Costco Wholesale Corporation

Background/History

During the mid-1970’s, small businesses only had the ability to buy their products and supplies from regional wholesalers or cash-and-carry operations. Because of this, Sol Price wanted to offer something more intuitive. After raising about $2.5 million from friends and family, Price created the company, Price Company, with his son Robert, and opened up the first Price Club, which was located on Morena Boulevard in San Diego, California. Price Club was the world’s first wholesale club and revolutionized retailing with its simple idea. It offered a small selection of products that covered a range of goods, which would be sold in bulk to sustain low prices. When Price Club first began, these wholesale items and supplies were only limited to business members. But as time went on, the company found that it would be much more beneficial to serve an audience of non-business members as well. Once this was implemented, the warehouse club industry started to prosper.

In 1983, the first ever Costco warehouse opened up in Seattle, Washington, which was founded by Jim Senegal and Jeff Brotman. Senegal had previously been the executive vice-president of merchandising, distribution and marketing of Price Club, so he had much experience with membership warehouses and retail chains. Brotman was an executive of an oil exploration company as well as a cofounder of a company that operated a chain of apparel stores. In 1985, Costco became a publicly owned company. Eight years later in 1993, the two companies Costco and Price Club decided to merge and became Price/Costco, Inc. Finally in 1999, the company changed its name to Costco Wholesale Corporation. To this day, Costco Wholesale Corporation operates a chain of membership warehouses that sell a wide variety of name-brand products, as well as the company’s own Kirkland Signature brand of products, at discount prices to businesses and individuals who are members of selected employee groups. With a continuous growing amount of warehouses located throughout the world in the United States, Mexico, Japan, Korea, and the United Kingdom, Costco Wholesale Corporation is the largest and most profitable chain of its kind (“Costco Wholesale Corporation”, 2015).

Industry and Competitors

Costco Wholesale Corporation is within the warehouse club industry. A warehouse club is a retail store that sells a wide variety of merchandise at discounted prices, in which customers have the ability to buy in large quantities. The difference between warehouse clubs and other retail channels is the fact that in order to shop at warehouse clubs, customers must pay for a membership. In return for the membership, members receive a multiple amount of benefits. These benefits include low prices, high quality, one stop shopping, rotating merchandise, member services and speciality businesses (“Warehouse Club Industry”, 2015). Low prices are guaranteed as the gross margin ranges from 8% to 14%. High quality is noted as a benefit since all products that are stocked within warehouse clubs are promised to be top notch and to be at a value. The benefit one stop shopping means having the convenience of a multitude of services in one place. This creates efficient services and it also gives the company the ability to sell a lot more to its customers. Rotating merchandise means that products are often times moved from place to place within the warehouses, which gives customers more incentive to stay longer and to buy a wider variety of products that they may have not seen before, rather than what is just on their list of things to buy. Member services is a benefit to the customer as they are given a variety of business and consumer services at a discounted rate. Last but not least, speciality businesses is by far one of the biggest benefits as to being a member at a warehouse club as there are so many that are included. Some specialty businesses that are included within a membership are cellphone sales, optical shops, pharmacies and much more (“Warehouse Club Industry”, 2015).

As Costco is part of the warehouse club industry, its top competitors of course include other warehouse clubs. BJ’s Wholesale Club and Sam’s Club are two warehouse clubs that are in competition with Costco. As Costco was introduced within the west coast, BJ’s Wholesale Club was the first warehouse club that was introduced within the northeastern region in 1984. In 1983, the same year that Costco opened, Sam’s Club was introduced within the Midwest in Oklahoma. All three warehouse clubs share similar products, and they all have house brands. As mentioned before, Costco’s brand is Kirkland Signature. BJ’s Wholesale Club’s brand is Berkley-Jensen and Sam’s Club’s brand is Member’s Mark. When comparing standard annual membership fees, Costco’s costs $55, BJ’s costs $50, and Sam’s Club costs $45. As well as warehouse club competitors, Costco Wholesale Corporation also has other retail stores such as Walmart and Target as competitors. Walmart and Target both hold competition against Costco as they also have similar products within their stores. Though their products are not in bulk as they would be in a warehouse club, stores like Walmart and Target do not offer membership fees so any customer is allowed to shop within their store.
Financials/Position of Business

When looking at a quarterly income statement of Costco Wholesale Corporation, it can be seen that overall, the company is in a good place financially as its revenues are increasing. Within the period ending on November 23, 2014, the company had a revenue of about $26,886,000. Three months later the revenue increased to $27,454,000 in the period that ended on February 15, 2015. In the next period which ended on May 10, 2015, though there was a decrease of revenue at $26,101,000, Costco was able to get back on its feet and increase within the next period which ended on August 30, 2015 to $35,778,000 (“COST Income Statement, 2015.) Costco is within good standing in terms of the position of the business, because of its business strategies. While some of Costco’s competitors may highly depend on advertising, Costco does the bare minimum and does not advertise at all. The company values selling a limited number of items, as it increases sales volumes and keeps the discounts steady. As Costco highly focuses on increasing sales, better pay and benefits are given to its employees. Costco believes this is beneficial as with good employees comes the motivation to increase the number of customers (“Costco’s Simple Strategy”, 2015.)

Technology and how utilized

Costco uses a point-of-sale system called Collaborative Retail Exchange (CRX). (“Costco Collaborative Retail”, 2005) This system allows suppliers to have access to Costco’s sales and inventory data for each warehouse location. The added benefit is that this data is nearly real time which gives constant feedback to the suppliers and vendors and notifies them on what is being sold and when. This also aides in stronger relations between Costco and their business partners by making them linked like they are a single entity. As of today this system works across all Costco warehouses and is used for all types of merchandise that is sold. The systems goal is ultimately to never run out of goods on the shelf, make new items get noticed and sell, and to improve upon promotions and inventory performance.

By using the CRX program Costco allows for their vendors to handle inventory. This model is known as a Vendor Managed Inventory (VMI) model (Connolly, 2014). It optimizes their supply chain so that Costco gives data on sold items and inventory levels to the supplier who is then responsible for shipping more supplies to the warehouse in need. This is the opposite of other stores where the seller orders goods, this model requires the supplier to create an order for the distributer. This however allows for Costco to have less suppliers and products which lowers costs and prices for the customers.

Since there are fewer suppliers than other stores, Costco sells less variance in goods compared to other retailers. There is roughly 4,000 different Stock Keeping Units (SKUs) compared to the average grocery store which has about 40,000 (Connolly, 2014). This allows for less items to be kept on the shelf consolidating overall inventory to a select few products per type.

The recent trend for buying things online has fueled Costco’s online retail business as well. They have created a mobile application, Costco Wholesale, which allows members to find the latest offers, shop, add a shopping list, and even find details about your nearest Costco store (“Introducing the Costco App”, 2015). This now benefits the consumer more as they can shop online and not even set foot inside of the physical warehouse.

SWOT analysis 

Costco has many strengths in its effort to grow and thrive. It puts a lot of effort in maintaining its pricing. The membership fee that members pay aids in lowering costs because the fee goes towards Costco’s expenses which then results in lowering item costs. Therefore the more members that join the lower prices will be. Costco also tries to keep prices up to date with the latest market prices giving a competitive pricing scheme. Costco has strived for high quality goods which shows customers that they are always trying to improve their stock. This effectively shows customers that it would be worthwhile to shop there getting high quality items and also paying competitive prices (Joo).

Another benefit of Costco is that they value their employees. They offer high paying positions and benefits which helps to make Costco run smoother by making employees enjoy their job and passing that along to the customers. Costco benefits by the word of mouth idea, as people who shop there will likely tell friends and family, increasing the amount of customers that end up shopping there. Then once inside customers are usually given food samples which may entice a customer. Technology staff is mostly outsourced to India lowering in house expenses for workers that don’t necessarily need to be onsite (Dalavagas, 2015).

Costco also has some weaknesses that hold it back. Costco’s customer base is primarily older shoppers who like to shop at physical stores and spend less. Newer generations tend to shop online which is why online shopping is crucial. Costco is also has location based issues. It has opened stores in Canada, Mexico, and a few other countries, however most income still comes from the United States and Canada Of these two locations California represents nearly a third of all sales. This is a liability if demand ever shrinks in this location as it will cause significant damage to the company’s finances (Dalavagas, 2015).The downside to having high salaries and benefits as well can potentially cause lower revenue over time. Balancing low prices with high salaries could cause a problem with the equilibrium and some new issues may arise in the near future. Another downside is that Costco uses warehouses instead of a typical building. Opening a new location could be difficult due to space problems and causing them to build a new location a significant distance from the customer base (Joo).

Costco is still growing and adapting to new markets and changing the way it handles internal structures to improve itself. One such opportunity is to expand is to start attracting new customers, mainly younger people. There are several strategies to acquire people from the age of 19 to 34 and the main one is by using online checkout services to buy goods. Younger generations also have a trend of healthy eating habits and Costco has been adding organic foods for lure them in (Dalavagas, 2015).

Aside from attracting new customers opening more stores in other locations adds more coverage for everyone. There are currently 670 opened warehouses and which might be increased to 1200 over time. Half of these stores may be opened internationally to broaden Costco’s range and to get more of the overall market share. There is also a potential to enter the Asian market, primarily China which will boost Costco’s customer base significantly (Joo).

The threats facing Costco’s business include other retailers that use large store fronts and also offer competitive pricing. For instance Wal-Mart and Target do not require membership fees and offer similar merchandise. Other big warehouse retailers include BJ’s Wholesale Club and Sam’s Club. Both of these retailers have the same business practice of selling bulk items of high quality and competitive prices. These factors limit Costco from raising prices because there are alternatives that customers can shop at instead (Dalavagas, 2015).

Online retailers have less expenses because they have fewer warehouses and can sell items cheap and fast right to a customer’s door. The biggest rival is Amazon, which offers low cost and quality products that ship and arrive fast. As of right now Amazon already started offering Amazon Pantry which ships food items and other essentials. Costco’s e-commerce abilities need to be improved to compete with other companies that already have a strong online marketplace and large customer base (Dalavagas, 2015).

Trends/disruptive technologies to watch

Costco is the largest membership warehouse club in the United States. Costco had developed a membership system in which consumers need a Costco membership in order to purchase items in the store. Unlike any other regular grocery store, one can not buy items without having the membership card when going in Costco. There are many different kinds of memberships in Costco and they are Gold star, business and executive membership. Each of these memberships have different kinds of benefits offered when purchased (“Join Costco”, 2015). The benefits of the Gold star and business membership is basically having access to Costco services and that means being able to buy items from Costco that are discounted. With that being said, Costco had also made a name for themselves for selling in bulk. They get to sell discounted items in big sizes and that is appealing to the customers that are buying them. Members get sales and discounts offered to them by Costco and they choose our the coupons use. With the ever growing social media there are an app where coupons are presented. One can choose the coupons on the app and give it to the register without having to rip out the coupons and having a bunches on piece of paper to give (“Introducing the Costco App”).This show efficiency and growth of Costco when they are able to adapt to the of technology.

Costco are benefit customers by having a variation of many kind of services to offer. The services are consumer services, insurances services and business services. Consumer services include having an auto program in where dealers are pre picked and will offer a Costco price and that means it is a low price. There are also home and health insurance that one can buy in Costco. In addition to all these other services there are water delivery and online investing service. These kind of services create strong ties with their customer and in return will get strong support from their customers (“Join Costco”, 2015).

Conclusion

Costco is a membership warehouse and their future is bright. Costco is doing well now because of the services they provide to the customers. Costco is innovative and stepping up with years to come. They are efficient because they use CRX program in which that helps with the inventory. Costco are efficiently restocking their inventory so customers get what they want. Costco has many strengths that makes it good competition to others. They provide discounts to customers and they also sell in bulk. Customers get the best prices and also the items come in huge sizes. Financially, Costco revenues are increasing and also they are expanding throughout. They have six hundred and seventy two warehouses in the world and that means they are globally known. Costco succession is providing what the customer want and also keep the morale high for the workplace. Having loyal customers and great employees will increase the transaction of word of mouth. Advertisement is then not needed to promote their brand. The services that Costco provide is great for customers ranging from mothers to people starting a small businesses. Costco will continue to thrive for new heights in the future. They will sought for innovativity and will continue to increase customer satisfaction by giving them discounted prices for their purchases.

Bibliography

About. (n.d.). Retrieved October 20, 2015, from http://www.costco.com/about.html
Connolly, Z. (2014, April 28). Supply Chain Logistics Analysis: Costco Wholesale Corporation. Retrieved October 20, 2015.
Costco Collaborative Retail Exchange Program Expands to All Major Departments. (2005, December 4). Retrieved October 20, 2015.
COST Income Statement | Costco Wholesale Corporation Stock – Yahoo! Finance. (n.d.). Retrieved October 20, 2015, from https://finance.yahoo.com/q/is?s=COST
Costco Wholesale Corporation – Company Profile, Information, Business Description, History, Background Information on Costco Wholesale Corporation. (n.d.). Retrieved October 20, 2015, from http://www.referenceforbusiness.com/history2/91/Costco-Wholesale-Corporation.html
Dalavagas, I. (2015, February 9). SWOT Analysis: Costco Wholesale Corporation. Retrieved October 20, 2015.
Introducing The Costco App. (n.d.). Retrieved October 20, 2015, from http://www.costco.com/costco-app.html
Joo, S. (n.d.). SWOT Analysis – BUS100SJO. Retrieved October 20, 2015, from https://sites.google.com/a/email.vccs.edu/bus100sjo/home/swot-analysis
Lutz, A. (2014, September 30). Costco’s Simple Strategy For Outperforming Wal-Mart And Target. Retrieved October 20, 2015, from http://www.businessinsider.com/costcos-simple-strategy-2014-9
Warehouse Club Industry. (n.d.). Retrieved October 20, 2015, from http://www.clubintelligencecenter.com/index.php?z=hstry
Loeb, Walter. “Costco- Overwhelming Services for Members.” Forbes. Forbes Magazine, n.d. Web. 21 Oct. 2015.
“Join Costco.” Join Costco. N.p., n.d. Web. 21 Oct. 2015.

(Authors: Brettany Tu, Christopher Sanfilippo, Wilson Hom, BUS 340.01, Fall 2015)

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