Costco Wholesale in 2016: Mission, Business Model, and Strategy

Four years, after being appointed wholesale president and chief executive officer, Craig Jelinek proved fully capable of cementing Costco Wholesale as one of the world’s largest and best distributors of consumer goods. Jelinek was selected by Sinegal as his successor and presided over the development of Costco from annual revenue. Jim Sinegal was Costco Wholesale’s co-founder and CEO from 1983 to the end of 2011 and the motivation behind the 28-year evolution of the company from a start-up business to the United States ‘ third largest retailers. At the end of fiscal year 2011, the company had revenues of $89 billion, and a membership warehouse of 598 to revenues of $116 billion membership warehouses at fiscal year-end 2015. Costco ranked second-largest retailer worldwide in 2016, with Walmart number one.

The company has a membership warehouse concept that was established by discount merchandising sage Sol Price. Although Price was conceived as a place where small local business could obtain products, they soon realized that the operation could produce larger volumes of sales and gain a more powerful influence by granting someone membership. Price later made Sinegal the manager of the original store in San Diego. This was done so that Sinegal can use his special abilities to evaluate and review the store and bring it up to scale. In its first year of operation, Price Club lost $750,000 but by 1979, it had two stores, 900 employees, 200,000 members and a profit of $1 million. Price’s Club emerged as the unchallenged innovator in consumer warehouse retailing that mainly had West Coast stores doing operations. Although Price originally conceived Price Club as a place where small local businesses could obtain needed merchandise at cost-effective prices, he soon concluded that his fledgling operation could achieve far greater sales volumes and gain clout with suppliers by also granting an individual membership.

Costco’s Wholesale has managed to remain true to its goal by constantly supplying its customers with quality goods and services at the lowest possible costs and has been able to fulfill this task by conducting business with a clear code of ethics. Costco’s business model hallmark included achieving high sales and fast turnover of inventories. In addition, the key elements of the company’s approach include ultra-low prices, a small range of nationally marketed private label goods and various products. Costco offered different products such as seat cover for car’s flat screen TV, digital cameras, baby toys, books etc.

The business model of the company defines why its business strategy and method is successful. This explains the use of Costco’s tool and how to produce large revenues. The business model provides consumers considerable value and at the same time gives great value to the company and its employees. The business model generated large sales volumes and fast inventory turnover by offering very low prices for consumers and shareholders in numerous product categories on specific types of global branded and selected domestic tag products. Controlling fast inventory turnover combined with operational productivities has made it possible for the company to achieve the buying of products in bulk, then successfully allocate, which further aid with the processing of the products and allow warehouse self-service facilities.

Finally, large volumes of sales and rapid inventory turnover made it possible for the company to sell the stock and generate cash for the stock. Rather than maintaining the obligations of working capital, the company paid vendors on time. Costco’s business model has a classification that considers rapid inventory turnover by generating high sales volumes.

Costco’s chief element of strategy included lower prices, a restricted product line, and product assortment with an atmosphere that creates a shopping treasure hunt. From my observation, I notice that, in an effort to attract more customers, the company developed, followed and upheld and low-cost strategy. Costco offered global and local tag products at very low prices and with better excellence by reducing all traditional wholesaler-related costs including sales, delivery and receivable accounts. The company has been known for selling high global and local brands at prices relatively lower than retail outlets. The main element of Costco’s strategy, however, is to keep prices low for employees and members in order to limit the margins on brand products to 14 percent compared to other supermarkets.

The private label goods sold by the organization are intended to deliver greater quality than the global brands. One tactic used was to increase the company’s revenue and income. This tactic has three features that include creative and modern warehouse, building large, loyal base membership and using well-planned strategies to attract Costco customers to shop.

Five- forces Diagram for North American Wholesale Club Industry

• Substitute for shopping at wholesale clubs
• Competitive pressure coming from the market attempts of other types of retailers to win buyers patronage away from wholesale
• Competitive pressure stemming from the bargaining power of wholesale club members
• Member’s wholesale clubs
• Rivalry among wholesale club competitors
• Competitive pressure created by the jockeying of wholesale club rivals for better market position and competitive advantage
• Competitive pressure stemming from bargaining power
• Suppliers to wholesale clubs

The rivalry between the wholesale companies of Costco, Sam & BJ is robust and would probably remain so. All three contenders are endeavouring to entice more members to offer product selection and shopping experiences that will cause them to visit more stores or spend more time in their stores, leading to more sending and or buying. All three-company rivalry is centered on two major factors that are low prices, quality and selection of products. Low prices are continuously below retail price levels and the price charged by retail discounts had to be at bargain level to attract members to provide them with substantial cost savings sufficient to cover membership fees. While product quality and selection merchandise were always of excellent quality and often included brand names which were used to complement privately labeled products. In addition, the product line-up included items such as electronics, restaurant and office supplies, auto supplies, toys & games just to mention a few.

Costco and Sam’s operated a secondary business in or near their warehouses to enable customers to shop more often. These three clubs compete vigorously by opening new stores and enticing more members from both new and current stores. Therefore, achieving fast revenue growth depends on how quickly rivals open new stores and increase sales in current stores.

The opportunity to join the North American club market is closed unless someone from outside has decided to purchase BJ’s wholesale club, with plans to expand quickly to regions and states where there are no existing BJ locations. Nonetheless, the barrier to entry may be high and may entail costly disadvantages. In fact, Walmart and Sam’s must be considered as formattable rivals due to their existing market presence. The size of the economies is not easily surpassed by a new capital requirement and is deemed to be significant if the entrant wishes to operate on a scale equal to that of the incumbents of the industry. Marketing and advertising would have to be large in order to encourage Costco customers to move from a novice to a veteran. These aspects have to be weighed for the chances of feasibly retaining members. The pool of candidates for new entry into the warehouse clubs industry is low and the likely hood of entry in years has gone down equally fast, making the possibility of new entrants non-existent competitive pressure.

Wholesale clubs are facing normal competition from discount stores and major retailers. We must bear in mind that customers are not always looking to buy in high quantity this increases the chances of losing revenue from the wholesale clubs. Many consumers would choose to go to local shops and supermarkets to buy perishable items, in this case they might buy a pound cake in a supermarket instead of at a wholesale place because they would end up paying less. Though an item may not be costly, a consumer may not choose to purchase it in bulk whether or not the cost of the product is low. Another important factor is that alternatives with a wider variety can offer a relatively low-cost experience. Not because wholesale markets are much bigger than retail stores, they have less items most of the time.

In my view, customer bargaining power is weak. I am stating this because wholesale club members purchase only small quantities of goods and no single member accounts for a significant percentage of total revenue of a wholesale club. But individual wholesale club members have little power to negotiate price level or other terms and conditions. Certainly, a member cannot buy goods and can also decide not to remain a member of a particular wholesale club. This does not, however, impact an organization like Costco which consists of 592 employees. They have also already collected membership fees for consumers, and such fees play a major role in the profits of the wholesale clubs.

Research shows that Costco attracts the wealthiest consumer in discount retailing with an average income of about $75,000, with an annual income of $100,000 or more from 30 percent of customers. These customers also make bulk purchases along with other business customers. The huge sales volumes will help Costco keep the price down so consumers don’t have more room to negotiate with Costco and that the buyers ‘ bargaining power is reduced. Costco has the ability to unearth its growing trend among members and revenue and need not compete with or will it reduce its supply. Costco currently has an average of over 100 members per store, more than 60% compared to Sam’s club wish is its closest rival. Such warehouse clubs provide a limited product selection by offering fewer brands and larger sizes but at a high quality.

I consider the competitive pressure associated with rivalry to be the strongest of the five forces. Competitive pressures faced by wholesale clubs are reasonable even though reducing profit margins is not so strong, but strong enough to prevent wholesale clubs from enticing outsiders to enter the industry. High profit margin always attracts many new entrants, but in this competitive environment they need to look deeper into the factors surrounding wholesale business operations and pay attention. Competitive situations help wholesale clubs to keep their costs low for themselves and also keeping prices low for customers and is seen as a positive relationship between all parties. This competitive position feature ensures more consumers are attracted and high profits are sustained. Regarding Costco, the business has already dominated 57 per cent of the industry’s market share and it works better than Sam’s Club and BJ’s Wholesale Club. It can remain profitable in the wholesale clubs industry in the future and can continue to grow its membership to customers. Costco will embrace bright future from financial trend data.

Costco shortcomings are the continuous improvement of its activities and its pricing strategy. There are prices that are not elastic because they believe shareholders can gain from a slight price increase. In terms of covering costs, mark-ups and prices were marginal which decreased shareholder profits as an outcome. Ranking 3rd among the largest retailer company in the U.S. and 8th among the largest distribution companies in the world, however, increased visibility. Progress in the business has helped it grow and transform into a great company. Their wide distinction made this possible. In conclusion, I believe Costco will expand its operations in China and Brazil. I say that because these countries have seen strong growth rates over the past ten years and have become industrialized with high income increases.