Costco is one of successful businesses in the U.S. It is the third largest retailer in the U.S. and the seventh largest retailer in the world, which makes 87 billion annual sales. The company’s business model and strategy are key factors for the success. Its philosophy is telling what the company is; obey the law, take care of our members, take care of our employees, respect our suppliers, and reword our shareholders.
Costco’s business model and strategy
Costco’s business model is focused on producing high sales volumes and rapid inventory turnover by offering fee-paid members low prices on a limited selection of national name brands and select private-label products in a wide range variety. They take the low-cost provider approach focusing on the target segment which is for affluent customers with $75,000 above income. Costco is not like regular discount stores like Wal-Mart. Their mission is to bring the highest quality goods and services to market at the lowest possible price. Furthermore, their view is also providing excellent customer service and adhering to a strict code of ethics that including taking care of their employee and members, respecting their suppliers, rewarding their shareholders, and seeking to be responsible corporate citizens and environmental stewards in their operations and the world.
They have a very appalling business model, which is by offering the best products possible at lower price, they are able to have these members return. The high volume sales and rapid inventory turnover allow them to accelerate cash conversion cycle, which takes advantage of early payment discounts. Actually that makes it possible to reduce further operating costs, and allow members enjoy the low priced goods.
Low price products and services
High inventory turnover
Low employees turnover
• Simple design floor for luxury goods
• Depend on membership fees
• Less advertisement
Positive image for social responsibility
Growth in membership
Sam’s Club and Bj’s as competitors
Depend on U.S. market
Not low income people
Different types retailers
Costco is trying to generate huge sales volume and quick inventory turnover by offering limited selections of national branded products with low price. Unlike other competitors, they pay well to their employees. By offering quality of goods to members, they generate the fixed revenue but also increase their own brand loyalty and awareness. They advertise less but their reputation from employees to customers and customers to customers is high. The well-paid employees would say good things about Costco, also its higher level openings are fill within the company, which will motivate employees and be better productivity.
Costco is keeping approximately 3,600 items at stores but some 20-25% of items are constantly changing. This distinctive segment is called “treasure-hunt merchandising.” This idea actually attracts customers offering limited items which will vanish quickly from the stores.
To achieve efficient operations, Costco handle its merchandise by storing on racks above the sales floor and displayed a portable platform for storing and moving goods containing large quantity of each category of merchandise. By doing so, Costco reduces its labor requirement for merchandise handling and stocking. It also eliminates merchandise receiving cost by eliminating multiple steps handling of merchandise.
Not only reducing the operational costs, but Costco pricing strategy is to cap it markup on brand-named merchandise at 14 percent, which is much lower compared with other discounters and many supermarkets. Costco’s private-label Krikland Signature items usually have a maximum 15% markup, still Krikland Signature brand is priced about 20% below compared to brand-named item.
Costco uses different kinds of cost strategies like