The strategy of Costco Wholesale is based on low price level, limited product line, as well as limited product selection, ultra-low markups, high sales volume, and rapid inventory turnover that transforms shopping experience into a treasure-hunt by constantly changing products. Due to its effective strategic model, it became the first company in the U.S. history that reached 1 billion dollar sales in less than six years (“How Costco Became”, 2005).
Pricing and Product Strategies
Effective pricing strategies made Costco Wholesale famous all over the world. According to Jill (2004), low price level was reached by limited markups on brand-name merchandise of 14 percent, comparing to other retailers which had 20 to 50 percent margins. By offering great values, Costco, for example, was selling brand-name jeans almost 20 dollars cheaper than any department store. It is an indicator of company’s commitment to long-term cooperation with customers rather than quick profits due to high markups (Gamble & Thompson, 2010, p. 265).
Unlike big supermarkets like Wal-Mart Supercenter and SuperTarget, which offer around 150 thousand items for their customers, Costco Wholesale provides their members only 4 thousands (“How Costco Became”, 2005). Despite the difference, the choice of products is still very high. However, products of each category are limited to fast-selling models and colors. For instance, Costco sells only big bottles of Advil, knowing that a few customers might be lost, and perceives this loss as intelligent loss of sales that will help their business function more efficiently and easily (Gamble & Thompson, 2010, p. 268).
The key point of Costco’s merchandising model is regular change of one-fourth of its
product line that makes shopping a real treasure-hunt. By offering great price on luxury items like diamonds, espresso machines, or digital pianos that are presented in the limited amount, customers are engaged to search for them and buy right away, because tomorrow this opportunity can be missed and the given product will be out of stock (Jill, 2004).
The main philosophy of Costco’s advertising and marketing is conducting mostly direct mail advertising in order to maintain low costs. The management team believes that extensive sales and advertising campaigns are not necessary, since treasure-hunt idea serves as the main advertising tool, and is followed by word-of-mouth advertising which attracts new members and customers.
Costco’s growth strategy implies constant expanding not only within the borders of the USA, but worldwide. The company opened 127 warehouses in 2005-2008, and was planning to open another couple of dozens in 2009. A total of 102 new warehouses have been opened outside U.S. as of 2008 (Gamble & Thompson, 2010, p. 273). Tools for new customer acquisition include money-saving prices, rock-bottom prices for luxury items, and making customers interested in coming back at least weekly or bimonthly with the help of special one-time-only offers.
Costco Corporation is a strong brand, characterized by low prices, efficient warehouse operations, and special approach to choose and handle excellent merchandise. The company has exceptional employees who receive multiple benefits, wages higher than work compensation in other stores and supermarkets, good human recourse policies that result in high level of service.
Costco tends to experience sales decrease of non-food items like sporting goods and electronics, which is the result of gas price deflation. During this kind of periods all the company weaknesses reveal themselves: energy costs jump high and it becomes difficult to distribute merchandise, maintain low margins and simultaneously keeping wages high. Thus, Costco is forced to raise prices, and it negatively influences its loyal customers (Fuhrmann, 2009).
Major opportunities of Costco Wholesale are future ongoing expanding of foreign markets such as Europe, including Eastern Europe, China and India, and its constantly increasing popularity and respect. Even during economic recession its customers can save their money and find bargain luxury items easily.
According to Fuhrmann (2009), BJ’s Wholesale Club and Sam’s Club pose the major threat and are the two main competitors of Costco. Fierce rivalry with them is one of the threats that can result in gradual sales decrease, cannibalization and as a result to market share loss, if company’s strategy will not be carefully planned in order to compete and win against its rivals. Other retailers and supermarkets are indirect competitors. However, they also present one of the possible threats. Additionally, instable economic and political situation in the world might also affect Costco.
In order to accelerate future business growth and success, Costco must keep expanding overseas, add new services, improve its e-commerce, think about acquiring one of its competitors, like BJ’s Wholesale Club, using more advertising, more effective promotions, and trying a few PR activities for brand positioning and brand awareness.
Strategic management decisions of Costco Wholesale are an example of effective merchandising and warehouse operating, when everything is thoroughly planned and executed in order to offer the best buy to customers (“How Costco Became”, 2005). It is achieved through eliminating all unnecessary expenses like additional labor costs by shortening of warehouse opening hours, and stocking and handling labor costs by putting all the merchandise directly on the first floor.
Fuhrmann, R.J. (2009). Costco’s Carts are Half-empty. Retrieved January 12, 2011, from http://stocks.investopedia.com/stock-analysis/2009/costcos-carts-are-half-empty-cost-bj-kr0602.aspx
Gamble, J. & Thompson, A. (2010). Essentials of Strategic Management: The Quest for Competitive Advantage. (2nd ed.). McGraw-Hill/Irwin.
“How Costco Became the Anti-Wal-Mart”. (2005). Retrieved January 11, 2011, from http://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?pagewanted=2
Jill, B. (2004). Retailer of the Year: Costco Wholesale; You do the Math – Costco’s Strategy Adds up. Retrieved January 11, 2011, from http://www.allbusiness.com/retail-trade/clothing-clothing-accessories-stores-stores/147470-1.html
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