Costco Wholesale in 2008: Mission Business, Model, and Strategy

Costco Wholesale in 2008: Mission Business, Model, and Strategy

? Question 1: What is Costco's business model? Is the company's business model appealing? Why or why not?

The official Costco' mission statement is "To continually provide our member with quality goods and service at the lowest possible prices". This statement shows us what drives Costco and their long-term goal is. They want to sell high quality goods and services to their customers, along with the lowest price of the market. Thus it is easy to understand what why the company strategy is how it is: to generate high sales volumes and rapid inventory turnover by offering member very low prices on limited selection of national brand and select private-label product in wide range of merchandise category". As a wholesale company, Costco purchase large amount of product from manufacturer. It has the ability then to obtain large and deep discount from supplier, in the same way as Wal-Mart does. This strategy give to the Washington-based company a high purchasing power compare to retailer. By generating high sales volumes and rapid inventory, Costco receive payment from customers before supplier's payment are due. Here again, this gives to the company another way to get more discount, and pass this saving on to customers by lowering price. Moreover, the risk of obsolescence, one of the most financial issues with huge inventory, is decrease. Storage cost is in this case very low, because products move quickly in and out of the store. This model does not need high working capital, because the money flows 24/7. High liquidity value, and (almost) no need of additional loan. Thus, we have a company able to obtain deep discount and then get low prices for its customer, while still able to offer national brand and select private-label. All together, this looks really appealing. Customers get best price of the market and brand recognition at the same time. Business and Families come easily to shop at Costco

? Question 2: What are the chief elements of Costco's strategy? How good is the strategy?

The three key components of Costco's strategy are a low pricing, a limited product line and limited selection, and a "treasure hunt" shopping department. The low pricing strategy consists of capping the markup at 14 percent for brand-name. While it is around twenty to fifty percent at others big markets, Costco prices are anywhere from six to thirty-six percent lower than its competitors. Additionally, Costco has its own brand named Kirkland Signature. This store-label produces juice, cookies, coffee, spices, tires, house wares, luggage, appliances, clothing, and detergent. The markup here is at fifteen percent, which still result for the wholesale company to be five percent lower than comparables named-brand.

The production selection is limited to 4,000 items classified in these category: rotisserie chicken, prime steaks, caviar, flat-screen TVs, digital camera, fresh flowers, fines wines, caskets, baby strollers, toys and games, musical instruments, ceiling fans, vacuum cleaners, books, DVDs, chandelier, stainless-steel cookware, seat-cover kits, for auto, prescription drugs, gasoline, and one-hour photo finishing. Although the range can appear wide, only a few products by category are available. Those ones are fast-selling models, sizes, and colors. It is a really good strategy, because it appeals to a variety of element. Commons goods like soft drinks are sold only by big-containers, case, carton, or multiple-pack, not individually. The last element is the "treasure-hunt" thing. Costco buy brand-named product on "the gray market" at a discount price. While some manufacturers do not want to have their product at Costco, because the low pricing strategy can hurt the image, others just do not have any issue with that. This is why it is easy to get big international brand. The treasure-hunt strategy consists of keeping three-fourth of products unchanged, but changing constantly about one-fourth. These products are high-end or name-brand that carried big price tags, like screen TV HDTV. The opportunity to find brand-name products at lower price appeals a lot to customers. It develops the loyalty of the client, may explain why the membership number is so high (53.2 million memberships).

The strategy seems to be a great success. The strategy gives a strong foundation for long-term survival. "Those people are in business of making money between now and next Tuesday. We're trying to build an organization that's going to be here 50 years from now", said CEO Sinegal. This quote resumes pretty well the overall strategy. By offering low prices and capping markups, the wholesale company does not give much chance to competitor to gain market