Costco Case Analysis INDIA

Overview Costco’s Business Model Costco’s Value Proposition Review of India Economy Government Infrastructure Real Estate Cost Real Estate Availability / Partners Conclusion on Costco in India Citations

Costco Business Model Factory direct purchasing, high velocity resale. Manufactures ship containers directly to Costco consolidation depot’s. Allocation of product to warehouse locations is fast (<= 24 hrs) Cost reductions realized from fast inventory sales. SKU’s on hand limited to fast-selling models, sizes and colors. Efficient sales floor layouts – more product, less wasted space = more sales. Customers must pay to shop at Costco. Provides another source of revenue. Builds customer loyalty. Helps reduce shrink.

Costco Value Proposition Very low marketing, labor and a targeted discount model Coupon/Sales blasts sent to a limited target audience – 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.

India - Economy Gross Domestic Product (GDP) Inflation GDP Growth Rate 2010 - $4.06 trillion (5th in the world) $3.44 Trillion in 2008 $3.67 Trillion in 2009. Inflation 2010 - 12% - High (206th in the world) 10.9% in 2009 GDP Growth Rate 10.4% (5th in the world) 6.2% in 2008 6.8% in 2009 Foreign Reserves $287.1 Billion (7th in the world) GDP Per Capita $3,500 (262nd in the world) $3,000 in 2008 $3,200 in 2009 Currency Stability The Indian Rupee is trading around 43 - 49:1 USD in the last 52 weeks.

India - Government Ruling Party and Leader Government Stability Pratibha Devisingh Patil – (2007 – Current) Party: Indian National Congress Government Stability Democratic Nation Harsh relations with China over allegations of munitions being traded with Pakistan and China’s oversized military footprint. Subsidies 14% of Indian GDP is subsidized. Majority of Indian subsidies are oil of which 39% of subsidized kerosene is stolen.

India - Market Access Tariffs and import barriers Indian Tariffs vary largely depending on what type of goods you are importing. The fees are not percentage based, rather flat fees. Member of World Trade Organization India has been a member of the WTO since 1995. Level of corruption. India has high levels of corruption. In 2010 $19B USD in illicit funds left the country. Acceptance of imported products 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. Local competition No competition for Costco in India.

India – Imports 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% Pearls – 66.35%

India - Infrastructure Indian Transport and Fuel Infrastructure Airports – 353 (249 with paved runways) Heliports – 40 Pipelines Condensate/Gas – 2km Gas – 9,596km Liquid Petroleum Gas – 2,152km Oil – 7,448km Refined Products – 10,486km Railways – 63,974km (4th in the world) Roadways - 3,320,410km (3rd in the world) Waterways – 14,500km (9th in the world) 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.

India – Real Estate Cost Indian Real Estate Cost India-wide real estate prices have increased 21.3% in Q2 2011. Ranked 2nd out of 50 countries for annual growth High Growth - Compared to 2010 by City Bhopal +46.41% Faridabad +44.74% Chennai +35.52% Bengaluru +35.29% New Delhi +33.64% Low Growth – Compared to 2010 by City Kolkata +10.23% Surat +9.56% Jaipur +4.92%

India Real Estate – Avail/Partners Real Estate Availability Moderate availability due to financial situations in India. High cost is a big detractor in Indian Real Estate Sales. Cost of land post Indian 2001 Economic Bubble exceed that of the median home sales prices. 65% of flats sold in Delhi and 35% of flats sold in Mumbai have sold to speculators. Booming growth in Indian GDP may result in more availability over 2013-2015 at affordable prices. Jones Lang LaSalle remains the largest partner for real estate sales and coverage in India.

Costco in India - Conclusion 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: Indian land prices are too high High land prices now make moving into India in the short term less attractive. Continued GDP growth over the next 1-2 years may help lower land prices. Indian Inflation too high Continued growth in Inflation would make doing business in India risky. 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. Indian Infrastructure is poor and threats loom Indian road conditions would not support the Costco business model of central delivery and distribution within 24 hours. Higher costs would be incurred by Costco by moving product slower than they do in the US, Canada and Mexico markets. The presence of pirates from nearby Somalia makes importing of goods via sea risky.

APA Citations The following Web Content was used for this presentation. The United States Central Intelligence Agency, Retrieved 10/6/2011 from https://www.cia.gov/library/publications/the-world-factbook/geos/in.html 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 Wikipedia, Retrieved 10/6/2011 from http://en.wikipedia.org/wiki/Energy_policy_of_India http://en.wikipedia.org/wiki/Real_Estate_in_India Global Property Guide, Retrieved 10/6/2011 from http://www.globalpropertyguide.com/Asia/India Costco Investor Relations, Retrieved 10/6/2011 from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-sec World Trade Organization, Retrieved 10/10/2011 from http://www.wto.org/english/tratop_e/tpr_e/s249_sum_e.pdf India Department of Commerce, Retrieved 10/10/2011 from http://commerce.nic.in/eidb/Icomq.asp India Imports, Trade Chakra, Retrieved 10/10/2011 from http://www.tradechakra.com/indian-economy/imports/index.html 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