Strategic+Recommendations+and+Action+Plan

Strategic Recommendations and Action Plan:

Notes: Look at employee pay


 * Best Scenario (25% chance):** increase sales, more customer service


 * Worst Scenario (25% chance):** save on cost, cost leader


 * Most Likley Scenario (50% chance):** economic conditions stay the same. take a second look at projects.

OR

Do a major strategy that will work in all three scenarios. **Strategic Recommendations** When looking towards the next 2 to 5 years, Costco must make sure that it understands where the industry is heading. Based on the external environment and industry analysis conducted above, Costco must make sure that it can cut costs as much as possible. (Add other recommendations to this intro as they come) As mentioned above in the Key Success Factors, the most successful company within the discount, variety stores industry is a company that is able to keep prices low. Customers have very low switching costs; therefore, Costco needs to constantly remain on its toes in order to compete and sustain its position in the industry. Because Costco needs to maintain very low prices, a lot of pressure is put on the profit margin of the company. In the past, Costco has kept relatively low profit margin levels versus other competitors within the industry. Table 3 below compares Costco’s average profit margin to that of its competitors over the past ten years.

**Table 3**
 * **Costco Profit Margin** || **Walmart Profit Margin** || **Target Profit Margin** || **BJ Profit Margin** ||
 * 13.16% || 23.79% || 32.73% || 11.94% ||

Costco’s profit margin above is significantly less than Walmart’s and Target’s. This shows that either Costco is trying to compete with the other competitors too severely and jeopardizing profits or they have large costs. In order to increase its profit margin and remain a viable player in this industry, it is strongly recommended that Costco finds a way to decrease costs while maintaining low prices.

 One way for Costco to cut their cost would be in their wages. "From the perspective of investors, Costco's benefits are overly generous," says Bill Dreher, retailing analyst with Deutsche Bank Securities Inc. "Public companies need to care for shareholders first. Costco runs its business like it is a private company. (Zimmerman)" Costco’s generous wages and benefits to their employees are one of the reasons for their below industry average profit margins. One of our recommendations would be for Costco to reduce the amount of employees’ health-insurance premiums they pay by at least 6%. Costco in 2004 paid about 92% of their employees’ health-insurance premiums compared to the top U.S. companies paying on average 80% (Zimmerman). By cutting the amount Costco pays for their employees’ insurance premiums by at least 6%, Costco will still be above average compared to the top U.S. companies and still be semi-generous to employees while at the same time increasing their profits margin.

One thing that has been hurting Costco and many other retailers has been the inflation cost on food. There has been a rise in cost for many of the products that Costco carries, and the company has been having a hard time passing those cost increases to their customers. This is because the costs of their products are rising to fast not giving them enough time to pass the increase to consumers. “ Consumers have felt the pinch of rising prices, but Costco and other retailers have often resisted passing along all their cost increases to avoid losing sales to rivals (McWilliams ) ”. Costco is stuck in a corner with the rising cost of their products, because if they choose to raise prices they face the threat of losing customers and if they decide to keep prices the same they are losing profits and increasing cost. Our recommendation would be for Costco to raise prices slightly below their competitors. This is a economic condition that many retailers are facing and in order for them to survive they must increase prices as well. With the belief that many retailers are going to raise their prices as well, Costco should do the same. The price increases should be proportionate to how much the cost is rising for the product but to also try to keep the price within the 14% markup that Costco has compared to their competitors. This in turn will keep cost for Costco under control while keeping customers and still being a price competitor.

(This is kind of a general strategy if we believe inflation is prominent) With the current economic times and massive Government spending any company needs to financially and strategically place themselves for success in the future. Simple economics tells us that with huge amounts of spending and Government debt comes inflation. This is a viable outlook for the economy and to place oneself to benefit during inflationary times one needs to increase debt. Costco should do as the Government does and issued debt, take out loans, or do whatever it takes to increase the amount of debt on their balance sheet. Then during the inflationary times Costco will be able to repay that debt with a cheaper dollar instead of having their asset purchasing power devalued.