Case Study 2 : A Simple Stategy at Costco

Costco launched the warehouse shopping model when it opened its first location in 1976, requiring customers to purchase an annual membership in order to shop at the store.65 The first location was called Price Club and initially sold only to small businesses. More than 40 years later, Costco is one of the nation's top retailers and the nation's largest membership warehouse chain. They operate more than 700 warehouses located around the world, with more than 80 million members and over $116 billion in annual revenues. In addition to demonstrating steady growth throughout its history, the company consistently performs better than competitors. For example, Costco's sales per square foot are nearly 70 percent higher than their closest competitor, Sam's Club. So how has Costco achieved this level of success? Experts agree that Costco's simple strategy has allowed the company to persist, even in challenging times. In fact, some say Costco has the best business model in the retail industry. The company's strategies that differentiate it from its competitors are to treat employees well, limit the number of items it sells, and keep markups low. Costco clearly values its employees. The company pays its employees on average 40 percent higher than competitors and offers health care insurance to all employees who work more than 20 hours per week. The company is also known for promoting from within, with 98 percent of their store managers and many of their company executives having started out as stock clerks or cashiers. These efforts have helped build a loyal and hard-working employee base that actively contributes to building a profitable bottom line. Furthermore, low employee turnover helps save the company in recruiting and training expenses. The company's average annual turnover rate is about 5 percent, compared to the average turnover rate of about 20 percent in the rest of the retail industry. Costco also has a sales strategy that has contributed to its success. They only sell a limited number of brands and, as a result, they are able to increase sales volume that leads to purchasing discounts. For example, Costco only carries four brands of toothpaste, compared to about 60 brands you'd find on the shelf at Walmart. Thus, the company is able to purchase those four brands in significant volumes, which allows them to negotiate with the product manufacturers for discounts. The company then passes along those savings to their customers through lower prices. Costco prices items at no more than 15 percent above their purchasing price. This markup strategy assures they are offering the lowest price possible, which is what draws customers and creates a loyal customer base. Sticking with these simple strategies has helped Costco build their retail empire. Can the company continue their growth trajectory and maintain their leadership position in the retail industry? There is some speculation that as consumers build confidence in online shopping, Costco and other brick-and-mortar retailers will face declining sales due to the competition. Costco has responded to this threat by expanding the diversity of their inventory, offering deep discounts on high-ticket items such as jewelry, electronics, and even cars. Such tactics help to encourage membership by making the company the go-to location for purchases that consumers prefer to make in person. And while they are there, they can pick up some toothpaste at a pretty good price.

Answer the following discussion questions?

19. How is Costco's business model different from other retailers such as Walmart and Sam's Club? Why do you think Costco's strategy works? 20. Beyond lower turnover, how else does Costco benefit from treating its employees well? 21. Are you surprised that Costco sells cars? How does offering diverse products help the company attract new members? 22. Costco now has a comprehensive website and sells online. Is this a threat to Costco's business model? Is there a downside to selling online?

Analyze the case study with these questions.

Problem/issue Identification

1. What are the central facts of the case and the assumptions you are making on the basis of the facts? 2. What is the major overriding issue in this case? ( what major questions/issue does this case address that merit(s) their/ its study in their course and in connections with the chapter/material you are now covering?

3. What sub issues or related issues are present in the case that merit consideration and discussion?

Analysis/ Evaluation

4. Who are the stakeholders in this case, and what are their stakes?

5. What challenges/threats/opportunities are posed by these stakeholders? What economic/legal/philanthropic responsibilities does the company have and what exactly are the nature and extent of these responsibilities?

6. If the case involves a company's action, evaluate what the company did or did not do in handling the issues affecting it.

Recommendations:

7. What recommendations would you make in this case? If a company's strategies or actions are involved, should the company have acted the way it did? What actions should the company take now and why? Be as specific as possible, and include a discussion of alternatives you have considered but decided not to pursue. Mention and discuss any important implementation considerations.