Problem
Case Study: Retail giant Costco opens its first New Zealand store
The wait is over for the highly anticipated retail giant Costco. Kiwi members of the US-based retailer are able to get their hands on wholesale-priced items at the first New Zealand (NZ) Coastco store in Westgate, Auckland,
The store sells a wide range of goods including food and grocery items, clothing, electronics, furniture and more. It also has services which include a food court, pharmacy, optometrist, audiologists, tire service centre and a petrol station.
The $100 million store, which is famous for its bulk groceries, was initially planned to open in mid-August 2022 but shipping, weather and COVID-19-related delays kept the doors shut an extra month, which was costly for the retail giant.
Earlier in the year, thousands of Kiwis queued up for the $60 annual membership, with the Cosco NZ fan page on Facebook boosting over 75,000 members.
Costco Australasia managing director Patrick Noone describes the wholesale store giant as a department store inside a hardware store.
"We have no frills. It's got a concrete floor, and open ceiling lighting but the merchandise is what makes the excitement."
The appeal to Costco is lower prices than traditional supermarkets, with research showing the club store prices can be 22.5 percent lower. This is largely due to Costco buying in bulk, allowing the store to pass its savings down to customers.
However, the shopping experience also encourages consumers to bulk-buy, with packaging sizes often a lot larger than traditional supermarkets - meaning fewer trips to the shops.
"We are very excited about coming there because there's only really a duopoly in the market place and then we could offer a third leg to that competition."
"The sooner we established here in Auckland the quicker we can roll out other stores. I think the two major centres for us would be Christchurch in the South Island and then Wellington in the North Island. Within a year or two, I would think if everything goes well" said Patrick Noone, emphasising that the store, which is famous for its bulk groceries, is likely to experience another flock of eager NZers on yet another opening day.
The Business Model
Costco is the cost leader of its industry. The business thrives on selling products that are cheaper than what you can find anywhere else. However, Costco does not cut prices at the expense of quality, customer service and profitability to gain market share, but through cost optimization and economies of scale, passing down savings to their members in the form of lower prices. The wholesaler has also gone from a lonely warehouse down in Seattle in 1983 to 803 locations worldwide.
"There are about 800 Costcos in the world so it's a simple, replicated business model" said Patrrrick Noone.
Costco has a powerful strategy in place that widens their cost advantage as they grow. Members shop frequently at Costco to recoup their membership fees from the savings they get. The increase in demand, in turn, drives the wholesaler (Costco) to expand its presence and purchase more goods from suppliers. From there, they will gain an economy of scale and lower their prices, and the cycle repeats.
Costco's emphasis is on selling only inventory that have high sales volume and rapid turnover, which helps to minimise the stockkeeping units in their warehouse. Having high volumes of sales gives Costco the upper hand when negotiating volume discounts with suppliers. Furthermore, since Costco's inventory flies off the shelves - with a typical cash conversion cycle of no more than 6.7 days, the wholesaler can take advantage of early payment discounts.
To get the best prices, Costco cuts out the middleperson and purchases directly from the source. Goods are delivered straight to their Costco stores within 24 hours. Everything is stored in their no-frills stores/warehouses, each literally 140,000 square feet of space filled with towering shelves. Costco uses the bottom racks for retail and stores excess inventory above, pretty much like what you see at other retail giants like IKEA.
Task
1) Phase: System Configuration SAP Enterprise/Organisational Elements.
2) How many Company Codes would you recommend Costco Australasia configure? Justify your answer according to the case.
3) For New Zealand only, how many Sales Organisations would you recommend Costco Australasia configure? Justify your answer according to the case.
4) For New Zealand only, how many Plants would you recommend Costco Australasia configure? Justify your answer according to the case.