Sample Business Studies Case Study on Costco

Introduction

Costco is among the wholesale corporation that is a membership club that was founded in 1983. The corporation has its head office situated in Issaquah in the U.S. The corporation operates by dealing with various merchandise that comprise of television, phones, camcorders, and computers. Besides, Costco Company offers different services in its operations. Costco is among the leading retail brands based within the U.S[1]. This firm’s services include mortgage purchase, online solutions, financing services, business prescription insurance, alongside payroll services. The company was founded to offer quality products along with services to its associates at attainable economical prices[2]. Therefore, this descriptive research paperwork’s major objective is to analyze the business model and strategy of Costco Corporation. The other area of focus on this study is to examine how well the strategy of Costco is operating and describing some of the recommendations that can be made to the management of Costco to sustain the advancement and improve the company’s financial performance.

Assessment of Costco’s business model and strategy

Business strategy

Cost leadership is the major generic strategy that Costco uses in its operations. The strategy comprises of maintaining the lowest prices of commodities and other services as possible. As stated by Kim, different companies that are retail giants such as Walmart often use the cost leadership strategy to improve their operations[3]. However, Costco’s cost leadership strategy often merges the membership warehouse club strategy of business to distinguish its operations from extra retail firms. Costco’s business strategy is the foundation aspect that allows it to track its set operations during operations. Besides, this kind of business method is always aligned with the goal of the corporation[4]. The broad policy of price leadership also concurs with and is required to maintain Costco’s business representation.

Membership program

Costco Corporation operates by getting most of its income from membership fees. As reported by Gudlaugsson, the majority of the net income of Costco comes from its membership fees[5]. The company operates by ensuring that its membership program enjoys extreme customer loyalty levels over different years. Such an idea has been essential in allowing the retailer to offer small product margins and pass through price hikes without protest. Hence, Costco operates by running on a ‘subscription business model.’ The model allows the customers that desire to shop at the store must purchase the association to have the opportunity of doing so. Most of Costco’s customers are required to subscribe to the service as it allows the management to employ economies of balance to bulk purchase large masses of goods at lower values[6]. Collection of such membership fees has enabled Costco to be the pioneer in implementing customer lifetime value through the adoption of return policy with no questions asked that also assist in generating extra impulse buying.

Costco comprises an effective business strategy and a model, particularly because of the competitive edge that the corporation enjoys with such kind of policy. The company has strategies on ultra-low pricing of services and products, low cost of operations, and keenness on geographic expansion. All these strategies are greatly adding to its daily success. Costco’s business representation alongside strategy’s major idea is to attain a great volume of sales by enticing clients with their reduced prices on services and products[7].  Costco uses different business strategies to demonstrate the ways with techniques that it uses to produce planned profits. Besides, Costco’s trade model is always to create high transactions volume along with fast inventory turnover. The turner is attained by providing low costs on a limited assortment of restricted choices of national identified and select private-tag products in a wide choice of merchandise kinds. Furthermore, Costco’s provide different yield to their affiliates who are of two different kinds[8]. Such types of affiliates that the company offers its products include business members and gold star members.

Limited selection

Costco’s business model is tempting as it tests the management of the corporation to continue to devise various methods and strategies in their operations. The idea of devising such techniques is always essential in Costco’s operations as they help management maintain existing associates and catch the interest of new associates[9]. Without appropriate attention to the strategies, the company’s management can always undergo failure as there can exists a danger that tends to unhappy members will be unwilling to renew their attachment. Hence, business strategy is taken by Costco always takes it towards total quality management. Besides, Costco has a business model that is appealing to most customers. The strategy concentrates on producing high sales volume and quick inventory incomes by gifting fee-paying members’ low costs on nationally recognized and privately labeled products. The strategy allow fee paid by different members to allow for sufficient supplemental revenues[10]. Besides, turnover rates permit the corporation to obtain cash for catalog before it had to disburse most of its merchandise sellers.

Costco utilizes inventory practices to lower costs of products and limit selection by the management and members during operations. The corporation employs the federal hub-with-spoke scheme of delivery between supplies to decrease the cost of supply[11]. The limitation of selection has been an effective strategy in improving the operations of Costco. It has helped the company be positioned strategically to resolve the key resistance for retail customers between the wish for high excellence together with aversion to high prices. Besides, this strategy has allowed the company to select markets and countries that can act as its engine for growth[12]. The strategy has been effective in ensuring that the management can understand the markets that make the international expansion of the firm risky because of different behaviors of the customer and geopolitical dangers like the intervention of authorities.

Lowering prices than grocery stories

Costco’s strategy’s main elements include, but are not limited to, pricing, selection of products, together with treasure-hunt merchandise. For pricing, the company applies low-cost prominence that offers the lowest price for their association clients. By maintaining the costs way beneath their rivals help Costco draw new membership clients and preserve the clients that have the contribution. For product collection, Costco presents over 3700 products priced at negotiation levels granting their clients with an important saving of price. Such items differ from rotisserie chickens to drying machines that comprise of washer. Hence, provision of such a wide range of items aids in conserving cost of purchase to members of Costco.

Costco affiliates understand that this store comprise of steadily lower values than a customary store dealing with groceries. Besides, Costco has enduringly caped its limits to guarantee that associates can validate paying for their attachment fees. In most cases, this retail firm does not put out its margin limits. However, by looking throughout the corporation’s financial reports, Costco has been able to attain an operating margin of 11.4 percent[13]. Additionally, this company operates by focusing on maintaining its product, Kirkland Signature that produces its higher income margin as there are fewer middlemen concerned in the creation.

Treasure-hunt merchandise

For Costco Retail Corporation to compete in the market successfully, it introduces treasure-hunt merchandise to its business strategy. The strategy forms the innovative technique useful in attracting new customers and making existing members shop more often during their operations[14]. The company, through top management, Jim Sinegal, created this kind of strategy by offering premium along with seasoned items. These items comprise of fine gemstone, famous tag handbags, and the newest in customer electronics, epicure cheese, leather jackets, imported wines, and lobster among different items. The strategy enabled the company’s regular products to be sold to different consumers with a short duration. Hence, treasure-hunt merchandise as a business strategy of Costco retail has to do more with the context as well as impulse buying persuasion[15]. Such persuasion emphasized on the situation that the company place on the product. The merchandise technique enabled the company to increase the number of products, leading to increased purchases.

Business model

Costco utilizes the model of membership-only warehouse club business to enhance its operations. In this kind of model, consumers must pay the fee for membership to allow them to examine the low-cost yields present at Costco warehouse. Besides, non-affiliates might accompany associates, but not merely members are permissible to buy in these stores. Besides, non-associated can be able to utilize Costco Cash Cards to do their shopping at the corporation’s stores[16]. The business model also allows Costco’s different rivals, like Sam’s Club along with BJ’s Wholesale Club, to utilize a similar business model.  The use of a business model that aims to increase its retail brands’ growth, Costco has focused on investing in digital technology[17]. It has also been focusing on digital commerce that seems to have started paying off. Besides, Costco also operates by selling premium products under its private label brand Kirkland Signature. The company’s brand is considered to be the strong driver of sales and popularity for Costco.

Creating an impressive presence

There are several other retailers within the U.S. that possess several private label brands exclusive to Costco’s operations. Besides, Costco has been able to remain competitive by being a famous retail brand with a strong presence crosswise the U.S, leading the market through the use of an effective business model. For instance, Costco has built an impressive presence outside the U.S. in many different markets[18]. The increase in business operations has been effective due to the effective business structure by the top management. Costco has been able to invest in strengthening its competitive advantage to retain its growth momentum. The idea has aided Costco to establish its presence within the market.

 Membership-only warehouse

Costco operates as the membership-only warehouse, which is different from its chief rivals, such as Walmart or Target Company. Such a strategy has effectively allowed Costco to adopt a very different business model than other rival retailers. The retail always functions by focusing on offering its customers a seamless shopping experience and creating the organizational culture[19]. Such a culture is always effective in fostering workers’ motivation and placing a heavy concentration on customer service.

Unique organizational culture

The unique culture of operations has enabled Costco to create an outstanding image. It has also enabled the retail firm to achieve the place among the leading ad most popular employers of the U.S. Besides, Costco has been successful in its operations through techniques of expanding its presence to different other geographical marketplaces that lie away from the U.S[20]. Unique organizational culture is vital in operations of the organization as it has been the major factor that allowed Costco to generate a substantial part of its revenue from retail sales.

Merchandising operations

Like different retail firms such as Walmart, Costco also depends on direct sourcing operations to maintain prices low for its clients. The idea of merchandising operations has enabled the operations of Costco to eliminate intermediaries in its operations. It has also been able to reduce the prices of merchandise for its customers on different retail products. Reducing the prices has aided the Costco Corporation to gain cost efficiency, which is further bolstered through the utilization of effective techniques of managing inventory[21]. Additionally, Costco always sources its products for retailing right from the manufacturers and sends the merchandise to cross-docking units to reduce the cost linked to warehousing and inventory management. Away from quality merchandise, Costco also operates with the business model that maintains the consistently lower prices to attract a huge customer base. The company uses the retail brand strategy as a way of offering its esteemed customers with high-quality merchandise at values consistently lower than its rivals[22]. Costco offers its clients stock in diverse groupings such as food alongside sundries, fresh foods, hardliners, soft lines, auxiliary to remain dominant in the retail business.

Improving E-commerce operations

Costco Retail Corporation always uses digital technology in the generation of new opportunities within the market. Apart from being the disruptor of operations, Costco uses digital technology to grow its operations and aim at being a leading retailer within the U.S. The company is always investing more in technology to increase its sales and competitive position within e-commerce. According to Hilliard and Don Goldstein, Costco Company has always continued to grow its investment in technology to enhance the Costco app and adding new features for higher client convenience[23]. Besides, Costco has been launching e-commerce operations in different countries such as in Japan and Australia in 2020 to improve its saves and revenue. By the end of 2019, Costco was operating different e-commercial websites within the U.K., Canada, the U.S., Mexico, Taiwan, and Korea. Hence, e-commerce in Costco’s business operations and sales account for four percent of its net sales in 2019.

How well is Costco’s Strategy Working?

Business strategy of Costco works well, as depicted from the performance of the firm. For an extended duration, the corporation has capped its markup at fourteen percent for brand-name merchandise. Conversely, its chief rivals have set their markups between twenty to fifty percent. Such a scenario indicates the significant disparity between Costco products and services’ prices and its rivals in the marketplace[24]. Although the profit obtained is low and can barely cover entire operations expenses, several clients are always attracted and retained within operations of the corporation. Costco Wholesale Corporation benefits from the membership subscriptions paid, given that it accounts for over seventy percent of the company’s operating revenue[25]. For instance, Costco’s merchandise plan has established very effective by making a huge sum of dollars for every square foot on standard annually associated with the value generated by chief rivals of the retail in the U.S. markets.

Costco’s different business strategies and models have been vital in its operations of dealing with retail services. The business replica of generation of soaring sales volume as well as quick inventory earnings has a great impact on improving Costco’s operations. Effective strategy and model in the business operation has made the company effective in dealing with sales of products and services to its members[26]. Cost leadership is the major business strategy of Costco that offers an effective competitive advantage over its rivals. All the strategies and models set by top management of Costco aim to minimize the cost of its operations through economies of scale. Besides, Costco operates by ensuring focusing on maintaining superior quality to differentiate the company’s generic strategy, particularly the Kirkland Signature brand.

Narrowing selection

Costco’s strategy works well because they have narrowed their selection of products to about 3,600 active items. Such strategy is quite different from the one practiced by other different wholesales who are probably to deal in forty thousand items and amid 125,000 to 150,000 for the Wal-Mart Supercenter[27]. Besides, Costco’s strategy of restricting their items to the sales of active products means that they can avoid different incidences of merchandise turning out to be obsolete. Therefore, such a policy helps in minimizing cases of losses during operations of Costco Corporation. Moreover, Costco’s strategy is working effectively as the company can quickly recover their money because management can always provide fast-moving goods such as dairy products, seafood, cookware, cheese, and apparel. Additionally, Costco’s growth strategy is working well as it makes the corporation have a big advantage to its operations because it allows the company to be capable of reaching different new marketplaces[28]. For example, Costco has been able to open four additional warehouses within the U.S and two other in Japan. Such expansion improved the firm’s operations by providing it with the best opportunity to explore new marketplaces while increasing its clientele.

Effective membership

The strategy used by Costco is considered to be working well as more members are keeping coming back. Such members are also continuing with buying items in mass as they have in the past, but different concerns can influence the trend if not addressed effectively. The strategy works effectively as customers can always choose to move their membership to the rivals like Wal-Mart’s Sam’s Club[29]. The discount provided by the membership fee is always fair, making the strategy set in operations to be effective. Hence, Costco’s business strategy is effective as it uses the subscription technique of business where clients turn out to be associates or subscribers of the merchant club through buying the association. As associates, clients can always obtain low costs on limited high superior state together with personal branded merchandise. Additionally, Costco’s business strategy is working effectively as it enables the wholesale to create high sales quantity alongside rapid record turnover. The generated turnover often permits the firm to sell as well as receive money for inventory and attain payment discounts. Hence, the business strategy of Costco is very appealing to its operations. Some of the critiques that make the strategy work effectively include the idea that the model focuses on Costco’s first component[30].  Therefore, Costco’s adopted business strategy is working effectively. It allows the corporation to compete against specialty retailers, making customers prefer their products and services over other competitors within the market.

Engaging in a low-cost leadership

The company has focused on pursuing a low-cost leader strategy that effectively improves the number of members who subscribe to the firm. The low-cost leadership strategy is working well. It has enabled the company to continue selling finest national together with regional products at prices constantly below customary retail outlets or wholesale[31]. Besides, this plan has been effective in Costco’s operations as it allows the company to sell its products at heavily discounted prices, making the firm remain on the growth trajectory. Low cost on products has made the company capable of differentiating its product range that is essential in providing the upscale shopping experience for registered members. Hence, the company’s engagement in low-cost leadership has enabled the company to work to be competitive. It works with a model that focuses on selling restricted selection o products at affordable prices, making leaders save a very high volume of products[32]. Moreover, this strategy is effective in Costco’s operations as it provides members with the selection of different affordable products. The business strategy is working as it helps in encouraging members to shop at Costco more frequently.

Recommendations to Make to Costco Management to Sustain the Company’s Growth and Improve the Company’s Financial Performance

The company’s management has done well by arriving at the decision of limiting their products to 3,600 that are active. There is a need to encourage the management to focus on maintaining such a decision as it is great in aiding the company to sustain its growth by being active in different markets[33]. Moreover, there is a need for management to focus on engaging in treasure-hunt merchandise. The move can help Costco help more consumers by providing attractive offers or deals on big-ticket items. The top management can also conduct an appropriate survey to understand what the clients desire to purchase. Therefore, the idea of having a small range of services and items might be risky to operations of Costco, as they might not be attaining the needs of some of their esteemed and targeted customers within the market[34]. Therefore, management can improve the growth and financial performance of Costco by conducting a market survey. The idea of conducting market research can form a vital step for the top management as it can help the top management of Costco to improve and sustain its growth, enhance its profitability through the determination of different needs of customers and possibly even identify the gap that exists within the market in the process of the survey.

Improving retail display

The company’s management can improve the operations by improving its retail displays apart from using a low pricing strategy. The focus display might have a considerable influence on the corporation’s financial performance as more customers will be attracted to purchase Costco’s products. Effective displays that give different products the attractive together with a well-organized outlook can be essential in luring customers to make the purchase[35]. Besides, retail displays can effectively enhance Costco Corporations’ growth and profitability because of the increased sales volume that the management will be able to get in return.

Training workers

Top management of Costco needs to create different programs that focus on offering timely training to staff. Different training will help in offering a continuous improvement of workers’ skills that will ensure the appropriate acquisition of service delivery and improve skills of handling customers[36]. Given the advancement in Costco’s strategy, the top management needs to ensure that the workers have the appropriate expertise to handle new challenges. As such, training various workers will allow the top management of Costco Corporation to maintain the advancement of the firm because workers have much-needed skills necessary to serve new markets.

Expanding market share

Top management of Costco needs to focus on taking different steps to expand the corporation’s market share. The management can attain such through exploring different untapped markets within different regions such as within the U.S. and other regions away from the U.S[37]. The management can improve company growth by expanding market share only if they can preserve their excellent reputation of offering better value to its targeted clients. Such approaches of expansion of market share can be improved by the ability of top management to provide online shopping opportunities to their targeted and esteemed clients who are outside from Canada and the U.S. Hence, management of Costco needs to continue with their valuable strategies like soaring compensation to workers, low cost, and dependable quality yields in the areas where they expand their operations[38]. The idea of maintaining such strategies during the operations of Costco can be effective in ensuring that the company improves its financial performance.

Conclusion

From the above examination, it can be concluded that some of the business models used by Costco comprise of creation of an impressive presence of products and forming unique organizational culture. Other models used by Costco to meet its set mission include merchandising operations and developing a membership-only warehouse. Besides, Costco’s business strategies comprise a membership program, limited selection o items and operations, treasure-hunt merchandise, and lower prices than grocer’s stories. Furthermore, the business strategy used by Costco is working appropriately in improving the firm’s operations. For instance, the strategy is working well as it helps in depicting Costco’s performance and it also narrows the selection of products that the company deals within different markets. The strategy also works well as it helps the company engage in low-cost leadership policy essential in improving the number of associates during operations. Moreover, different recommendations can be proposed to the top management to improve the growth and improve the performance of Costco Corporation. The top management needs t to improve the retail display, improvise different training workers, and expand market share.

 

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[1] “Analysis Of Costco’s Business Strategy”. 2020. Businessteacher.Org. https://businessteacher.org/reports/analysis-of-costcos-business-strategy.php.

[2] “Costco Wholesale’S Generic And Intensive Growth Strategies – Panmore Institute”. 2020. Panmore Institute. http://panmore.com/costco-wholesale-generic-intensive-growth-strategies.

[3] Kim, Jae-Jin. 2019. “The Entry And Growth Strategy Of Multinational Retail Warehouse In Korea Market: The Case Of Costco Wholesale”. INTERNATIONAL BUSINESS REVIEW 23 (1): 53-79. doi:10.21739/ibr.2019.03.23.1.53.

[4] Thompson, Arthur A, Margaret A Peteraf, John E Gamble, and Alonzo J Strickland. 2020. Crafting And Executing Strategy: The Quest For Competitive Advantage: Concepts And Cases, Mcgraw-Hill Education. 22nd ed. New York: 2018. Case 4 Teaching Note Costco Wholesale Corp. in 2018: Mission, Business Model, and Strategy, p.302.

[5] Gudlaugsson, Thorhallur. 2018. “The Image Of Costco In Iceland And Its Impact On The Grocery Store Market”. Journal Of Academy Of Business And Economics 18 (3): 93-103. doi:10.18374/jabe-18-3.10.

[6] “Costco Wholesale Corporation | Company Profile | Vault.Com”. 2020. Vault. https://www.vault.com/company-profiles/retail/costco-wholesale-corporation.

[7] “Costco’s Mission, Business Model, Strategy & SWOT – Panmore Institute”. 2020. Panmore Institute. http://panmore.com/costco-mission-business-model-strategy-swot.

[8] Haaker, Timber, Harry Bouwman, Wil Janssen, and Mark de Reuver. 2017. “Business Model Stress Testing: A Practical Approach To Test The Robustness Of A Business Model”. Futures 89: 14-25. doi:10.1016/j.futures.2017.04.003.

[9] Thompson, Arthur A, Margaret A Peteraf, John E Gamble, and Alonzo J Strickland. 2020. Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, McGraw-Hill Education, New York, 22nd edition. CA 1 – CA 12.

[10] Hilliard, Rachel, and Don Goldstein. 2018. “Identifying And Measuring Dynamic Capability Using Search Routines”. Strategic Organization 17 (2): 210-240. doi:10.1177/1476127018755001.

[11] Baek, Jung-Yim, and Shuguang Wang. 2018. “The Localization Strategies And Success Of Costco : Focusing On A Japanese Mature Retail Market”. Journal Of Industrial Distribution & Business 9 (2): 7-16. doi:10.13106/ijidb.2018.vol9.no2.7.

[12] Gudlaugsson, Thorhallur. 2018. “The Image Of Costco In Iceland And Its Impact On The Grocery Store Market”. Journal Of Academy Of Business And Economics 18 (3): 93-103. doi:10.18374/jabe-18-3.10.

[13] Teece, David J. 2018. “Business Models And Dynamic Capabilities”. Long Range Planning 51 (1): 40-49. doi:10.1016/j.lrp.2017.06.007.

[14] Thompson, Arthur A, Margaret A Peteraf, John E Gamble, and Alonzo J Strickland. 2020. Crafting And Executing Strategy: The Quest For Competitive Advantage: Concepts And Cases, Mcgraw-Hill Education. 22nd ed. New York: 2018. Case 4 Teaching Note Costco Wholesale Corp. in 2018: Mission, Business Model, and Strategy, p.302.

[15] Kim, Jae-Jin. 2019. “The Entry And Growth Strategy Of Multinational Retail Warehouse In Korea Market: The Case Of Costco Wholesale”. INTERNATIONAL BUSINESS REVIEW 23 (1): 53-79. doi:10.21739/ibr.2019.03.23.1.53.

[16] Wiener-Bronner, Danielle. 2020. “Costco Owes Tiffany More Than $19 Million For Selling Counterfeit Rings”. Cnnmoney. https://money.cnn.com/2017/08/14/news/tiffany-costco-lawsuit/index.html.

[17] Teece, David J. 2018. “Business Models And Dynamic Capabilities”. Long Range Planning 51 (1): 40-49. doi:10.1016/j.lrp.2017.06.007.

[18] Thompson, Arthur A, Margaret A Peteraf, John E Gamble, and Alonzo J Strickland. 2020. Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, McGraw-Hill Education, New York, 22nd edition. C17 – C40.

[19] Thompson, Arthur A, Margaret A Peteraf, John E Gamble, and Alonzo J Strickland. 2020. Crafting And Executing Strategy: The Quest For Competitive Advantage: Concepts And Cases, Mcgraw-Hill Education. 22nd ed. New York: 2018. Case 4 Teaching Note Costco Wholesale Corp. in 2018: Mission, Business Model, and Strategy, p.302.

[20] Teece, David J. 2018. “Business Models And Dynamic Capabilities”. Long Range Planning 51 (1): 40-49. doi:10.1016/j.lrp.2017.06.007.

[21] Shih, Shiau Pei, Szuchiang Yu, and Feng Ju Yen. 2015. “How Does Costco Win Customer Satisfaction: A Case Study Of The South Of Taiwan”. Journal Of Economics, Business And Management 3 (3): 360-363. doi:10.7763/joebm.2015.v3.210.

[22] Loftsdóttir, Kristín, and Már Wolfgang Mixa. 2017. “The Opening Of Costco In Iceland: Unexpected Meanings Of Globalized Phenomenon”. Veftímaritið Stjórnmál Og Stjórnsýsla 13 (2): 189. doi:10.13177/irpa.a.2017.13.2.2.

[23] Hilliard, Rachel, and Don Goldstein. 2018. “Identifying And Measuring Dynamic Capability Using Search Routines”. Strategic Organization 17 (2): 210-240. doi:10.1177/1476127018755001.

[24] Gaille, Brandon. 2020. “Costco Business Model And Their Strategy”. Brandongaille.Com. https://brandongaille.com/costco-business-model-and-their-strategy/.

[25] Fischer, Peer. 2020. “Vision Statement: Interactive Materials—Drivers Of Future Robotic Systems”. Advanced Materials 32 (20): 1905953. doi:10.1002/adma.201905953.

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