costco case study

Costco Case Study: Costco Wholesale Corporation Case Study

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Introduction

Current situation, internal environment, recommendations.

Costco Wholesale Corporation is a membership club founded in 1983 and headquartered in Issaquah, US. The company deals in a variety of merchandise including televisions, computers, camcorders and phones.

In addition, the firm provides services such as website and online solutions, mortgage purchase and financing, business prescription insurance as well as payroll services. The corporation was formed with a mission of offering quality products as well as services to its members at achievable economical prices.

The company’s competitive advantages are the business strategies, customer approach and the diversified trade model.

Strategy elements

Low pricing as well as limited selection of products are the foundation of the corporation’s strategy. Further, Costco’s treasure-hunt merchandising is also an invaluable tactic applied by the firm in operations. Through treasure-hunt merchandising, the company is capable of purchasing high-end products and services on the gray economy from the vendors with the motive of eliminating surplus stocks.

Competitive approach

The company’s price leadership tactic attained through reduced handling and warehouse expenses, the utilization of just-in-time stocking principle and maintenance of in stock has proven invaluable in the reduction of prices and increased purchases.

The corporation also maintains preeminent value packs that contribute hugely in attracting large numbers of customers. The company undertakes minimal promotional activities resulting in minimal number of expenses incurred.

The business model

The firm currently utilizes business model that focuses on the provision of restricted categories of trademarked national stock while anticipating high proceeds from vending as well as prompt stock returns.

In fact, the company’s just-in-time stock, minimal handling of stock, volume purchases as well as efficient delivery channels has enabled the firm to generate higher revenues from its operations. Further, the corporation’s treasure-hunt merchandise has created a process that attracts large number of clients.

The macro-environment

Costco Corporation uses PEST analysis in the examination of the macro-environment in which it operates.

Political aspects

The corporation recognizes the significant roles played by both the political and the legal sectors in ensuring excellent status, success and trust in its operations. As such, the firm adheres to business morals as well as the legal provisions provided by the international business organizations. The company offers goods and services that meet the standards as well as gratifies the customers’ needs across the globe.

Economic aspects

The company’s repute appeals to large number of clients leading to increased sales. Additionally, the firm continues to offer superior goods and services to its clients. Further, the firm has spread remarkably across different states in the globe by opening various businesses causing an increase in its economic power and competitive position over similar firms in the industry.

Socio-cultural aspects

Culture influences the performance and productivity of Costco Corporation in a number of ways. First, the corporation recognizes the worth of its personnel’s ideas and beliefs without prejudice. The company also satisfies its client social assurance by the provision of high quality goods and services.

Technological aspects

The utilization of contemporary technology in businesses ensures efficiency and competitiveness. Costco is at the forefront of utilizing the current progression in expertise to come up with innovative products that suit the needs of the customers. Further, the company’s website enables the clients to familiarize with the firm’s products and services.

Key success factors

The company’s business model is instrumental in defining its achievements. The firm recognizes cultural perspective by seizing opportunities in different locations. In addition, the firm’s circular vision is instrumental in the reinvention of innovations leading to efficient delivery of products.

The corporation’s passion has been imperative in the designing of a collaboration-propelled paradigm enabling innovations of current value models. Moreover, entrepreneurial spirit and working for a purpose is invaluable in sharing ideas that deliver greater achievements.

Costco Strategic Group Map

The company relates with other two competitors including the Sam’s Club and BJ’s wholesale club. The map exhibits the stiff competition that Costco faces in the market from rivals. Based on the business model, all the firms apply low cost and high volumes model. In terms of revenue, Costco leads with $70 billion followed by Sam’s Club $45 billion and BJ”s Club at $10 billion.

Costco’s sales have declined by 6%, Sam’s by 4.5% and BJ by 3.5%. The firms have diversified their stores all over the globe with the Sam’s Club leading with the number of stores at 590 followed by Costco’s 513. BJ Club has 170 stores.

The firms are employing a number of current strategies to gain competitive advantage. For instance, Costco has diversified operations in the global economy while the Sam’s has opened up 20 new locations nationwide. The BJ’s Club focuses on retail shoppers as well as presenting volume groceries.

Porter’s five forces

New market entrants

The corporation has a competitive advantage over rivals due to high barriers of entry into the market, low threats from new firms and diversified products at low-costs.

Competitive rivalry

The company faces stiff competition from other firms such as the Sam’s Club. The firm’s delivery series is effortlessly duplicated leading to enjoyment of economies of scale. Low-cost strategies by many firms have resulted into meager proceeds to the firm.

Supplier power

The firm enjoys good working relations with its vendors who supply large quantities of products at low prices

Purchasing power

The firm enjoys high purchase bargaining power, high concentration and mobility of buyers

Substitutes

There is insignificant pressure of substitute and the customers get towering worth from the economical purchases as well as elevated membership maintenance.

SWOT analysis

The firm maintains devoted and rich clients, towering stock proceeds and consistent return on sales as well as resources together with incredible remunerations policy. All the aspects have enabled increased revenues.

The company diminishing profit levels, weak promotion activities, lack of self-checkouts and the primary focus on the club’s members opposed to the general customers make Costco less attractive to many potential customers.

Opportunities

Higher growth prospects are presented to the firm due to operations in high GDP states, expansion in membership, good repute regarding employee remuneration and societal responsibility as well as the augmenting trademark among the masses.

The firm faces stiff competition from competitors such as the Sam’s Club and BJ Club. Additionally, the firm’s geographical diversification is insignificant compared to the Sam’s Club.

Financial ratios

Liquidity ratios.

The current ratio showed a decreasing trend from 116% in 2010 to 110% in 2012. The quick ratio and cash ratio were 60% and 47% respectively in 2010 and declined to 52% and 40% respectively in 2012.

Profitability ratios

Costco’s profitability ratios have remained constant over the years. For example, gross margin has been at 13%, operating margin at 3% and profit margin at 2%. Return on investments after tax has been increasing from 12% in 2010 to 14% in 2012.

Value chain

The Costco’s CRX program enables clients to obtain inventory requests in time. In addition, the program enables the firm to measure performance and productivity against competitors thereby increases priceless insights in the viable economy.

The system has also provided efficient delivery series solution to the clients through updating stock information, forecasting and demand planning leading to enhanced business operations and reduction in costs.

Key strategic issues

The critical tactical aspects of Costco encompass low prices, limited product lines and selection as well as treasure-hunt shopping experience. In fact, the firm strives to offer quality goods and services to its members at economical costs achievable. The company operates a limited number of products approximated to be 4,000 through volume buying, effective delivery procedures and abridged inventory managing.

The firm should modify its strategies to address the shortcomings in its operations. For instance, the corporation should diversify selections of merchandise instead of limiting choices to only 4000 to expand the customer base.

Secondly, the firm should build many warehouses across the globe to counter the rising number of competitors like the Sam’s Club that may attract a large share of the market. Thirdly, the company should also diversify applied cost and pricing strategies since competitors are utilizing the low-cost tactics.

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IvyPanda. (2019, July 5). Costco Case Study: Costco Wholesale Corporation Case Study. https://ivypanda.com/essays/case-analysis-costco-wholesale/

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Bibliography

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Lessons from Costco on Sustainable Growth

Growing sustainably means doing the right thing for all your stakeholders.

Few companies succeed in growing at a sustainable rate over time. The reason is that leaders give in to the temptation to grow in ways that overlook the customer or they grow more quickly than their organizational capabilities allow. But the leaders of a handful of companies, including Costco and Four Seasons Hotels and Resorts, never forget that businesses are complex systems whose elements are interconnected. That gives them the discipline to reject temptations to grow faster than their organizations can sustain.

Under pressure to grow, leaders often give in to two temptations that can hurt their business in the long term:

• Zeynep Ton is a professor of the practice at MIT’s Sloan School of Management and a cofounder and the president of the nonprofit Good Jobs Institute. She is the author of The Good Jobs Strategy and The Case for Good Jobs: How Great Companies Bring Dignity, Pay and Meaning to Everyone’s Work (Harvard Business Review Press, 2023). zeynepton

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How Costco's Unique Business Model Resulted In Global Success

Table of contents, here’s what you’ll learn from costco’s strategy study:.

• How developing a radically different business model can lead to an industry breakthrough.
• How global expansion can be safely explored when you’re at your very best.
• How to accompany a business model innovation with policies that create a cohesive strategy.
• How managing your competitive advantage requires the evolution of your strategic approach.
• How to respond to market trends without killing your strategic advantage.

Costco is the third biggest retail player in the world - behind only Walmart and Amazon. Yet there is something very unusual about the retail giant. Costco makes way less money per a sold product compared to other retail stores. 

The company’s average   gross profit margin was only around 12% in 2022 . That’s way lower than your average retailer gross margin which ranges from 20% all the way to 50% for department stores. E.g. Walmart’s average margin in 2022 was 24.4% . In fact, Costco even loses about $40 million a year on their $5 roasted chickens alone.

It also doesn’t have nearly as many stores as other big retailers, yet it outperforms everyone but Walmart. Costco has “only” 838 stores around the world, while Walmart has 10,593 retail stores in 2022 , Schwarz Group, the group that owns Lidl and Kaufland, has 13,500 stores , Kroger owns nearly 2,800 stores , and Target owns 1,948 stores .

After all, the company boasts:

• $222.7 billion net sales in 2022
• 314,000+ employees 273,000 employees
• Stores in 13 countries
• 120.9 million worldwide members
• A 93% membership renewal rate in the U.S. and Canada and an 90% renewal rate worldwide

Members - that’s Costco’s secret. Their warehouse retail stores are membership-only and that’s the foundation of their extremely successful business model.

Costco’s story is a masterclass of thinking outside the box and creating win-win scenarios which satisfy customers and employees while achieving the company’s business goals.

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A warehouse club: the birth of a disruptive business model

Costco’s story begins with Price Club which was founded in 1976 by Sol Price and his son Robert Price. The store introduced a brand new concept - a retail warehouse club . In order to shop there, you had to be a member.

At first, Price Club was limited exclusively to business members, who could purchase a wide range of supplies and wholesale items. But after a while, it opened up its membership to employees of local businesses, non-profit organizations, and government. 

One of the people who were instrumental in fine-tuning the new warehouse club concept was Jim Sinegal , the executive vice-president of merchandising, distribution, and marketing. He was previously employed by Sol Price and was familiar with the Price Club business model.

Seven years after the first Price Club store, Sinegal used his expertise to co-found Costco Wholesale with Jeff Brotman, and together they opened the first warehouse in Seattle, Washington in 1983.

In 1993, Costco and Price Club agreed to merge operations since Costco's business model and size were similar to those of Price Club, which made the merger more natural for both companies.

Costco has transformed the retail world as the world's first membership warehouse club for the wider public which accepted non-business members. While the idea of charging people to shop in your store seemed very bold and was not followed by any of the retail giants, it proved to be the right move. It allowed Costco more efficient buying and operating practices while giving the members access to unmatched savings.

Costco’s operating philosophy has always been simple: 

Keep costs down and pass the savings on to our members.

People loved the concept, which resulted in Costco’s stunning rise. By the end of 1984, 200,000 people held Costco memberships and Costco soon became the first company ever to grow from zero to $3 billion in sales in less than six years since its inception.

The annual membership of Costco’s first Seattle store back in 1983 was $25. The cost of a membership nowadays starts from $60, which is around the same as it was back in 1983 once adjusted to inflation.

The merger between Price Club and Costco created  the world's most successful warehouse club . In 1999 the name of the company was changed to Costco Wholesale Corporation and remained as such until this day.

Key takeaway #1: A radically different business model is a preposterously effective business strategy

Costco’s radically different business model was a disruptive innovation in the retail industry.

It created a constant flow of revenue that offered unmatched flexibility that was returned back to its customers. It’s important to note, though, that:

• Costco tested the model with a small circle before it proved successful. It didn’t go into full launch mode without  validation .
• The model is not different for the sake of being different. It included an advantage (e.g. the fixed revenue stream) and a way to turn that advantage into increased customer value (e.g. unbeatable low prices). It was  meaningfully different .

The different business model created a second, unique to Costco, profit model. The company faces the same challenges as any other retail, but its second profit model gives it the flexibility to challenge the conventional way of the industry (like having much lower profit margins). In other words, it offers an unfair advantage like every great strategy.

How Costco safely started its global strategy

Before Costco's international expansion, there was quite some doubt whether the innovative Costco retailing strategies would result in success outside the United States.

There are plenty of failure stories indicating that advantages aren’t easily transferred geographically:

• Target's exit from Canada in 2015
• Tesco's shutdown of its U.S. Fresh and Easy chain
• Walmart's store closings in Brazil in 2016

Being successful in the global market is not a given even for the biggest retail players.

However, Costco's expansion, which began in 2013, succeeded in ways that Target, Walmart, and Tesco failed to do. By   January 2023 , Costco was present in 14 countries outside the US and Puerto Rico.

Costco membership sign ups in the first 8 to 12 weeks of a new store opening overseas are generally 10 times greater than at Costco store openings in the United States. Additionally, the company’s international membership renewal rate was 90% at the end of its 2022 fiscal year.

While many other retail chains open international locations as a defensive strategy in order to shore up declining sales, Costco isn't compensating for domestic weakness. Costco's international expansion came in the middle of high profits in the U.S. market, allowing the company to focus on a long-term international strategy and to test if its business model would be well-received in other markets.

And talk about great reception! In 2017, before Costco opened its doors in Iceland, one out of eight Icelanders had already signed up for membership. On the opening day, search-and-rescue teams were deployed to manage the crowds.

Perhaps even more impressive is Costco’s opening of its first store in mainland China in Shanghai in 2019. On an opening day, 139,000 people got their Costco membership. The store even had to close early on the first day due to traffic jams caused by crowds of shoppers and three-hour wait times just to park .

Key takeaway #2: A global expansion attempt as a growth experiment

Costco’s strategic plan was carefully formed before it was executed.

And the approach had a few critical traits that helped it to succeed where other retail giants failed:

• Costco tested the waters beforehand . Again, validation, then action. Before opening its first store, the company enabled its potential customers to subscribe ahead of time, giving a feel of the potential demand.
• Costco expanded when its US profits were still rising.  That enabled it to take a long-term stance, in case the attempt wasn’t fruitful initially.

Costco’s business model innovation was market agnostic.  The retail giant could transfer the advantages of its innovative approach to any market whose fundamental working principles were the same as the US market.

Now let’s see what exactly makes Costco’s business model so successful.

Understanding Costco’s business model

Costco’s strategy remains at its core a cost leadership approach.

Costco’s mission is “to continually provide members with quality goods and services at the lowest possible prices.”  

This mission statement is directly linked to its business model and strategy. It emphasizes quality and cost leadership , which are two factors that top consumer’s priority charts. While they might seem mutually exclusive, Costco is known for both.

Costco is primarily a big-box store. Such stores achieve economies of scale by focusing on large sales volumes and are meant to be a one-stop shop for customers. Establishments like Costco took “the one-stop shop” a bit further and don’t offer just groceries and store products, but also a food court, optical services, gas stations, tire garages, or photo processing services. 

Big-box stores typically carry items in extra-large sizes and lure customers with the promise of saving by buying in bulk . Costco is no exception - real bargains can be had by purchasing bulk non-perishable items or items with long shelf life.

As a result, Costco’s generic strategy is cost leadership. 

This strategy entails maintaining the lowest prices possible and is used by many retail giants. However, Costco’s strategy incorporates the warehouse club membership business model, which differentiates it from other retailers and enables Costco to offer lower prices than its competitors.

Costco is so effective because its revenue is broadly divided into two streams:

• Product sales , which is revenue from all the sales of goods and services through all Costco’s channels.
• Membership fees , which is revenue from Gold Star, Business and Executive memberships to customers worldwide.

This is a very basic overview of Costco’s general business model. Now let’s go into more details and look at some specific elements - starting with the core of the business model, Costco’s membership.

Costco’s membership: the competitive advantage of Costco’s business model

As said, Costco uses a membership-only warehouse club business model , which means consumers pay a membership fee to access the low-cost products available at Costco stores.

Each member is entitled to issue a free supplementary card to someone living in the same household or to a fellow staff member working in the same company. Non-members may accompany members, but only members are allowed to purchase products in stores. In 2020, Costco had a total of 58.1 million paid members and 105.5 million cardholders .

Costco has two tiers of membership – basic and executive plans for consumers and businesses. Basic plans cost $60 per year, while Executive plans cost $120 per year.

Executive members get an annual 2% cashback on their purchases (up to $1,000 per year). This makes executive membership an enticing offer for people who often shop at Costco and there’s plenty of them. In fact, 45% of members pay $120 for the Gold Star Executive membership.

These membership fees actually represent the majority of Costco's operating profit. Yes, Costco makes most of its money by selling access to affordable products and not by selling those products.

In 2019, Costco made $4.2 billion from membership fees , an increase of 9% from the previous year. Its entire net income for the year was $5.8 billion.

Costco’s membership is also a powerful play on the human psyche. Once a customer pays the membership fee, it treats it like a sunk cost. The investment has been made and now it is time to get value from it. Because of that, customers will make additional trips to Costco to make sure they get value from their investment. 

While other retailers need to worry that a decline in same-store sales will lead to collapsing profits, Costco doesn’t really face this problem. Its profits are mostly dependent on its memberships, which are getting renewed on an extremely high basis (93% in the US and 90% internationally).

Obviously, such high renewal rates aren’t a coincidence. Costco does reinvest the membership fees into low prices for customers and by doing so ensures that everyone wins. We’ll talk more about product prices later on, but now let’s see what kind of people Costco wants for its members.

Target market: suburban homeowners

From the very beginning, Costco targeted relatively affluent and college-educated customers who would understand the value of membership.

A typical Costco shopper is an upper-middle or upper socioeconomic class and has an income of about $93,000 a year. 

But if Costco employs a cost leadership strategy, why does it target relatively wealthy people? Well, while all shoppers like a bargain, Costco’s customers also have the means to buy in bulk, which is the only way one can buy most products Costco stocks.

While the price of an individual product generally is the lowest around, shoppers usually have to buy at least a three-pack, which means that the average transaction total is quite high.

That also explains why the vast majority of Costco stores are located in affluent suburban areas both in the U.S. and around the world. It’s hard to make the most of a Costco membership if you’re renting a small flat as it takes a lot of space to store bulk purchases. That’s why a typical shopper is a suburban homeowner.

Speaking of buying and selling in bulk - that is also an important part of Costco’s business model.

Bulk purchasing

Product quality is a crucial aspect that Costco focuses on for driving growth and maintaining customer loyalty.

Instead of selling a hundred thousand different products as most other retailers, Costco’s merchandise is limited to under 4,000 items (for comparison, Walmart sells over 142,000 SKUs in each of its supercenters). This allows Costco’s procurement team to rigorously screen each product in order to provide the best quality and the best price to members. Each item Costco sells is meticulously selected . As a result, consumers don’t suffer from choice paralysis and can always rely on Costco for selling quality products.

Because of the lower number of options, each option has a higher perceived quality and is more likely to sell, which allows Costco to order more stock and thus lower the product’s price. Remember that Costco is selling most products in bulk packaging, so shoppers can’t buy just one cereal box but have to get 5 or them - which complements Costco’s ordering model.

By selling products in bulk Costco entices customers to buy large quantities of items. The perception of getting a deal often negates the fact that one may not even need all the products. Customers believe they're saving more money by spending more money , which leads them to spend more in the long run. 

According to Perfect Price’s research from 2015 , customers spend by far the most money per shopping trip when visiting Costco compared to other retailers.

Here are the top 10 stores where customers spend the most per shopping trip:

• Costco, $136 
• Sam’s Club, $81 (similar membership model)
• Target, $62
• Stop & Shop, $56
• Wal-Mart, $55
• Meijer, $54
• Whole Foods, $54
• Trader Joe’s, $50
• Kroger, $50 

There’s another part of Costco’s business model we haven’t mentioned yet that makes big purchases less risky.

Costco’s refund policy is essentially a promise for a risk-free investment

Costco has a very liberal return policy where customers can return almost anything they have purchased at any time. Even their membership.

On Costco’s website it says: 

“We are committed to providing quality and value on the products we sell with a risk-free 100% satisfaction guarantee on both your membership and merchandise. ” 

Having such a liberal return policy is almost necessary if you want to entice shoppers to try new products which they can only buy in bulk. If you know you can return anything if you don’t like the first product in the box of ten, you’ll be much more inclined to buy something new.

And yes, members can also claim a refund on their memberships at any time if they are not satisfied with the service, which means anyone can try shopping at Costco risk-free.

There was even a case of a woman who successfully returned a Christmas tree 10 days after Christmas because the tree was dead.

Efficient inventory management and warehouse design

From a logistics standpoint, Costco is one of the most efficient retailers in the world. This is because of two factors: inventory management and warehouse design.

Costco uses its warehouse-style stores as retail and storage spaces in one . It utilizes cross-docking, which means that products from a supplier or a manufacturing plant are distributed directly to the retail chain with marginal to no handling or storage time, which reduces inventory management costs and storage space costs.

Costco also displays goods in their shipping pallets, instead of arranging individual items on shelves, which further reduces inventory costs.

Costco’s warehouses are strategically designed to make restocking as easy as possible . Warehouse design allows forklifts to restock the store, which also makes it easier to rotate seasonal products and enables the treasure-hunt experience. This purposeful design saves both time and costs.

The combination of impeccable inventory management and warehouse design also allows Costco to utilize the just-in-time stocking principle , which is a management strategy that has a company receive goods as close as possible to when they are actually needed.

Once you combine everything mentioned thus far in this chapter, you can see why Costco can cut prices even lower and pass on the savings to their members, thus attracting more membership sign-ups and directly increasing their bottom line.

However, their store design serves yet another purpose.

“Costco doesn’t use any fancy decor or lighting, instead, they make sure that their store resembles a warehouse with exposed beams, pallets, and simple metal shelving,” says Mark Ortiz, a marketing expert and founder of Reviewing This. “This is smart because it tricks the consumer into believing that they are purchasing goods at low prices . Logically, you would think, less money spent on decor equals less overhead cost equals the opportunity to lower your prices.”

The warehouse design is a part of “the Costco Experience”, which Costco is famous for, which shouldn’t be neglected when talking about their business model. Let’s see what the famed experience is all about.

The Costco experience and Costco culture

Shopping at Costco is often called “The Costco experience”.

As offering superior customer experience is the key to customer loyalty, Costco does its best to be an experience in itself. By putting customers first in every choice and innovation, Costco continues to build its loyal customer base 

Consumers go crazy for a deal, and Costco has designed its entire strategy around this core tenet. A good deal “feels like winning,” says Bob Nelson, the senior vice president of financial planning and investor relations at Costco. And Costco would like their members to feel like they’re always winning, even if this means resisting the urge to raise prices and increase profits.

James Sinegal, Costco’s co-founder and former CEO, once talked about how once Costco was selling Calvin Klein men’s jeans for $29.99 a pair. The pants were selling faster than Costco could stock them, and when he bought another shipment for $22.99 per pair, it was ultra-tempting to charge more. However, Costco stayed true to their philosophy of passing the savings to their members and sold the jeans for $22.99 per pair.

Making sure that the customers get the best deal at Costco is an integral part of Costco’s culture.

Besides providing an exceptional shopping experience, Costco is also famous for an employee-focused organizational culture, which we’ll explore later. 

The combination of cost, generous return policy, and satisfied employees resulted in a shopping experience that many customers get addicted to.

It was believed at the company that culture is not the most important thing, but the only way forward . Costco saw promoting its core values as the only recipe for success. Maintaining integrity, passion, motivation, and customer trust is what enables Costco to outdo its competitors.

Shopping features aside, there is something more to Costco that cultivates such a loyal customer base.

"Costco relaxes my soul," says John, the founder of the I love Costco blog. 

"I do love that everyone at Costco appears to be relaxed humans," says Ellinger. "I love overhearing a weird personal conversation between two employees unloading a box and knowing that Costco is a safe space for people to just be people."

Costco also has great food courts which drive visits on their own. And they offer amazing deals, which are even losing them money in some cases.

We already mentioned the $5 roasted chicken, but there’s also the famous hot dog and soda combo for $1.50. It still costs the same as in 1985 when it was introduced and that is a big part of its almost mythical status among Costco’s members. Yes, Costco could make a lot of money by raising the price, but it’s much more valuable if they let it serve as a reminder of Costco culture every time a customer decides to grab a hot dog after a shopping trip.

All this helped the company build an outstanding image among its customers and it’s apparent that it leads to more sales year after year.

Key takeaway #3: Reap the benefits of a business model innovation with a cohesive strategy

Costco’s business model isn’t an isolated difference from its competitors, but one of many distinctly different policies, approaches, and benefits that create a cohesive corporate strategy.

Otherwise, any one of its competitors could duplicate the business model and reap the benefits for itself, rendering Costco competitively exposed. Here some policies that tie well with Costco’s innovative business model:

• Customer filtering. Costco’s subscription model discourages low-income customer groups from becoming members, like students and small household tenants. That ensures a larger average spend per shopping trip.
• Supplier independence.  Since Costco makes most of its profits from its membership fees and has a more exclusive customer base, it doesn’t need a big variety of products. As a result, it can be more picky with its product and supplier selection, increasing its negotiating leverage.
• A loyal culture. Costco has one of the most supportive cultures in the business world. It pays its employees above average, provides rare benefits and powerful leadership initiatives. That’s why it enjoys a triple retention rate than the industry average (90%) and increased productivity. Also, customers feel employee loyalty by having a pleasurable experience while buying.
• A cheap design. Maintaining an industrial decoration keeps operating costs at lower levels and the “I’m getting a bargain” feeling at higher levels.

But does Costco’s strategy produce results? How successful has its business model been during the last few years? We’ll let the numbers do the talking.

Recommended reading:   What is Strategic Analysis? 8 Best Strategic Analysis Tools + Examples

How Costco’s corporate strategy evolves leading to constant expansion

Costco pricing strategy - lower margins, lower prices, high value.

Offering quality products at the lowest prices is as much a part of Costco’s business model as the result of it.

According to Craig Jelinek, Costco's CEO and Director: 

"Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members." 

Unlike most other retailers, Costco’s membership model allows them to focus on strategies for making products cheaper for customers , rather than trying to increase revenue by finding ways to make customers pay more.

Because of its limited range of products, Costco can stay committed to delivering high-quality items at the lowest prices. Because of its efficient inventory management system and constant revenue from membership fees, Costco can keep its gross profit margins lower than most other retailers. Low margins result in cheaper products as Costco passes the savings to their members. 

Kirkland Signature: one of the most trusted private-label brands

When it comes to affordable yet quality products, Costco’s own private-label brand, Kirkland Signature, deserves its own chapter.

In 1995 Costco began the Kirkland Signature. Its mission was to create an item of the same or better quality than the leading brand at a lower price and do so by controlling every element of the item’s creation , including packaging and transportation. 

Costco claims that Kirkland Signature products are high-quality goods at simply excellent prices and openly invites customers to compare any Kirkland Signature product with its brand-name counterpart. The store’s return policy basically guarantees Kirkland’s quality.

Costco prices Kirkland Signature items according to its philosophy and that’s why they are always cheaper than their brand-name equivalents, often by more than 20%.

It’s no surprise that nowadays Kirkland products account for roughly 25% of Costco’s sales and shoppers can find them in virtually any category, from groceries to household products and clothing.

"I am not sure there is another [private-label] brand that has established this level of trust," says Timothy Campbell, a senior analyst at Kantar Consulting.

The success of Kirkland Signature is possible because of Costco’s business model as they have direct contact with lots of manufacturers and their members trust them that they will only choose and offer quality products.

In return, Kirkland Signature has become one of the top reasons that customers are so loyal to Costco. Creating such a strong store brand shows that Costco cares about its customers and wants them to have great products at a great price.

A lot of Kirkland products are actually manufactured under a private label by name-brands just for Costco. 

Select varieties of Kirkland Signature Coffee are actually roasted by Starbucks Coffee Company, Kirkland Signature dry dog and cat foods are made by Diamond Pet Food and Craig Jelinek, Costco’s CEO, said in an interview that Kirkland Signature Batteries are made by Duracell. 

There are many other examples and in each case, Kirkland products are cheaper than their brand-name counterparts.

The treasure hunt experience

If you’ve ever spoken with a Costco member, you’ve probably heard them brag about their latest find at our warehouse. Costco calls those products treasure hunt items , and they’re offered in various departments throughout the year. 

They’re there to make the customers feel the thrill of discovery . The aisles at Costco aren’t labeled, which tempts shoppers to walk down each one. That makes them more likely to encounter what Costco calls its “treasures.” 

“Treasures” make up 25% of Costco’s inventory and they are items that make shopping an adventure. When customers turn the corner they might suddenly find the luxury “surprise” of the week. It’s often something one would expect in upscale department stores, but certainly not in Costco. Surprises like Waterford Crystal, Coach handbags, Omega watches, Andrew Marc, Calvin Klein, Adidas, Chanel, Prada handbags and many more are offered at incredibly low prices. Other treasures include electronics, appliances and other less frequently purchased finds at extremely good prices. These products appear on Costco’s shelves one day, but are gone the next. 

That uncertainty creates a sense of urgency , and means that Costco shoppers don't just buy a pack of gum on impulse - they buy an 80" 3D television or a whole box of fine wine.

The company refers to this strategy as “treasure hunting,” in which Costco shoppers must navigate through the entire warehouse in search of exciting deals and unbelievable bargains. And they know some of the things they can find as they receive a pamphlet filled with coupons and irresistible deals as soon as they walk into the warehouse.

Every Costco warehouse is purposely designed with the necessities at the back of the store, meaning customers have to walk through the rotating items and sales to get their most-needed products and groceries. 

The treasure hunt atmosphere is also a safeguard against online competitors as customers have to go into a Costco store to see what is new and exciting. 

One would think that unlabeled isles, rotating inventory and purposely longer shopping trips would bother customers, but in the case of Costco, it’s quite the opposite. It’s all a part of the famed Costco experience and members enjoy it as they feel that’s how they get the most value for their membership. Instead of a run-of-the-mill grocery trip, Costco becomes an adventure that loyal customers are obsessed with.

Setting up the adventure is made possible by Costco’s inventory management and warehouse design which enables the store to quickly and efficiently rotate merchandise and allows them to grab the best deals their procurement team can find.

The treasure hunt experience is once again something that is enabled by Costco’s business model and at the same time a part of it. It’s also another factor that contributes to Costco’s extremely high customer retention rate.

Customer loyalty

Most consumers take pride in being a Costco member and the company’s high level of customer loyalty is no secret.

The emphasis Costco places on excellent customer experience and the value to their members results in an extremely high membership renewal rate - 93% in the US and Canada and 90% on the global market . 

Costco’s number of cardholders has also been steadily growing - there were 76.4 million cardholders in 2014 and the number rose to 120.9 million cardholders in 2022. Around 66.9 million of them are paying members as each member gets an additional card for their household. These numbers are what makes Costco’s customer retention rate even more impressive.

But Costco’s members aren’t just loyal, some of them are obsessed with the Costco experience. There are websites and blogs solely devoted to people talking about the warehouse. Some of them, like Costco Insider , have huge followings as they review recent deals at the store.

A blog dedicated to the Costco experience

This stable base of members who are making repeat purchases throughout the year is the result of Costco’s business model. There’s another very interesting thing Costco does or rather doesn’t do, in order to keep their profits higher and prices lower.

No advertising

Costco spends next to nothing on advertising and has no official advertising budget. It does send targeted emails to prospective members, email coupons and offers to existing members, but that’s negligible. Considering the huge sums of money most retailers spent to bring customers into their stores, that’s a really unorthodox approach.

How can Costco completely shun traditional advertising and still be successful? There are two reasons.

First, Costco has a product that sells itself . The membership offers great value to those who shop regularly at Costco, and because they’re excited about the deals they get, they spread the word.

Costco’s focus on customer satisfaction helped them create a strong brand and nowadays it’s safe to say that their reputation precedes them and that most of their target market has at least heard of Costco.

Second, spending on marketing to get existing members to shop more wouldn't really help Costco’s bottom line as membership fees are the real driver of profits. You might think that spending heavily to gain more members would make sense, but when you look at the numbers it actually doesn’t.

Spending just 0.5% of its revenue on marketing would wipe out 17% of the company's operating profit. If Costco was to spend 2% of revenue on advertising, as Target does, it would erase nearly 70% of their operating profit. The number of new members they’d get couldn’t possibly cover that loss, so it’s just not worth it.

Costco’s membership model allows them to focus on improving every aspect of the experience that leads to customer loyalty and inevitable word-of-mouth recommendations instead of spending on traditional marketing campaigns. This is one of the company’s core strengths as almost no other retailer can afford to pretty much ignore advertising.

Instead of investing in ads, Costco invests in something that much more directly impacts their members’ experience - their employees.

Higher wages and great employee benefits

Costco is often recognized as being much more employee-focused than other Fortune 500 companies. By offering higher wages and top-notch health benefits, the company has created a workplace culture that attracts positive, high-energy, talented employees.

Costco’s objective is to have motivated employees and reduce the employee turnover rate. And it succeeded as Costco's annual employee turnover is 13% while the industry turnover is believed to be well above 20% annually. The company also cultivates most of its leaders through internal leadership development, which presents an opportunity for professional growth and development.

Costco fosters a culture that is built on employee empowerment. It invests in its employees in order to improve operations and drive profits. Employees are recognized as an asset for the company as they are the ones driving the competitive advantage in the physical retail landscape. Costco doesn’t only provide them with good wages and health benefits but also promotes cultural diversity and inclusion.

This inclusive organizational culture and HRM practices have resulted in extreme popularity along with a strong social image - driving more and more loyal customers into the stores.

Apart from that, the focus of Costco has been on a company culture that promotes constructive criticism, and the philosophy has been ‘leading from the floor’, which means there’s much less micromanagement than in many other similar jobs.

Of course one of the biggest draws is a higher wage, so let’s take a closer look at it.

In early 2019, Costco raised its minimum hourly pay to $15. Its average hourly pay in 2019 was about $17.60 an hour, compared to about $10.88 on average for retailers, according to Payscale. When you add healthcare benefits, you get arguably the best job package in the retail sector.

According to Forbes surveys, Costco is consistently among the 5 top employees on America’s Best Large Employers chart. In 2017, it was even ranked as #1, and in 2021, it is ranked as #4.

How can Costco afford these higher wages and great benefits? Once again, it’s all thanks to its business model. In fact, Costco always had a much higher revenue per employee than other big retailers.

The average Costco employee generates nearly triple the revenue produced by the average Wal-Mart and Target employee and the latest results show, Costco is ranked #1 for revenue per employer in the retail sector, the wholesale industry as well as the general market!

Highly paid, motivated and happy employees help customers enjoy a consistently good shopping experience . That plays a large part when it comes to membership renewal and ensures that Costco’s customers keep coming back. In the end, that’s what matters the most.

Key takeaway #4: Expand your competitive advantages to evolve your strategy

Complacency is a giant killer in the business world.

Large enterprises that rest on their laurels, don’t evolve their strategies, and manage their competitive advantage die.

Costco’s strategy is constantly adapting to market changes. The company keeps finding new ways to take advantage of its unique business model and the policies surrounding it. Here is the list of the policies that no Costco competitor could benefit from implementing isolated:

• Offering premium product options with the lowest market prices.
• Spend zero on advertising and promoting its sales and special offers.
• Offer a treasure-hunt-like experience.

Other policies like its employee extensive support are repeatable but work exceptionally well for Costco.

Recommended reading:   The 7 Best Business Strategy Examples I've Ever Seen

Why Costco’s growth strategy doesn’t follow the norm

Costco is a shining example of how very successful an innovative business model can be and how it can create an environment where everybody wins.

Almost everything we discussed in this study is thought-thru and purposeful innovation - from Costco’s membership model to its warehouse store design. 

Despite its success (or because of it?) Costco never stopped evolving. It expanded its offering to services such as gas stations, pharmacies, beauty salons and travel agencies which generated about 16% of the company’s $166 billion in revenue in 2020. 

It added a food court and if it weren't considered a retailer, Costco would be #14 on the list of the largest pizza chains in the U.S in 2018. They cannot be easily implemented by e-commerce giants like Amazon and as such make Costco more “future-proof” than many other retailers.

Let’s take a look at two interesting examples of how Costco evolved some aspects of its business and  how it implemented its growth strategy.

The art of free samples

Free samples in stores are anything new or groundbreaking, but there’s no brand that’s as strongly associated with them as Costco. 

The company took the promotional activity to the next level and people have been known to tour the sample tables at Costco stores for a free lunch, acquired piecemeal. There are even personal finance and food bloggers who’ve encouraged the practice . 

There are shopper blogs about favorite sample options, and some say the samples are their main reason for coming into the store.

Of course, free samples boost sales of certain products (in some cases even up to 2,000% ), but Costco knows that they also can make the store a fun place to be .

Consider this - Penn Jillette, from the famous magic act Penn & Teller, has even taken his dates to Costco to enjoy free samples on more than one occasion. And he’s surely not the only one.

However, samples don’t just make Costco’s store more appealing, they operate on a more subconscious level as well. As author Robert Cialdini writes in his best-selling book Influence, the Psychology of Persuasion : “One of the most potent of the weapons of influence around us is the rule for reciprocation. The rule says that we should try to repay, in kind, what another person has provided us.”

This means that customers feel a stronger urge to buy something after they sample it and that creates a potent combination for Costco. Even if people come to their stores because trying samples is fun, a variety of psychological mechanisms kick in, compelling them to buy more products over a longer period of time.

The curious case of Costco and e-commerce

Costco actually entered the e-commerce world in 1998 , which shows that they were again quick to evolve and try something new. However, online shopping never became a substantial part of its business model.

As for most other companies, the COVID-19 pandemic changed that to a certain extent. Costco’s e-commerce sales grew by 10% in 2022 .

Costco definitely upped their e-commerce game and also started selling their products via Instacart, which had to hire 300,000 new staff to accommodate the surge in shopping delivery.

Costco now also offers same-day delivery service to its customers located within a 20 minute vicinity. 

While Costco evolved its e-commerce activities, it hadn’t quite recreated the unique in-store experience online. And the interesting thing is, perhaps it doesn’t need to.

Costco’s online margins aren’t as good as their in-store sales and even as foot traffic slowed at some of its competitors, Costco saw their members spending more in stores during the pandemic. That’s why the company opened 16 new warehouses even in 2020.

“Ultimately, we still want our members to come into the warehouse,” CFO Richard Galanti said during a December 2020 earnings call . “When they come in, they see the items and they are more likely to buy some of those items.”

When you think about it, it’s apparent why Costco is more resistant to the rising e-commerce threat. Their members give them a stable income and treat their fees as a cost that makes them come to the store. Costco entices them with the services they offer and the treasure hunting experience which can’t really be replicated. Customers genuinely enjoy being there and they buy in bulk, which means they don’t have to visit the store that often if they don’t want to.

So in the case of e-commerce, it’s not that Costco wouldn’t be willing to further evolve, it just doesn’t make a lot of business sense for them at that very moment.

This already shows that there are some unusual strengths when it comes to Costco’s business model, which means it’s high time to look at Costco’s SWOT analysis.

Key takeaway #5: Study a market trend meticulously to understand how you fit in it

Costco is unlike any other retail player.

Naturally, its business is affected by market trends, but not in the same way as its competitors. Costco’s business model compels its members to go to the store to make their purchases. If Costco tried to make its online experience something like offline, it would kill its advantage.

The company would end up slowly transitioning to a more conventional retail player, lose its competitive advantage, and eventually die.

Instead, it uses its online presence in a complementary way that supports its offline experience and invites members back to the store.

Where initiatives like free samples have a big impact on buying behavior.

Recommended reading:   Internal Analysis: What is it & How to conduct one

Costco’s SWOT analysis

While there’s certainly a lot to love when it comes to Costco and its business model, there are always things that could be improved. As the SWOT analysis is going to recap a lot of what you already read in this study.

Membership business model

Costco’s membership fees enable Costco to better predict their income, cut prices and ensure customers have an incentive to shop at the store. 

Loyal customer base

Membership card renewal rates of 91% in the US and 88% worldwide show that Costco has an extremely loyal customer base in an industry where it’s very easy to switch brands and retailers. 

Low prices, high quality

Costco’s strategy of stocking high-quality items, which are sold in bulk-size at low-profit margins entices their target customers to become Costco members and to buy more products during their shopping trip. Their own Kirkland Signature brand is also a result of Costco’s philosophy to offer the highest quality products at the lowest price.

Selling in bulk

Costco can keep their margins low because they sell more of the same product compared to other retailers. It significantly increases how much money customers spend during one trip to Costco.

Low operation costs

Costco’s inventory management, warehouse store design and selling in bulk directly from transport pallets keep overhead costs low. 

Passing savings to customers

Costco is not reliant on making huge profit margins in sales and can therefore pass the savings to customers, which encourages loyalty and entices new members.

Costco doesn’t rely on ads to sell their products and doesn’t need to spend huge amounts of money on ad campaigns, which allows them to keep their prices lower than their competitors. Their strong brand name and word of mouth are enough to bring in new members.

High paying retail jobs with generous benefits

Costco takes care of their employees which translates into a better customer experience for their members. Satisfied and motivated employees do a better job and are less likely to leave which results in a low turnover rate.

Flexible inventory

Costco rotates their inventory faster than other retailers which enables them to make the most out of the best deals on the market (e.g. by buying the surplus stock at the lowest prices) and create a treasure hunting experience.

Eco-friendly

Costco’s eco-friendly approach focuses on four main objectives:

• Creating proper waste management systems
• Significantly reducing their carbon footprint
• Changing how they package designs
• Improving energy management systems in warehouses

This is important for eco-conscious shoppers, which a lot of their target customers are.

Limited product selection

While this is a plus for some, it’s indisputable that Costco offers much fewer choices than other retailers and that customers often can’t find more “exotic” products. Therefore, Costco is unable to attract a wider customer base, who want a bigger selection of products in smaller quantities.

Cumbersome transportation and storage

Buying in bulk can be very difficult for people living in cities and storing these products can be tough if a customer doesn’t own a house. 

Aging customer base

Costco has an aging problem . It is mostly attributed to its lack of digital advertising and limited e-commerce. A lot of younger people prefer a quick shopping experience or an online shopping spree, which is not something Costco is known for.

Long lines at the checkout

That’s the biggest complaint of Costco members, which Costco is trying to address with self-service lanes at selected locations.

Wasted food

As consumers are becoming more eco-conscious, it’s starting to bother them that a lot of food from Costco goes uneaten as there’s just too much of it in the one big package the store offers.

Opportunities

Online presence and e-commerce 

Although we said Costco might not need e-commerce as much as other retailers, it’s still an opportunity they can explore to attract new members and increase their revenue.

Social media

Costco could tap into new markets by using social media and social advertising for a fraction of the cost of traditional advertising. Currently, they have 0 tweets on their Twitter accounts and are lacking behind the competition on Facebook.

Global expansion

Costco has shown it can successfully enter new markets, which is an opportunity to expand further. China especially represents a huge opportunity after the success of Costco’s first Shanghai store. 

Reputational damage

Costco relies on its strong brand name more than other retailers and therefore has to retain a strong reputation. Product recalls can seriously damage Costco’s image of a store that provides quality items. Instances such as a rotisserie chicken salad recall in November 2015 due to the outbreak of E. Coli toxin where 19 people were infected make Costco less attractive to potential members.

Data security 

Costco gathers and hands over its customers’ and employees’ information to a third-party cloud service for safekeeping. In an era where people are more and more conscious of cybersecurity, any incident can create a major problem for the company.

Competition and digitalization

A lot of Costco’s competitors are ahead of them when it comes to e-commerce and digital services. While this might not be a problem yet it does represent a threat in the long run if Costco doesn’t evolve and starts losing younger potential members to their competitors.

Why is Costco so successful?

Costco has been so successful because it introduced a new business model, accompanied it with a cohesive strategy, and managed its competitive advantage cautiously.

It’s a company with strong leadership and a powerful culture.

Costco’s unwavering commitment to doing what they feel is the right thing for their members, their employees, their suppliers, and their communities have created a Costco culture and a strong brand with an impressive social image. That’s quite an achievement for a retail company that primarily employs a cost leadership strategy.

Growth by the numbers

As a result, a lot of customers are crazy about Costco. They love the company and have fun going to their stores. It’s not just a shopping trip, it’s a Costco experience - an adventure where members look forward to what treasures they might find. 

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Team 1 -Costco Wholesale Corporation Case Analysis

Related Papers

Southern Economic Journal

Charles Courtemanche

Indus Foundation International Journals UGC Approved

The purpose of this study is to identify and compare the Business strategies and Business models adopted by two big discount retailers in the United States which are Target Corporation (" Target ") and Costco Wholesale Corporation (" Costco "). The study also examines the characteristic of the competitive environment in which both companies operate in. The SWOT analysis shows that the discount retail industry is highly competitive and is affected by key strategic factors as Technology improvement, innovation in product design and promotion, employee welfare, internet, multi-channel distribution and communication. Target follows an Integrated Cost Leadership and Differentiation strategy expressed in its promise of " Expect More, Pay Less ". It provides high quality, trend-forward merchandize with lower margin. Target achieves its strategies with core co mpetencies and resource such as superior guest experience, corporate culture, systems, strong supply chain, technology infrastructure, innovation, and disciplined management approaches. On the other hand, Costco adopts a Cost Leadership strategy. It uses economies of scale to buy in bulk at low cost and pass the discount to the customer. Costco achieves its strategy with core resource and competencies that include efficient supply chain management, pleasant shopping experience, strong bargaining power, motivated highly paid employees.

Murray Rice

Yeh, YunLung. The Global Expansion of Transnational Retailers: A Case Study of the Localization Strategy of Costco in Taiwan. Master of Science (Applied Geography), December 2010, 95 pp., 21 tables, 10 illustrations, reference list, 39 titles. This research focuses on the global expansion of the transnational retail industry. Globalization is a phenomenon experienced by many industries in the present global economy.

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All you need to know about the Business Model Of Costco – Extensive Research

By Aditya Shastri

Quick Read   Costco’s business model is centred on a membership-only warehouse club structure, offering bulk goods at low prices. This case study explores the business model of Costco , detailing its market share, product offerings, revenue model, and strategic partnerships, highlighting the company’s approach and success.

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Curious about Costco’s winning formula? You’ve come to the right place! Let’s dive into the business model of Costco that has made the company a retail giant.

Costco, a membership-based warehouse club, is renowned for offering an array of products at discounted prices. From groceries and electronics to furniture and clothing, Costco has something for everyone.

Their business model, centred around bulk purchases and a no-frills shopping experience, has contributed to their immense success. Based in Issaquah, Washington, Costco runs hundreds of stores globally and is a significant force in the retail industry.

The business model of Costco will be discussed in depth in this case study. Let’s begin with a brief overview of the Costco corporation.

PS: For those interested in how companies like Costco create their business model, pursuing a post-graduate diploma in digital marketing can offer valuable insights and skills.

About Costco

Source: Google

Founded in 1983 by James Sinegal and Jeffrey Brotman, Costco has evolved into a retail powerhouse. Headquartered in Issaquah, Washington, this membership-based warehouse club offers a vast assortment of products at discounted prices. From groceries and electronics to furniture and clothing, Costco caters to a diverse customer base.

Known for its bulk-buying model, Costco has disrupted the traditional retail landscape. Their iconic $1.50 hotdog and soda combo has become a symbol of their commitment to offering exceptional value. With a strong emphasis on quality and customer satisfaction, Costco has solidified its position as the world’s second-largest retailer, trailing only Walmart.

Big companies like Costco are increasingly incorporating marketing elements in their business model. For this reason, these companies are looking for digital marketing professionals to take their marketing campaigns up a notch. Many aspirants who want to work in such companies start looking for digital marketing classes to begin their careers in this dynamic industry.

Business Model of Costco

A business model provides a framework for a corporation to develop a methodical way to unlock long-term value while providing value to customers and capturing money through monetisation techniques. A business model is a framework for assessing, designing, and putting your company’s assumptions to the test in the market.

As part of Costo’s business model , the company aims at maximising sales and inventory turnover. They achieve this by offering a limited selection of nationally branded and private-label products at significantly reduced prices to members. This strategy promotes bulk buying, boosting sales and ensuring rapid inventory turnover.

It is based on annual memberships from customers who join and renew their memberships. This demonstrates customer loyalty because satisfied customers would renew their subscriptions year after year.

Costco’s business model is amazing; everyone wants to get a good price, and the company is set up to keep people coming back for more. Goods are typically bulk-packaged and sold to large households and enterprises in this region.

Let’s see it in detail in the coming sections.

1. The Costco Business Model : Brand’s Market Share & Analysis

Thanks to the incredibly designed business model of Costco, the company today holds approximately 8.4% of the US retail market share. The company operates over 800 warehouses worldwide, serving millions of members. Costco’s market segmentation focuses on cost-conscious consumers and businesses looking for bulk purchasing options. The retail market is highly competitive, with major players like Walmart, Amazon, and Target. Costco’s unique value proposition of high-quality products at low prices sets it apart from competitors.

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2. The Costco Business Model : Product Offerings

Costco is one of the most well-known retail chains in the United States. Costco’s marketing mix includes a diverse range of product offerings like art, caskets, clothing, books, computer software, wines, furniture, home electronics, home appliances, jewellery, solar panels, pharmaceutical goods, dairy, flowers, fresh fruits and vegetables to meet the needs of its customers.

As a result of the perfectly planned Costco business model , the company readily generates economies of scale by focusing on selling high-value products in large quantities. The products are packed in bulk and sold to large households or corporations. Costco does not carry several brands or marques when the products are the same.

Costco has a vast product portfolio; let’s identify its target audience for effective distribution.

3. Costco Target Market

Costco doesn’t aim for a one-size-fits-all approach. Their target audience leans towards middle-class families in suburban areas. The annual membership fee, typically around $55, reflects this focus on budget-minded shoppers.

However, Costco’s business model recognises the value proposition for businesses as well, offering a dedicated business membership option. This strategy allows them to cater to a wider range of customers, all seeking high-quality products at competitive prices.

4. The Costco Business Model : Funding & Investors

Costco is a publicly traded company on NASDAQ, with the ticker symbol COST. Owing to the successfully created Costco business model , the company’s market capitalisation stands at approximately $200 billion in 2023. Major investors include institutional investors, mutual funds, and individual shareholders. Costco’s consistent revenue growth and robust financial performance make it an attractive investment option.

Businesses across the country, especially the ones operating in Thane and South Delhi, want to understand the relevance of funding an investment in a company’s business model, how much proportion of it is delegated to marketing, and how are the funds allocated in digital marketing activities. This growing curiosity has encouraged them to search for the keywords (words used to search information over the internet), ‘ digital marketing courses in navi mumbai ’ and ‘ digital marketing courses in south delhi ’.

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5. Revenue Model

Costco’s revenue model is primarily based on membership fees and sales of bulk goods. Membership fees contribute significantly to their bottom line, with annual fees ranging from $60 to $120. In 2023, Costco generated a total revenue of approximately $200 billion, with membership fees accounting for nearly $4 billion. The bulk purchasing model allows Costco to offer competitive pricing, driving high sales volume and member retention.

6. Marketing Strategy

Costco’s marketing strategy focuses on word-of-mouth, member satisfaction, and limited advertising. The company relies heavily on the quality and value of its products to drive member referrals. In-store promotions and product sampling further enhance the shopping experience. Costco’s minimal advertising budget is a strategic decision to keep operational costs low, passing the savings on to members.

Curious to learn about how companies like Costco leverage their business model to design campaigns that bring in revenue? Check out our advanced digital marketing course so that you can learn and implement these learnings in real-life scenarios.

7. Costo Value Proposition

Costco’s business model is built on a simple yet effective principle: offer a limited selection of high-quality products at rock-bottom prices. By focusing on bulk purchases and rapid inventory turnover, they’ve managed to keep costs low and pass the savings on to members. This strategy, combined with a strong emphasis on customer satisfaction, has propelled Costco to the top of the retail industry.

Costco sells items in a few different categories:

• Dry foods, packaged foods, and groceries are all examples of foods.
• Snack foods, candies, alcoholic and non-alcoholic beverages, and cleaning supplies are among the sundry items.
• Major appliances, electronics, health and beauty aids, hardware, garden and patio are among the hardlines.
• Meat, fruit, deli, and bakery are all examples of fresh foods.
• Softlines include clothing and tiny appliances.
• Gas stations and pharmacies are examples of ancillary services.

8. Operational Model

Costco manages an efficient supply chain by emphasising bulk purchasing and rapid inventory turnover. The company’s warehouses are designed for simplicity, reducing overhead costs and enhancing operational efficiency. Costco’s operational model also includes strategic placement of warehouses in high-traffic areas to maximise accessibility and convenience for members.

Many individuals want to understand the impact of marketing and how it strengthens a company’s business model. Check out our free digital marketing certification to understand this from both, a marketing and business perspective now!

9. The Costco Business Model : Strategic Alliances & Partnerships

Costco has established strategic partnerships with leading brands to offer exclusive products and services. These alliances enhance Costco’s product offerings and provide members with unique purchasing opportunities. Partnerships with financial institutions, such as their co-branded credit card with Citibank, offer additional member benefits and drive customer loyalty.

10. The Costco Business Model : Technological Innovations

Based on its business model of Costco , the company leverages technology to enhance the shopping experience and streamline operations. The company’s e-commerce platform allows members to shop online and access exclusive deals. Innovations like self-checkout kiosks and mobile apps improve convenience and efficiency. Costco’s investment in technology ensures they remain competitive in the evolving retail landscape.

Do you find this article insightful? Check out our digital marketing blogs now!

11. Corporate Social Responsibility (CSR)

Source: Costco.co

Costco’s CSR initiatives focus on sustainability, community support, and ethical sourcing. The company is committed to reducing its environmental impact through energy-efficient practices and sustainable product sourcing. Costco’s charitable contributions and community engagement programmes demonstrate their commitment to social responsibility, positively impacting the communities they serve.

12. Costco Market Segmentation

The corporation has always catered to a rather affluent and college-educated clientele. It was initially targeted at business owners, licensed professionals, and government, utility, hospital, and bank employees.

Advertising Strategy of Costco

Costco believes in ambush marketing or large discount promotions because it is incredibly frugal with its advertising budget. Its treasure hunt, allows buyers to purchase high-end products for a fraction of the cost. A documentary on CNBC called The Costco Craze, Inside the Warehouse Giant contributed to the company’s brand development. Costco also advertises its specials and discount programs in targeted newspaper and radio commercials, as well as on online social media channels.

Would you like to research about the business model of other well-known brands? Have a look at our digital marketing case studies now!

Top Competitors

Costco is not the only business that operates in this industry. Many other players can make the company to alter the Costco Business Model :

• Walmart: The largest retailer in the world, Walmart offers a vast selection of products at competitive prices, with a strong emphasis on everyday low prices.
• Amazon: A global e-commerce leader, Amazon provides a wide range of products and services, known for its fast delivery and customer-centric approach.
• Target: Target is known for its stylish and affordable merchandise, offering a curated shopping experience with a focus on quality and design.
• Sam’s Club: A direct competitor, Sam’s Club operates on a similar membership-only warehouse model, providing bulk goods at discounted prices.
• BJ’s Wholesale Club: BJ’s offers a wide range of products with a focus on value and convenience, operating primarily in the eastern United States.

Many businesses across India, especially the ones operating in Coimbatore, face marketing intense competition, but there’s a way to overcome it! Enrolling in a digital marketing course in coimbatore will provide you with valuable information about the right way to deal with such pitfalls.

Costco’s strategy is manifested in the loyalty of its customers, the expansion of its locations, and the leadership team’s experience. Costco runs membership warehouses where high-quality products from a variety of brands are sold at cheaper prices than at other stores.

Sol Price’s unique business approach is responsible for Costco Wholesale’s expanding success. Thank you for your interest in reading this case study on the business model of Costo . We hope you enjoy it, and we’d appreciate it if you could take a few moments to tell us what you think.

Learning From Other Brands

In comparison with other brands, the Amul marketing campaign case study highlights how the brand leverages topical and witty advertisements to create a strong emotional connection with consumers, showcasing how consistent and relatable messaging can drive brand loyalty and market leadership.

Similarly, the marketing strategy of Maggi focuses on extensive advertising, product innovation, and strategic partnerships to maintain its dominant position in the instant noodle market and cater to the evolving tastes of consumers.

Additionally, the business model of Jollibee emphasises providing affordable and diverse menu options, strong local market understanding, and strategic international expansion, illustrating how a customer-centric approach and adaptability can foster growth and market leadership. These examples illustrate how well-crafted marketing strategies and business models can help brands excel in their respective industries.

FAQs About the Business Model of Costco

Costco's business model is a membership-only warehouse club offering bulk goods at low prices.

Costco's value proposition focuses on providing high-quality products at the lowest possible prices for its members.

Costco’s target market includes cost-conscious families, small businesses, and individuals seeking bulk purchasing options.

Thanks to the brilliantly planned business model of Costco, the company generates revenue primarily through membership fees and sales of bulk goods.

Costco's primary competitors are Walmart, Amazon, Target, Sam’s Club, and BJ’s Wholesale Club.

Costco uses technology to enhance the shopping experience, with innovations like self-checkout kiosks, mobile apps, and an e-commerce platform.

Costco focuses on sustainability, community support, and ethical sourcing, including energy-efficient practices and charitable contributions.

Strategic partnerships enhance Costco's product offerings and provide unique purchasing opportunities for members.

Costco relies on word-of-mouth, member satisfaction, and limited advertising to drive growth and member retention.

Author's Note: My name is Aditya Shastri and I have written this case study with the help of my students from IIDE's online digital marketing courses in India . Practical assignments, case studies & simulations helped the students from this course present this analysis. Building on this practical approach, we are now introducing a new dimension for our online digital marketing course learners - the Campus Immersion Experience. If you found this case study helpful, please feel free to leave a comment below.

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Leads the Learning & Development segment at IIDE. He is a Content Marketing Expert and has trained 6000+ students and working professionals on various topics of Digital Marketing. He has been a guest speaker at prominent colleges in India including IIMs...... [Read full bio]

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The Costco Model

How can companies promote positive treatment of employees and benefit from leading with the best practices? Costco offers a model.

Costco is often cited as one of the world’s most ethical companies. It has been called a “testimony to ethical capitalism” in large part due to its company practices and treatment of employees. Costco maintains a company code of ethics which states:

“The continued success of our company depends on how well each of Costco’s employees adheres to the high standards mandated by our Code of Ethics… By always choosing to do the right thing, you will build your own self-esteem, increase your chances for success and make Costco more successful, too.”

In debates over minimum wage in the United States, many commentators see Costco as an example of how higher wages can yield greater company success, often pointing to competitors such as Walmart and Target as examples that fall short in providing for their employees. Other commentators do not see Costco’s model as being easily replicable for different types of businesses, citing wages as only one of many factors to consider in companies’ best practices.

Costco tends to pay around 40% more and provides more comprehensive health and retirement benefits than Walmart and Target, saving large amounts in employee turnover costs. The company resists layoffs, invests in training its employees, and grants them substantial autonomy to solve problems. U.S. Secretary of Labor Thomas Perez stated:

“And the remarkable loyalty that [employees] have to [Costco cofounder Jim Sinegal] is a function of the fact that he categorically rejects the notion that, ‘I either take care of my shareholders or my workers.’ That is a false choice.”

While few disagree with the benefits of fair treatment of employees, some commentators credit the success of Costco to its broader business model that favors higher productivity, not employee satisfaction. Columnist and economist Megan McArdle explains:

“A typical Costco store has around 4,000 SKUs [stock keeping units], most of which are stacked on pallets so that you can be your own stockboy. A Walmart has 140,000 SKUs, which have to be tediously sorted, replaced on shelves, reordered, delivered, and so forth. People tend to radically underestimate the costs imposed by complexity, because the management problems do not simply add up; they multiply.”

Furthermore, McArdle notes that Costco mainly serves as a grocer rather than department store and caters to a generally affluent customer base in suburban areas.

Discussion Questions

1. How does Costco, as described, match up to the “best practices” explained in the video? Where does Costco fall short? Where does Costco succeed?

2. Walmart pays its employees substantially less than does Costco, even though the two companies often compete head-to-head. How can Costco stay in business when it pays up to 40% more to its employees than its direct competitors?

3. What do you think are the most important practices for a retail company to pursue to foster an ethical environment for workers and consumers? Why?

4. A stock analyst criticized Costco, saying: “Costco continues to be a company that is better at serving the club member and employee than the shareholder.” Do you think this a fair critique? Why or why not?

5. Another analyst complained that Jim Sinegal “has been too benevolent. He’s right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden.” Again, do you think this a fair criticism? Why or why not?

6. Is a company that does not follow the Costco model a “bad” company? Explain.

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Bibliography

Unselfishness: The World’s Most Ethical Company & Why Collaboration Works http://www.rohitbhargava.com/2012/05/unselfishness-the-worlds-most-ethical-company-why-collaboration-works.html

How Costco Became the Anti-Wal-Mart http://www.nytimes.com/2005/07/17/business/yourmoney/how-costco-became-the-antiwalmart.html

Connecting the Dots Between Leadership, Ethics and Corporate Culture http://iveybusinessjournal.com/publication/connecting-the-dots-between-leadership-ethics-and-corporate-culture/

Why Be an Ethical Company? They’re Stronger and Last Longer http://www.bloomberg.com/news/articles/2009-08-17/why-be-an-ethical-company-theyre-stronger-and-last-longer

Labor Secretary Thomas Perez Says More Employers Need To Follow Costco’s Example http://www.huffingtonpost.com/2013/10/29/thomas-perez-costco-minimum-wage_n_4174249.html

Costco’s Profit Soars To $537 Million Just Days After CEO Endorses Minimum Wage Increase http://www.huffingtonpost.com/2013/03/12/costco-profit_n_2859250.html

Why Can’t Walmart Be More Like Costco? http://www.thedailybeast.com/articles/2012/11/26/why-can-t-walmart-be-more-like-costco.html

Why Costco and Other Warehouse Club Retailers Matter http://www.lek.com/sites/default/files/lek-why_costco_and_other_warehouse_club_retailers_matter.pdf

Ethical Leadership: A Primer on Ethical Responsibility in Management http://www.wiley.com/college/sc/scherm/ethicsfinal.pdf

Firms of Endearment: How World-Class Companies Profit From Passion And Purpose http://www.worldcat.org/title/firms-of-endearment-how-world-class-companies-profit-from-passion-and-purpose/oclc/70167640

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The Big Misconception You Shouldn't Believe About Costco's Free Samples

In many ways, Costco has transcended the identity of a warehouse superstore and turned itself into a full-on pop-culture phenomenon. The retail giant is a constant subject of internet attention, which usually centers on one of three things. First, there's the famous Costco food court items , anchored by the beloved $1.50 hot dog deal, and then of course, you have the inflation-proof $4.99 rotisserie chicken . Those two alone have made Costco a fan favorite, but the store's biggest calling card has to be its free samples.

Coscto's free samples turn a plain old errands outing into a smorgasbord of unexpected delights. Each trip through the cavernous warehouse is fueled by handouts from friendly faces in hairnets and rubber gloves. They're a big enough draw to prompt web searches on the best times to get free samples at Costco , and some customers have even pondered online whether they need disguises to snatch multiple samples.

There's a twist to this tale, however, that you probably wouldn't expect. It would be natural to assume that the people handing out samples at Costco are Costco employees, but this isn't the case. Despite this common misconception, they are actually employed by a separate company that works exclusively with Costco to staff their free sample tables. It might seem like an odd business model, but it effectively saves Costco money. However, it does so at the expense of the employees themselves.

Read more: 10 Easy Tips To Reduce Food Waste

Who Really Hands Out Costco's Free Samples

At most Costco locations, the people handing out free samples are actually employees of Club Demonstration Services, a company that is technically independent from Costco, but works as the warehouse store chain's "exclusive in-house service provider" (via the CDS website ). CDS was founded in 1988, five years after the first Costco location opened for business. Today, it hires staff for Costco locations in the United States, Canada, Mexico, Australia, New Zealand, Spain, France, Sweden, Japan, Taiwan, South Korea, and China. Expect more regions to join this list in the near future, as the company has been expanding steadily.

CDS is not the only company that Costco has used to hire staff to hand out its free samples. For many years, the company also partnered with Warehouse Demonstration services, which was formed shortly after CDS and which primarily handled staffing on for the western United States. CDS acquired Warehouse Demonstration Services in 2013, but the similarly named Warehouse Demo Services still hires staff for Costco locations in the United Kingdom and Iceland.

Although these companies are independent from Costco, CDS employees work at Costco locations. However, working at Costco and working for Costco are very different, and that is reflected in the benefits and pay that CDS and WDS employees receive.

How Costco Saves Money With Its Sample Staff

Costco frequently receives great press for its treatment of employees, and it has been ranked as the top workplace for compensation and benefits by the employment site Indeed . It's easy to see why. Costco's minimum wage ($17 per hour as of summer 2024) is well above the federal minimum wage ($7.25 per hour) and it comes with a benefits package that includes paid vacations, a 401(k) retirement plan, and stock options to go with health, dental, vision, and life insurance.

It all sounds great, and these benefits packages in particular were touted by Costco founder Jim Sinegal, who told U.S. News & World Report  in 2009, "When you hire good people, and you provide food jobs and good wages and a career, good things are going to happen." However, these policies do not extend to the people who give out free samples at Costco. Under the auspices of CDS and similar companies, those employees receive lower wages and fewer benefits. Part-time product demonstrator jobs at CDS in the United States typically pay around $1.00 to $3.00 less per hour than entry-level jobs at Costco. Although CDS does offer some benefits, many of them, including insurance, are only offered to full-time employees, while demonstrators are mainly hired on a part-time basis.

Read the original article on Chowhound .

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The Federal Trade Commission today announced a final rule that will combat fake reviews and testimonials by prohibiting their sale or purchase and allow the agency to seek civil penalties against knowing violators.

“Fake reviews not only waste people’s time and money, but also pollute the marketplace and divert business away from honest competitors,” said FTC Chair Lina M. Khan. “By strengthening the FTC’s toolkit to fight deceptive advertising, the final rule will protect Americans from getting cheated, put businesses that unlawfully game the system on notice, and promote markets that are fair, honest, and competitive.”

The final rule announced today follows an advance notice of proposed rulemaking and  a notice of proposed rulemaking announced in November 2022 and June 2023, respectively. The FTC also held an informal hearing on the proposed rule in February 2024. In response to public comments, the Commission made numerous clarifications and adjustments to its previous proposal.

The final rule prohibits:

• Fake or False Consumer Reviews, Consumer Testimonials, and Celebrity Testimonials: The final rule addresses reviews and testimonials that misrepresent that they are by someone who does not exist, such as AI-generated fake reviews, or who did not have actual experience with the business or its products or services, or that misrepresent the experience of the person giving it. It prohibits businesses from creating or selling such reviews or testimonials. It also prohibits them from buying such reviews, procuring them from company insiders, or disseminating such testimonials, when the business knew or should have known that the reviews or testimonials were fake or false.
• Buying Positive or Negative Reviews: The final rule prohibits businesses from providing compensation or other incentives conditioned on the writing of consumer reviews expressing a particular sentiment, either positive or negative. It clarifies that the conditional nature of the offer of compensation or incentive may be expressly or implicitly conveyed.
• Insider Reviews and Consumer Testimonials: The final rule prohibits certain reviews and testimonials written by company insiders that fail to clearly and conspicuously disclose the giver’s material connection to the business. It prohibits such reviews and testimonials given by officers or managers. It also prohibits a business from disseminating such a testimonial that the business should have known was by an officer, manager, employee, or agent. Finally, it imposes requirements when officers or managers solicit consumer reviews from their own immediate relatives or from employees or agents – or when they tell employees or agents to solicit reviews from relatives and such solicitations result in reviews by immediate relatives of the employees or agents.
• Company-Controlled Review Websites: The final rule prohibits a business from misrepresenting that a website or entity it controls provides independent reviews or opinions about a category of products or services that includes its own products or services.
• Review Suppression: The final rule prohibits a business from using unfounded or groundless legal threats, physical threats, intimidation, or certain false public accusations to prevent or remove a negative consumer review. The final rule also bars a business from misrepresenting that the reviews on a review portion of its website represent all or most of the reviews submitted when reviews have been suppressed based upon their ratings or negative sentiment.
• Misuse of Fake Social Media Indicators: The final rule prohibits anyone from selling or buying fake indicators of social media influence, such as followers or views generated by a bot or hijacked account. This prohibition is limited to situations in which the buyer knew or should have known that the indicators were fake and misrepresent the buyer’s influence or importance for a commercial purpose.

As the Commission noted previously, case-by-case enforcement without civil penalty authority might not be enough to deter clearly deceptive review and testimonial practices. The Supreme Court’s decision in AMG Capital Management LLC v. FTC has hindered the FTC’s ability to seek monetary relief for consumers under the FTC Act. This rule will enhance deterrence and strengthen FTC enforcement actions.

The Commission vote to approve the final rule and accompanying statement of basis and purpose was 5-0. The rule will become effective 60 days after the date it’s published in the Federal Register.

The primary staff members on this matter are Michael Ostheimer and Michael Atleson in the FTC’s Bureau of Consumer Protection. 

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