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Case Study 2 - Research Paper Example

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1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? Costco is a membership warehouse that is based on efficiency and selling at discounted prices. Specifically Costco has a business model committed to providing brand name and company name products at discounted prices, reducing handling on shipments, rapid inventory turnover, volume purchasing, and having a “treasure hunt” merchandising strategy…
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Case Study 2
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Case Study 2

Download file to see previous pages... This part of the strategy is in keeping with low cost merchandise. Costco also only purchases certain sizes, colors, and fast moving inventory. This part of the design is to avoid keeping inventory that customers will not be interested in buying. In doing this inventory will always be moving out of the door and thus the company will always have a high inventory turnover. Not only is Costco specific in terms of choosing the characteristics of the products but Costco actually keeps a small amount of products on hand in order to avoid an inefficient number of products that are slow-moving or become unable to move. One part of the model that is concerning is that there is a lack of serious competitors in the membership warehouse business. I would be concerned with the possible effect of new competition and the growth of current firms like Sam's Club and BJ's Wholesale. Another concern I would have with Costco is the large holding of the land and warehouses. Certainly this could be thought of as a benefit for the company but with the recent drop in real estate prices the value of the property could fall and thus be less able to sell in the future with 150,000 sq. ft. warehouses on the land. On the other hand the land is purchased on low priced land, not necessarily in high traffic areas which would be a positive if the real estate price dropped, since it would be less likely to drop significantly. This is a a great business model because not only is the company able to sell a high amount of inventory in a short amount of time, but Costco is also able to finance inventory purchases through their vendors, thus avoiding long term debt. This allows them to pass on the discounts to the customer which in turn causes the volume and higher revenue. 2. What are the chief elements of Costco’s strategy? How good is the strategy? Volume Purchasing is one of the main elements of Costco's strategy. By purchasing in large amounts Costco is able to realize discounted prices from vendors. Not only that, due to discount pricing Costco is able to sell all of the merchandise before payment is due. By doing this Costco can realize their profit before paying for merchandise while avoiding the need for financing. The Costco vendors are actually financing the sale of the merchandise which is the advantage of this strategy. Treasure-hunt merchandising which is a Costco phenomenon where Costco purchasing agents search for deals that the Costco members would find desirable and stock the shelves with this product that will sell out quickly. The merchandise is purchased from wholesalers and retailers who are struggling and need to move old inventory. The inventory comes in deeply discounted even though the products are brand name products. By selling this deeply discounted merchandise Costco is able to lure in customers who love brand name products. Not only will customers purchase this merchandise but members will most likely be on the look out for such deals thus increasing the likelihood of a quick sale of the merchandise. Costco's business strategy also calls for less marketing through expensive channels such as television and radio. Instead Costco utilizes direct marketing which is not only less expensive but also very personal. The company opens up a store and directly calls companies, individuals and employee's in big ...Download file to see next pagesRead More
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