Palmers Limited Case Study
Costs they overlook the quality. While BC tries to look pretty to their customer, Cost pay less attention to their look and more to provide the lowest prices for their members.
From 1997 to 2001, Wall-Mart store numbers were increased by 53, Bi’s stores went up by 50, but Cost went up by 91 . Cost’s business strategy is very simple, “To generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories” (Thompson, 2008) .
They have able to Implement this strategy very successfully. They have also been very successful in making their customer believe that product is a better quality than their competitors, interestingly their competitors in most cases don’t carry the same kind of product. Cost’s marketing strategy Is simple yet effective, the Idea of providing the lowest price and good quality product is a strategy to be reckon with.
Plus there marketing idea of “Treasure Hunt” has allowed them to saved tons of money from broad advertisement.
After a membership base is established In an area, most new memberships came from word of mouth. This simple marketing and advertisement strategy has allowed Cost to keep its marketing expenses low relative to those at typical retailers, discounter, and supermarkets. Cost Is also known for Its price strategy. They have become a master In providing top quality products even including some brand products at the lowest price possible to their customers.
Instead of marking up their cap to 20 or 50 percent like their competitors they decided to cap their mark up to only 14 percent, which Gel a key element In Cost’s pricing strategy. This also Indicates that Cost Is trying to do what it takes to please their customer to increase their profits so they can make their shareholders happy at same time. It’s this price strategy that has allows Cost to only only make profit over the year, but increase their member to $110. Cost’s product selection strategy Is also very Impressive. Unlike their competitor who carry from where from 40000 to 1 50000 SKU items , Cost decided to selecting 1 OFF Ana prove only auto mess I nee last Includes everyday Items sun as kitchen supplies, Electronics, health and beauty products, automotive supplies, gasoline, games, cleaning supplies, canned goods, Food.
They categories their product in commercial and professional use. Plus, Cost’s treasure hunt merchandising strategy is also an attention grabber. Out of the 4000 items on the floor about 1000 were the treasure hunt product, meaning their prices with constantly changing.
In most cases these were higher end products like furniture and TV. Cost’s growth strategy is also quite remarkable.
On average they have been opening about 20 to 25 new stores each year. Most of them in American but some internationally as well including; Canada, Korea, I-J, Japan, Canada, and Mexico. In recent year they experimented by opening independent Furniture store to sell high end bigger furniture items which resulted in good success. Later rather than opening more stores they instead added extra space about 45000 square feet to the Cost it self and called it Cost Home.
Now the furniture category has become on of the tope 5 selling items on Cost’s website.
They are very innovative when it comes to their warehouse and management strategy. Cost’s CEO, Jim Senegal, quoted, “Cost is able to offer lower prices and deter 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 dramatic savings to our members”. They stored the inventory on racks above the items being sold in the warehouse. That reduced their labor cost and saved them a lot time on handling and stocking.
They treat their manager as entrepreneur and allows them to decide what item should be sold in their store. They doddered most of the inventory directly from the manufactures. It either came directly to the store or went to their distribution center called crosschecking depots. The point of these depots were to reduce the transportation cost by making sure all truck are full when they come the store.
As an investor I wouldn’t would want to invest in a company that has a good reputation, consistently growing, good sustainable growth, and good future plans. Let’s talk about sustainable growth rate, which basically means that a firm can grow while keeping its profitability and financial policies unchanged.
Sustainable growth model allows us to segregate reasons or changes that have led as a company to substantial growth so at the same time we can segregate the causes for those change. It is represented in four steps.
In real life every company has to deal with changes in return on equity every once in a while and give out some portion of earnings to investors. Cost’s assets to equity ratio has slightly gone down in recent years which is very uncommon. At the same time Wall-Marts asset to equity ratio is very irregular and it’s very difficult to forecast future investment decisions. I also that their operating margins are low, which could be because of the 14% cap strategy.
Which is the price they pay to keep the prices low.
Then I noticed that Cost’s asset turnover has decrease in recent year. However their rats are still way higher compared to Sears, Wall-Mart, and B]. That shows that though they may might be meeting the expectations but at same time they are still better than their competitors in generating sales. Cost’s rapid growth might makes once think they might be growing too fast and might not be able to sustain and keep their rate as high as they ad in previous years. They might have to rely on retained earnings to fund their growth if they want a sustainable growth.
In recent news we found that Cost’ CEO stepped down this year, which bring could be good news and a bad news. Questions: 1- Why is Cost’s member fee almost 35% higher than Cam’s club ($40 vs.. $55)? 2- Why Annual fee? (Cost offers 2% rebate to Executive members, what’s the purpose? Why not make it free for all since customer only come 9 times a year on average anyway? ) 3- Why haven’t you start offering “Cam’s Club: Click ; Pull” (order online and pick up next day)