Wholesale Corporation: Mission, Business Model, and Strategy Renee Francia Strategic Human Resources BME 0939883 May 2013 Term Company Background Costco Wholesale Corporation (Costco) is a retail membership warehouse chain which was founded by Jim Sinegal and Jeff Brotman in 1983. Headquartered out of Issaquah, Washington, Costco has grown in to one of the largest wholesale giants in the industry.
The company’s business model was to generate high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories (Gamble & Thompson Jr. , 2009, p. 217). This concept was created using the Price Club model, a member warehouse retailer that has stores primarily on the west coast and was a pioneer of the membership warehouse concept, as Sinegal was a former manager there. The first Costco store opened in Seattle the same year that Wal-Mart launched its warehouse membership format, Sam’s Club (Gamble & Thompson Jr. 2009, p. 216). The mission Costco had in mind was, “To continually provide our members with quality foods and services at the lowest possible prices” (Gamble & Thompson Jr. , 2009, p. 217). This business model proved to be effective and Costco was able to open new stores with funding from public shareholders. After this expansion, Costco became the first U. S. company to reach $1 billion in sales in less than six years (Gamble & Thompson Jr. , 2009, p. 217). In 1993 Costco merged with Price Club and was renamed PriceCostco. In 1997 PriceCostco changed its name to Costco Companies Inc. nd then again to Costco Wholesale Corporation after their relocation to Washington. Strategy Costco was planned using a strategic vision of providing affordable high-quality products with a quick turnover rate while participating in responsible and sincere business practices. The cornerstones of Costco’s strategy were low prices, limited selection, and a treasure-hunt shopping experience (Gamble & Thompson Jr. , 2009, p. 217). Costco remains competitive by offering low prices to their members and by provide good pay and an excellent work environment to their employees.
Costco is able to offer lower prices and better values by eliminating all the frills and costs historically associated with the conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing, and accounts receivable. Sinegal was quoted saying that, “We [Costco] run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members (Gamble & Thompson Jr. , 2009, p. 221). Costco’s pricing strategy has allowed them to develop a cost-based advantage over their competitors.
Using a low-cost provider strategy, Costco was able to achieve lower overall costs than their rivals and appeal to a broad spectrum of customers (Gamble & Thompson Jr. , 2009, p. 36). This strategy in line with limited selection enabled Costco to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters. Part of Costco’s strategy was to provide only a limited selection to their members; about 4,000 items. Although the number of items where limited, the store carried a broad range of products from steaks to caskets to fine jewelry.
Costco is known for selling in bulk or large quantities. By doing this Costco is able to lower their business costs and keep lower sales prices on their products. Costco’s merchandise buyers remained on the lookout to make one-time purchases of items that would appeal to the company’s clientele and that would sell out quickly. (Gamble & Thompson Jr. , 2009, p. 220) With the ever changing inventory, Costco customers are encouraged to make purchases that day, because the next time they visit, the item may not be in stock. This strategy helps increase sales as well as continues to bring customers back in to the store.
Analysis Costco’s strategy has proven to be successful allowing them to rise above their competitors in terms of stores, sales volumes, and members. Costco has had steady growth in sales and earnings going as far back as 1995 as shown in Costco’s financial reports published on their corporate website. Also, Costco’s stock had substantial growth between 1995 and 200 and has shown steady growth trends since them (Yahoo Finance, 2013). Their member renewal rate was approximately 89. 7% in the U. S. and Canada, and approximately 86. 4% on a worldwide basis in 2012, consistent with recent years (Costco, 2012, p. 11).
Costco’s strong financial performance, stock price trends, and customer retention are all indicators that their strategy is in line with their visions and objectives. Many of Costco’s strengths are held with their low prices, limited selection, and their employees. Costco prefers to hire from within and focused on career longevity and development for their employees. It was company policy to fill at least 86 percent of its higher-level openings buy promotions from within; in actuality, the percentage ran close to 98 percent, which meant that the majority of Costco’s management team members were home grown (Gamble & Thompson Jr. 2009, p. 226). Even with their many strengths, Costco still had some weaknesses. Their warehouses appeared to be very industrial, with concrete floors and merchandise displayed on wooden pallets. Costco also relied heavily on word-of-mouth advertisement, which saved the company money in terms of marketing, but could also be hurting their new member attainment. The long lines that tend to form during peak shopping periods are also a deterrent for new member or renewals. Some members may not see the benefit to saving in bulk if they have to wait in extremely long checkout lines.
Costco has a specific member demographic in mind and normally attract more affluent customers. The average member had an income of nearly $75,000 a year. This provides Costco with the opportunity to have more revenue by catering to those with a higher disposable income. In similar terms, they are missing out on an entire customer base, in the lower income earning families, because they are often not able to pay the membership fees or afford to pay “bulk” prices in order to save money.
Costco’s biggest threat has proven to be their competitors. In their 2012 Annual Report Costco states that, “our inability to respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and negatively affect our financial results. Some competitors may have greater financial resources, better access to merchandise and greater market penetration than we do (p. 14). Conclusion
According to Costco’s 2012 Annual Report, net sales totaled almost $97 billion over 600 stores worldwide, for the year (p. 25). Their membership fees increased more than 11% and Costco has about 26. 7 million households and 6. 4 million businesses that have paid memberships with the company (Costco, 2012, p. 11). Costco’s strategic business and management plans have allowed them become one of the largest wholesale giants in the industry and it is these strategies that set them apart from their competitors.
Costco’s markups and prices were so low that Wall Street analysts had criticized Costco management for going all out to please customers at the expense of increasing profits for shareholders (Gamble & Thompson Jr. , 2009, p. 219). Sinegal was confident that his business strategy would help build a lasting, profitable organization. He was focused on the future of the business rather than just the right now; which turned out to be an extremely profitable business strategy.
References Costco Wholesale. 2012) Annual Report 2012. Costco Wholesale Corporation. Gamble, J. E. & Thompson Jr. , A. A. (2009). Essentials of Strategic Management: A Quest for the Competitive Advantage. New York: McGraw-Hill Irwin. Investor Relations. (2013). Costco Wholesale Corporation. Retrieved from http://phx. corporate-ir. net/phoenix. zhtml? c=83830&p=irol-reportsannual Yahoo Finance. (2013). Costco Wholesale Corporation – NasdaqGS. Retrieved from http://finance. yahoo. com/q/bc? s=COST&t=my&l=on&z=l&q=l&c=