Costco's Case Study

Costco Wholesale in 2012:
Mission, Business Model and Strategy
Purpose Of The Study

Purpose of the study is to examine Costco Wholesale Corporation’s business structure
and strategy and how those relate to industry success.
Synopsis
Costco Wholesale Corporation is an American multinational corporation, which operates a chain
of membership-only warehouse clubs. The membership warehouse concept was pioneered by
discount merchandising sage Sol Price, who opened the first Price Club in 1976. Jim Sinegal,
former CEO of Costco Wholesale Corporation, got his start in retailing there. After working
several years Sinegal left Price Club and with Jeff Brotman, who at the time was a Seattle
entrepreneur, opened the first store of Costco in 1983, which was at the same time Walmart
launched its warehouse membership format, Sam’s Club. Costo became a public corporation in
1984 to raise additional capital for store expansion. In 1993, Costco and Price Club merged to
form a largest wholesale corporation in the United States. In 2012, Jim Sinegal stepped down as a
CEO of Costco. Then, the board elected Craig Jelinek President and former COO of Costo, to
succeed Sinegal and hold the tittles of both President and CEO. Numerous company documents
stated that Costo’s mission in the membership warehouse business was “To continually provide
our members with quality goods and services at the lowest possible prices”. However, in their
“Letter to Shareholders” in the Company’s 2011 Annual Report, more expansive view of
Costco’s mission was provided by its three top executives Jeff Brotman, Jim Sinegal and Craig
Jelinek, stating “The company will continue to pursue its mission of bringing the highest quality
and services to market at the lowest possible prices while providing excellent customer service
and adhering to a strict code of ethics that includes taking care of our employees and members,
respecting our suppliers, rewarding our shareholders, and seeking to be responsible cooperate
citizens and environmental stewards in our operations around the world”. The centerpiece of
Costco’s business model entailed generating high sales volumes and rapid inventory turnover by
offering fee-paying members attractively low prices on a limited selection of nationally branded
and selected private-label products in a wide range of merchandise categories. Membership fees
were a critical element of Costco’s business model because they provided sufficient supplemental
revenues to boost the company’s overall profitability to acceptable levels. A second important
business model element was that Costco’s high sales volume and rapid inventory turnover
generally allowed it to sell and receive cash for inventory before it had to pay many of its
merchandise vendors, even when vendor payments were made in time to take advantage of early
payment discounts. And the key elements of Costco’s strategy were ultra low prices, a limited
selection of nationally branded and private label products, a treasury hunt shopping environment,
strong emphasis on low operating costs, and geographic expansion. The number of fulltime and
part time employees that Costco’s Wholesale Corporation had in 2011 is 164,000. Their starting
wages for employees was from $10-$12, warehouse jobs include pay scales from $12-$23
depending on the job. Salaried employees can range from $30000 a year to $125000 a year.
Salaried employees are eligible for benefits include health and dental plans, vision programs,
dependent care reimbursement plans, employee stock purchase, and a long term care insurance
plans for employees with 10 or more years of service. Costco is performing very well from a
strategic prospect. Sam’s Club and BJ’s Wholesale Club are Costco Wholesale Corporation’s two
main rivals. Sam’s Club, a division of Walmart Corporation, has a format of selling products at
very low profit margin. It offers 4000 different types of products, similar to Costco. Although,
Sam’s Club has less upscale items and in turn allows their products to carry a lower price tag than
most Costco products. And BJ Wholesale Club offers a choice of 7000 different types of items,
which is 3000 more than its competition. Their plan focuses on the individual consumer and not
the customer friendly shopping experience, like Costco or Sam’s Club. Despite facing huge
competition Costco is the third largest retailer in the US and seventh largest retailer in the world.
SWOT Analysis:
Costco’s Wholesale Corporation’s strengths are their employee size, employee turnover, strong
financial position made possible by low operational costs, and largest retailer of wine in the
world. The weaknesses that Costco has are the huge competition within the wholesale market and
they don’t offer a variety of products as their competition. Costco’s opportunities are international
market expansion, website expansion, marketing technique and social media. Costco’s threats are
increased labor wages and demands, increasing product pricing on goods and services.
Porter’s Five Forces Model:

Costco has two competitive forces from porter’s five forces model that are strongest.
Those are the buyers and the firms in the industries offering substitutes products. The
competitive pressure from the buyers bargaining power of getting the lowest prices is the
huge part of Costco’s business. Also competitive forces of other firms that are substitute
products such as Sam’s Club and BJ’s Wholesale Club are both strong pressures from the
market place.
The Five Generic Strategies

Generic Strategies of Costco
Costco Wholesale Corporation mainly uses cost leadership as its first generic strategy for
competitive advantage, which entails low cost reflected through low prices. Customers expect
significant savings when they buy from Costco. But Wal-Mart also uses a cost leadership generic
strategy that’s why to set itself apart from the competition Costco also partly uses broad
differentiation as its second generic strategy. The company differentiates based on value or
quality through its house brand Kirkland Signature that leads to competitive advantage and allows
Costco to compete based on quality, on top of low prices based on the cost leadership generic
strategy. In addition, the strategic objective of keeping superior quality applies to Costco’s broad
differentiation generic strategy, especially the Kirkland Signature brand.
Suggestions:
Costco has a sound expansion plan for their future of growing sales for each f their existing stores
but they should expand more internationally. Asian countries like Bangladesh and India would be
beneficial for Costco to expand. This is because they are known to have large families and if the
company places their stores in demographic areas suitable for their target market, they would
have an extremely successful international business.

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What is Costco's business model?

What are Costco's main competitive strategies?

Costco Wholesale in 2012:

Mission, Business Model and Strategy

Purpose Of The Study

Porter’s Five Forces Model:

The Five Generic Strategies

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