items. The 2 percent rebate for Executive members was capped at $1,000 for any 12-month period in the United States and Canada (equivalent to annual qualified pre-tax purchases of $50,000); the maxi- mum rebate varied in other countries. Executive members also were eligible for savings and benefits on various business and consumer services offered by Costco, including merchant credit card process- ing, small-business loans, auto and home insurance, long-distance telephone service, check printing, and real estate and mortgage services; these services were mostly offered by third-party providers and varied by state-Executive members did not receive 2 per- cent rebate credit on purchases of these ancillary services. In fiscal 2017, Executive members repre- sented 38 percent of Costco's cardholders (includ- ing add-ons, but not holders of household cards) and accounted for approximately two-thirds of total company sales. Costco's member renewal rate was 90 percent in the United States and Canada, and 87 percent on a worldwide basis in 2017. Recent trends in membership are shown at the bottom of Exhibit 1. In general, with variations by country, Costco members could pay for their purchases with certain debit and credit cards, co-branded Costco credit cards, cash, or checks; in the United States and Puerto Rico, members could use a co-branded Citi/ Costco Visa Anywhere credit card for purchases at Costco and elsewhere, Costco Cash cards, and all Visa cards. Since the June 2016 launch of Citi/ Costco Visa Anywhere Card, 1.8 million new mem- ber accounts (approximately 2.4 million new credit cards) were opened. The enhanced cash-back Visa Anywhere rewards included earning 4 percent on gas; 3 percent on restaurant, hotel, and eligible travel; 2 percent at Costco and Costco.com; and 1 percent on all other purchases, exceeding the company's pre- vious co-branded credit card offering with American CASE 4 Costco Wholesale in 2018: Mission, Business Model, and Strategy C-29 Express. Executive Members using the new Visa Anywhere card continued to earn a 2 percent rebate on qualified purchases. Costco accepted merchandise returns when members were dissatisfied with their purchases. Losses associated with dishonored checks were minimal because any member whose check had been dishonored was prevented from paying by check or cashing a check at the point of sale until restitution was made. The membership format facilitated strictly controlling the entrances and exits of warehouses, resulting in limited inventory losses of less than two- tenths of 1 percent of net sales-well below those of typical discount retail operations. 19 Warehouse Management Costco warehouse managers were delegated con- siderable authority over store operations. In effect, warehouse managers functioned as entrepreneurs running their own retail operation. They were responsible for coming up with new ideas about what items would sell in their stores, effectively mer- chandising the ever-changing lineup of treasure-hunt products, and orchestrating in-store product loca- tions and displays to maximize sales and quick turn- over. In experimenting with what items to stock and what in-store merchandising techniques to employ, warehouse managers had to know the clientele who patronized their locations-for instance, big-ticket diamonds sold well at some warehouses but not at others. Costco's best managers kept their finger on the pulse of the members who shopped their ware- house location to stay in sync with what would sell well, and they had a flair for creating a certain ele- ment of excitement, hum, and buzz in their ware- houses. Such managers spurred above-average sales volumes-sales at Costco's top-volume warehouses ran about $4 million to $7 million a week, with sales exceeding $1 million on many days. Successful man- agers also thrived on the rat race of running a high- traffic store and solving the inevitable crises of the moment. York, as well as at one warehouse in Virginia, were represented by the International Brotherhood of Teamsters. All remaining employees were non-union. Starting wages for entry-level jobs for new Costco employees were raised to $13.00 to $13.50 in March 2016; hourly pay scales for warehouse jobs ranged from $13 to $24, depending on the type of job. The highest paid full-time warehouse employees could earn about $22.50 per hour after 4 years; com- pensation for a Costco pharmacist reportedly ranged from $45 to over $60 per hour. 18 In 2016, Costco's chief financial officer told The Seattle Times, "About 60 to 65 percent of Costco's employees make top- scale wages, which are in the $23 range." Salaried Costco employees earned anywhere from $30,000 to $125,000 annually.20 For example, salaries for merchandise and department managers reportedly were in the $65,000 to $80,000 range; sal- aries for supervisors ranged from $45,000 to $75,000; salaries for database, computer systems, and soft- ware applications developers/analysts/project man- agers were in the $85,000 to $125,000 range; and salaries for general managers of warehouses ranged from $90,000 to $145,000. Employees enjoyed the full spectrum of benefits. Salaried employees were eligible for benefits on the first of the second month after the date of hire. Full-time hourly employees were eligible for benefits on the first day of the sec- ond month after completing 250 eligible paid hours; part-time hourly employees became benefit-eligible on the first day of the second month after completing 450 eligible paid hours. The benefit package included the following: Health care plans for full-time and part-time employees that included coverage for mental ill- ness, substance abuse, and professional counsel- ing for assorted personal and family issues. A choice of a core dental plan or a premium den- tal plan. A pharmacy plan that entailed (1) co-payments of $3 for generic drugs and $10 to $50 for brand- name prescriptions filled at a Costco warehouse or online pharmacy and (2) co-payments of $15 to $50 for generic or brand-name prescriptions filled at all other pharmacies. A vision program that paid up to $60 for a refrac- tion eye exam (the amount charged at Costco's Optical Centers) and had $175 annual allowances for the purchase of glasses and contact lenses Compensation and Workforce Practices As of September 2017, Costco had 133,000 full- time employees and 98,000 part-time employees. Approximately 15,600 hourly employees at loca- tions in California, Maryland, New Jersey, and New CASE 4 Costco Wholesale in 2018: Mission, Business Model, and Strategy C-29 Express. Executive Members using the new Visa Anywhere card continued to earn a 2 percent rebate on qualified purchases. Costco accepted merchandise returns when members were dissatisfied with their purchases. Losses associated with dishonored checks were minimal because any member whose check had been dishonored was prevented from paying by check or cashing a check at the point of sale until restitution was made. The membership format facilitated strictly controlling the entrances and exits of warehouses, resulting in limited inventory losses of less than two- tenths of 1 percent of net sales-well below those of typical discount retail operations. 19 Warehouse Management Costco warehouse managers were delegated con- siderable authority over store operations. In effect, warehouse managers functioned as entrepreneurs running their own retail operation. They were responsible for coming up with new ideas about what items would sell in their stores, effectively mer- chandising the ever-changing lineup of treasure-hunt products, and orchestrating in-store product loca- tions and displays to maximize sales and quick turn- over. In experimenting with what items to stock and what in-store merchandising techniques to employ, warehouse managers had to know the clientele who patronized their locations-for instance, big-ticket diamonds sold well at some warehouses but not at others. Costco's best managers kept their finger on the pulse of the members who shopped their ware- house location to stay in sync with what would sell well, and they had a flair for creating a certain ele- ment of excitement, hum, and buzz in their ware- houses. Such managers spurred above-average sales volumes-sales at Costco's top-volume warehouses ran about $4 million to $7 million a week, with sales exceeding $1 million on many days. Successful man- agers also thrived on the rat race of running a high- traffic store and solving the inevitable crises of the moment. York, as well as at one warehouse in Virginia, were represented by the International Brotherhood of Teamsters. All remaining employees were non-union. Starting wages for entry-level jobs for new Costco employees were raised to $13.00 to $13.50 in March 2016; hourly pay scales for warehouse jobs ranged from $13 to $24, depending on the type of job. The highest paid full-time warehouse employees could earn about $22.50 per hour after 4 years; com- pensation for a Costco pharmacist reportedly ranged from $45 to over $60 per hour. 18 In 2016, Costco's chief financial officer told The Seattle Times, "About 60 to 65 percent of Costco's employees make top- scale wages, which are in the $23 range." Salaried Costco employees earned anywhere from $30,000 to $125,000 annually.20 For example, salaries for merchandise and department managers reportedly were in the $65,000 to $80,000 range; sal- aries for supervisors ranged from $45,000 to $75,000; salaries for database, computer systems, and soft- ware applications developers/analysts/project man- agers were in the $85,000 to $125,000 range; and salaries for general managers of warehouses ranged from $90,000 to $145,000. Employees enjoyed the full spectrum of benefits. Salaried employees were eligible for benefits on the first of the second month after the date of hire. Full-time hourly employees were eligible for benefits on the first day of the sec- ond month after completing 250 eligible paid hours; part-time hourly employees became benefit-eligible on the first day of the second month after completing 450 eligible paid hours. The benefit package included the following: Health care plans for full-time and part-time employees that included coverage for mental ill- ness, substance abuse, and professional counsel- ing for assorted personal and family issues. A choice of a core dental plan or a premium den- tal plan. A pharmacy plan that entailed (1) co-payments of $3 for generic drugs and $10 to $50 for brand- name prescriptions filled at a Costco warehouse or online pharmacy and (2) co-payments of $15 to $50 for generic or brand-name prescriptions filled at all other pharmacies. A vision program that paid up to $60 for a refrac- tion eye exam (the amount charged at Costco's Optical Centers) and had $175 annual allowances for the purchase of glasses and contact lenses Compensation and Workforce Practices As of September 2017, Costco had 133,000 full- time employees and 98,000 part-time employees. Approximately 15,600 hourly employees at loca- tions in California, Maryland, New Jersey, and New C-30 PART 2 Cases in Crafting and Executing Strategy at Costco Optical Centers. Employees located more than 25 miles from a Costco Optical Center could visit any provider of choice for annual eye exams and could purchase eyeglasses from any in-network source and submit claim forms for reimbursement. A hearing aid benefit of up to $1,750 every four years (available only to employees and their eli- gible dependents enrolled in a Costco medical plan, and the hearing aids had to be supplied at a Costco Hearing Aid Center). A 401(k) plan open to all employees who had com- pleted 90 days of employment. Costco matched hourly employee contributions by 50 cents on the dollar for the first $1,000 annually (the maximum company match was $500 per year). The com- pany's union employees on the West Coast quali- fied for matching contributions of 50 cents on the dollar up to a maximum company match of $250 a year. In addition to the matching contribution, Costco also normally made a discretionary contri- bution to the accounts of eligible employees based on the number of years of service with the com- pany (or in the case of union employees based on the straight-time hours worked). For other than union employees, this discretionary contribution was a percentage of the employee's compensation that ranged from a low of 3 percent (for employees with 1 to 3 years of service) to a high of 9 percent (for employees with 25 or more years of service). Company contributions to employee 410(k) plans were $436 million in fiscal 2014, $454 million in fiscal 2015, $489 million in 2016, and $543 million in 2017. A dependent care reimbursement plan in which Costco employees whose families qualified could pay for day care for children under 13 or adult day care with pretax dollars and realize savings of any. where from $750 to $2,000 per year. Long-term and short-term disability coverage. Generous life insurance and accidental death and dismemberment coverage, with benefits based on years of service and whether the employee worked full-time or part-time. Employees could elect to purchase supplemental coverage for themselves, their spouses, or their children. An employee stock purchase plan allowing all employees to buy Costco stock via payroll deduc- tion so as to avoid commissions and fees. Although Costco's longstanding practice of pay- ing good wages and good benefits was contrary to conventional wisdom in discount retailing, co-founder and former CEO Jim Sinegal, who originated the prac- tice, firmly believed that having a well-compensated workforce was very important to executing Costco's strategy successfully. He said, Imagine that you have 120,000 loyal ambassadors out there who are con- stantly saying good things about Costco. It has to be a significant advantage for you. ... Paying good wages and keeping your people working with you is very good business."21 When a reporter asked him about why Costco treated its workers so well compared to other retailers (particularly Walmart, which paid lower wages and had a skimpier benefits package), Sinegal replied: "Why shouldn't employees have the right to good wages and good careers.... It absolutely makes good business sense. Most people agree that we're the lowest-cost producer. Yet we pay the highest wages. So it must mean we get better productivity. Its axiomatic in our business-you get what you pay for."22 Good wages and benefits were said to be why employee turnover at Costco typically ran under 6 to 7 percent after the first year of employment. Some Costco employees had been with the company since its founding in 1983. Many others had started work- ing part-time at Costco while in high school or col- lege and opted to make a career at the company. One Costco employee told an ABC 20/20 reporter, It's a good place to work; they take good care of us."23 A Costco vice president and head baker said work- ing for Costco was a family affair: "My whole fam- ily works for Costco, my husband does, my daughter does, my new son-in-law does.24 Another employee, a receiving clerk who made about $40,000 a year, said, "I want to retire here. I love it here." 25 An employee with over two years of service could not be fired with- out the approval of a senior company officer. Selecting People for Open Positions Costco's top management wanted employees to feel that they could have a long career at Costco. It was company policy to fill the vast majority of its higher-level openings by promotions from within; at one recent point, the percentage ran close to 98 percent, which meant that the majority of Costco's manage