Costco Memo

MEMO

TO: Elizabeth McIntyre, CEO Costco DATE: Jan. 31st 2018

FROM: Caden Burrows VP HR Costco SUBJECT: Alternative Corporate Strategies

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You have asked me to prepare a memo outlining at least 3 viable corporate strategies Costco could pursue to increase profits. The alternative corporate strategies discussed below are intended to be either an alternative to our current HR strategy of investing in employees or could be undertaken in conjunction with our current HR strategy, while still leading to increased profits.

I. Relevant Facts

Costco as an organization has created a well-known brand for treating and paying

their workers exceptionally compared with our rivals. As good as it sounds; we pay our workers an average that is two times that of our best rival in Wal-Mart. Wal-Mart pays their representatives an average of $12.14 compared with our average worker pay of $21.45. Full-time workers get 5 weeks of paid vacation or time off. They also get full medical benefits from our company, which is a positive for any employee.
Our organization has been producing and benefitting a large portion of our income from our member’s membership charges. Each charge for a gold membership is 60 dollars for each member, and our executive membership cost clients 120 dollars for each individual. Our customers are exceptionally loyal and adore our image and all that we represent.
We as an association pride ourselves on our lower costs and cost proficiency. We try to locate the least expensive approaches to make items, to sell items, and fabricate items. Keeping our costs moderately low, some of our items have achieved the purpose of a 30% discount from retail cost, and only achieve a 15% markup on specific items. One of our best offering items is our hot bogs we offer at our concession stand. We make around 100 million dollars just from selling hot dogs and we offer them at the most reduced cost as we can at a $1.50.

II.

Problem/Issue

The Board of Directors recognizes that our current business strategy, that includes “investment in employees” has historically been successful. However, it wishes to explore other options for improving profits that the corporation should consider for the future. The following are 3 alternative strategies for increasing profits and a discussion of their costs, challenges and opportunities.

III. Alternative Courses

A. Close the gap on how well we treat employees. Cutback on total workers, and limit full time worker’s benefits, lower the wage at which all new hires receive.

B. Increase item pricing on items that we charge very low on. For example, our hot dogs and pop combo that we off at our concession stand is at a very low price, $1.50. Might want to add to the amount we charge for our hot dog and pop combo.

C. Increase the cost of each member’s membership type by 5 dollars. Our membership expenses begin at 60 dollars for gold members and would like to increase membership prices to 65 dollars, also our executive membership prices begin at 120 dollars and would like to increase these prices to 125 dollars.

IV Evaluation of

Alternatives
A. What I am putting forth as an alternative option to increase our profits is cut the amount we pay our employees, cut paid time off, yet keep medical advantages. Costco as a company treats our workers extremely well, almost too well. Regardless we need to keep up that employee friendly environment that has been made, yet limit how friendly we are. We give our workers an average pay of $21.45. Full-time employees get full medical advantages, and 5 weeks of paid vacation or time off. I insist we still pay our employees an exceptionally sensible pay to keep our notoriety, however not to the degree where we are paying an average of $21.45. Our biggest competition in Wal-Mart has an average pay of $12.14, we are about double of what they pay their workers, but they stay at the top of most profitable organization in retail. Ways we can contend more by bringing down our employment situation is consider laying off costly laborers or, pay cuts to current workers, and lower our beginning wages for new hires. The way we could go about lay-offs, is either cutting employees who have not been performing as indicated by Costco benchmarks, or workers who are ending up excessively costly for our organization, or employees who are becoming expensive for our company to have employed where we could promote someone inside the company and pay them less. With respect to cutting current employees pay, we would need to know as to whether they will take a pay cut and agree or disagree to taking the pay cut. The least demanding way I think we can produce more revenue inside our business is diminishing what amount of paid vacation or time off we provide for full-time employees. 5 weeks being paid for doing no work is a lot of time as I would see it. I am proposing that we bring down how much time off we enable our workers to have and bring it down to 2-3 weeks of paid time off. As this is all against our organizations spine, notoriety, and how we built this company, some of the time we must change our organization's structure to maximize our revenue.
B.

Our notably cheap hot dog and soda combo has made a name for its self for how inexpensive and how much you get for paying just a $1.50. We create alone just from selling the hot dog and soda combo, over 100 million dollars in income. We created the combo from the very first days of Costco’s method to lower prices. We have tried and tried to not raise the price of the combo, but instead find the cheapest way to sell the combo while still creating profit. What I am suggesting is the opposite; instead we increase the price of the combo by a quarter and try to sell the combo for $1.75. We have built a loyal customer satisfaction with our company and how low our prices are. An increase in 25 cents to the combo is not going to steer away our loyal customer base as it is only a 25 cent raise. It increases our profits for every combo we sell and it is still that low price that we shoot for in a company. Many customers will over look the fact that we raised the price 25 cents and still be happy that the combo is lower than two dollars. Though it would not create a substantial gain in profit, every few millions of dollars goes a long

distance.
C. As I stated earlier, our customers are loyal and love our brand and everything we stand for. To be exact, 85 million customers have invested in our membership fees and keep coming back every year. Costco has most of its profit that is put back into the company from the membership fees to help run this company. I am willing to say that most, if not all, customers are willing to pay more money to shop at Costco and get those lower prices on products then pay for mark up prices at other retail stores. What I propose is that we increase the membership fee for each member 5 dollars. This would raise our gold member fee from 60 dollars to 65 dollars, and our executive member fee from 120 dollars to 125 dollars. Assuming no customer purchases our executive membership and they all pay for the gold membership, Costco generates 5.1 billion dollars charging customers 60 dollars. Increasing our membership fee to 65 dollars for the year, Costco would generate 5.525 billion dollars. This creates a gain in profit of 425 million dollars just off of an increase in membership fees. Now we would have to first look at what our competitors charge for a yearly membership such as Sam’s club before foregoing with this alternative. Our customers are loyal and would be safe to assume that they would not be too upset with a 5 dollar increase in yearly membership fees.
V. Selected Alternative & Reasoning
Best course of action in my opinion would be the third alternative, which is increasing our membership fees 5 dollars. Costco has always been about and will always be about taking care of our employees. Though we do it differently and more expensive than most competitors, we do it better as our employees love to work for us and are better workers because of it. The first alternative would be against how we built this company and how we built our names. It would be a much longer process, and worse than anything cause worry and panic to the rest of our employees having the thought they could possibly be laid off or take a pay cut. Alternative two is along the same lines. Our brand has came to be, because we offer the lowest price guaranteed and people love shopping with us they are willing to buy more for less. Our classic hot dog and soda combo has become country famous for how cheap and how great the deal is. Going against Costco’s morals of finding the lowest price to sell, would have people second guess our brand. Though it is only a 25 cent increase, people will realize it and possibly think we have raised prices on everything.
The first two alternatives both in some way go against the Costco way. Even though we raise the price of the membership fee, we as a company are still sticking to what we have done since day one, treat our employees the best possible and create the lowest prices for our customers. Customers will still invest in our membership even with the increase, because they are still guaranteed the lowest price and friendly customer service. Most important it will create the most profit as that is the objective to these alternative plans. We still keep the brand and name they we have created with our customers and employees and we still create a substantial amount of profit with the 5 dollar increase. Our customer base is one of the most loyal in the retail industry, especially with all of our members. Customer satisfaction is a great achievement and sometimes can be hard to get in a time of increasing profits.