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Costco is one of United States’ largest retailers, serving over 3600 variants of convenience products at excellent quality with competent prices. Founded in 1983, Costco quickly expanded in its operations to over 598 stores worldwide. One of the unique selling propositions of Costco is the fact that they offer very low prices as compared to their competitors without requiring to compromise quality. This paper will analyze Costco’s key success factors in terms of its strategic management.
Costco’s business model is simple and straightforward; they offer high quality products at affordable rates.
The centerpiece of Costco’s model entails high sales volume and rapid inventory turnover. Costco enjoys high inventory turnover which means that they don’t need to stock a particular good for long period of time. Also, before they need to pay the suppliers, they are able to sell it. Which means, they are able to pay suppliers with the cash derived from sales, leading to low working capital.
This shows significance in financial health and good financial management. This kind of business model is appealing for several reasons; low prices can generate high number of customers, indicates healthy operations, encourage rapid turnover, decrease warehouse costs and many more. However, in order to keep up with this business model, Costco needs to continually maintain overhead costs, which will be discussed further into the paper.
Costco’s low pricing strategy highly depends upon several factors. In terms of pricing, they offer bargain products at low prices. Their earnings highly come from membership fees, over which members can join in an annual subscription and enjoy promotional rates as members.
Even though Costco enjoys less profit margins, they have high number of annual members and earn their profit by membership revenues. In terms of product, their Kirkland Signature is also of good quality as a representation of their brand. They are also ready to experience loss of sales by customers who do not want to purchase in larger quantities. Treasure-hunt merchandising is also a smart method to continually renew their product lines to encourage members to purchase the item right away in fear of not having them available at the next visit.
Jim Sinegal shows good examples of leadership as a CEO. He conducts an open-door policy which makes him accessible to staff, thereby increasing employee motivation. Jim also conducts regular store visits as opposed to working at a desk, which shows his willingness to step down to the field to help improve the store. The business environment is made to be causal and unpretentious, so employees feel sense of belonging and are often committed to the organization, in benefit of themselves and the company. Low employee turnover shows the compatibility of the employees and the company, which means that the corporate culture can be maintained or enhanced.
We have come to understand that Costco achieves much of their revenue from membership renewals. Observing the financial data, we see that Costco’s membership fees if four times over from 2000 up to 2011. This signifies their proficiency in making member packages attractive. Their actions in prioritizing members have been successful as we see that members are continually signing up. Therefore, membership is encouraged to be sustained. However, we see that sales also increase significantly over the years, almost 3 times over. Therefore, we can conclude that despite having less marketing activities, Costco is able to attract customers by emphasizing on price efficiency. Their working capital ration (current assets minus current liabilities) is kept at a low level due to high inventory turnover.
A key competitive advantage owned by Costco over its competitors is, without a doubt, their low prices. Although they do not invest much in store layout, store ambiance, labor and marketing, they have low overhead costs which contributes to being able to keep prices low. Also, they offer a wide array of product categories from food products to gasoline, although within a product category, they offer less brands than usual retailers (Llopis, 2011).
The fact that Costco carries only 3600 selections of merchandises could potentially be a major flaw in their strategy. Generally, other stores carry over 10.000 selections. Customers may initially feel the thrill of shopping at cheap prices at Costco but could eventually dislike the lack of choices in terms of brands and may choose to shop at stores with larger varieties. Secondly, Costco spend less for advertisements and rely on word-of-mouth and certain campaigns. However, their competitors, Sam’s Club and BJ’s Wholesale Club spend much more on advertisements. Presently, Costco’s financial conditions show steady results in sales but the power of marketing is such that customers may choose to shop elsewhere for various reasons. It is also important to note that customers’ switching costs (from Costco to another) is relatively low.
Costco offers attractive compensations as compared to their competitors. The employee benefits covers all aspects such as fixed wages, health benefits, medicinal discounts, eligibility for company profits, counseling services and many more. At a quick glance, we notice that Costco spends much on compensation, despite the comparatively lower amount of labor, due to the vast varieties of compensations.
In my opinion, it shows good corporate culture to take care of employees. In most companies, CEOs are the first ones to be rewarded with sky-high numbers. It is different in the case with Costco, where CEOs are paid enough without failing to reward employees appropriately.
Although from a management and operation point of view, Costco is doing everything to a tee, there are several recommendations provided to further improve its performance: Increase product lines to above 3600 in order to compete in terms of product choice with their competitors, especially after understanding that customers’ switching costs are low. Costco already has a big advantage in terms of prices and can do wonders when they also hold
product advantage. Prepare some funds for marketing.
Branding and brand awareness are two of the most important factors for warehouses to remain sustainable in the market to be seen as reliant. With more marketing, Costco can retain top-of-mind positioning as the “place to shop” in customers’ mindsets. Maintain membership fees at a fair rate. Currently, Costco’s membership fees are higher compared to their competitors. They can maintain their fees at this level only if they can provide more attractive member benefits to their customers compared to their competitors.
Llopis, G. (2011, January 31). The Costco Factor: To Win The Business Game, You Need to Change How You Think. Retrieved February 20, 2015, from Forbes: http://www.forbes.com/sites/glennllopis/2011/01/31/the-costco-factor-to-win-the-business-game-you-need-to-change-how-you-think/
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