Costco Case Study

Overview

Sol Price and son Robert started Price Club in 1976. It remained a big player in the discount space until its merger with Costco.

For fiscal year ending August 2015, the company increased sales and net income. Sales came in at $116.2 Billion which represents an increase of 3.1%. Net income increased by an impressive, 15.5% to $2.377 Billion. This goes to show how efficient companies can make the most of what they have.

Workers for Price Club, James Sinegal, and Jeffrey Brotman, pooled resources to start up Costco. By 1993, after refusing to merge with Walmart, Price Club and Costco merged operations. They combined the name to PriceCostco, in part, to honor membership in both companies during the merger.

Both owners managed the company until the Price family departed, seeking other unrelated ventures. The company soon after changed its name to Costco Wholesale Corporation.

James Sinegal has been with the company until his retirement in 2011. He is still a board member overseeing that his company stays on track. The company has been left in good hands by veteran Craig Jelinek. He has headed merchandising since 2004 and has been the president and COO. He also held the executive vice president role during his time with the company.

How the Company Started

There are two sets of competing factions at play. The Price family and the workers who started up the first official Costco store. After they both had merged, the Price family decided to depart from the venture.

The Price family obtained $2.5 Million from family and friends to form Price Club. After merging with Costco, the company was renamed PriceCostco. After the merger was complete and the Price family departed, the company became Costco Wholesale and retains that name to this day.

Initial Problems

One of the biggest problems the company faces and has since its opening is selling bulk to single people or couples with no kids. For non-perishable goods, this is not as problematic. But even here, this group of customers will use much less than larger families. The company should consider offering smaller-sized packages to get around this problem.

Why it Works

If you have ever been in a Costco store, you will notice that it is almost factory-like. This barebones approach keeps costs contained. The company focuses on selling high volumes at low prices. It also keeps pallets of stock directly in the store, reducing or even eliminating the need for warehouses.

The company draws a good portion of its revenues from its membership fees. It seems customers are loyal enough to stick with the company even when fee hikes occur. Part of this loyalty could be due to the location of the store.

With over 50 million members across several hundreds of stores, the company has a goldmine of data to use in its analysis. It can use the activities of customers to determine how better to serve them.

The company also uses food and gasoline as loss leaders to draw customers in. Offering below-average gas and food prices, customers may purchase other higher-priced products during their visit. For most items, however, the company operates on thin margins with the goal of selling in large volumes. It’s these volumes that allows the company to obtain such low prices, which they pass most of the savings onto its members.

Costco limits the number of products. This streamlined process allows the company to keep the best sellers while ditching low volume items. This simplifies most aspects of the supply chain and keeps costs down. This strategy also allows the company greater bargaining power with suppliers as they must prove their products are sales worthy to be included in the product mix.

The company offers a money back guarantee at any time for the duration of the membership.

Promotion:

The company uses the word “wholesale” as part of its name. This lets consumers believe they are getting lower prices than buying from other companies. It’s important to note that the true definition of wholesale is when no sales tax is charged for purchases in most US states, and buyers must have a certificate issued by the state showing they are exempt from tax.

The company has a membership plan that allows reselling, and it states that to gain this status appropriate resale information must be provided. This usually means presenting a sales tax exemption certificate.

Costco has a huge word-of-mouth base of customers. When one family experiences significant savings due to their membership at Costco, they are likely to tell friends and family about it. This trend continues indefinitely. In fact, membership used to require an invite from another member.

Features:

Ratings are based on the level of membership and tend to be at about 4.5 stars or higher. The company offers three types of memberships: Executive, Business, and Gold. The Executive and business memberships allow those members who qualify to resell the items and not be charged sales tax. The Gold membership is for families or individuals and does not have any provisions for sales tax exemption.

As for ratings, the Business and Gold have higher ratings than the Executive membership. This could be because the Business and Gold have much more members due to cheaper pricing. The Executive membership still enjoys a healthy 4+ star rating.

The products online are also rated from one to five stars which help customers determine if other purchasers were satisfied.

Lessons Learned by The Business

  • Pay employees well and treat them right. This reduces turnover and theft. Conscientious members also like the fact that they can get low prices without workers’ sacrificing a lower rate.
  • Stand strong against shareholders when they pressure the company to raise prices. Management implements a cap for its markups and sticks to that cap. The company wants to retain customers long term. Shareholders are often fleeting.
  • When members get great deals, they won’t care that the store doesn’t look polished or like a department store. They understand what is at stake to keep prices low and know the savings are being passed onto them.
  • The company is constantly looking for ways to save money. That could be from hitting up their suppliers for seasonal discounts, or it could be finding hungry suppliers with hot-selling products. It is an avid recycler of its boxes and looks for ways to save money using logistics measures.
  • Costco keeps an active watch on its competition. Managers will obtain memberships in their competitors and visit their stores. When a company like Sams (Walmart) introduces something new, Costco tries to determine how they accomplished it and incorporates it if it makes sense to do so.

How Other Businesses Can Learn from This

If you can find out why and where you are losing sales, take advantage of that information. Use whatever information you have available to determine what customers want and why they didn’t buy from you.

Keep the quality as close to the higher-priced competitors as possible. If you concentrate on low quality just for the sake of keeping prices low, customers will notice and take their business elsewhere. What good are low prices if the customer has to buy the same products weeks later due to damage or other problems? Maintaining high standards keeps customers loyal.

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