Costcos Business Strategy - Assignment Example

Costco’s business strategy Name University Costco’s business strategy The $125 billion North American retailing industry consists of 3 main competitors Costco wholesale, Sam’s Club, and BJ’s Wholesale club. In the warehouse clubs operate an industry where there exists no frills, and there is self-service, where customer can select their goods from a relative narrow assortment of discount priced products, which are usually sold in case lots. Costco wholesale is the third largest wholesaler in United States and the seventh largest in the world, the wholesale company is clearly a leader in its field (Thompson, 2009). Costco was founded in 1983, using it membership business model. In 2012, Costco Company has a total of 598 warehouses around the world. The revenues for the company for the period ending 2011, stood at $88.8 Billion, with the net income standing at a record high of $1.46 Billion. For the same period 93 warehouse of Costco generated sales exceeding $200 million per year, this was an increase from 53 warehouses in 2010, 4 stores had sales exceeding 300 million, with one store exceeding 400 million. The company operates membership card system to its clients, which entitled them to shop at any Costco warehouse; this business model generated nearly $1.9 Billion in membership fees for the company. The business strategy of Costco is to continue to provide high quality products at the lowest cost possible to the market, while providing an exceptional customer service. The business model of Costco is geared towards generating high sales volume and rapid inventory turnover by offering low prices to fee paying embers in a wide range of product categories (Gamble, 2013). In this business model Costco operates profitably at significantly low profit gross margins. Therefore, the membership fees are an essential element that provides essential revenues to boosts Costco’s profit margins to acceptable levels. The second important factor of Costco business model is that due to its high sales volume, and rapid inventory turnover, allowed the company to receive money for the inventory before it pays its suppliers and merchandise vendors. This also allowed for Costco to pay its suppliers early enough to take advantage to early payment discounts. The key element of Costco strategy was to provide its customers with low prices, the company only stocked good that it could offer to customers at discount prices. The company’s mark-up profit margins were put at 14%, while those of the competitors were at 20%. This profit margin was significant low enough just fractionally above the breakeven point (Greenhouse, 2005). Significant percentage of the company’s profit came from the membership fees of the members. The membership fees attributed to over 70% of the company’ membership fee revenue. On the products that are stocked; a normal supermarket stocked over 40,000 items, with superstores stocking between 125,000 to 150,000 products. Costco stocked only 3,600 active items on its stores. With 85% of the products consisting of brand names, while the rest being the company’s private label of Kirkland (Cascio, 2006). Kirkland represents about 20% of the company’s sales and the CEO believes there is still room for more improvements. The growth strategy of Costco is to increase the number of its branches by 5% annually; the growth could be higher depending on the profits margins for the previous year. What are the strengths and weaknesses of the Costco Business Model? Costco’s business model is a hybrid strategy that combines the low prices approach that seeks to provide the lowest cost of its products and services and the membership strategy, which enlists members into its business and guarantees them discounts for their purchases (Wagner, 2012). The strengths of these strategies includes the following; The low cost and membership strategy enable Costco to withstand the competition from its competitors in the industry. Costco has the lowest profit margins in the industry, the low profit margins guarantees customers and a lot of business for the company. This means that the company will be able to withstand the competitions pressure in the industry. The bargaining power of buyers can affected the way businesses is operated, buyers demand low prices for high quality products. By offering the same product quality with the same set of benefits that matches the competitors in the industry, the company is offers value to customers because now customers, thereby the company is able to wield much flexibility over buyers in the industry. The company has been able to absorb the request of customers and buyers without being able to damage the profitability of the company. The competitors in the markets have found it difficult to respond to the wielding power of buyers, putting Costco in a strong position to serve the needs of the market. This strategy ensure that buyers become members of Costco warehouse to guarantee them the access to discounts of the selected products in the company stores. The company reduces the pressure that buyers have because they are getting value for high quality products. Having low prices in the industry creates a barriers of entry for new customers in the industry. This strategy ensures that most customers in the industry are members of Costco, hence new entrants will find it hard to compete in the industry. The membership strategy has provided Costco with an alternative revenue stream for the company. Costco has the lowest profit margins in the industry, this means that the company’s revenues from the sale of its products are extremely low. The profit of Costco from the sale of products are just a fraction above the breakeven point. The membership fees from the members of the company provides about 70% of the company’s revenues. This has provided the company with an alternative competitive advantage in the industry over the other players in the industry. The company now boasts huge number of customers thereby guaranteeing it huge sale volumes. Through this strategy the company has been able to maintain its profit margins and also expand its market share. This strategy opens up new markets for Costco and has enabled the company to penetrate new markets with ease. The cost leadership advantage the company has over its competitors has enabled the company to attract new members into its membership scheme, the new customer provide new business opportunity for the company. This strategy has to just deal with high turnover products, this means that the company is able to generate enough sales from its products to be able to pay its merchandisers and suppliers on time and also take advantage of the early pay discounts that suppliers and merchandisers offer. This strategy has given Costco strategic choice in the industry, Costco can set its prices at the level of the competition and still be able to maintain profitability and huge number of customers. Through its membership program Costco is able to know and understand its customer, through its premium and gold membership program the customer demographics are available for the company, and their buying trends can be analysed, this means the company can evaluate and ascertain the needs of customers. The weaknesses of this strategies includes the following; Costco is getting extremely low profit margins from its low cost strategy. The profit margins of the company is at 14%, which is extremely low compared with the other competitors margins whose stand at around 20%. This has made the contribution of sales to the overall profits of the company to be as low as 30% of the company’s profits, with the other significant amount coming from membership fees (Wang, 2010). The cost leadership approach used by Costco has the potential of making Costco lose sight of the consumers change tastes and preferences in the market. The use of this strategy has made manager focus a lot of the reduction of costs, and this makes them blind to the changes that is occurring in the market. The rapid advancements in technology is continually making the low cost strategy of Costco ineffective and outdated. The strategy has made the production of goods and services to become cheaper (Wang, 2010). The customers’ membership program offers customers limited merchandise and discount prices. Members of Costco membership program do not have a wide access to the all high quality products that is available in the market. Customers have only access to limited products that are available in the market through its limited selection merchandise. The membership program offers customer a lot of advantages, but the company stocks certain products for limited amount of time, this limits the customers’ access to the product. Customer has therefore be access the product as and when they are in offer. This strategy does not offer customer with a lot of alternatives and access to the product. The strategy is facing huge competition from online stores like ebay.com, the online stores offer product for relatively cheaper prices than the market prices. The growth and development of online stores means the low cost strategy of Costco is becoming obsolete and out of date. How is it differentiated from its 2 main competitors identified in the case study? This section analyse the differentiation strategies used by Costco warehouse versus its main rivals that Walmart and Kroger. The product differentiation strategies the Costco uses to tailor its products, and shopping experience from its customers target consumers to effective attain its differentiation strategy and enable customers to recognise the differences that exist. The company only sells a selected limited amount of products in its stores, this enables customers to get the best prices possible, value and high quality for the products available (Gates, 2011). The differentiation strategy target the warehouse atmosphere, the quality of service, and unique merchandise. In order to counter the competition Costco has developed a unique product differentiation strategy. The company has come up with its own products that enables the company to be able to offer other high quality products in addition to the other products that are available in the store, these products includes are Kirkland and Green Mountain Coffee. The private labels that Costco’s offers has communicable advantages tailored into them. This communicable advantages tell customers about the advantages that they get by using these products in a language that they can identify and relate (Rice, 2010). These products have high quality standards that is comparable with other products in the industry, but cheaper. The other differentiation strategy involves a favourable return policy. This policy is available to its members, and this enables the company to be able to serve its customer effectively and ensure that customer satisfaction is achieved. The favourable return policy that is available for customers is a ‘no question asked’ policy, the customer get full favourable return policy. Through this program, the company has also outlined the guidelines of product return policy, to ensure that customers are fully aware of its product return policy (Becker, 2009). The company in its warehouses has developed a treasure hunt program, whereby customers can look for products like hunting for treasures. The products available are 3,600 to 4,000, 3000 of the products are available in the normal stands, and the rest 1,000 products are available through treasure hunts. This enables the shopping experience of customers to become fun and captivating. The company is focussed on attracting who spend a lot on the product. The idea of the treasure hunt program is enable the company to attract big spenders in the company membership program (Stephen H. Goodman, 2006). Big spenders buy products in bulk, and with this strategy the company is able to achieve its sales goals. The company has focused on selling distinctive products for the customers. This enables customers to focus themselves on products that will offer them maximum value. The company also offers food stamps to its customers, through its strategy the company has stated that it is mandatory for food stamps to be offered to children shoppers in Costco warehouse (Berman, 2010). Costco warehouse has empowered its personnel through better payments and training mechanisms, and this has resulted in enabling the staff members to go out of their way to look for products for the clients. The employees are trained on the location of where the products are located, this eatables customer to get the maximum help from employees. The isles of Costco’s are well lit, and properly organised to ensure that there is ease of movement of customers through the company warehouses. Through its merchandise program, Costco refuses to sell merchandise that is not objectionable to the clients or retailer high spenders target market. The merchandise program has well-tailored and edited merchandise programs that serves customers and ensure that they get offering such as ease of use, high quality and distinctive features. There exists specific sampling stations for the various products available, which enables customers to be able to sample the various products that is available, and also test the appliances that they have bought (Nelson, 2012). The company has also initiated an internet purchase portal website, through this system customer can be able to access Costco’s product from any place in the world. Costco warehouses is the united states second largest retail stores as off 2012, the company has continually been achieving tremendous growth and profitability throughout the years. The company uses a hybrid strategy that employs the low cost strategy and membership strategy in order to increase its profitability by achieving high sales volume. In order to achieve high sales volume the company sales product that have a high turnover rate, which offer the same high quality and benefits as the other products in the market, to its customer. The membership fees contribute a significant margin to the profits of the company than its sales margin. The company low cost strategy limits the profitability of the business. 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