Last Updated 04 Aug 2020

Costco business strategy

Essay type Analysis
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Costco is the second largest retailer and an American multinational company which runs a chain of membership-only warehouse. It first opened its wholesale warehouse in 1983 in Seattle, Washington. Low-prices on limited selection of items and brands and a broad range of merchandise categories are offered by Costco. It has been around 40 years and has changed the way Americans do grocery. The ability of this business to continue growing and thriving is affordable price of goods and services. The business model and strategy of Costco is wholly linked to its mission statement. In its model, customers pay a membership fee annually to attain the low priced goods. Only members are allowed to make the purchase while non-members can still accompany them. It is based on speedy inventory turnover and high quantity of sales. Costco’s competitors such as BJ’s wholesale and Sam’s Club use similar model. It is engaging in light of the fact that the charges paid by individuals took into consideration adequate supplemental income while the turnover rates permit Costco to get money for stock before it needed to pay huge numbers of its product merchants. It creates value for its shareholders. That's what makes its business model appealing.

Strategy is a long-term plan that is designed to achieve its objectives. The chief elements of Costco’s strategy are limited inventory with quick turnover, low priced goods, treasure hunt merchandise and membership fees. The strategy is pretty good and effective since low price items and brands attract abundant customers and create a competitive environment for its opponents. Roughly 80% of Costco stocks were quality brand name, 20% were Costco's private name brand. For instance, Kirkland Signature. Kirkland have a wide scope of choices to contend with others acclaimed brand with an appealing cost in addition to the nature of their private image. Costco has other subsidiary departments such as gas station, pharmacy, optical center etc. that engages plenty of customers.

In my opinion, Jim Senegal was an effective CEO. Being a co-founder of Costco, he had a great personality and interpersonal skills. I would grade him A in leading the process of crafting and executing Costco’s strategy. He believed that his people were the most important assets in the company. He listened to them and took care of them and admitted that if they were happy they would provide better customer service. He communicated his visions clearly which enriched the company’s objectives and execution of strategy. He personally monitors stores being informal which allows him to have better perception of day-to-day operation of employees and customers. He relinquished from the position as CEO in September 2011. Craig Jelinek basically follows the same principle as Jim Senegal imposes. He followed Senegal’s vision and strategy making sure that activity, production and sales growth continues to be consistent.

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The core values or business principles that Jim Senegal stressed at Costco are:

  • Take care of subscription members as they are the main reason that the company exists
  • Take care of employees as they are the most important asset
  • Assent to the law in all aspects of operating a business
  • Respect suppliers; since the relationship between suppliers and buyers is significant for company’s prosperity
  • Reward stockholders; if you provide stockholders with good return, they will invest more in the future

Sam’s Club and BJ’s Wholesale Club are two primary competitors of Costco. Five competitive forces of Costco:

  1. Bargaining power of supplier: This is low as wholesales have high inventory turnover
  2. Bargaining power of customers: this force is considered weak because of member buying power that does not involve with how many members they have.
  3. Threat of new entrants: Barriers to entry at this point are substantial. Barriers such as economic, technological, and logistical barriers make the entrance of a new company difficult
  4. Rivalry among sellers: This is the strongest force in five forces model. It forces the company to do better than other competitors. All rivalries focus on low price strategy to get more customers.
  5. Threat of substitutes: Substitutes such as Sam’s Club, BJ’s Wholesale Club or even Walmart can be chosen as substitutes since they don’t have membership fees but could also disregard the customer service offered by Costco. So this force is weak.

Costco appears to keep up unfaltering improvement in its activities from the monetary angle. The number stockroom and benefit expanding every year. Costco current proportion equivalent 0.98 (2016), and this proportion measure Costco liquidity, which is the capacity for Costco to pay their present capacities by utilizing its very own advantage for convert to money. Proportion ought to be higher than one however Costco apportion just 0.98, which mean the organization less ready to pay their liabilities in an opportune way. The 7% ROA (Return on assets) proves that Costco’s assets are being used well to generate revenue. Compared to its other competitors, its financial performance is superior. The data in case Exhibit 2, implies that its expansion outside the U.S. is financially successful because of its increasing revenue, number of warehouses and operating income.

From a strategic objective, Costco has been very successful in wholesale industry. It is proven by continuing to establish new locations not only in U.S. but across the world, high sales volume and increasing profit. Costco exceeds BJ’s or Sam’s Club financially by net sales and share market. Yes, the prices are low as the gross profit margin falls in the normal range. They run tight tasks with high stock turnover, low overhead and how they empower to pass the caring toward their employees. By taking a glance at Costco's statements, they are meeting their objectives and they're making the most of their competitive advantage with building more warehouses. Costco’s compensation package is better than Walmart or other warehouses towards its employees as they value its members as an important asset of the company. Their package includes health, dental, dependent remuneration plan, 401k and many more. Since it takes good care of its employees, its employee turnover rate is low. Costco’s top management is doing well. However, one recommendation that I would make is expansion of sales through other items such as furniture and international expansion.

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