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What is Costcos current business model and why is it appealing?

Costcos business model is predicated on a best-cost theme. They take the low-priced supplier
approach and mix that with creating price of the many stakeholders by targeting on wonderful
client service, a severe code of beliefs, treating staff like family, concerning suppliers, satisfying
shareholders, and a robust intelligence of environmental place. They need to enforce distinctive
cost-saving methods in their production, operations, and selling that has allowed them to draw in
the foremost affluent customers in discount selling. The central focus of their business model
turned around high sales volumes and fast inventory turnover by giving fee-paying members
beautifully low costs on a restricted choice merchandise that include a mix of across the country
branded and illicit private-label products in an exceedingly wide selection of merchandise
This is an awfully appealing business model because it provides the power to control fruitfully at
a lot of lower profit margin by securing marketer volume getting agreements, economical
distribution, no-frill self-service warehouse facilities and supplemental membership fee revenue.
Another magnet is because of the high sales volume and fast inventory turnover style of this
business model, the accelerated money conversion cycle permissible Costco to gather the funds
for inventory before marketer liabilities changing into due. This provided for marketer finance
and also the ability to require advantage of early payment discounts that additional reduced
operational prices. As a testament to the success of this business model, from 2008 through 2011,
Costco was able to increase the amount of warehouses by 15.6%, revenues by 22.6%, and
earnings by 14.0%.


What are the chief elements of Costcos current strategy and is it effective?

Costcos key strategy components consist of:

Ultra-low costs,
A restricted choice of across the country branded and private-label merchandise,
A treasure hunt searching surroundings,
Low overhead stress, and Geographic growth

Due to ultra-low costs, they need to be being able to lure a bigger population of affluent
customers. From 2010 to 2011 income enhanced by14. 0% and membership fee revenue by
10.4% annual goal was 5% or additional. However, once membership revenue is systematically
over earnings. Therefore, while not the membership revenue, Costco would be operational within
the red. Also, once reviewing ROS from 2000 to 2011, although sales have enhanced, the price
has not been contained as expeditiously. This can be proven by the gradual ROS erosion of 2000
ROS of 1.96% to 2011 ROS of 1.64%. With such a little ROS, any increase in the variable value
might be harmful. On the opposite strategic components like geographic growth, restricted
product choice, and providing a treasure hunt searching surroundings, Costco was terribly
5. How well is Costco performing from a financial perspective?
2011 Sales Growth robust - Costco accomplished a 14.1% sales growth and a 17.4% increase
in operational financial gain. This can be because of the 10.4% increase in membership fees that
flowed on to operational financial gain. This ability to extend sales together with undefeated
valued containment has allowed for a 12.2% increase in earnings. This signifies that the rise in
membership revenues went straight to rock bottom line.

2011 profitableness Low - profit margin 12.6%, trade 36.0%; income Margin 1.6%, industry
3.0%; operational Margin 2.7%, industry 5.0%; ROE of 11.6% is weak considering trade
average is 20.6%.
2011 Liquidity Moderate Current magnitude relation of 1.14 indicates the corporation will
pay its current liabilities in with quick assets fully once. The average trade is 2.4. However, a
Current magnitude relation that will be nearer 2.0 would provide an additional most well-liked
liquid position. Capital of $1.6M is favorable and represents a stronger liquidity considering it's
over the companys annual earnings thus far and better than the trade average of $895K
2011 Leverage Low Debt-to-Equity magnitude relation 17.1%, trade 62.7%. Low leverage
magnitude relation and high times-interest-earned magnitude relation of 21.03 is incredibly
engaging for future creditors, which are able to pave the method for additional warehouse growth
within the future.
2011 Earnings Power and Persistence Moderate - DEPS enhanced by 13.0% to $3.30. The
dividend yield is at 1.1% that is significantly less than the trade average of 2.30%. The market
views this stock as a decent investment as their P/E ratio of twenty 4.08 is over the trade average
of 17.4.

Costco Wholesale Corporation (Costco), one among the few largest wholesaler giant
differentiates itself applying unique strategies relating to production and operations, and
marketing which make it stand out from the rest of the retailers who are also said to be
competitive in the retailing and wholesaling business globally. Costco is one of the innovative
wholesalers teamed by very dynamic management team and dedicated, motivated and satisfied
workforce with the mission to continually provide its members the best quality products at the
lowest possible prices (Costco Annual Report 2006). Some of the fundamental principle of the
Costco is that they obey the law, they take care of their members, they take care of their
employees, they respect their suppliers, and finally they reward their shareholders.
Some of the reasons how Costco can serve those highest quality goods of national brands
for the lowest possible prices is that they eliminate different cost associated with delivery
expenditures, account receivable, inventory, sales people, and fancy buildings. And they
successfully operate themselves in the competitive environment serving not only an individual
customers but also a legal customers (a company), and small business customers.
Costco believe that society and the community is one of the key factors of their success.
Therefore, they are willing to give back to their community and the society in terms of quality
goods in lowest possible prices. Not only this but also, Costco encouraged its employees to
actively participate in the social welfare program by volunteering in every possible occasions in
the locality wherever they are located.

SWOT Analysis


Low product and services

Internal (Home grown) top management team in

Comparatively less attractive store layout for

luxury items
Weak advertisement base leading to the inability of

Employees turnover within a year of recruitment reaching full range of membership base.
Declining or inconsistent profit margins
is just six percent
Unique ability to keep overhead cost low
Not widely scattered around the world than its

resulting in low prices of goods and services

Loyal and affluent customer base
High inventory turnover comparing to its

Consistent return on sales and return on assets
Incredible return policy

individual customers


Costcos operations is mainly targeted in


Costco cannot attract people who are below

countries where there is high GDP and high

poverty line due to its membership fees and bulk

disposable income of the consumers (Canada,

Not well diversified in terms of geography

Serves the democratic countries with political

and governmental stability

Rapid growth in membership

Possibility of international expansion

Advantage of economic downturn
Increasing brand awareness

Positive image in terms of employees pay and

High competition from Sams Club and BJ
Highly dependent on United States and Canadian

U.S.A and Japan) with low inflation rate in the

Location is not attractive in terms of real-estate
No self-checkout
Primary focus on business customers rather than

Largely dependent on vendors for timely supply
of quality merchandise at reasonable price
High market expectation in terms of price, quality
and financial performance

social responsibility

In the core of their strategy, Costco sells limited numbers of products in fewer varieties to
keep the cost down and they rely on high volume sales. But unlike their competitors they pay
well to their employees. One of the key uniqueness and strength is that they sell membership to
their customers that not only generate the fixed revenue every year but also increase the brand

loyalty and awareness of the customers towards Costco. They advertise very less thereby
reducing the cost by two percent each year.
One of the crucial factors of Costco is their pricing strategy. They have unique way or
mechanism that helps them keep the price lower than that of competitors and they can still afford
to pay 48 percent higher salaries to their employees than their major competitors mainly WalMart. Their membership base is growing and they are able to retain their customers. Virtually,
they do everything to retain their customers. Most importantly they have very incredible return
policies in hand to attract and retain customers. Furthermore, they try to find the best value pack
for almost every product they sell in their location (store). For example, they have thousand
packet box of Splenda (sugar free sweetener). They generally engage in bigger packages because
they believe that bigger package provides better value and cost savings to their customers.
Costco applies several other strategies to achieve corporate wide price leadership
strategies. For example, to achieve the price leadership they reduce handling and storage cost,
they maintain in-stock positions without being overstocked and transition seasonal merchandise,
they utilize just-in-time principles when ordering merchandise to minimize the cost of inventory,
keep best value pack product to assure low prices through volume buying, expense reduction and
low gross margins etc. in addition to this, Costco doesnt spent a lot in advertising and use word
of mouth advertising for marketing which is not only one of the cheapest way to advertise but it
is one of the most effective ways of advertisement.
Costcos mission statement is to focus on bringing high quality goods and services to the
market at the lowest possible prices every day, but to do it with integrity at every level of the
company while valuing the interests of the stakeholders (Annual Report 2006). The mission
statement of the Costco is well understood throughout the organization by the management and

employees. Costco offers their customers with low prices on selected private and a limited
selection of nationally branded products in a wide range of merchandise categories. Businesses
and families can rely on Costco to offer high quality goods and services at everyday low prices.
Rapid inventory turnover, high sales volume per warehouse, leveraging an efficient operating
structure, reduced handling of merchandise, and making themselves the low cost operator in
retail are all key elements that make the company so successful (Annual Report 2006)
Fig: Showing strategic group map of the Costco along with its rivals.
In this strategic group map, there are four whole sales companies; Costco, Wal-Mart, BJs and
Target that are chosen to be evaluated based on their sales revenue and market capitalizations.
The circle represents the sales revenue.
This group map shows that Costco Wholesale Corporation has strong competition in the market.
Based on market capitalizations and revenue, Wal-Mart is the leader of the discount variety store
industry in the US. However, Costco has second highest position based on sales revenue in
wholesale store industry of the US market. The market capitalization of Costco Wholesale
Corporation is 26.06 billion (Market watch, 2010).Costcos sales revenue in 2009 was 71.42
billion, which is a decrease of 1.46% in comparison to 2008 sales (market watch, 2010). The
trend of the market share price is increasing in the last few months because of the slow economic
recovery. As per April 28, 2010 at 1:06 am, Costco Wholesale Corporation (COST) market price
is $59.45. In the competitive discount variety store industry, Wal-Mart is the top Wholesale
Company based on the revenue as well as Market capitalization. It has $202.71 billion of market
capitalization and sales revenue of $408.21 billion in 2009 (market watch, 2010). In 2009 Sales
was increased by 1.7%. The stock share price was $54 per share as of April 28, 2010. At the
same time, Target Corporation is the second highest company in the industry based on market

capitalization. Target Corporation has $41.90 billion of market capitalization and $65.36 billion
of sales revenue in 2009. The sales revenue of Target was increased by 0.6% compared to
previous year (market watch, 2010). The share price was $56.25 per share as of April 28, 2010.
BJs Wholesale club Corporation has the last position in the industry compared to its competitors
as per its sales revenue and market capitalization. The market capitalization of BJs Wholesale
Club Corporation is 2.05 billion and sales revenue of $10.19 billion (market watch, 2010). The
sales revenue of the BJs wholesale corporation was increased by 2.1%. The share price was
$38.26 per share as per April 28, 2010.
The discount variety store industry one of the mature industry of the US market; some of
the company in the industry has international expansion of their business also. Analysis of the
completion using strategic group map shows that Costco has numerous well know competitors in
the market. Most of them have wider presence of their business with better brand image.
Costcos Business Model, strategies and core competencies:
Costco is trying to generate huge sales volume and quick inventory turnover by applying
a business model that offers limited selections of nationally branded product in a wide range of
merchandise categories. Costco apply number of operating excellence or mechanism such as
efficient way of managing inventory and Just in time inventory, efficient distribution, minimum
merchandise handling, and volume purchasing to reduce the price of its product. One of the
major benefits of high sales volume and rapid inventory turnover is that they can sell their
inventory and receive cash which can be used to pay its vendors and take the advantage of earlypayment discounts. And because Costco is able to sell its product before they have to pay their
suppliers or manufacturer for its merchandise, it enables them to finance their inventory from
their working capital. Furthermore, among those 4000 merchandise that Costco keeps in its

location, it has distinctive segment which they called treasure-hunt merchandise where they
keep 1000 products which keeps changing quickly. The main idea behind this is that it helps lure
customers by offering irresistible deals on those 1000 products which will quickly vanish from
the store. Another key strategic competency of Costco is that they do not obtain its luxury
offerings from the high end manufacturers rather they look for the opportunities to find such
luxury products legally on the gray markets from the retailers who want to get rid of their
Generally speaking Costco strategy to increase sales and profits largely depends on some
of the key strategic components such as increase the number of new warehouse, build larger and
loyal customers base and finally implement such a merchandising technique to motivate and
attract members to shop at Costco more often and induce volume purchase per shopping trip. To
achieve these strategic objectives, Costco frequently used business and household merchandise at
money-saving prices. Beside this, Costco provides opportunities to purchase ever changing array
of big merchandise at lowest possible prices. And finally they try to encourage their members to
regularly visit Costco so as to not miss out on the those special best value products offering
selections that would otherwise will sold out in a matter of days.
To achieve the operational excellence, Costco uniquely handles its Merchandise by
storing on racks above the sales floor and displayed a portable platform for storing or moving
goods containing large quantity of each category of merchandise. By doing so, Costco reduces its
labor requirement for merchandise handling and stocking. Another crucial way of Costcos
merchandise handling that helps in reducing the cost associated with the merchandise handling is
when merchandise arrives at the warehouse; it goes directly to the sales floor of the store. By
doing so Costco eliminates merchandise receiving cost by eliminating multiple steps handling of

merchandise. Beside this, another benefit of Costco merchandising is that not a single
manufacturer supplies a huge percentage of the merchandise that Costco stocked. Therefore,
Costco is not experiencing any kind of problems in obtaining necessary quantities of
merchandise from its vendors. If one of the supplier or manufacturer is unable to supply the
sufficient merchandise then Costco could switch its purchase to alternative manufacturer without
disruption in the day to day business. Not only this but also to achieve the excellent store
operations, considerable level of authority is delegated to the warehouse managers who are
responsible for bringing the new ideas about the items or product that would possibly be sell in
their stores. Furthermore, store managers at Costco is responsible for experimenting with what
products or merchandise to stock and what in-store merchandising techniques to employee.
These are the actions within the Costco that helps organization to successfully execute its
strategy in each location.
Strategic Weakness in Comparison with Competitors:
One of the major strategic draw backs of the Costco is that they just have 4,000 selections
of merchandise. Generally, other supermarkets such as Wal-Mart stocked about 40,000 to
150,000 items for shoppers to choose from and BJs have 7,300 items. Another major problem of
Costco strategy is they spend very less in the advertisement and solely rely on the reputation and
word of mouth advertisement. But the major competitors of the Costco that is Sams Club spent
about dollar 50 million annually on advertising and direct mail promotions. It may affect
Costcos future performance and competitors such as Sams Club may take away its market share
due to the lack of promotional activities. Beside this, Costco gives more priority to the business
consumer but on the other hand Sams club is adding new lines of merchandise with additional
emphasis on products such TVs, furniture and other electronics products. Beside this, while

comparing with that of Sams Club and BJs membership fee of the Costco is relatively
expensive. Not only this but also, Sams Club is announcing different promotional program to
increase its membership base such as announcing and offering the college student membership of
dollar 40 and receive a dollar 15 worth of gift card to offset the cost of their first purchase.
In comparison with BJ,s Costco doesnt have self-checkout lanes, but BJ s have well
managed self checkout lanes and BJs also have low cost video based sales aids to make
shopping more efficient for members. There is the tough competition especially in between
Costco and Sams Club. In some areas Sams Club is outperforming the Costco because it added
some additional department with the store such as pharmacies and optical shops. Beside this,
Sam's Club has the advantage of opening many other stores in areas where it already exist in the
In conclusion, Costco is applying different cost related strategy such as penetration
pricing, and below the line promotion and they have also employed diversion buying strategy
which they themselves termed as treasure hunt shopping experience. Mainly, Costco targets
independent small business with annual income of $100,000 or more. Some major features of the
Costco are that they sell high end quality product in relatively low prices, and it is convenience
and reliable. One of the key to their ability to lower the price is that their product or goods is
usually bulk-packaged and Costco does not carry multiple brands or varieties that helps in
resulting high volume of sales from single vender, that gives the edge to decrease the price and
reduce the price. If we analyses the Costco from the five forces model of competitive analysis it
seems like there is high barriers to entry therefore we can say that there is low threats of entrants.
Furthermore, there is low power of supplier and because Costco is dealing with several suppliers
and if one or some of the suppliers are unable to provide timely merchandise then Costco can get

same merchandise from the any other venders thats minimize the vendors dependency in the
business affair but, there is high bargaining power of the buyers because of the intense
competition among number of similar business mainly BJs and Sams Club. Beside this, there is
high competition because all the rivals including Costco are trying to reduce the price that
ultimately lowering the overall profitability of the businesses.
Some of the major problems of the Costco is that they have very few product choice
(4000) comparing to the competitors that can be a future challenges for the Costco because
customer wants choice. Beside this, there are not lots of category or variety of the one particular
kind of product and Costco just keeps what they called best value packet which may not be
appropriate for individual or house hold customers. In addition to this, now a days economy is
doing poorly, and customers are looking for relatively less expensive products, Costco will do
even better if it considers those low ends customers and individual households customers.
Because those customers who are said to be well off last year may not be same this year and they
may need help in terms of saving money whenever they go for shopping.
Costco has some other operational level problems that in some extent hinder the overall
companywide effectiveness and goals achievement. For example, they dont accept all kinds of
credit cards from the customers, though it is done to minimize the cost of overall operation. But
the key fact is that, customers are rather willing to pay few more cents but they want
convenience when they go for shopping. Beside this, Costco is unable to stand their employees
to make the shopping process easier to its customers. There are so many employees around the
counter or check out area but not a whole lot in shopping floor that makes the customers feel
awkward, helpless and uncomfortable. Costco should also focus on the advertisement because
number of its rivals is already doing intense advertisement. Today, global business players of the

world are investing heavily on the marketing. It is true that company like Costco are doing good
in economic downturn but competitors like Sams Club is outperforming Costco in pricing which
could be biggest threats to the Costco though Costco keeps relatively branded and qualitative
product than that of Sams Club. Furthermore, Costco now is widely depends upon the U.S. and
Canadian market therefore, it will be better if Costco further diversified itself into international
market that gives competitive edge and financial security to the company minimizing the risk of
partial economic downturn.
Finally, this is the time of structural change. If we see and analyze the economic situation
then we can say that entire global economy is looking for the structural change in terms of how it
does business. Therefore, just opening door for only members means closing doors for all those
who even cannot afford to pay or not willing to pay the one time membership fee per year. But
they are still the prospective customers of the Costco. Today, only those businesses will do better
which serves all no matter what corner of the Pyramid the customer occupies.