Costco’s Business Model, strategies and core competencies:
Costco is trying to generate huge sales volume and quick inventory turnover by applying a business model that offers limited selections of nationally branded product in a wide range of merchandise categories. Costco apply number of operating excellence or mechanism such as efficient way of managing inventory and Just in time inventory, efficient distribution, minimum merchandise handling, and volume purchasing to reduce the price of its product. One of the major benefits of high sales volume and rapid inventory turnover is that they can sell their inventory and receive cash which can be used to pay its vendors and take the advantage of early-payment discounts. And because Costco is able to sell its product before they have to pay their suppliers or manufacturer for its merchandise, it enables them to finance their inventory from their working capital. Furthermore, among those 4000 merchandise that Costco keeps in its location, it has distinctive segment which they called “treasure-hunt merchandise” where they keep 1000 products which keeps changing quickly. The main idea behind this is that it helps lure customers by offering irresistible deals on those 1000 products which will quickly vanish from the store. Another key strategic competency of Costco is that they do not obtain its luxury offerings from the high end manufacturers rather they look for the opportunities to find such luxury products legally on the gray markets from the retailers who want to get rid of their inventory.
In the core of their strategy, Costco sells limited numbers of products in fewer varieties to keep the cost down and they rely on high volume sales. But unlike their competitors they pay well to their employees. One of the key uniqueness and strength is that they sell membership to their customers that not only generate the fixed revenue every year but also increase the brand loyalty and awareness of the customers towards Costco. They advertise very less thereby reducing the cost by two percent each year.
One of the crucial factors of Costco is their pricing strategy. They have unique way or mechanism that helps them keep the price lower than that of competitors and they can still afford to pay 48 percent higher salaries to their employees than their major competitors mainly Wal-Mart. Their membership base is growing and they are able to retain their customers. Virtually, they do everything to retain their customers. Most importantly they have very incredible return policies in hand to attract and retain customers. Furthermore, they try to find the best value pack for almost every product they sell in their location (store). For example, they have thousand packet box of Splenda (sugar free sweetener). They generally engage in bigger packages because they believe that bigger package provides better value and cost savings to their customers.
Costco applies several other strategies to achieve corporate wide price leadership strategies. For example, to achieve the price leadership they reduce handling and storage cost, they maintain in-stock positions without being overstocked and transition seasonal merchandise, they utilize just-in-time principles when ordering merchandise to minimize the cost of inventory, keep best value pack product to assure low prices through volume buying, expense reduction and low gross margins etc. in addition to this, Costco doesn’t spent a lot in advertising and use word of mouth advertising for marketing which is not only one of the cheapest way to advertise but it is one of the most effective ways of advertisement.
Costco’s mission statement is to focus on bringing high quality goods and services to the market at the lowest possible prices every day, but to do it with integrity at every level of the company while valuing the interests of the stakeholders (Annual Report 2006). The mission statement of the Costco is well understood throughout the organization by the management and employees. Costco offers their customers with low prices on selected private and a limited selection of nationally branded products in a wide range of merchandise categories. Businesses and families can rely on Costco to offer high quality goods and services at everyday low prices. Rapid inventory turnover, high sales volume per warehouse, leveraging an efficient operating structure, reduced handling of merchandise, and making themselves the low cost operator in retail are all key elements that make the company so successful (Annual Report 2006)
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