The Costco Wholesale Corporation Marketing Essay
|✅ Paper Type: Free Essay||✅ Subject: Marketing|
|✅ Wordcount: 1953 words||✅ Published: 1st Jan 2015|
Costco Wholesale Corporation is the largest membership warehouse club chain in the United States with an aim to offer low prices on the selective and specialty brands in the wide range of products. Costco opened its first warehouse in 1983 and since has grown to become the fifth-largest retailer in the United States and seventh-largest retailer in the world. Currently headquartered in Issaquah, Washington, Costco has 614 warehouses with 67.4 million members and 160, 292 employees worldwide. Costco began its journey in Seattle, Washington with its business model similar to that of Price Club. Price Club was founded in 1975 by Robert Price and has been considered the pioneer of the warehouse stores. Its membership was only available to business customers and certain groups such as employees of local businesses, nonprofits, or government. Shoppers paid a membership fee to the company to buy bulk products at discounted prices in a no-frills warehouse setting. Costco was founded on the basis of the same concept; however, it started to expand customers to non-business members as well to raise their profit. In less than six years, Costco became the first company ever to grow from zero to $3 billion in sales. By the early 90s, it had outperformed its rival club, Price Club. However, Sam’s Club became successful in surpassing them both. Face with threats of a takeover by Sam’s Club, Costco and Price Club entered into a partial merger in 1993, creating the nation’s largest warehouse chain. The newly formed company, named PriceCostco, focused heavily on international expansion. However, the company soon faced a breakup due to disagreements between the two leaders, Jim Sinegal and Robert Price, regarding company direction. Sinegal continued to manage PriceCostco while Price’s breakaway company was named as Price Enterprises. In 1997, the company changed its name to Costco Wholesale and all its Price Club locations were rebranded as Costco.
Low product and services
High inventory turnover compared to its competitors
Incredible return policy
Great membership benefits
Not enough warehouses
Contributing to higher carbon footprint and pollution due to bulk-packaged products
Private label growth
Diversification in terms of geography
Political, cultural and ethical issues with international expansion
Costco’s no-frills approach has helped the leader keep its overhead costs low and in turn offer great prices to its customers. Costco does not let fancy buildings, salespeople, and big advertising budgets get in the way of providing great values. It has been successful at keeping overhead costs low by eliminating costs historically associated with wholesalers and retailers, such as delivery, billing, and account receivable. Costco buys its merchandise directly from the manufacturers and route it either to a cross-docking consolidation point or directly to their individual warehouses. Their depots receive container-based shipments from manufacturers and reallocate these goods for shipment to their individual warehouses in less than twenty-four hours. This allows Costco to eliminate many of the costs associated with traditional multi-step distribution channels by maximizing freight volume and handling efficiencies. Traditional steps generally include purchasing from distributors as opposed to manufacturers, use of central receiving, storing, and distributing warehouses, and storage of goods off the sales floor. Costco passes the savings generated from elimination of these traditional costs to the consumers by not marking up its merchandise more than 15%. In comparison, a supermarket may mark up its merchandise by 25% while a markup by department store may be up to 50%.
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Costco’s strategy to offer limited selection of nationally branded products in a wide range of merchandise categories has helped the business generate high sales volume and quick inventory turnover. It carries fewer than 4000 items as compared to 40,000 items at a supermarket and 100,000 items at Walmart. For example, Costco may only carry one size of Aspirin bottle containing 350 pills, whereas a Walmart may carry two or more different sizes of Aspirin bottle. Narrowing the number of options increases the sales volume of each, allowing Costco to squeeze deeper and deeper bulk discounts from suppliers. Because of high sales volume and quick inventory turnover, Costco sells it inventory before it is required to pay many of its merchandise vendors. It can use cash received from selling its inventory to pay it vendors and thus avoiding financing and payment plans.
Costco’s additional strength lies in its strong managerial ground. Costco believes in a homegrown approach to management by promoting from within the company. The majority of its current home and regional office team members are home grown, which means that they started in their warehouses, depots, and business centers, learned the business and moved up within the company. One great example is its current CEO, Craig Jelinek. He started his career with Costco almost 28 years ago by managing a single warehouse; however, he is now responsible for managing almost over 600 warehouses. In addition, Costco ensures its employees’ satisfaction by providing them with generous wages and benefits. While this practice may be more expensive for Costco, they have an off-setting cost containment effect. Its turnover rate is unusually low at 17% overall and just 6% after one year’s employment. In contrast, Walmart’s turnover rate is 44% per year, which is close to the industry average. Due to its low turnover rate Costco saves money spent on recruiting, hiring, and training. It takes cares of its employee, which in turn take care of its members. Smiling employees help make Costco the best shopping experience.
In addition to low prices and great service, Costco has a very generous and hassle-free return policy. It offers a 100% satisfaction guarantee on all of its products including food, furniture, jewelry, and electronics. If a member is not 100% satisfied with the purchase, they may return it at any time for a full refund; there are no time limits with the exception of electronics. Electronics, such as televisions, projectors, camcorders, touchscreen tablets, MP3 players, and cell phones, must be returned within 90 days of purchase. However, Costco offers a two-year manufacturer’s warranty on its electronics free of charge. Perhaps, it’s the low prices and great shopping experience that Costco has been able to retain its members successfully. In the United States and Canada, it has been able to keep 90% of members, while it retains 86% of members worldwide. This number is even higher for business members at 93.7%. In addition, other great membership benefits offered by Costco contribute to its success in retaining members. It has formed strategic relationships with outside parties to ensure that its members can be provided great warehouse prices for additional products and services that range from health and auto insurance to five star vacations.
Costco has also been very successful with its private label offering, Kirkland Signature. It is now considered a strong private label offering as it competes with many national brands in an ever-expanding range of categories. After 19 years since its launch, the private label products now represent only 15% of the items carried by Costco but generate 20% of its sales dollars. The goal of the company with Kirkland Signature products is to provide equal or better quality at discounted products. It believes that it has the capacity to increase the sales penetration of its Kirkland Signature products to 30% over the next several years, while continuing to provide its members with quality brand name products that will always be part of its product selection.
Although strengths exceed Costco’s weaknesses, it still needs to address them for the betterment of the company’s future. Its warehouse locations are mainly concentrated in urban areas with higher population densities versus their competition Sam’s club who chooses to place their clubs in the suburbs. It may be very time consuming for someone to shop at Costco who does not live nearby its coverage areas. In addition, long lines at the checkout are the subject of many complaints made by Costco customers. In comparison with BJ’s, Costco does not have self-checkout lanes while BJ’s has well managed self-checkout lanes. Their store hours are also a big setback for busy members. Many of the other membership clubs open early for the convenience of business members and stay open late to accommodate busy families.
Another weakness of Costco’s strategy is that they spend very less on advertising. They generally rely on reputation and word of mouth advertising. However, one of Costco’s biggest competitor, Sam’s Club, spends about 50 million dollars on advertising and direct mail promotions. If Costco’s competitors are able to take away its market share due to lack of promotional activities, it may adversely affect Costco’s future performance.
Since many of Costco’s members may purchase too much stuff unnecessarily due to its bulk packaging, the practice may lead to higher carbon footprint and pollution. Costco offers bulk-packaged products to target large families and business owners. However, many of its members are not large families or business owners; they choose to stop at Costco because they like the products and prices. As a result, they end up purchasing more than their needs and create unnecessary waste. It may be seen as a negative because it is against current mainstream green marketing.
Of the 614 Costco warehouses worldwide, nearly three quarters are located in the United States. Costco can find opportunities to increase international expansion that will help fuel decades of future growth. Recently, India and China have become the choice of retail expansion for big businesses like Walmart. Similarly, Costco can find ways to increase its presence in these markets as well. As more stores open, more opportunities will be created for Costco’s private label, Kirkland Signature, products to compete against big brands. Growth of its private label can also be fueled by looking into introducing more margin enhancing products.
Growing trend of internet shopping can also open up many opportunities for Costco. Costco’s current website, Costco.com, is currently members only. To target members that may not have the privilege to shop at Costco warehouses, it can offer online only membership. This approach can help Costco rapidly expand its market saturation. Additionally, it can lead to improved margins while simultaneously improving revenue growth. Costco can also take advantage of the current economic downturn by finding more high quality products at affordable prices from various vendors that may not have been available before.
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