Coscto Wholesale Corporation - Case Study Example

COSTCO MOVEMENT ACROSS TIME Table of contents Executive Summary 2. Introduction 3. The Organization of Costco 4. The Survival 5. Demands 6. The Down Fall 7. Conclusion EXECUTIVE SUMMARY Costco is one of the large wholesale club chains working on the market since 1976. Costco customers belong to different social groups but the core of customer audience is low and middle income working families and small businesses. Price reductions and discounts are the main benefit low income consumers. Costco targets at local communities and requires membership for all customers. Costco's customers desire product variations, and their consumption behavior decries the postulates of perfect competition. Brands, styles, colors, and labels have become significant. Consumers want new products, which often result from sizable expenditures on research and development that can be undertaken only by large enterprise. In reality, it seems that a market of partial monopolies has provided the greatest measure of abundance (Global Marketing Principles 2008). Competition occurs not only in markets of many small firms but also in markets of relatively few large ones. However, in markets with few large firms, competitive action can be countered, and price competition may not serve as an effective method of competition. Therefore, products and services also become competitive weapons, and nonprice competition assumes importance. This fact has not yet been sufficiently recognized and integrated into theoretical models (Costco Home Page 2008). Costco spends no on advertising following "the no-frills concept". Costco has no public relations and advertising department trying to prove that the main principle of business is to sell products "as inexpensively as possible" (DiCarlo 2004). Costco does not rely on advertising proposing customers unique services and wide assortment, low prices and customer support. Technological improvements facilitate the type of centralized management that characterizes these organizations. The economies of scale that result from increasing store count and the ability to divide tasks between store operations and central merchandising put them in very powerful positions vis--vis both their customers and their suppliers. Costco was founded in 1976 as Cash-and Carry Company. The owner of Costco, sol Price, opened the Price Club store in San Diego as a discount store. INTRODUCTION The sales model of Costco is to sell products at low prices but at high volumes. During the 1980s, economic turmoil opened the door to retailing innovators who cut the cost out of distribution and drove conventional department stores or discounters to their knees or to bankruptcy court. Of the top twenty discount department stores in 1980, fewer than half remain in operation today, while the doomed still stick to business as usual. The seeds of "creative destruction" were sown in the 1980s but will be harvested in the 1990s. As many as 20 percent of the regional shopping centers currently operating in the United States will close by the year 2000 (Costco Home Page 2008; Bearden et al p. 54). In order to remain competititve, Costco changed its strategy and introduce Costco membership. Goldstar and Business Memberships costs about $50 a year and the Executive membership is about $100 a year. Only Costco members can purchase main products except drugs, drinks and gasoline similar to other retailers of this type, Costco continues to rattle around within overstored retail square footage that outstripped both population growth and consumer spending over the past decade (Costco Home Page 2008). The coming shakeout in retailing has been preordained by a copycat, follow-the-leader mentality, a quiet conspiracy toward "sameness" in retailing--in layout, location, presentation, products, and service. Diversity in products, in consumers, in employees, and in the environment will demand diversity and dexterity among retailers. "Costco sells very large volumes of merchandise and achieving high inventory turnover In addition to providing a wide range of products and services for personal use, Costco's warehouses also help small-to-medium-size businesses reduce costs on purchasing for resale" (Costco History n.d.). THE ORGANIZATION OF COSTCO The organization and structure of Costco is based on innovative and entrepreneur ideas of its founder Sol Price and co-founder, J. D. Sinegal. Price supposed that the company should own its own real estate and did not invest in rapid expansion and market penetration. Thus, this strategy helps Costco to remain competitive and expend its business during the 1990s, The innovation time scale is collapsing. The time interval from perception of dysfunctioning to acceptance of innovation has been decreasing (Global Marketing Principles 2008). This places additional pressure on management to understand more fully the process of managing change and programming innovation through manipulation of knowledge. Innovation approaches manageability when participation in the process becomes part of the continuing responsibility of all levels of management. Management must develop the appropriate environment and set of attitudes to encourage innovation. Only then can a firm hope to deploy its resources most profitably in order to meet the challenge of change. The main stores of Costco are located in the USA and Puerto Rico - 393, in Canada - 75, in Mexico - 31, in the UK - 19 and in Asia - 17 (Costco Home Page 2008). The uniqueness of the approach and structure of purchases is that only Costco members can purchase the main assortment. This allows the company to analyze and evaluate buying patterns and predict sales volume. "Originally serving only small businesses, the company found it could achieve far greater buying clout by also serving a selected audience of non-business members. With that change, the growth of the warehouse club industry was off and running" (Costco History n.d.). Innovations have been said to differ with regard to how they will change the potential adopter's behavior. Is the innovation continuous, requiring little or no change on the part of the adopter; dynamically continuous; or is it discontinuous requiring whole new types of behavior for the adopter. Many developments are easing the consumer into a position where distance-based retailing will not be a discontinuous innovation and therefore a difficult one to adopt. Costco can serve those smaller and more remote markets via the shopping medium (Global Marketing Principles 2008). The consummation of the sale would then take place via a vastly expanded delivery system and its growing set of clone-like competitors. The unique sales model and strategy allows Costco "to impose a strict 15% markup limit on all items and offer bargains like a Compaq personal digital assistant for $319.19, vs. $449.99 at Circuit City Stores Inc" (Costco history n.d.). Costco stores are located in local communities and the company has owned around 440 stores worldwide. "As a warehouse club, Costco "eliminates all extraneous costs," says its finance chief. Some tactics are common to warehouse shoppers, like eliminating shopping bags (a cost estimated at one-half of one percent of sales) and having very few, if any, sales people roaming its unfinished, concrete floors" (DiCarlo 2004). These outlets carry large stocks of a wide and somewhat erratic assortment, concentrate on large packs and large sizes of packaged foods and other quick consumables, promise more continuity of category than of brand or specific products, aggressively seek bargain purchases, operate on about an 8 percent margin, and limit patronage to small business owners (reportedly responsible for about 60 percent of dollar value) and selected consumers, There is absolutely no legal advantage, such as enjoying greater freedom from minimum price legislation, in membership restriction. The membership system does provide a source of additional funds; it also provides a good list of names for inexpensive direct mail promotion, it facilitates check acceptance and, probably most importantly, it gives customers a sense of being the selected beneficiaries of special bargains not available to the general public. One of the implications of the expansion of retail sales, which of course refers to the growth of markets, has been an opportunity for the growth of large scale mass market specialists (Kotler and Keller 2005). THE SURVIVAL For Costco, its fist year of operations was the most difficult. The company lost millions of dollars and could not revive its main operations. Thus, Costco management decided to enlarge its membership and involve such categories as credit unions and savings and loan associations. Also, Costco opened three more stores in other cities and attracted wider target audiences form local communities. Costco did face competition from (and may be co-subsidiaries of companies that own) "wholesale warehouse" retailers, another form of low-priced generalists. The new era of retail operations was marked by consolidation and downscaling. Retail sales became concentrated among fewer, but larger, smarter, and more streamlined companies. At the same time "storeless shopping" was projected to reach escape velocity, facilitated by at-home interactive shopping technologies with broadcast-quality audio-visual capabilities. Management Costco forecasts that the "death of the mass market" will be accompanied by a rebirth of specialty stores with an expanded but tight matrix of merchandise conceived to make a powerful statement to select market targets. Differentiation was the main tools which helped the company to survive. In contrast to other discount stores, Costco proposed wider assortment and low prices than any other retailer could propose (Kotler and Keller 2005). CUSTOMER DEMANDS Costco consumers are constantly balancing continuity and change. The evolutionary nature of consumption is perhaps it's most undervalued and unexplored facet. There are two important manifestations of the collision of continuity with change that retailers should note. One is the American consumer's insatiable appetite for something new, something different, something "state-of-the-art "--so long as something "new" does not deviate too far from convention. However, nowhere is the collision between continuity and change more evident than among consumer migrants and consumer immigrants (Kotler and Keller 2005). The evidence of our insatiable appetite for something new is perhaps most visible in the waves of fad and fashion that sweep across the landscape with predictable regularity. Rarely does radical change take hold, except at the fringes of the market, and never for very long. "Costco sells private label and branded merchandise (Kirkland Signature) to businesses and individual shoppers. Kirkland Signature products is designed to be of equal or better quality than national brands, including diapers, photographic film, frozen foods, coffee, batteries, luggage, tires, clothing, detergent, health and beauty aids, housewares and more" (Costco History n.d.). Surviving department stores will evolve into "local market relationship merchandisers," an ungainly term but a logical move toward humanizing retailing by moving away from products toward personal services such as food, insurance, travel, legal, catering, and tailoring. In short, retailers in the next millennium will target a larger share of the customer's spending rather than a larger share of the customer pool (Global Marketing Principles et al 2008). THE DOWN FALL Low price retailers like Costco are generally the first to sense significant change in the marketplace; they are like front-line shock troops on a battlefield. Costco has been criticized for its monopolistic position and a negative impact on small business. small towns protest against such giant retailers as Costco because of their impact on small businesses and price monopoly. Overall, the decipherable threads of demographic, psychographic, and life-style change in the U.S. market signal growing market fragmentation. Thus core values that have shaped in the context of unique historical and social events provide both the impetus and objective of consumption throughout the consumers life cycle (Costco Home Page 2008). Time and information have emerged to eclipse money and materialism as the primary constraints on contemporary life. Allocating increasingly precious time among ever-expanding obligations is an unending, unsolvable problem for almost all consumers. But time is the insatiable adversary of consumers caught in a vise between multiplying domestic and employment responsibilities on the one hand and intensifying financial pressures on the other (Kotler and Keller et al 2005). CONCLUSION Costco consumers typically do not make decisions on the basis of attributes or image alone. Rather they use attributes and image to infer some benefit. A benefit is an abstract concept such as convenience, pleasure, or fun. The rationale for a benefit is the fact that it has some attributes or that certain people use it on particular occasions. The taste benefit might be supported by specifying the brand's choice of hops, or by showing young adults enjoying it after work. In some instances consumers know a brand's category membership, but are not convinced that the brand is a good member of the category. In such cases, alerting consumers to a brand's category membership is warranted. Attributes and image might also be used in their own right to claim membership. When image is used to create membership, a brand attribute is often used to create a point-of-difference. Sometimes brands are affiliated with categories in which they do not hold membership rather than one in which they do. This approach is a viable way to highlight a brand's point-of-difference from competitors, providing that consumers know the brand's actual membership. The strongest positions are ones in which a brand has a clear point-of difference on a benefit that prompts category use. Large brands are generally positioned using these benefits. In spite of the fact that economics currently favors particle markets among a limited number of specialty retailers, the mass market is still bound together by a single thread--value. The money pressure may be greater at the downscale end of the economic continuum, but time pressure is greater at the top. But, as we have noted, nearly no one is exempt from both. Woks Cited 1. Bearden, W. O., Ingram, Th. N., LaForge, L.W. Marketing, Prentice Hall, 2004. 2. Costco History. n.d. < http://www.priceviewer.com/costco/costco.htm 3. Costco Home Page. 2008. < http://www.costco.com/> 4. DiCarlo, L. Costco Rings Up Results. 2004, The Forbes. 5. Global Marketing Principles. 2008. 6. Kotler, Ph, Keller, K. Marketing Management. Prentice Hall, 2005 Read More