Costco Wholesale Corp.: Mission, Business Model, and Strategy

What is Costco’s business model? Is the company’s business model appealing? Why or why not?Costco’s business model is focused on producing high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of national name brands and select private-label products in a wide range variety.   Costco is focused in low-cost strategy is concentrated on a narrow buy segment and out competing rivals by having lower costs, therefore being able serve a niche consumers at a lower price. (Gamble, John and Thompson, Arthur (2009)Costco’s business model is appealing because they are able to continually sell to a niche market.   This niche market has annual income which ranges from $75,000 to $100,000 or more a year.   By offering the best products possible at lower price, they are able to have these members return.   Presently there are 47,679,000 card holders which include Executive members, Business member, Primary cardholders and Add-on cardholders.   Whereas Costco has offered the most popular products in order to have a rapid turn-over.   Costco has proven that there business strategy has worked by continually producing higher net sale. 

What are the chief elements of Costco’s strategy? How good is the strategy?Costco’s cornerstone strategy is to offer the lowest price possible, to offer a limited selection and a have a treasure-hunt shopping environment.   This has provided significant cost savings to many members and has these members continuing to return.   Other supermarket or retail stores may have stocked in between 40,000 and 150,000 different products for customers to choose from.   However, Costco will provide members only with 4,000 items to choose from.   Not providing a wide range but offering the most popular products in the market.       While Costco is not presenting a wide range of products one-fourth of those item are constantly changing.

Figure 2.1. shows that total revenue and operating income at Costco from 2003 to 2006 is increasing, and the company has a steady expansion. These numbers can prove Costco's success and Jim Sinegal, CEO and cofounder, does a great job in the company.   Sinegal saves on operation costs in order to provide low price while still keeping high quality products for customers such as constructing warehouses with inexpensive concrete floors, providing each product with only one size, carrying less variety than other competitors to keep inventory costs down, as well as offering customer boxes for carrying instead of plastic bags. Sinegal also attracts customers to spend more than they may anticipate by offering treasure-hunt merchandising with limited quantity.   Low prices strategy usually comes from saving wages and benefits for employees. However, Sinegal offers the employees good health care plan and compensation because he believes this way would increase employee’s performance and decrease employee turnover. In addition, most Costco’s managers and vice presidents had started from entry-level jobs. They are familiar with Costco’s operation and know how to better manage the employees and business. On the other hand, Sinegal also brings five principles and

a philosophy into Costco’s corporate culture and the manner in which the company operates. Based on the statements above, I think that Sinegal operates Costco’s business very well, not only in its business model and strategies but also in the way he treats and respects the employees. He also spends much of his time visiting one Costco store to another, he even picks up the phone and answers customer’s questions. In my opinion, I would grade him an A because he does everything he is supposed to do as CEO and better

Case Analysis 1

Costco Wholesale Corporation: Mission, Business Model, and Strategy

Renee FranciaStrategic Human ResourcesBME 0939883May 2013 TermCompany BackgroundCostco 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. and 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.

1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? Costco’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. Costco's business model is built upon customer memberships, who join and renew annually. This directly monetizes customer loyalty as unsatisfied members may not renew and represents a real cost to Costco's business. Its business model is fantastic, all customers want to find great bargains and Costco is setup to keep the customer coming back to find them.

2. What are the chief elements of Costco’s strategy? How good is the strategy? The cornerstone of Costco’s strategy was low prices, limited selection, and a treasure-hunt shopping environment. Chief elements of Costco’s strategy were low prices, limited selection, and a treasure-hunt shopping environment. The ultra-low pricing strategy includes a mark-up capped at 14% and Kirkland, a Costco brand designed to be of equal or better quality than national brands. Product Selection is limited to 4,000 items within a wide variety of categories. Costco does however include ancillary businesses to increase member alternatives. The loss of sales from customers who refuse to purchase large amounts is considered “Intelligent loss of sales.” Treasure-Hunt Merchandising consists of a constantly changing selection of 1,000 luxury items on the floor enticing shoppers to spend more than they might otherwise by offering irresistible deals. To make Treasure-Hunt shopping profitable, Costco’s buyers purchase these items from the grey market such as wholesalers, or distressed retailers rather than manufacturers.