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The Strengths of the Costco’s Business Model
For those who are not familiar, Costco is a retailer know as a warehouse club or wholesale club where you can go buy items in bulk for a discounted price which ultimately saves customers a great deal of money. According to the case study, Costco’s business model is quite simple. Their goal is to generate high sales volume and rapid inventory turnover by offering fee-paying members low prices on a selection of nationally branded and selected labels in a wide range of categories. Almost everyone has experienced this type of business strategy at some point or another in their life, and personally (as a Costco Member myself) I believe that ultimately this business model gives customers the most for their money and provides some sort of ‘elite’ feeling as a member. I believe that this business strategy falls in line with the best-cost provider strategy for many reasons. This strategy by definition gives people and customers ultimate value for their dollar ultimately by selling them for a lower cost than other competing companies. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies and the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes. I confidently agree in saying that Costco’s business model is most certainly working to their advantage with one article stating that Costco’s business model is making the retail giant unstoppable. The article states that Costco has become the go-to location with customers ultimately choosing Costco over other providers such as Walmart, Target, and Amazon simply because they are the best option for product value. This is overall giving them the competitive edge over other locations and even online ecommerce stores.
Ultimately, I find the business model appealing because as a consumer, I’m always looking for the best deal for my dollar and the discounted prices and wholesale quantities wind up being cheaper in the long run. For example, If I can buy one Gillette razor from Walmart or Target for $10.00 that comes with two razor replacements or I can buy 14 Gillette razors from Costco for around $35.00 dollars, ultimately, I’m going to go with Costco. While it is more money up front, the better bargain comes from the bulk price and quantity from Costco.
The next thing we must analyze in the case study are the key elements of Costco’s strategy. There are three main elements that play into Costco’s business strategy include low prices, a limited selection of nationally branded and private-label products, a “treasure hunt” shopping environment, low operating costs, and an active expansion of new stores. The main and most important elements of Costco’s business strategy include the absolute lowest prices possible for its customers, a term that the company branded ultra-low pricing. This philosophy was to keep customers coming in to shop by wowing them with low prices and thereby generating big sales.
Another key aspect related to ultra-low pricing is that fact that they have permanently capped its margins to ensure that members can justify paying for a membership. By definition, a capped margin is a maximum price markup that an item has. While Costco doesn’t publish its capped margins, you can look through the company’s financial statements and see that they operate at a margin of 11.4% which means that for every $100.00 that Costco spends to buy its products, it’s selling them on average for $111.40. Costco also uses product selection as another key element in their business strategy. According to the case study, typical supermarkets stocked about 40,000 items and bigger chains may have had anywhere from 125,000 to 150,000 items to choose from, whereas Costco’s strategy was to provide members with a selection of approximately 3,700 active items that could be priced at bargain levels and thus provide members with significant cost savings.
Another key element also mentioned above was the element of treasure-hunt merchandising. Basically, this concept is the idea of certain items being on sale for a number or weeks or a specific time period and then going back up to a normal price after that time period. The most popular time of the year that we see this kind of merchandising is around the Christmas season and the biggest shopping event of the year, Black Friday and Cyber Monday. By using this type of merchandising, Costco takes this concept and applies it year-round, ultimately giving members deals and savings all year round on a variety of different products.
The final element of Costco’s business strategy is that of low operating costs in order to maximize profits and continue expanding their empire. They are able to do this with low overhead for example by using warehouse that are kind of industrial, but maintain low operating costs. This concept also takes effect by the way they display their product, essentially leaving all of their products on wooden pallets for display.
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