The business model of Costco’s is simply to generate high sales volumes and rapid inventory turnover by offering its members low prices on a limited selection of nationally branded and selected private-labeled products in a wide range of merchandise categories. The company’s business model is appealing in today’s market because of the economic downturn we are experiencing. Everyday American’s are looking to make their dollar stretch and Costco’s provide them with a great way to buy in bulk and stretch the consumer dollar to the max!The chief elements of Costco’s business strategy are strong within its pricing, product selection, and treasure-hunt merchandising. This strategy is key to the success of Costco’s. We can tell by examining a summary of the company’s financial and operating reports that between the years of 2000 through 2006, the net sales and the net revenue of the company was in a steady increase.
We have learned that a strategy is only as good as it appeals to its target market. Costco’s have clearly identified who their customers are and designed its strategy to keep those customers coming back for generations.Jim Sinegal, cofounder and CEO of Costco Wholesale, while his methods may be unorthodox, his business strategy is certainly working. He is not only interested in taking care of his customers but also his employees. With his methods of interacting with his employees, he has proven that a company doesn’t have to be ruthless.
But being humane can make employees happy to be employed with a company. When Sinegal walks into one of his stores, he's treated like a celebrity. His employees seem to genuinely like him. And the feeling's mutual.
"The employees know that I want to say hello to them, because I like them," he saidSinegal’s vision for Costco is to continually provide quality goods and services at the lowest possible prices. The company’s business model was to generate high sales volumes and rapid inventory turnover by offering members low prices on a wide range of its merchandise. Jim Siegel believed that rapid inventory turnover combines with operating efficiency enables the company to operate profitably at lower price margins than its competitors. Therefore applying these strategies to Costco’ operations can be viewed as a complete success.Typically, a company has three levels of strategy – business strategy for the company as a whole, functional –area strategy for each area within the business, and operating strategy undertaken by lower echelon managers. Crafting a strategy to achieve the objectives and move the company along the strategic course that management has charted.
Jim Sinegel’s was able to craft strategies to successfully address these company goals.We continue to see proof as to why Costco’s strategy is appealing and seems to resonate among its consumers. The data in Exhibit 3 doesn’t represent all the data in Exhibit 1, but from the sales for 2006, Costco is superior to Sam’s and BJ’s. Costco leads in net sales for 2006 by $58,963MM followed by Sam’s Club with $41,582MM and BJ’s wholesale with $8,303MM.According to the year ended September 3, 2006 data, the US operations for Costco was 81% of total operations.
Canadian operations portion was 14% followed by other international operations with only 5%. Because the Canadian and international operations are showing a profit, it does make them a success. However, they pale in comparison to the success of the United States stores.Costco is performing very well from a strategic perspective and they do have several competitive advantages over both Sam’s Club and BJ’s Wholesale Club. They start with their merchandise selection which typically consists of only 4,000 items.
Three quarters of their inventory is comparable to what would be found in their competition’s stores, but the other 1000 items is one area that they enjoy a competitive advantage. It’s these products that founder Jim Sinegal refers to as “Treasure Hunt” merchandise.These items are special buys that Costco merchants find and are constantly changing. These are usually one time buys at very low prices and that turn very quickly. Costco’s customers shop their stores and look for these deals. These customers also know that when they spot these bargains they have to act quickly, because they would not last for long and most likely would not return.
This concept naturally led to even high turnover of the “Treasure Hunt” products and is a definite competitive advantage. These characteristics – Low Prices, Limited Selection and the Treasure Hunt shopping environment are all key components to their winning Strategy.Costco’s prices are not too low…Low prices are what their brand was built on. Their merchants have very strict guidelines on maximum margins on every product line. Brand name merchandise for instance has a cap of 14% compared to 20 – 50% mark ups at other discounters.
Jim Sinegal makes mention of other retailers selling a product for $10 and wonders how to sell it for $11, while his buyers are constantly looking for ways to sell that same product for $9. There is another example of where Costco was selling a pair of $50 jeans for $30.In this situation most competitors would be upset with Costco for destroying the street price and eroding the margins for the entire industry, but Costco has stuck to its guns and to its strategy not winning the friendship of any competitors undoubtedly. Even Wall Street was not happy with their low prices and margins and would draw attention to the fact that the company should be doing more to increase profits for their shareholders.
Jim Sinegal summed it up best and stuck to their core strategy by saying “we don’t want to get so fancy and raise our prices and all of a sudden a new competitor comes in and beats or prices”.Costco’s have some of the happiest employees in the industry. The company out maneuvers the competition by offering its employees higher salaries, better vision, 401(k), and medical plans. Jim Sinegal firmly believes that by having 120,000 ambassadors speaking highly about the company they work for is all part of a successful business strategy. In order to be the best, you have to hire the best.
By paying higher wages, which Sinegal feels is good business, you get better productivity from you staff!At the end of the day, the only recommendations that anyone can make to Sinegal and his management team is simply keep doing what you are doing. They have a very effective and approachable business strategy, a mission statement that the employees live by and they have happy employees which in turn provide them with a productive workforce. My only hope is that Costco’s will start to expand their business base and open in other markets applying these same great strategies to other corners of the country. This will go well for the revenues and will create more jobs for people in these hard economic times.
