Industry Analysis Part A

B.

Task Environment Audit (Industry and Competitors) 1. INDUSTRY Analysis - GLOBAL a. Description of each Industry/segment including Market Share Analysis Costco is identified as a major player in the Warehouse Clubs & Supercenter industry along with Sam’s Club and BJ’s Wholesale. According to NAICS, this industry specified with code 452910, “comprises establishments known as warehouse clubs, superstores or supercenters primarily engaged in retailing a general line of groceries in combination with general lines of new merchandise, such as apparel, furniture, and appliances..” The breakdown of the Warehouse Club and Supercenter industry from the parent industry of Retail Trade is as follows:

Industry NAICS Detail

Code 44-45 452 4529 45291 452910

# of Description Retail Trade General Merchandise Stores Other General Merchandise Stores Warehouse Clubs & Supercenters Warehouse Clubs & Supercenters

Estab.

Sales

1,114,637 40,723

3,056,421,99 7 445,224,985

31,368 2,912 2,912

224,482,103 191,252,396 191,252,396

% of Estab .

% Sale s

3.7%

14.6%

2.8% 0.3%

7.3% 6.3%

% Estab.

% Sales

GM

GM

77.0% 7.2%

Although Warehouse Clubs & Supercenters (WC&S) only make up .3% of the retail trade industry in terms of number of establishments, this industry earns only 1% less than other general merchandise stores in terms of sales. If the WC&S industry is compared to General Merchandise Stores, it pulls in 43% of the industry’s sales with only 7.2% of the industries establishments running with a WC&S classification. According to Hoover’s Online, warehouse clubs are seeing customer membership at an all-time high. While annual membership fees range from $40-100, Costco’s offers its memberships from $45-60. • Source: US Census Bureau. – Industry Statistics Sampler The supermarket industry lost market share to such warehouse clubs and supercenters. Currently in North America, supercenter Wal-Mart has achieved the number one spot of top 10 Mass Market Retailers, with Costco coming in at number 3. On the global scale, Costco is the seventh largest food retailer. In regard to the warehouse industry, Costco rivals both Sam’s Club and BJ’s for the number 1 spot. KEY COMPANIES Top 10 Mass Market Retailers (North America) (Annual Sales)

1. Wal-Mart 2. Kroger 3. Costco Wholesale 4. Target 5. Walgreen 6. CVS/Caremark 7. Albertsons 8. Safeway 9. Ahold USA 10. Loblaw

50% 43%

Source: Mass Market Retailers, August 2006 Top 10 Worldwide Food Retailers (Annual Sales)

1. Wal-Mart 2. Carrefour 3. Tesco 4. METRO AG 5. Kroger 6. Royal Ahold 7. Costco Wholesale 8. REWE-Zentral 9. Lidl 10. ALDI Source: Supermarket News 2006 Top 5 US Warehouse Clubs (Annual Sales)

1. 2. 3. 4. 5.

Costco Wholesale SAM'S CLUB BJ's Wholesale Club Smart & Final PriceSmart

Source: Hoover's, Inc.

b. c.

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Financial Performance of each Industry/segment - Past, Present, and Future Overall assessment of the competitive nature of each industry using Porter’s model

Business/Product Segments – Food • Fresh & dry • Packaged – Sundries • Snacks • Beverages • Health and Beauty Care • Tobacco – Hardlines • Major appliances • Electronics • Office supplies • Auto supplies – Softlines

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• • • • Other • • •

Apparel Books Cameras Jewelry Pharmacy Optical Gas stations

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Geographic Segments – U.S. – Canada – U.K. – Taiwan – Mexico – Japan – South Korea

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Customer Segments – home market; business market; online market

•

Market Segments = Wholesale Club & Supercenter Industry

Threat of Entry - Absolute Cost Advantage - Economies of Scale – High The three players in the industry have extremely large stores A unique experience, high sales with lower SKUs than traditional Supermarkets. Rapid inventory turnover. Low labor costs. Appendix Consumers have different expectations when shopping at warehouse clubs, thereby creating a unique experience which separates these retailers from competitors in other channels. Warehouse clubs appeal to consumers’ sense of value and the convenience of stocking up on certain items. A typical supermarket will stock 30,00052,000 SKUs. Supercenters normally stock up to 125,000 SKUs. Warehouse clubs by contrast typically carry 4,000 SKUs. - Brand Identity – High Membership increases each year Wide array of products offered

Even though they carry fewer SKUs, the large number of product categories covered means that warehouse clubs face a wide array of competitors ranging from drug stores to florists. - Access to Distribution - Switching Costs - Government Policy Degree of Rivalry - Number of competitors – Low There are three main players in this industry: Costco, Sam’s Club and BJ’s - Industry Growth - Moderate Industry growth of 7.3% is below Market Median of 11.35 Same store growth does not show consistency Location growth has risen to 32% Store closings is rare Appendix – Source Mintel: Warehouse Club Buying, 2005 Tracking of same store sales shows that growth in the market is varied from month to month and does not display a consistent trend. In December 2004, sales increased a combined 7.3%, however, earlier growth in April 2004 was much higher. In that month, Costco, BJ’s Wholesale and SAM’S CLUB posted 16%, 12.1% and 11.8% gains respectively. Overall, membership revenues—which are excluded in market size data—represent only a small share of total revenue, approximately 2-3% on average. Over the review period, Costco’s membership fees as a share of net sales were 1.9-2.0%. Similarly, SAM’S CLUB’s ranged from 2.5-2.7%. This indicates that membership revenues are driven, in large part, by new store openings and by same store sales increases, to lesser degree. In terms of warehouse club locations, the market has grown 32% over the review period. Overall, 41 new warehouse clubs were added in the U.S. in 2004, following growth by 50 stores in 2003. Note that warehouse club locations is computed as the net value of store opening minus store closings over the year. However, store closings in the U.S. are relatively infrequent with only a few closings among the three industry leaders in recent years.

- Asset Intensity - High Industry ROA of 4.7% exceeds the Market Median of 1.5% - Product Differentiation - High Warehouse Clubs offer high value to customers in unique bulk sizes. High appeal for small businesses. Differentiation exists between the three players Appendix

Despite the companies’ similarities, there is a great deal of differentiation among the top three warehouse clubs, both in terms of performance and strategic execution. This differentiation exists in multiple areas, including SKU assortment, customer segments targeted, distribution capabilities and manufacturers partnered with. –

Exit Barriers – Low The retail industry can easily apply inventory to other locations or liquidate.

Threat of Substitution - Functional Similarity – Low Warehouse clubs are hard to replicate because of the low cost shopping experience for customers coupled with high value. 60% of warehouse club customers agree that channel is the most time efficient . New products are common – exciting for customers Increased use of ecommerce Appendix: By offering a convenient, low cost shopping environment to consumers, warehouse clubs provide a value to consumers that is not replicated in other channels. As such, across the three main competitors, consumer satisfaction and member retention are high. Mintel’s exclusive consumer research indicate that 80% of warehouse club respondent shoppers agree that clubs provide an enjoyable shopping experience, while 60% of warehouse club respondent shoppers agree that these retailers provide the most time efficient way to shop. Furthermore, by rapidly turning inventory, expanding selections, and stocking new items quickly, warehouse clubs are among the most responsive merchandising channels, which attracts consumers because there is always something new. This ability will remain one of the key features to differentiate warehouse clubs from other retail channels. The online retail channel is one of the most rapidly expanding markets. The following figure details retail ecommerce sale sin the U.S. from 1999 through 2004. - Price/Performance Trend - Product Identity – High 65% of BJ’s sales came from their private label in 2004. Private label brand items are heavily featured because of the undulating SKUs carried Because of the vast differences in the number of SKUs carried, warehouse clubs typically limit selection to items that are brand name leaders within their respective category or to staple products in which private label brands can compete.