Transcript Team 4 - Costco Case Study

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INDIA
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Costco’s Business Model
Costco’s Value Proposition
Review of India
o Economy
o Government
o Infrastructure
o Real Estate Cost
o Real Estate Availability / Partners
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Conclusion on Costco in India
Citations
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Factory direct purchasing, high velocity resale.
o Manufactures ship containers directly to Costco consolidation depot’s.
o Allocation of product to warehouse locations is fast (<= 24 hrs)
o Cost reductions realized from fast inventory sales.
o SKU’s on hand limited to fast-selling models, sizes and colors.
o Efficient sales floor layouts – more product, less wasted space = more
sales.
o Customers must pay to shop at Costco.
• Provides another source of revenue.
• Builds customer loyalty.
• Helps reduce shrink.
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Very low marketing, labor and a targeted discount
model
o Coupon/Sales blasts sent to a limited target audience –
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members only.
Reduction in marketing dollars over competitors equals lower
costs for goods.
Labor costs reduced via larger volumes of stock on hand, in
pallets and ready for customer distribution with low labor
required.
Hours of operation limited to core shopping times and light
need for overnight stocking staff.
Return policy highly favorable in the market, most goods
accepted back without receipts and with extended warranty
options.
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Gross Domestic Product (GDP)
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2010 - $4.06 trillion (5th in the world)
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Inflation
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2010 - 12% - High (206th in the world)
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10.4% (5th in the world)
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$287.1 Billion (7th in the world)
GDP Per Capita
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$3,500 (262nd in the world)
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6.2% in 2008
6.8% in 2009
Foreign Reserves
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10.9% in 2009
GDP Growth Rate
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$3.44 Trillion in 2008
$3.67 Trillion in 2009.
$3,000 in 2008
$3,200 in 2009
Currency Stability
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The Indian Rupee is trading around 43 - 49:1 USD in the last 52 weeks.
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Ruling Party and Leader
o Pratibha Devisingh Patil – (2007 – Current)
o Party: Indian National Congress
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Government Stability
o Democratic Nation
o Harsh relations with China over allegations of munitions being
traded with Pakistan and China’s oversized military footprint.
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Subsidies
o 14% of Indian GDP is subsidized.
o Majority of Indian subsidies are oil of which 39% of subsidized
kerosene is stolen.
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Tariffs and import barriers
o Indian Tariffs vary largely depending on what type of goods you are
importing. The fees are not percentage based, rather flat fees.
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Member of World Trade Organization
o India has been a member of the WTO since 1995.
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Level of corruption.
o India has high levels of corruption. In 2010 $19B USD in illicit funds left
the country.
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Acceptance of imported products
o There are some items now allowed to be imported into India, namely
unprocessed Ivory products, however this would not impact Costco’s
ability to do business in India.
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Local competition
o No competition for Costco in India.
140,000.00
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Mineral Fuels and Oils.
120,000.00
Pearls and Precious
Stone
100,000.00
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Nuclear Reactors
Electrical Machinery
and Equipment
80,000.00
Organic Chemicals
Iron and Steel
60,000.00
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Plastics
Animal and Vegetable
Fats
40,000.00
Fertiliser
20,000.00
Misc Goods
0.00
2009-2010
2010-2011
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India is one of the largest
importers of fossil fuels in the
world.
Pearls and precious stone
imports are important as a large
portion of India’s revenue comes
from the export of handicrafts.
These two represent 50% of all
imported goods into India from
2009 to now.
Growth from 2009 - 2011
Fuels – 20.6%
o Pearls – 66.35%
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Indian Transport and Fuel Infrastructure
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Airports – 353 (249 with paved runways)
Heliports – 40
Pipelines
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Condensate/Gas – 2km
Gas – 9,596km
Liquid Petroleum Gas – 2,152km
Oil – 7,448km
Refined Products – 10,486km
o Railways – 63,974km (4th in the world)
o Roadways - 3,320,410km (3rd in the world)
o Waterways – 14,500km (9th in the world)
o Merchant Marine – 324 (29th in the world)
Air and sea import/export is generally considered to be sufficient in India. The recent thread of pirates
from Somalia have reduced the efficiency of waterway capability and have added risk of
shipping/freight contains being compromised.
Road and railway conditions are poor in India. Public investment has been insufficient to correct this
condition and India is seeking private investments to help improve these two.
Energy infrastructure in India is sufficient for sustaining retail business operations.
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Indian Real Estate Cost
o India-wide real estate prices have increased 21.3% in Q2 2011.
o Ranked 2nd out of 50 countries for annual growth
o High Growth - Compared to 2010 by City
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Bhopal +46.41%
Faridabad +44.74%
Chennai +35.52%
Bengaluru +35.29%
New Delhi +33.64%
o Low Growth – Compared to 2010 by City
• Kolkata +10.23%
• Surat +9.56%
• Jaipur +4.92%
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Real Estate Availability
o Moderate availability due to financial situations in India.
o High cost is a big detractor in Indian Real Estate Sales.
o Cost of land post Indian 2001 Economic Bubble exceed that
of the median home sales prices.
o 65% of flats sold in Delhi and 35% of flats sold in Mumbai
have sold to speculators.
o Booming growth in Indian GDP may result in more availability
over 2013-2015 at affordable prices.
o Jones Lang LaSalle remains the largest partner for real estate
sales and coverage in India.
We do not believe Costco should seek India as a market to move into over the course of
the next 3 years. The following points highlight how we came to this decision:
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Indian land prices are too high
o High land prices now make moving into India in the short term less
attractive.
o Continued GDP growth over the next 1-2 years may help lower land prices.
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Indian Inflation too high
o Continued growth in Inflation would make doing business in India risky.
o GDP Per Capita shows the standard of living is improving in India, however
not at a rate fast enough to make India an attractive market to enter.
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Indian Infrastructure is poor and threats loom
o Indian road conditions would not support the Costco business model of
central delivery and distribution within 24 hours.
o Higher costs would be incurred by Costco by moving product slower than
they do in the US, Canada and Mexico markets.
o The presence of pirates from nearby Somalia makes importing of goods via
sea risky.
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The following Web Content was used for this presentation.
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The United States Central Intelligence Agency, Retrieved 10/6/2011 from
https://www.cia.gov/library/publications/the-world-factbook/geos/in.html
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Yahoo! Finance, Retrieved 10/6/2011 from
http://finance.yahoo.com/q/bc?s=USDINR=X&t=5y&l=on&z=m&q=l&c
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Wikipedia, Retrieved 10/6/2011 from
http://en.wikipedia.org/wiki/Energy_policy_of_India
http://en.wikipedia.org/wiki/Real_Estate_in_India
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Global Property Guide, Retrieved 10/6/2011 from
http://www.globalpropertyguide.com/Asia/India
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Costco Investor Relations, Retrieved 10/6/2011 from
http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-sec
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World Trade Organization, Retrieved 10/10/2011 from
http://www.wto.org/english/tratop_e/tpr_e/s249_sum_e.pdf
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India Department of Commerce, Retrieved 10/10/2011 from
http://commerce.nic.in/eidb/Icomq.asp
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India Imports, Trade Chakra, Retrieved 10/10/2011 from
http://www.tradechakra.com/indian-economy/imports/index.html
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India, Speaking up for Integrity. (2011, 08 26). Retrieved 10/10/2011 from
http://www.transparency.org/news_room/in_focus/2011/india_speaking_up_for_integrity