ECONOMIES OF SCALE Essay

Submitted By ebaad1
Words: 685
Pages: 3

Past few weeks of studies has enlightened us with many concepts and ideas that businesses practice in order to maximize profits, increase return on investment and differentiate them to survive and sustain the trends of the consumer market. One of the key factors discussed is economies of scale which has a huge impact in the current business environment as it also plays a vital role to create barrier for other small businesses to enter as a possible contender or competitor in the same industry. Through this dissertation I would highlight key components around the concept of economies of scale to help elaborate how it influences the business or a specific industry.
Economies of Scale basically means that buying or selling in bulk is always cheaper. This is what Wal-Mart, Sam’s Club, and Costco practice to stay in business and to differentiate them from a local grocery store. Economies of scale is the reason why we buy package of toilet paper that has 36 rolls, or anything that is buy one get one free. The more we buy at one time, the less it costs us per item. It’s like grandmother’s adage of “everything is cheaper by the dozen”.
As an example, Costco can stock up huge shipments of bread loaves from Oroweat, while a mom and pop business may only be able —or need— to buy a case of bread. Costco’s voluminous deal would definitely be much cheaper than the price an average store would have paid. Resulted economies of scale prevents any business from even thinking about starting a little store because they will have to sell their bread for a $3.50 (for example), while Costco can sell the same loaf for $1.90 and can sell in bulk, thus economies of scale become barriers to entry. “Costco Wholesale, a big favorite with consumers hunting for bargains on brand-name merchandise, might seem a great investment, too. After all, it leads the “membership warehouse” retail segment, has an upscale and loyal clientele, and by most accounts the company is as well-managed as are its stores.” [1]
“With 471 stores and $58 billion in sales last year, Costco is the nation's largest club warehouse chain. It generates annual revenues of $120 million per warehouse, compared with just $58 million in sales at each Sam's Club store.” [2] Higher sales per store mean that Costco benefits more from economies of scale. Costco continues to grow and is expected to double the number of stores in next ten years, with sales consistently rising at 10% annually. According to an article published by Kiplinger.com, The Company has "fanatical management focused on value for the customer and managing for the long term," The article further…