Contents

Introduction ..................................................................................................................................... 3

History of Costco Wholesale Corporation ...................................................................................... 4

Products & Services Offered .......................................................................................................... 5

a. Products................................................................................................................................ 5

b. Services ................................................................................................................................ 6

Costco Sales Channels .................................................................................................................... 7

a. Warehouse Style Stores ....................................................................................................... 8

b. Costco Online Store ............................................................................................................. 8

c. Costco Mobile App .............................................................................................................. 9

Role of Technology in Costco’s Strategy ....................................................................................... 9

a. Costco B2B E-commerce Website..................................................................................... 10

b. Costco Mobile App ............................................................................................................ 11

c. Costco Collaborative Retail Exchange (CRX) & Subsequent Improvements ................... 13

Challenges Faced by Costco ......................................................................................................... 14

Additional Growth Drivers ........................................................................................................... 15

a. International Expansion ..................................................................................................... 15

b. Strong Membership Renewal Rate .................................................................................... 15

Conclusion .................................................................................................................................... 16
Bibliography ................................................................................................................................. 18
 Introduction

The following report focuses on the role of technology in the success of Costco
Wholesale Corporation. The report shall aim to analyze the nature of technology adopted by
Costco at various stages throughout its history as well as to understand how and to what extent
the technology impacted the business of the organization. Moreover, the report seeks to quantify
the success achieved by the organization through the use of technology, by considering key
performance measures such as sales and other growth indicators.

Costco Wholesale Corporation was chosen as the subject organization for this report for
two main reasons. Firstly, given the topic of the report, Costco provides a good example of how
a large organization can successfully adopt technology to achieve and sustain success in an ever
evolving technological era. Secondly, in the age of online shopping where Amazon, Target,
Walmart and other Goliaths have ruled the retail market, Costco has managed to remain the
second largest wholesale retailer in the world. This is particularly interesting as Costco has not
resorted to depending as heavily on technology as some of its competitors. As such, it presents
an intriguing phenomenon of how Costco Wholesale Organization was able to achieve success
by using technology to improve its core business practices instead of drastically adapting its
business functions to the advent of new technology.

It would be pertinent to mention here the approach adopted by the report to study the use
of technology that improved the business performance of Costco. The report shall focus on key
instances in the history of Costco Wholesale Organization when new technology was introduced
into the organization. Data from these particular financial years has been used to identify
whether the introduction of new technology had any impact on the business performance of
Costco. Moreover, only the financial data from the United States will be exclusively considered
in the report for the sake of simplicity. Similarly, all sales figures from products and services
mentioned in the report are only within terms of those provided in the United States. In addition,
the bulk of the financial data that will be analyzed in the report is from recent years. This is due
to the fact that Costco itself was late in implementing the technology within the organization and
because the most crucial technological changes have taken place in the past two decades. The
report concludes with a brief commentary on how and why Costco was able to make use of
technology successfully to drive up sales and profits despite being seemingly slow to react to the
changes.

History of Costco Wholesale Corporation

The name “Costco” first appeared in 1983 when Jeffery H. Brotman and James D.
Sinegal came together to open the first warehouse of the chain in Seattle. However back in 1976,
a man named Sol Price had already established the first “warehouse club” called Price Club,
where members could purchase items in bulk at extraordinarily low prices for a minimal annual
membership fee, which is the entire business concept of Costco today. Sol Price was in fact,
regarded as the pioneer of the “buyer’s club” concept and also happened to be the mentor of
James D. Sinegal in membership warehousing and retail chains. As such, it was only natural
when Price Club and Costco came together in a merger in 1993 to form “PriceCostco”. (Lewis,
2016)

However, despite PriceCostco enjoying decent growth and increasing revenues in the
year of its inception, Sol Price left the new organization to establish Price Enterprises as a
separate business unit in 1994. It was in 1997 that the name was changed from PriceCostco to
Costco Companies Inc. and then in 1999 when it was changed again to Costco Wholesale
Corporation. (Trewin, 2012)

Costco Wholesale Corporation has achieved some truly remarkable milestones in its
history. Costco established its website, Costco.com in 1998 for B2C purposes. The business to
business or B2B website for Costco was set up in 2001. Within the same year, Costco Wholesale
Corporation generated $73 million from e-commerce sales alone. The following year in 2002
was the first time Costco hit the billion dollars mark, with its net sales amounting to $17.5
billion. By 2007, the typical Costco location within the United States generated $130 million of
sales and it was also in this year that Costco.com, the website generated $1 billion in sales.
(Encyclopedia.com, 2009)
 Today Costco Wholesale Corporation has over 200 warehouses internationally in service
in ten countries outside the United States which include Canada, Mexico, United Kingdom,
Japan, Taiwan, France, Australia, South Korea, Spain and Iceland. Costco was also hailed as the
sixth most valuable retailer in the world in 2018 with a net worth of over $18 billion. (Conway,
2019)

Products & Services Offered

Costco Wholesale Corporations is the largest warehouse retailer in the United States, and the
second largest globally. As such, there are a tremendous number of products and services offered
by Costco not just in the United States but throughout the ten countries in which it operates.

a. Products

Speaking in terms of product offerings, Costco has almost 17 different categories in which it
provides products to its members within the United States. These categories are as follows:

1. Electronics
2. Computers
3. Appliances
4. Furniture and Mattresses
5. Tires and Auto
6. Flora, Gifts and Books,
7. Jewelry, Watches and Sunglasses
8. Patio, Lawn and Garden
9. Home Improvement
10. Home and Kitchen
11. Office Products
12. Clothing, Luggage and Handbags
13. Health and Beauty
14. Baby, Kids and Toys
15. Grocery and Household
 16. Sports and Fitness
17. Other Categories which include Emergency kits and supplies as well as pet supplies

There are hundreds of products within each category which are offered at low prices to
members of Costco. Most of these products come from Costco’s own Kirkland Signature brand
which is why Costco is able to offer such good prices for them. The product offerings are quite
similar within Canada and Mexico since this constitutes the North American market for Costco.
However, slightly different product categories are offered in Japan, Taiwan and South Korea due
to their cultural difference from the North American nations. Clearly distinct product categories
offered in these regions for example, are food and wine, tool kits and hardware and automotive.
(Costco, n.d.)

b. Services

Costco has almost as much variety in terms of services offered as it does with its product
offerings. The services offered by Costco are divided into three distinct categories. These
categories and their respective services are as follows:

1. Home Services category includes:

 Home
 Audi Limited-Time Savings
 Auto & Home Insurance
 Bottled Water Delivery
 Budget Truck Rental
 Checks, Forms and Accessories
 Costco Auto Program
 Costco Travel
 Identity Protection
 Mortgage: Purchase and Refinancing
 Motorcycles & Power-sports
 Costco Service Guide
 Parts and Service Discounts
 2. Business Services category includes:
 Bottled Water Delivery
 Business Health Insurance Marketplace
 Business Phone Services
 Checks, Forms & Accessories
 Custom Logo products
 Costco Service Guide
 Payment Processing
 Vision Insurance
3. Life Services category includes:
 Auto and Home Insurance
 Business Health Insurance Marketplace
 DeltaCare® USA Dental Plans for Costco Members
 Life Insurance
 Costco Service Guide
 Prescription Program
 Vision Insurance

All of these services are provided exclusively to members of Costco Wholesale

Corporation only. Moreover, a significant portion of these services are provided in the United
States as Costco has an established resource network within its home country and the consumer
base in the United States is the largest among all of its markets. Even though Costco offers its
services in other countries of operation such as Australia, Iceland, France, United Kingdom,
South Korea, Japan and Taiwan, it has been unable to make a sizeable dent in the market share in
most of these countries. (Costco, n.d.)

Costco Sales Channels

Despite being the largest retailer in the United States, Costco has managed to keep its
business activities simple, which is in my opinion a key factor in its success. There is perhaps no
better example of this simplicity in execution than the sales channels Costco has set up to reach
potential as well as existing customers. There are three distinct sales channels Costco uses to
reach the market. They are as follows:

a. Warehouse Style Stores

As mentioned above, Costco uses warehouse style stores to house its products. As such, it
is able to cut costs on store rent and maintenance, allowing it to establish more number of stores
in a given geographical area. By 2018, Costco had 761 warehouses worldwide of which 561
were located within the United States, providing customers with more opportunities to visit
Costco stores near them to purchase products. (Farfan, 2019)

Moreover, whenever Costco opens up a warehouse in an area, the marketing team of the
region contacts local businesses to urge them to purchase the business memberships to Costco.
As such, this is a form of direct marketing employed by Costco to attract customers to its
warehouses. In addition, the discount offers on bulk amount of products offered by Costco are
incentive enough for customers to visit its warehouse style shops, and in turn generate word of
mouth allowing Costco to attract more customers without incurring advertising costs.
(Lemberger, 2014)

b. Costco Online Store

The e-commerce website initiated by Costco back in 2001 is still going strong and is one
of Costco’s main sales channels in today’s market. Costco Wholesale Corp. online sales
increased by 32% in 2018 because of how much people were shopping online at Costco. In an
effort to increase the reach of its online store, Costco issued Citi Visa Credit Cards to its
members and attracted more customers from email campaigns. The reason Costco’s online store
has been one of the most successful sales channels is because it enables buying online and
pickup store options as well as more availability and visibility of high end in demand items.
(Risley, 2018)

Yet, despite the success of the online store, Costco wants its customers to visit a
warehouse to make a purchase rather than to purchase something online. This stems from
Costco’s original business model which revolves around giving its customers a unique physical
shopping experience. If people shop online at Costco, then there remains virtually no difference
between it and its competitors like Walmart or Target and that is something Costco wants to
avoid at all costs.

c. Costco Mobile App

The latest sales channel being utilized by Costco is the Costco mobile app. Available on
the App Store and the Google Play Store, the Costco mobile app is proof that Costco has
changed with the times to maintain its success. The mobile app can be used by customers who
possess the original membership for Costco. Using the membership card, they can login to the
app and acquire a digital membership card which allows them to order products from their
nearest Costco warehouse through the mobile app. Not only is the mobile app an excellent sales
channel to tap more customers, especially those who belong to the younger generation, but the
delivery options incentivizes customers to purchase more products from Costco. (Costco, n.d.)

Warehouse-style stores, Costco website and Costco mobile app are the three sales
channels Costco has in place to reach customers and increase its growth as well as sales. Direct
marketing, personal selling and sales promotions play a big role in the marketing and sales
strategy of Costco Wholesale Corp. which is why it prefers to provide customers with the real
life experience of shopping in its stores rather than ordering products online. (Thompson, 2017)

Role of Technology in Costco’s Strategy

No business can be successful in today’s world without the use of technology. The fact
that Costco has managed, not only to become the largest retailer in the United States but to
remain in that position, shows that it has made the right use of technology in progressing its
business strategy. In the evaluation of the role of technology in Costco’s strategy, we shall
analyze particular instances when the introduction of technology allowed Costco Wholesale
Corporation to gain the competitive advantage and retain its market position. As such, there are a
few clear cut introductions of new technology that can be singled out for having had a significant
impact on the business performance of the organization.
 a. Costco B2B E-commerce Website

The first, and arguably the most significant, case of the use of technology by Costco was
when it launched its B2B website back in April, 2001. The website allowed businesses and
business clients to purchase products in bulk quantities online, which was something that had not
been offered by Costco before. The then Vice President David Sinegal saw the introduction of
Costco.com for business products as a vital enhancement to the services offered by Costco. The
B2B website allowed customers to enable quick order inventory, access shopping lists and view
real-time inventory which were the cutting edge online features at the time. The first half of the
website was initiated in 1998 which provided the entire range of products to the regular member,
however with the addition of the B2B website, business members of Costco could order just as
easily. (Costco, n.d.)

The introduction of the B2B website in 2001 proved to be a crucial step in the right
direction for Costco at just the right time. It is important to remember that Amazon had just
started offering books online at the end of the 1990s, so for Costco to follow suit with its own
online store was not only brave but imperative. Sales for Costco had already been steadily
increasing through the previous decade, however with the introduction of online shopping
website for both business as well as regular members, the upward trend in net sales and net
income maintained itself throughout the following years.

By looking at the sales data from 2002, it is clear that Costco Wholesale Corp. was able
to drive growth in sales by utilizing the B2B online shopping technology. The main reason this
website boosted sales for Costco was because it was able to allow more lucrative clients to
purchase bigger order with greater ease. As such, the number of orders and the corresponding
sales figures increased steadily in successive years.
As is evident by the figure above, net sales for Costco Wholesale Corp. increased from $34.1
million in 2001 to $37.9 million in 2002 after the B2B website had been up and running for
almost a year.

This graph displays the PE ratio or Price to earnings ratio for Costco through the first
decade of the 21st century. The noticeable spike around the beginning of the 21st century is when
Costco introduced Costco.com. This shows that investors at that time expected the share price for
Costco to increase substantially because of its sales and growth in the industry. (Hayes, 2019)

b. Costco Mobile App

The advent of the smartphone era brought the next big technological step for Costco in
the form of its mobile app in order to tap the millennial market. The launch of the mobile app
took place in May 2012 which was late as compared to the introduction of mobile apps by
Costco’s competitors, especially Walmart. Costco was late to adapting to this technological
change, yet the introduction of the mobile app increased the sales channels for Costco as it
opened up a new platform on which to connect with customers and allowed it to tap new markets
as well as new market segments, such as millennials. Even though it was late, the introduction of
the app came at a crucial time for Costco since the senior vice president of the company at the
time, Ginnie Roeglin, admitted that the organization did not appear in search engine result pages
on the web. This was putting Costco at a disadvantage in the digital domain until the introduction
the mobile app came along. (Clay, 2012)

The sales performance of Costco did not improve drastically after the introduction of the
mobile app, as it had in case of the B2B website. Yet, there was a steady increase in sales,
revenue and net income for the following year meaning that the introduction of the app had a
positive impact. (Costco Wholesale Corp., 2013)

Net sales increased by 5% in 2013 after the introduction of the Costco mobile app,
breaching the $1 billion mark for the first time in the company’s history. Despite the modest
increase in net sales, the bottom line for Costco was impressive in 2013 with net income
increasing by 19% to more than $2 billion. (Costco Wholesale Corp., 2013)
 c. Costco Collaborative Retail Exchange (CRX) & Subsequent Improvements

In 2004, Costco launched a new information platform to coordinate with suppliers. This
platform was name as Costco Collaborative Retail Exchange (CRX) which allowed better
information sharing and coordination. In 2013, this information platform was drastically
improved to increase the flow of information and operational functionality of the suppliers as
well as of the organization itself. Considering the magnitude of Costco’s business, using a
supplier information platform to enhance supply chain functions was an outstanding use of
technology by Costco. It was also necessary since when the system became operational in 2004,
Costco was facing intense competition from Target and Walmart. The improvements in 2013
allowed categories to be tracked as well as updates in real-time and tools for categories that
provided a three-year historical analysis of seasonal trends and the current market situation. The
improved CRX also included a “Category Tools” service which provided crucial benchmarking
abilities that allowed manufacturers to assess their own performance against the industry. (Retail
Info Systems, 2013)

Costco CRX did not directly enhance sales; however, it did allow the supply chain to
function more efficiently. This had an indirect effect on sales for Costco, as better quality
products were available for consumers at all times. Moreover, better forecasting and
benchmarking abilities allowed Costco to plan its marketing strategies accordingly and offer
sales promotions to customers that resulted in greater volumes sold.
 The net sales for Costco exceeded $110 billion in 2014 because of the direct result of
Costco CRX system which was able to provide a better platform for sharing information between
suppliers and the organization. Order and inventory management became more convenient which
allowed sales to sore which resulted in an increase in Net income as well. (Costco Wholesale
Corp., 2014)

Challenges Faced by Costco

Despite its use of technology to increase sales and income in recent years, Costco faces several
serious challenges in regards to technology moving forward.

 The biggest challenge faced by Costco is its untapped potential from e-commerce sales.
E-commerce still accounts for only 5% of Costco’s overall sales which means that Costco
is not attracting enough customers to its online webpage. The problem lies in the
conventional business model adopted by Costco since its inception which contradicts the
concept of online shopping. Costco hugely relies on giving people the best social
experience in its warehouse style shops which offer big discounts on bulk quantities of
items as well as attract people with free food and other product samples. However, in
 order to drive more growth from e-commerce, Costco must move away from its
fundamental business model. (Hensel, 2019)
 Costco is extraordinarily dependant on the United States and Canada market for a bulk of
its profits. The United States and Canada comprised of 87% and 83% of Costco’s net
sales and operating income, respectively, in 2018, with the remaining 9 countries only
accounting for 13%. This is dangerous for Costco as it exposes itself to risk if economic
conditions in either the United States or Canada were to deteriorate. Costco requires a
more diversified input of income from all of its markets around the globe. (Costco
Wholesale Corp., 2018)
 Costco has had a tendency of responding late to changing consumer and technological
trends in the past. With intense pressure from Walmart and Target, Costco cannot afford
to be late in adapting its business model or product and services to the changing business
climate. (Costco Wholesale Corp., 2018)

Additional Growth Drivers

Here are some of the key factors that have driven and will continue to drive Costco’s growth in
the future:

a. International Expansion

Costco already has more than 200 warehouse clubs outside of the United States but that
number is expected to reach 300 by the end of the next fiscal year as Costco is looking to
aggressively expand in the international market. Costco has a strong presence in Japan, Taiwan
and South Korea already, and China is on the target list now. As discussed above, quite a high
percentage of Costco’s net income comes from U.S. and Canada alone. So this international
expansion will move Costco towards a more balanced distribution of income. (Trefis, 2015)

b. Strong Membership Renewal Rate

Costco has always relied on its customers coming back year after year and renewing their
memberships with the organization since they are unlikely to get such low prices and unique
experience anywhere else. Costco also has some of the most loyal customers in the world with
91% of United States members and 87% of global members renewing their Costco membership.
This incredibly high renewal rate allows Costco to keep its prices low by providing customers
with products in bulk quantities while avoiding any extra advertising or marketing cost either.
(Trefis, 2015)

Conclusion

Costco Wholesale Corporation still remains the largest retail organization in the United
States and the second largest retailer in the world behind Walmart. This is particularly
astonishing since Costco has been late to adapting to technological changes as compared to its
competitors. Yet, there are several factors that contribute to the continued success of Costco
despite the lateness in introducing new technology.

Firstly, Costco offers its customers low prices by offering them products in bulk
quantities. This makes Costco the perfect cost effective store where customers can find what they
need at cheaper costs and have a larger quantity of the product as well so it lasts some time.
Secondly, because of these low prices offered by Costco, its customers have an excellent
membership renewal rate standing at 91% for U.S members and 87% for global members. This
ensures that for $55 fee of membership, Costco can operate its business without running the costs
high for the consumers. Moreover, since consumers are so loyal therefore all of the advertising
Costco gets is through word of mouth. This allows them to forgo extensive advertising and
marketing costs and instead focus on developing their personal Kirkland Signature brand.
Through this brand, Costco can provide more variety to consumers at all times in all 761
warehouses around the world and not worry about filling each warehouse to the brim with
10,000 product pieces as its competitors do.

Costco’s online presence is growing and it has done well to stay relevant in the digital
climate of the business industry. Through the introduction of its B2B website, mobile app and
CRX platform, Costco has not only been able to increase its sales and income but also keep
expenses low thereby beating its competitors Walmart and Target in recent years in terms of
increase in share price. However, success in the past is no guarantee of success in the future and
Costco needs to be quick to adapt to any incoming technological changes if it wants to capitalize
on its advantage over its competitors.

Lastly, Costco Wholesale Corporation has established a prominent place in the retail
market through the warehouse club concept. It needs to utilize its resources to develop its
business model and change it to fit the 21st century. Expanding internationally is appropriate only
when the most successful market like North America is secure from imminent risks, which it is
not. As such, it makes more sense to focus on the current markets Costco is a part of instead of
expanding internationally to stretch itself even thinner over a rapidly changing business
landscape.
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