Costco Corporation is a strong brand, characterized by low prices, efficient warehouse operations, and special approach to choose and handle excellent merchandise. As a result of their ultra-low prices with small margins, Costco relies a lot on the revenue from their membership fees. This article focuses on the effect Costco had in Iceland when it opened its doors in 2017. There could be membership discounts offered to those who need or deserve them (e.g., military discount). Boxed found a niche market with the younger generations. The long-term debt-to-equity ratio increased significantly from 19% in 2000 to 45% in 2015, as shown in Table 1. Higher staff satisfaction results in superior performance and better productivity. Costco’s inventory management has also increased and is the best in the industry with high inventory and low days of inventory. For a retailer, its supply chain and logistics are like the backbone of its business. Costco has worked hard on policies and tried to simplify them and empower costumers. With a substantial part of its business focused on selling merchandise at the low profit -margin, Costco also has about fifty million members that each year guarantee to the company over $2.8 billion in steady income at high- profit margins. A business enters into a market with its products that are valued in the market. Costco Wholesale uses the membership strategy on its business strategy. For example, Net sales increased from $31.6 billion in 2000 to $87,048 in 2011 and proceeded to grow to $113.6 billion in 2015. However, since the company offers a large range of products at discounted prices, it also attracts consumers from the middle class. And marketing ensures that the products can have an excellent reach to the target market. (2018). Costco was able to successfully navigate its entry into Japan by sticking to their business model of offering its members low prices on their products. Wait… what? As shown in Table 1, there has been overall favorable increases. The company received an overwhelming response in China when it opened its first store there despite investing nearly nothing in marketing and promotions. The company operated 785 warehouses in fiscal 2019 of which 546 were located in the United States, 100 in Canada, and 139 in the other international markets where Costco is operational. As mentioned in the case, if one item became unavailable from a supplier, Costco would have no problem switching to another supplier as it would not have a substantial effect on business (Thompson, C-35). One of the differentiating factors that has helped the company build an outstanding and unique identity is its customer service. Figure 1. Rivalry and competition from substitutes are the two strong competitive forces facing the wholesaler clubs in North America. Costco marketing strategy is developed by making use of marketing mix strategy. These competitors can either individually or collectively offer Costco members better prices, selections, convenience, or amenities. Ways to reduce long-term debt would include better inventory management, but Costco already had a remarkable handle on this area of operations, as will be discussed next. Abhijeet has been blogging on educational topics and business research since 2016. Bhattarai proposes that millennials could be the downfall of the wholesales area. With the lack of luxuries, there is a very low overhead that allows savings to pass to the members. To grow its popularity among millennial consumers, the company has grown its focus on technology. Costco being one of the largest warehouse service providers with 40 years of infield experience always strive for customer satisfaction. A large number of small businesses also shop from Costco since its membership offers an enormous advantage on a large range of products. Unlike Walmart that targets a large and varied customer segment composed of people from diverse classes including middle class, upper middle and upper class, Costco targets mainly the affluent class consumers which are the largest part of its customer base. Supply chain management, apart from being a critical source of competitive advantage for the brand, is also a core pillar of Costco’s business growth strategy. Costco continues to dominate, as it is now the largest wholesale club in 2019 (Vault, 2019). You can view professional samples here. The company has conducted their market research and found popular market trends (e.g., Internet trend), as discussed in both Marketing Management and Entrepreneur Management. Iceland experienced the 2008 economic crash, and it along with the Panama files revelation, it changed the Icelander’s view towards foreign businesses. To accommodate this, Costco changed some of its packaging types to allow better their members to share among themselves. It has been difficult for foreign businesses to establish themselves in Japan. The competitors are losing money by holding onto their goods longer. In Costcos case, the business has a marketing mix that is relatively uncommon in the retail industry, especially in terms of the promotion element. People’s reliance on digital technology has grown and they are using online channels to fulfill most of their needs including shopping and entertainment. The Icelandic food retailer, Bonus, dominated all over Iceland due to the abolishment of currency restrictions and the diminishment of wholesaler monopolies. Net income increased from $631 million in 2000 to $1.4 billion in 2011 to $2.3 billion in 2015, which is a 277% increase. Costco's distribution includes the transporting activities and costs of the goods (e.g., moving goods to sales food via trucks, forklifts, and pallets). The high sales volume ensures high revenues in spite of low selling prices. The Japanese found shopping at Costco a family event where they spend a long time in the store shopping and enjoying their leisure time. To achieve higher sales volumes, the company needs to maintain higher membership retention rates. Its international footprint is limited to only a few major markets. Boxed's average shopper age ranges from 25 to 44 and does not have to rely strongly on a physical location to reach customers like Costco. In this area, however, the brand has still to do a lot to catch up with the latest trends. Baek, J. Y. & Wang, S. (2018). Costco Wholesale Corporation is the second biggest retailer in the world, behind Walmart. However, since the company deals in a limited range of products, it has managed a simpler but lean and agile supply chain. It has not pursued an aggressive international expansion strategy which might bring the company extra revenue and help it find faster growth. Costco has also made several arrangements to attract affluent consumers. (2019). The goods are transported to either a warehouse or one of Costco's 23 cross-docking depots that distribute to stores or members' personal addresses for online orders within 24 hours generally. They heavily advertised a free two-bite service to members with a Korean grilled beef Costco was selling at the time. The wholesale clubs can make a nice profit by keeping prices low and keeping the barriers for new entrants low. Costco is a membership based warehouse chain. Return on stockholder’s equity (ROE) had a favorable increase from 14.88% in 2000 to 21.92% in 2015. Its approach to marketing is a lot like Starbucks. Two critical elements make the Costco business model effective and efficient. Total revenue from membership fees increased from $32.1 billion in 2000 to $88.9 billion in 2011 and climbed to $112.2 billion in 2015. This has enabled the company to create higher customer satisfaction and gain higher loyalty from both customers and staff. The company saves on its operating expenses by not investing in marketing. Like Walmart, Costco also strives to offer its customers the price advantage. While Walmart follows an open for all approach to retail, Costco is a chain of membership warehouses. The company’s culture exists at the core of its competitive advantage. It was an exploratory research to provide insights in the perceptions of Costco customers in reference to new, seasonal, and premium products (“treasure hunt”) in their shopping habits, in comparison with purchasing regular items. In this way, despite having a much lower gross margin as compared to the other retailers, the company is able to operate profitably by achieving higher sales volume and rapid inventory turnover. The products sold at the wholesale clubs are comparable and readily available among each other and at other stores and with a large selection of products to choose from (e.g., supermarkets and convenience stores). Always looking for ways to sell and merchandise products more effectively. Costco’s target market is different from that of Walmart or other retailers. This ratio indicates that as Costco has grown and expanded, so has its debt. Costco keeps its product selection to approximately 3,700 compared to its competitors that have 40,000+ in their stores. Its e-commerce sales were around 4% of its total sales in 2019. It offers co-branded credit cards for its loyal customers. A possible solution would be to raise prices on some items to increase their net sales, which would be an adjustment to their strategy. No retailer can make growth possible without having an efficient and agile supply chain. Costco’s net sales, total revenue, and total income have all steadily increased. Moreover, it seems that Boxed’s strategy is paying off well as the company's annuals sales went from $8 million in 2014 to exceed $100 million in 2018. This was hypothesized to be the result of the Icelander's negative view towards foreign businesses. Costco has a simple strategy for winning — concentrating on driving sales. Technology has become an important driver of competitive advantage in the retail industry and also an important differentiator for the retail brands that are investing heavily in digitalization and cloud technologies for efficiency and speed. But that’s not to say that Costco isn’t savvy when it comes to self-promotion. You’re telling me that my business should offer LESS choices? Hence pricing is a strategy in its marketing mix which is critically dependent upon the competition, amount of goods sold etc. Costco should not have advertised the ring as "Tiffany" as it led to customer confusion. Costco had successfully opened 26 stores across Japan as of November 2017. Word had gotten around the community by mouth and with the help of the media. The member of the Costco Wholesale club has access to get various products at a low price. Also, what happens if members stop paying their fees? Members may switch based on convenience and which wholesale club is offering the best deals. Costco has several market opportunities to grow and expand into. However, Costco could improve in some areas, as mentioned earlier, with Costco's high long-term debt-to-equity ratio. Disclaimer: This report was written by a student and is not an example of our proffesional work. The retail industry in the United States is marked by intense competition and apart from Walmart and other retailers like Target, Costco is also facing increased competitive pressure due to the rise of the e-commerce brand Amazon. The unpretentious setting and lack of formality underscore a message of simplicity Jelinek and Vachris describe as the foundation of Costco’s strategy during a conversation with Retail Leader in which the co-workers of more than 30 years occasionally finished each other’s sentences. 750 warehouses are empowering pioneer businesses to store their finished goodsand ship them across the … Costco marketing strategy – offer less choices. Find your ideal job at SEEK with 6 costco jobs found in Sydney, New South Wales. The customers now do not just think of good quality products and prices when they think of shopping. Costco's operation activities and costs include the management of the Costco stores and online sales, both nationally and internationally. Costco’s main source of revenue is the United States market followed by Canada. The supplier switching costs are low for this wholesale industry. It would be recommended for Costco to officially create a vision statement and share it with employees, members, and shareholders as it provides direction. It stocks a limited number of units per warehouse; an average of 3700. The company has maintained a clean and strong brand image, which has continued to grow stronger with time due to a consistent focus on quality and customer service. By investing in technology over the previous several years, the company has been able to improve the level of customer convenience and customer satisfaction. Costco’s value chain begins with the supply chain that includes the activities and costs of purchasing goods from various manufacturers/vendors. Thompson, A. Costco positions itself as a higher-end shopping destination than Sam’s Club, and has built a reputation for quality fresh food. It would be recommended for Costco to monitor its competitors to ensure that they still have a competitive edge in the industry. The localization strategies and success of Costco: Focusing on a Japanese mature retail market. This membership only model may be unappealing and be a barrier to some customers who do not have the capabilities to pay the membership fee. Official website for Costsco Wholesale. Costco has gained fast in the area of e-commerce. Gross profit margin had a favorable increase from 11.95% in 2000 to 13.02% in 2015. Three main topics related to Costco dominated media discussions. The final element is Costco’s growth strategy. The overall shopping experience matters for the customers like the level of convenience that they have when they are shopping from a particular brand. The high sales volume contributes to high operating efficiency. It does not mark up any of the products more than 14% compared to other supermarkets and department stores that mark upto 25% – 50%. Shop by departments, or search for specific item(s). The threat of new entry, supplier bargaining power, and wholesale club member bargaining power are all weak competitive forces. The Japanese have a high priority towards freshness, and foreign retailers have not met the Japanese standard, till Costco. Instead of investing heavily in marketing as the other retail companies do, Costco strives to maintain a strong reputation in the market, which it has made possible by establishing a culture of customer service, collaboration, and ethics. This encourages the bargain-hunters to spend more on the unique and enticing deals more frequently. Higher focus on customer service also helps the brand differentiate itself from the other retail brands. However, prior to that, we will take a look at the customer segments the company is targeting. Costco uses a single-step distribution strategy to sell its inventory. Bhattarai, A. Wiener-Bronner, D. (August 15, 2017). This also helps the company save on its operating expenses. It is recommended that Costco do more online marketing and selling. It deals in a limited product range as compared to Walmart. Costco was ruled to be guilty of infringing on Tiffany & Co's trademark and ordered to pay Tiffany & Co a total of $19.3 million in punitive damages. The second element is Costco's limited product selection. No plagiarism, guaranteed! Costco’s inventory turnover has remained the same from 11.37 in 2000 to 11.35 in 2015, as shown in Table 1. Tags: Business ReportsCase StudyBusinessCostcoBusiness StrategyWholesale. Costco owes Tiffany more than $19 million for selling counterfeit rings. The working capital had a favorable increase from $66 million in 2000 to $759 million in 2015. It is Costco's philosophy to keep prices low to generate large sales volumes (Thompson, C-30). Once goods arrive at the warehouse, they are put on the sales food for members to buy from. In fact, on average, Iceland's food prices were 50% higher than in other countries within the European Union. contact: firstname.lastname@example.org, email@example.com. Costco’s growth strategy also depends on product quality. The Icelandic media was very interested in the arrival of Costco. High complexity products affect the customers to spend more time to find their desired products, All of Costco’s merchandising categories also experienced growth. While Costco does not have an official stated vision on its website, research shows its implied vision is to give its members "a place where efficient buying and operating practices give members access to unmatched savings” (IMP, 2018). To combat the odds of members leaving Costco for its competitors, Costco should differentiate itself by possibly offering a better selection and lowering prices of individual items and more in-store promotions. Punitive damages, also learned in Business Law and Ethics, are to compensate the plaintiff for their losses and to punish the defendant. Retrieved from. Costco’s Kirkland signature brand is also an important attraction for affluent customers. It would be recommended for Costco to monitor its main competitors to ensure that the company has better deals and promotions. Business Growth strategy of Nike: A case study, Ways To Build a Stronger Business In 2021. (21st ed). View all our costco vacancies now with new jobs added daily! Table 1 Costco Performance Ratios (2000-2015). Vault. There are three basic things that underlie the Costco experience and differentiate it from others and include quality, lower prices, and distinct in-store shopping experience. Costco runs on a "subscription business model," that is, customers who want to shop at the store must buy a membership in order to do so. Costco Wholesale Corporation (trading as Costco) is the largest American membership-only warehouse club. Financially, it did not seem that Costco was significantly affected by the recession, even though most of Costco's stores are in the United States. The company’s success capitalizes on the main strengths of the business, as follows: 1. In the context of Costco marketing strategy, Costco has a wide range of products to offer to its customers. Moreover, there is an important reason that Costco must continue to invest in quality. Moreover, the staff are also a critical source of advantage and help it maintain its edge in the industry through improved performance. The discount warehouse services industry is highly competitive. Costco has established a customer centric culture that focuses heavily on customer satisfaction. 2. The net profit margin had a favorable increase from 1.96% in 2000 to 2.05% in 2015. The price for food remained high. There are monthly coupon mailers and weekly emails to members, and for special occasions, there are direct mailings to campaign for new members. Since its foundation, the company has strived to create a culture that cares for the happiness of both the customers and the staff. As mentioned earlier, Costco's inventory management is the best in the wholesale industry with its use of retail space, store, and distribution warehouse locations. The products bought from the manufacturers are delivered to Costco depots and then to the warehouses using the cross-docking technique. Any opinions, findings, conclusions, or recommendations expressed in this material are those of the authors and do not reflect the views of BusinessTeacher.org. Costco’s unique supply chain is what gives it a competitive advantage over competitors as it limits the possession of the goods. The company has been successful at generating strong results using an efficient supply chain management model. In 2013, a lawsuit was filed against Costco for selling rings advertised in-store as “Tiffany” rings, to customers for multiple years. Another important segment of consumers that Costco targets are small businesses. This shows that Costco’s commitment to quality has paid well in the long run. *You can also browse our support articles here >, http://dx.doi.org/10.13106/ijidb.2018.vol9.no2.7, https://www.sfgate.com/business/article/Will-millennials-kill-Costco-and-Sam-s-Club-12511119.php, https://integratedmp.com/vision-statement-compass-future-practice-success/, https://opinvisindi.is/bitstream/handle/20.500.11815/664/2665-3718-1-PB.pdf?sequence=1&isAllowed=y, https://www.vault.com/company-profiles/retail/costco-wholesale-corporation, https://money.cnn.com/2017/08/14/news/tiffany-costco-lawsuit/index.html, Developing a Business or a Career in Business. Several factors intensify the rivalry among wholesale competitors. Its Kirkland Signature brand offers high-quality products that earn higher margins than the other products sold by the company. He graduated with a Hons. The incumbents have cost advantages against new entries as well (e.g., exclusive suppliers and fixed costs). The high inventory turnover reflects positively upon the company as it indicates the company is selling items quickly, and they are not in Costco's possession long as indicated by their days of inventory. Shareholders were receiving a steady increase in returns from 2013 to 2015. It was stated in the article that three months after the grand opening, Costco had given out 90,000 membership cards, which was reported to be about 35 percent of the total Icelandic population in 2017. As a part of its business growth strategy, Costco continues to focus heavily on its reputation and image and continues to invest in the areas that maximize customer and staff satisfaction. This high compensation has resulted in low employee turnover. Copyright © 2003 - 2021 - BusinessTeacher.org is a trading name of All Answers Ltd, a company registered in England and Wales. Since 2000, Costco’s financial performance has been remarkably good. Even though the company directl… The entry barriers into the wholesale industry are relatively high. Japanese retailers are relatively more sophisticated with technology and for their knowledge of handling perishable foods (e.g., fish, fruits/vegetables, and meat) when compared to Western retailers. However, the company has been investing in digitalization strategically over the past few years to grow its e-commerce capabilities stronger. You need to be a member to shop at Costco. There are a couple of threats facing Costco that include other wholesale clubs, supermarkets, convenience stores, and e-commerce retailers/wholesalers. As learned from Managerial Economics, monopolies have almost or total control over a sector or industry. (January 19, 2018). Costco, while making advancements to target the younger generations (e.g., Generation X, Generation Y, and Generation Z) are losing to new wholesale companies taking advantage of their slow progress. Overall, its brand image is an important source of competitive advantage for Costco and has helped it maintain its leadership position in the retail industry. Managing operational efficiency in its supply chain allows the company to reduce operating expenses and pass on the benefits earned to its customers. It is a critical source of efficiency. The result is that its membership retention rates are very high. In the first few days months of operation, Costco had claimed 32 percent of the gasoline market share, which was higher than the country’s Bonus that had 28 percent of the market share. (February 12, 2018). It is important to note that Costco offers a broad range of limited brands for each product category. Find your ideal job at SEEK with 3 costco jobs found in Sydney Olympic Park NSW 2127. Even when the United States was in the recession (2008-2011), Costco reported positively stable numbers and quickly progressed after the recession ended. Costco's low-cost leader strategy was successful yet again. The third element is Costco's treasure-hunt merchandising. Costco’s supply chain management strategy has made consistent growth possible for the brand. These competitive forces indicate that the industry is average. Free resources to assist you with your business studies! The current ratio has relatively stayed the same since 2000, as shown in Table 1. The third element of Costco’s pricing is treasure hunt merchandising, which is the short term stocking of unique goods when available. Based on the case study, Costco would not sell a Tiffany & Co ring as it is not a product at a low price, so it would be unlike Costco to sell a Tiffany & Co ring. Costco’s merchandising strategy is to buy products in handful from the vendors and that helps drive cost down for members and lets Costco sell in volume (Harris 2007). Many individuals went out of their way (e.g., out of their towns) to travel to Costco to get better deals on items. All work is written to order. Overall, the collective strength of the five competitive forces is attractive. Costco’s strategy is to offer its members a wide assortment of high-quality merchandise at lower prices than the competitors. To weaken these competitive forces, Costco should monitor its competitors and explore different market opportunities to expand and better differentiate itself from competitors to gain a higher competitive advantage. We're here to answer any questions you have about our services. As mentioned previously, with the membership fee critique in the business model, a solution would be to increase prices. Costco’s strategy has always been to target affluent consumers who want to save money but also want to shop in a customer-friendly environment. We've received widespread press coverage since 2003, Your BusinessTeacher.org purchase is secure and we're rated 4.4/5 on reviews.co.uk. Unlike Walmart, which was known for paying its associates lower wages to save on operating expenses, the company pays its employees very well, which has helped it gain higher staff satisfaction and lower attrition rates. The company believes in the continuous augmentation of the sales as well as the products mix and has made many improvements to do so. Mexico, UK, and Japan are among the other significant markets of Costco. “Spencer, have you been in a Costco before? There are monthly coupon mailers and weekly emails to members, and for special occasions, there are direct mailings to campaign for new members. While Wal-Mart and Target pour money into marketing, Costco has a no frills approach and doesn’t advertise. In 2016, membership fees grossed over $2.5 billion. VAT Registration No: 842417633. Below is the pricing strategy in Costco marketing strategy: Costco offers products which are widely available. Even with these efforts, it has failed at an important aspect of their business model. As we learned in chapter one of this course, Boxed is using a focused low-cost strategy as opposed to Costco’s low-cost provider strategy. Costco has opportunities in foreign markets. View all our costco vacancies now with new jobs added daily! Loftsdottir, K., & Wolfgana Mixa, M. (2017). The company has very attractive low prices on practically every good or service offered in its stores and on its website. The company has exceptional employees who receive multiple benefits, wages higher than work compensation in other stores and supermarkets, good human recourse policies that result in high level of service. Costco’s sales and marketing strategy include in-store advertisements (e.g., sampling and signs). Costco's low rate of days of inventory has also steadily remained the same from 32.09 in 2000 to 32.17 in 2015. By targeting affluent customers, the company is able to generate strong revenue while dealing in a much-limited product range as compared to Walmart. This was different from the norm as most Japanese go to the local grocery store a few times a week and spend a short amount of time there. The implied vision also ties in elements of Costco's strategy by mentioning efficiency and savings that allude to low prices and great deals. Costco reported positive numbers even in the recession. The price of fuel at Costco’s was about 15 percent cheaper than the average gas prices in Iceland at the time this article was published. An excellent opportunity for an experienced & seasoned Manager to join Costco. This critique is a valid concern as shareholders provide the necessary funds to the company to grow and expand. The company buys from the manufacturers directly and has successfully eliminated the middlemen just like Walmart did. However, as will be discussed in question five, there are new entrants, who have found a foothold in the niche market of online wholesale clubs that are prospering using a focused low-cost strategy. Costco has a simple strategy for winning — concentrating on driving sales. Both Costco’s business model and strategy align with the company’s mission and vision. That is more than 260,000 memberships. Costco has a strategy that is a global phenomenon. With the pandemic, the retail brands have moved even aggressively towards digitalization and digital commerce in the United States. In this post, we will analyse the main pillars of Costco’s growth strategy. In fiscal 2019, the company had a total of 42,900 Gold Star members as well as 11,000 business members. Costco is among the leading physical retailers in the United States. Costco's typical pricing strategy is to undercut competition and make up for this with high volume sales. First, Costco’s fuel prices. Costco can expand and grow its online sales. There is a growing market segment for online wholesalers, as briefly mentioned earlier. It has been aggressively infiltrating global markets with retail innovation practices that have created a cult-like consumer following characterized as \"The Costco Craze.\" Costco's global expansion frenzy began in 2013 and includes more than 200 international Costco Warehouse locations operating in ten countries outside th… However, the product quality is outstanding. It would be recommended for Costco to strengthen its competitive advantage against these new entrants and current competitors by increasing its online sales presence (e.g., offering exclusive online promotions). In fact, they rely on targeted direct mail to lure in new customers, and personalized coupons to encourage repeat purchases with existing shoppers. The shorter inventory turnover highlights the success of Costco’s business model and strategy. Of unique goods when available and wholesale club in 2019 ( Vault, 2019 ) days. 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