Analysis of Costco’s Business Strategy

In this Case Study I will be reviewing some key points of Costco’s business strategy. I will discuss Costco’s clear cut choices on how they compete inside their market, how their Code of Ethics relates to their employees, how Costco compares to BJ’s Wholesale, what practices positively influence Costco’s culture and which revenue stream is the most important to their company model.

Case Study 1: Costco

Costco is a wholesale multinational corporation that operates as a chain of membership only warehouse clubs founded in Seattle in 1983. Costco cofounder and former CEO is Jim Sinegal. The warehouse clubs offer a vast variety of departments ranging from, but not limited to, pharmacy, clothing, electronics and furniture with a variety of choice within competitive brands including a store owned brand Kirkland Signature. Costco does operate online sales for members and non-members, with a surcharge. Costco’s direct competitors are Sam’s Club and BJ’s Wholesale, while discount non membership general store like Walmart and Target also compete in the same space.

Clear Cut Strategy

Jack Welch, former CEO of General Electric said “Strategy means making clear-cut choices about how to compete” (Crafting and executing strategy: The quest for competitive advantage, concepts and cases Chapter 1) is echoed in Costco’s lean business model structure. Costco operates at low cost to maintain their customers against rival companies. According to Arthur Thompson, Costco has a cap on mark up prices of 14% while most other competitors range from 20% to 50%. The Kirkland Signature branded products are often priced 20% lower than comparable products within the Costco store. These prices propel a strategy to break even in sales compared to expenses and have membership fees drive profit.

Other ways Arthur Thompson notes Costco reinforces their lean structure is lack of interior décor in their stores, limited store hours and extreme just in time inventory. The interior décor in most stores is very minimal and often just concrete floors and staged merchandise with inexpensive aisle description signs. Most Costco stores are open around 70 hours a week compared to 24/7 Walmart’s or Target’s hours, these limited store hours keeps employee costs down. Costco’s business model and floor plans brings majority if not all merchandise straight to the sales floor, creating a just in time inventory system and reducing space wasted on products not being sold. These efforts and actions to remain lean are evidence that Costco has a clear plan to compete as a lean company.

Although Costco does have two areas where they veer off the short term road of “clear cut strategy” but in the long run these outlining expenses are meant to provide savings in other areas of the company. These outliners are employee compensation and focusing on limiting inventory losses. Employee compensation is higher than comparable stores in both pay and benefits. Using quotes from Jim Sinegal we can explain Costco strategy on why good employee compensation benefits marketing, productivity and turnover;

Marketing. “Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco” Word of mouth advertising is saves money of media based advertising.

Productivity. “It’s axiomatic in our business—you get what you pay for.” Employees that feel appreciated will work harder and produce more worker than unhappy workers.

Turnover. “Paying good wages and keeping your people working with you is very good business.” Keeping employees inside the company, leaves less time for training and less time working understaffed.

Costco focuses on limiting inventory losses by limiting the customers into the store and having security exiting the store. Spending on security for both pathways has Costco losing only two tenths of 1 percent of net sales.

Code of Ethics

Costco’s third rule in the Code of Ethics (Costco website) is “Take care of our employees”. Costco does this by offering starting pay higher than industry standards and offering extensive benefit packages. On top of employee friendly compensation Costco also offers career growth and job stability. In past years, Costco hiring from within percentage was 98% and employees with over two years of service cannot be fired without approval of senior company officer according to Arthur Thompson.

Comparison to BJ’s Wholesale

Costco currently a winning advantage has over BJ’s due to Costco company size. Costco size allows them to offer cheaper products to sell more quantity. Costco size also allows membership fees to cover larger portion of profits. According to Arthur Thompson in 2011 BJ’s had 189 stores open with 9,600 members (in thousands) and Costco had 592 stores open and 64,000 members (in millions).

An article on Business Insider projected Costco had 15 of the best prices over assorted food products out of a possible 28. While in the same article BJ’s only had 8. Although Costco membership cost more than BJ’s the difference is saved in maybe just one trip to the Costco.

This pricing strategy is an advantage that can be overcome. There is no “order winner” that differentiates the two companies and Costco must be leverage their size to prevent BJ’s from growing to a comparable size and neutralizing the advantage.

Business Culture Influence

A positive influence on Costco’s culture is their practice of environmental sustainability. Costco has made efforts to going green according to Arthur Thompson they have installed energy efficient solar power roofs, warehouse lightening, heating/cooling/refrigeration systems and recycling packaging material. These efforts are another example of the company’s lean processes. Their environmental sustainability approach also influences Costco’s word of mouth culture. While, reducing cost and doing the right thing, their efforts are seen throughout the industry and provide positive conversation useful for marketing.

Revenue Stream

Costco has five major product categories Food, Sundries, Hardlines, Softlines and Ancillary/Other. According to the Table 1.1 below over a ten year period only Food and Ancillary/Other have grown in percentage. The other three categories have seen the percentage of sales drop in the last 10 years. At every mark Food has been the largest selling category and thus the highest revenue stream. Not noted in the table is Membership, which according to the Arthur Thompson in 2015 was 2,533 (in millions) compared to $116,199 (in millions) total revenue which is only roughly 2% of revenue.

References

1. Costco Code of Ethics (accessed February 8, 2016) Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-govhighlights
2. Goldberg and Ritter Costco CEO Finds Pro-Worker Means Profitability. Retrieved from Thompson, A., Peteraf, M., & Gamble, J. & Strickland, A. J. III (2018). Crafting and executing strategy: The quest for competitive advantage, concepts and cases (21th ed.). New York, NY: McGraw-Hill.
3. Pyros, Andrea (April 26, 2013) Sam’s Club Vs. Costco: Which Is The Best Wholesaler For Your Wallet? Retrieved from http://www.businessinsider.com/sams-club-vs-costco-vs-bjs-2013-4
4. Shapiro Company for the people. Retrieved from Thompson, A., Peteraf, M., & Gamble, J. & Strickland, A. J. III (2018). Crafting and executing strategy: The quest for competitive advantage, concepts and cases (21th ed.). New York, NY: McGraw-Hill.
5. Thompson, A., Peteraf, M., & Gamble, J. & Strickland, A. J. III (2018). Crafting and executing strategy: The quest for competitive advantage, concepts and cases (21th ed.). New York, NY: McGraw-Hill.