please read the case and answer the following question::

1)what are the Alain Passard's resources and capabilities?Are they competitively valuable?? How and why ,,What particular resource bundies are so important for Passard and L'Arpge??

Five years after being appointed as Costco Whole- sales president and chief executive officer (CEO), Craig Jelinek had demonstrated the ability to enhance the companys standing as one of the worlds biggest and best consumer goods merchandisers. His prede- cessor, Jim Sinegal, co-founder and CEO of Costco Wholesale from 1983 until year-end 2011, had been the driving force behind Costcos 29-year evolution from a startup entrepreneurial venture into the third largest retailer in the United States, the seventh larg- est 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 Costcos growth from annual revenues of $89 billion and 598 membership warehouses at year-end fiscal 2011 to annual revenues of $119 billion and 715 membership warehouses at year-end fiscal 2016. Going into 2017, Costco ranked as the second largest retailer in both the United States and the world (behind Walmart).

Company Background

The membership warehouse concept was pioneered by discount merchandising sage Sol Price, who opened the first Price Club in a converted airplane hangar on Morena Boulevard in San Diego in 1976. Price Club lost $750,000 in its first year of operation, but by 1979 it had two stores, 900 employees, 200,000 members, and a $1 million profit. Years earlier, Sol Price had experimented with discount retailing at a San Diego store called Fed-Mart. Jim Sinegal got his

start in retailing at the age of 18, loading mattresses for $1.25 an hour at Fed-Mart while attending San Diego Community College. When Sol Price sold Fed- Mart, Sinegal left with Price to help him start the San Diego Price Club store; within a few years, Sol Prices Price Club emerged as the unchallenged leader in member warehouse retailing, with stores operating primarily on the West Coast.

Although Price originally conceived Price Club as a place where small local businesses could obtain needed merchandise at economical prices, he soon concluded that his fledgling operation could achieve far greater sales volumes and gain buying clout with suppliers by also granting membership to individuals a conclusion that launched the deep-discount ware- house club industry on a steep growth curve.

When Sinegal was 26, Sol Price made him the manager of the original San Diego store, which had become unprofitable. Price saw that Sinegal had a special knack for discount retailing and for spotting what a store was doing wrong (usually either not being in the right merchandise categories or not sell- ing items at the right price points)the very things that Sol Price was good at and that were at the root of Price Clubs growing success in the marketplace. Sinegal soon got the San Diego store back into the black. Over the next several years, Sinegal continued to build his prowess and talents for discount merchan- dising. He mirrored Sol Prices attention to detail and absorbed all the nuances and subtleties of his men- tors style of operatingconstantly improving store

Copyright 2018 by Arthur A. Thompson Jr. All rights reserved.

ARTHUR A. THOMPSON JR. The University of Alabama

case

operations, 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 (now chairman of Costcos board of directors) founded Costco, and the first Costco store began operations in Seattle in 1983the same year that Walmart launched its warehouse membership for- mat, Sams 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 pub- lic company, selling shares to the public and raising additional 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 Costcos chairman since the companys founding, became vice chairman of PriceCostco in 1993 and was elevated to chairman of the companys board of directors in December 1994, a position he continued to hold 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 Washing- ton in August 1999, the name was changed to Costco Wholesale Corporation. The companys headquarters was in Issaquah, Washington, not far from Seattle.

Jim Sinegals 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 customers calling and they have a gripe, dont you think they kind of enjoy the fact that I picked up the phone and talked to them?1

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 Jims 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: Were going to be a company thats 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.3 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 man- ager, Sinegal was very much the person-in-charge. He functioned as producer, director, and knowledge- able 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 merchandising displays or the position of certain products in the stores, commenting on any aspect of store operations 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 tremendous mer- chandising savvy, demanded much of store manag- ers and employees, and definitely set the tone for how the company operated its discounted retailing business. Knowledgeable observers regarded Jim Sin- egals merchandising expertise as being on a par with Walmarts legendary founder, Sam Walton.

In September 2011, at the age of 75, Jim Sinegal informed Costcos Board of Directors of his intention to step down as CEO of the company effective Janu- ary 2012. The board elected Craig Jelinek, president and chief operating officer since February 2010, to succeed 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 companys first warehouse managers in 1984. He had served in every major role related to Costcos business opera- tions and merchandising activities during his tenure.

Case 2 Costco Wholesale in 2017: Mission, Business Model, and Strategy 239

240 Part 2 Cases in Crafting and Executing Strategy

When he stepped down as CEO, Sinegal retained his position on the companys Board of Directors and, at the age of 79, was re-elected to another three-year term on Costcos board in December 2015.

Costco Wholesale in 2016

In June 2017, Costco was operating 732 membership warehouses, including 510 in the United States and Puerto Rico, 95 in Canada, 37 in Mexico, 28 in the United Kingdom, 25 in Japan, 13 in South Korea, 13 in Taiwan, eight in Australia, two in Spain, and one in Iceland. Costco also sold merchandise to members at websites in the United States, Canada, the United Kingdom, Mexico, South Korea, and Tai- wan. Almost 89 million cardholders were entitled to shop at Costco as of June 2017; in fiscal year 2016,

EXHIBIT 1

Selected Income Statement Data

Net sales Membership fees

Totalrevenue Operating expenses

Merchandisecosts

Selling, general, and administrative Preopeningexpenses

Provision for impaired assets

and store closing costs Operating income

Other income (expense)

Interest expense

Interest income and other Income before income taxes Provision for income taxes Net income

Diluted net income per share Dividends per share (not including spe-

cial dividend of $5.00 in 2015 and

$7.00 in 2013)

Millions of shares used in per share

calculations

Balance Sheet Data

Cash and cash equivalents

membership fees generated over $2.6 billion in rev- enues for the company. Annual sales per store aver- aged about $162 million ($3.1 million per week) in 2016, some 86 percent higher than the $86.9 mil- lion per year and $1.7 million per week averages for Sams Club, Costcos chief competitor. In 2014, 165 of Costcos warehouses generated sales exceeding $200 million annually, up from 56 in 2010; and 60 warehouses had sales exceeding $250 million, includ- ing two 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.

Exhibit 1 contains a financial and operating sum- mary for Costco for fiscal years 2000, 2005, 2011, and from 2013 through 2016.

Selected Financial and Operating Data for Costco Wholesale Corp., Fiscal Years 2000, 2005, 2011, and 20132016 ($ in millions, except for per share data)

Fiscal Years Ending on Sunday Closest to August 31

2016

$116,073 2,646 118,719

102,901 12,068 78

3,672

(133) 80 3,619 1,243 2,350 5.33

1.70 441.3 3,379

2015

$113,666 2,533 116,199

101,065 11,445 65

3,624

(124) 104 3,604 1,195 2,377 5.37

1.51 442.7 4,801

2014

$110,212 2,428 112,640

98,458 10,899 63

3,220

(113) 90 3,197 1,109 2,058 4.65

1.33 442.5 5,738

2013

$102,870 2,286 105,156

91,948 10,104 51

3,053

(99) 97 3,051 990 2,039 4.63

1.17 440.5 4,644

2011

$87,048 1,867 88,915

77,739 8,682 46

9 2,439

(116) 60 2,383 841 1,462 3.30

0.89 443.1 4,009

2005

$51,862 1,073 52,935

2000

$31,621 544 32,164

28,322 53 42

16 7 1,474 1,037

(34) (39) 109 54 1,549 1,052 486 421 1,063 $ 631 2.18 $ 1.35

46,347

5,044 2,755

$ $

$

$

$ $

$

$

$ $

$

$

$ $

$

$

$ $

$

$

$ $

$ 0.43 492.0 $ 2,063

0.00 475.7 $ 525

Case 2

Costco Wholesale in 2017: Mission, Business Model, and Strategy 241

Fiscal Years Ending on Sunday Closest to August 31

Selected Income Statement Data

Merchandise inventories Current assets

Current liabilities

Net property and equipment Total assets

Long-term debt

Stockholders equity

Cash Flow Data

Net cash provided by operating activities Warehouse Operations

Warehouses at beginning of yeara New warehouses opened (including

2016

8,969 15,218 15,575 17,043 33,163

4,061 12,079

$3,292

686

2015 2014

8,908 8,456

2013 2011 2005 2000

relocations) 33

17,299 16,540 15,401 33,440

4,864 10,843

$4,285 663

26

(3) 686

$165.7 7%

7,100 34,000

40,200 81,300

17,588 14,412 14,830 33,024

5,093 12,515

$3,984 634

30

(1) 663

$164.0 6%

6,900 31,600

37,900 76,400

15,840 13,257 13,881 30,283

4,998 11,012

$3,437 608

26

0 634

$162.0 6%

6,600 28,900

35,700 71,200

13,706 12,050 12,432 26,761

2,153 12,573

$3,198 572

24

(4) 592

$147.1 10%

6,300 25,000

32,700 64,000

Existing warehouses closed (including relocations)

Warehouses at end of year

Net sales per warehouse open at year-

end (in millions)b

Average annual growth at warehouses

open more than a year

Members at year-end

Businesses (000s)

Gold Star members (000s)

Add-on cardholders (employees of busi-

ness members, spouses of Gold Star

members) Total cardholders

(4) 715

$161.0 4%

7,300 36,800

42,600 86,700

7,894 6,638

4,015 8,238 6,761 7,790

16,514 711 8,881

$1,773 417

21

(5) 433

$119.8 7%

5,000 16,200

n.a.

2,490 3,470 3,404 4,834 8,634

790 4,240

$1,070 292 25

(4) 313

$101.0 11%

4,200 10,500

n.a.

a Prior to 2011, the companys warehouses30 of which were opened in 2007 and two others in 20082009were consolidated and reported as part of Costcos total operations at the beginning of fiscal 2011.

b Sales for new warehouses opened during the year are annualized.

Note: Some totals may not add due to rounding and the fact that some line items in the companys statement of income were not included in this summary, for reasons of simplicity.

Sources: Company 10-K reports for fiscal years 2000, 2005, 2011, 2013, 2015, and 2016.

Costcos Mission, Business Model, and Strategy

Numerous company documents stated that Costcos mission in the membership warehouse business was: To continually provide our members with quality

5 goods and services at the lowest possible prices. How-

ever, in their Letter to Shareholders in the companys 2011 Annual Report, Costcos three top executives Jeff Brotman, Jim Sinegal, and Craig Jelinekprovided a more expansive view of Costcos mission, stating:

The company will continue to pursue its mission of bringing the highest quality goods and services to market at the lowest possible prices while pro- viding excellent customer service and adhering to a strict code of ethics that includes taking care of our employees and members, respecting our sup- pliers, rewarding our shareholders, and seeking to be responsible corporate citizens and environmen- tal stewards in our operations around the world.6

The centerpiece of Costcos business model entailed generating high sales volumes and rapid inventory turn- over by offering fee-paying members attractively low

242 Part 2 Cases in Crafting and Executing Strategy

prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories. 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 facilitiesenabled 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 Costcos business model because they provided sufficient supplemental rev- enues to boost the companys overall profitability to acceptable levels. Indeed, it was common for Costcos membership fees to exceed its entire net income, meaning that the rest of Costcos worldwide busi- ness operated on a slightly below breakeven basis (see Exhibit 1)which translated into Costcos prices being exceptionally competitive when compared to the prices that Costco members paid when shopping elsewhere.

A second important business model element was that Costcos 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 facili- tate timely payment of suppliers.

Costcos Strategy

The key elements of Costcos strategy were ultra- low prices, a limited selection of nationally branded and private-label products, a treasure hunt shop- ping environment, strong emphasis on low operating costs, and ongoing expansion of its geographic net- work of store locations.

Pricing Costcos philosophy was to keep custom- ers coming in to shop by wowing them with low prices and thereby generating big sales volumes. Examples of Costcos 2015 sales volumes that contributed to low prices in particular product categories included

156,000 carats of diamonds, meat sales of $6.4 billion, seafood sales of $1.3 billion, television sales of $1.8 bil- lion, fresh produce sales of $5.8 billion (sourced from 44 countries), 83 million rotisserie chickens, 7.9 mil- lion tires, 41 million prescriptions, 6 million pairs of glasses, and 128 million hot dog/soda pop combina- tions. Costco was the worlds largest seller of fine wines ($965 million out of total 2015 wine sales of $1.7 billion).

For many years, a key element of Costcos pric- ing strategy had been to cap its markup on brand- name merchandise at 14 percent (compared to 20- to 50-percent markups at other discounters and many supermarkets). Markups on Costcos private- label Kirkland Signature items were a maximum of 15 percent, but the sometimes fractionally higher markups still resulted in Kirkland Signature items being priced about 20 percent below comparable name-brand items. Kirkland Signature products which included vitamins, juice, bottled water, cof- fee, 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 clothingwere designed to be of equal or better quality than national brands.

As a result of these low markups, Costcos prices were just fractionally above breakeven levels, pro- ducing net sales revenues (not counting member- ship fees) that exceeded all operating expenses (merchandise costs + selling, general, and admin- istrative expenses + preopening expenses and store relocation expenses) and contributed only several million dollars to operating profits. As can be veri- fied from Exhibit 1, without the revenues from mem- bership fees, Costcos net income after taxes would be minuscule because of its ultra-low pricing strat- egy and practice of capping the margins on branded goods at 14 percent and private-label goods at 15 percent.

Jim Sinegal explained the companys approach to pricing:

We always look to see how much of a gulf we can create between ourselves and the competition. So that the competitors eventually say, These guys are crazy. Well compete somewhere else. Some years ago, we were selling 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.7

At another time, he said:

Were very good merchants, and we offer value. The traditional retailer will say: Im selling this for $10. I wonder whether we can get $10.50 or $11. We say: Were selling this for $9. How do we get it down to $8? We understand that our members dont 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.8

Indeed, Costcos markups and prices were so frac- tionally 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.9 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. Were trying to build an organization thats going to be here 50 years from now.10 He went on to explain why Costcos 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 dont want to be one of the casualties. We dont want to turn around and say, We got so fancy weve raised our prices, and all of a sudden a new competitor comes in and beats our prices.11

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, Costcos merchandising strategy was to provide members with a selection of approximately 3,700 active items that could be priced at bargain levels and thus provide members with significant cost savings. Of these, about 80 percent were quality brand-name products

and 20 percent carried the companys private-label Kirkland Signature brand, which were a growing percentage (over 20 percent) of merchandise sales. The Kirkland Signature label appeared on every- thing from mens dress shirts to laundry detergent, pet food to toilet paper, canned foods to cookware, olive oil to beer, automotive products to health and beauty aids. According to Craig Jelinek, The work- ing rule followed by Costco buyers is that all Kirk- land 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 Kirk- land Signature selections and gradually build sales penetration of Kirkland-branded items to 30 percent of total sales. Costco executives in charge of sourc- ing Kirkland Signature products constantly looked for ways to make all Kirkland Signature items better than their brand name counterparts 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 Kirk- land Signature products at prices substantially lower than name brand products.

Costcos product range covered a broad spectrum rotisserie chicken, all types of fresh meats, seafood, fresh and canned fruits and vegetables, paper prod- ucts, cereals, coffee, dairy products, cheeses, frozen foods, flat-screen televisions, iPods, digital cameras, 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 toothbrushes, vitamins, and washers and dryersbut the selection in each product category was deliber- ately 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 quan- tities. In a few instances, the selection within a prod- uct category was restricted to a single offering. For example, Costco stocked only a 325-count bottle of Advila 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

Case 2 Costco Wholesale in 2017: Mission, Business Model, and Strategy 243

244 Part 2 Cases in Crafting and Executing Strategy

EXHIBIT 2

Food (fresh produce, meats and fish, bakery and deli products, and dry and institution- ally 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 sup- plies, 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)

36% 36% 21% 21% 16% 16% 12% 11% 15% 16%

33% 30% 23% 25% 18% 20% 10% 12% 16% 13%

Costcos Sales by Major Product Category, Selected Years 20052016

2016 2015 2010 2005

Source: Company 10-K reports, 2005, 2011, and 2016.

just have one size? Maybe one or two. We refer to that as the intelligent loss of sales. We are pre- pared 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 cant go on selling at these margins if you are not.12

The approximate percentage 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 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:

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 Costcos stations). Almost all new Costco locations in the United States and Canada were open- ing with gas stations; globally, gas stations were being added at locations where local regulations and space permitted.

Total number of warehouses Warehouses having stores with Food Court

One-Hour Photo Centers Optical Dispensing Centers Pharmacies

Gas Stations Hearing Aid Centers

2015 2010 2007

686 540 488

680 534 482 656 530 480 662 523 472 606 480 429 472 343 279 581 357 237

While Costcos product line consisted of approximately 3,700 active items, some 20 to 25 percent of its product offer- ings were constantly changing. Costcos merchan- dise buyers were continuously making one-time purchases of items that would appeal to the com- panys clientele and likely sell out quickly. A sizable number of these items were high-end or name-brand products that carried big price tagslike $1,000 to $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, cashmere sport coats, $1,500 digital pianos, and Dom Perignon cham- pagne. Dozens of featured specials came and went quickly, sometimes in several days or a weeklike Italian-made Hathaway shirts priced at $29.99 and $800 leather sectional sofas. The strategy was to entice shoppers to spend more