Updated October 13, 2020

Costco Company Strategy

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Costco Company Strategy essay
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The concept of warehouse was ages old. In USA the first warehouse was with the name of Price Club warehouse which was established on 12 July 1976 in San Diego, California. With the established of this warehouse Sol Price and his son, Robert gave birth to a new concept. But Price club warehouse is a history now as the warehouse concept got a new definition and is also known by a new name “Costco Warehouse”.

Costco Wholesale Corporation is an American multination corporation which deals in a chain of membership-only warehouse clubs. The first warehouse of Costco was opened in Seattle on 15 September 1983 by James Sinegal and Jeffrey H. Brotman. In the chain of warehouse the second store was opened in Portland and third was in Spokane in 1983. In the year of 1993 the merge of Price club and Costco bring a boom in warehouse business. The merge of both the companies was the result of refusal from Price Club to the offer of Sam’s club which is owned by Sam Walton and Wal mart.

The merge in both the companies was natural due to some similarities in their size and business models. Now the company is named as PriceCostco and the members were awarded with universal membership. The company claims a sale of 16 billion and 206 locations of warehouses in a year. In 1997, PriceCostco was renamed as Costco Wholesale Corporation as Price brothers left the company in 1994 and forms Price Enterprises a warehouse club chain unrelated to current Costco. Price Enterprises deals in warehouse club business in Central America and Caribbean. Industry overview and analysis: Costco Wholesale Corporation is the top most retailers in the United States and the seventh largest in the world. It took Jim Sinegal 23 years to reach at this platform. Today, Costco owns 785 warehouses worldwide.

A majority of which are in the United States i.e. 546 whereas, 100 are marked in 9 Canadian provenances and chain follows various other countries including Mexico, UK, Japan, South Korea and 11 warehouses in Australia. The Costco Wholesale Corporation is a house for over two lakh fifty thousand full time and part time employees the worldwide. As per of 2019 data Costco had around 98.5 million members with a benchmark of a huge growth from 0 to 3 billion dollar sale in under six years Costco become the first company to do so. In fortune 500 ranking of largest United States Corporation Costco ranked at 14th in 2019. In the initial days, Costco only deals in the boxed products whereas the range of products and services has gradually expanded.

Costco believes to deal with its products as seasonal and they carry out inventory phenomenon to do so, the company deals with its products for a time and discontinue it, which seems to be a tactical move to raise the product demand. With a huge list of 3,700 products at Costco warehouse one can say that Costco has become a life dependency brand. In Australia Costco deals with alcohol as its major product and with their 1st store in the state of Victoria, The Company sets the trend to sale alcohol on selves by the retailers.

Costco’s Business Model and Strategy

The Costco Business Model is based on high quality and low price concept. Costco Wholesale Corporation is an international chain of warehouses that deals in high quality products available at low prices. As compare to other conventional wholesale and retail sources. Costco model of business is a membership based model where a company provides 3 different types of membership namely Business, Gold star And the Executive membership. In U.S, the business member pays an annual fee of 55 dollar and gets the business member ship by operating a business. The gold star member is an individual membership with annual fee of 55 dollar. This membership is for those individual who do not on any business.

The key to Costco business model is the high quality of products at their lowest price. The high quality of product keeps this firm a head of the competitors as they also provides same product at lower prices. Costco Wholesale Corporation attended a huge success in providing the limited selection of nationally branded and private label product at their lowest prices. This brings rapid turn over for the firm Costco also labels to have significant profit by having volume purchasing and least handling expenditure. The success rate of Costco can be assumed from the RNOA scores of 2015 which was 23.21% which is comparatively high with the RONA score of Wal-Mart (12.01).

The difference in RNOA scores of both the company is due to the high sale volume and rapid turnover of Costco. Costco’s warehouse is an umbrella with large no. of products under it. The Costco members get a choice of approximately 3600 items under single roof which includes about 85% national brands and about 15% of companies on products. The Company also has its own manufacturing plants for certain items like food packaging, Meat processing, Jewelry distributions and Optical laboratories.

The company has its private label with the name Kirkland Signature. The manufacturing of certain products allows the company to sell those products at the lowest possible cost or even at the manufacturing cost. Costco business model is low cost leader strategy model which governs the strategy to provide a high quality product at its lowest cost. Costco creates “treasure hunt” shopping environment where plain to offer an ultra-low price of limited selection of national and private label brands. Costco follows the policy to deal in seasonal products or we can say that the company has created this kind of atmosphere in the market. Company provides attractive offers to the members and only stocks those items which could be sold at reasonably low prices. Costco follows the cross dock distribution facility where it purchases its major products directly from the manufactures.

With the help cross dock facility company moves full truck loaded volume of goods to the stores. With the target of 5% or more increase in sale of existing stores and to open a definite number of warehouses both domestically and globally, Costco is on its path of growth. The establishment of Kirkland Signature proves to be a master stock for Costco and the company takes a lead in discount based industry.

Costco’s Membership programs:

The membership program is a cornerstone in the success of Costco Wholesale Corporation. As discussed earlier the company has three membership plans for its member. The membership fee is a big amount of income for the company. Under the membership program Costco provide three different membership plans to different types of members to have the shopping benefits from the warehouses. As the company business model is low rate leader strategy model. So the company provides all the high quality products at their lowest rate under these membership plans.

Company members gains good profit and also utilizes good quality products at low rate than other wholesaler and retailer. This built a chain of loyal customers/ members for the company. The company is enjoying extreme level of customer loyalty over the years. As membership fee has a bigger contribution in annual profit of the company, so this allows the company to sell high quality products at razor-thin margins to its members. With big family of loyal members even global recessions do not have much effect to the firm’s growth. The company has a wise strategy of reminder for the renewal of membership plan. The members are awarded with a cash back reward check with their renewable forms.

The company also provides a reminders of savings the membership plans brings to the customer while the renewal process is opt-in. The success of membership program for Costco Wholesale Corporation can be judge by the high % renewal rate i.e. 90%. Costco and employees relationship An employee is considering as a backbone of a company. The success or the growth of any company/ firm is based on its human resource. The Costco Wholesale Corporation also has a big family of around 254,000 full time and part time employees worldwide. Costco values its employees and take proper of their health benefits, vacation timings and also spent an ample amount of money on their wages.

The company pays about $21 per hour to each of the employee which is a huge amount of money expenditure. Costco high employee wage is also a strategic move which also have contribution to its growth. Costco’s founder and board of directors are well known with the fact that decent wages increases the employees productivity and reduces the chance to quit. An overview to the business model an strategy of Costco Wholesale Corporation supports the company position of leading warehouse club membership chain.

Now the company model of providing high quality products at lower prices set a benchmark in competitive business of discount industry. Company strategy for its members as well as its employees also has noticeable contribution in its growth.

Costco Company Strategy essay

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