Costco Wholesale Case Study

Gabriella Fortuna

MGMT 4350

Case Analysis

Costco Wholesale

Costco is the 2nd largest retail store in the US and the world. It is safe to say they took the retail market by storm with incredible profits, low operating costs, and their low-price business strategy. For Costco to get to this point, however, they faced challenges, opportunities, and important decisions. One major challenge Costco faced was trying to uphold their philosophy of quality goods at the lowest possible price. They wanted their products at the lowest possible price to attract customers and keep them coming back. This is extremely important because some of Costco’s competitors include large retail stores such as Walmart and Sam’s Club. More customers mean more sales, and more importantly a higher inventory turnover. Costco figured out they could just a minimum price on quality goods if their inventory turnover is high. Vendors will be satisfied when they get paid in a short period of time since Costco already has the product stocked up and being sold. When outside companies sell their merchandise to Costco, many of them offer product discounts if they can pay for the order in a certain amount of time. For example, a normal roll of paper towel may cost 2 dollars in the stores, and Costco buys it from an outside vendor for 1 dollar. If Costco can pay their entire bill to the vendor within a week, the paper towel will now only cost Costco .75 cents and increase the profit margin on that product. High inventory turnover is also important because vendors want to see their product will be displayed and sold and not sitting in the back of a receiving room somewhere. Especially for a company like Costco who buys very large quantities from vendors, the deal needs to look attractive for the vendor to accept an agreement. In order to be successful with the low-price operative, Costco must focus on running a low-cost operation. Since their revenue may not necessarily be the highest, they must ensure their costs are minimized in order to maximize profit. One way they do this is by having low advertising costs. Costco does not need to spend a lot on advertising since their brand name is so widely known. Everyone knows Costco is the super retail store with low prices. They also limited their deals and promotions to members, so it did not need to be advertised to every customer.

One very important decision Costco had to make that is completely different than their competitors is regarding product selection. Instead of having 40,000 -125,000 products like Walmart or other retailers, Costco has around 3700. Costco chose a different strategy by offering a small selection, but at a minimum price and super sized. They focused on savings for their customers, so they only picked products they would always have in stock at discounted prices. I believe Costco made the right decision by offering fewer products only because the cost is so low and the sizes of the products they do offer is super-sized! For example, a normal retail store may sell a pack of 2-10 roll paper towel, but Costco would offer 20-30 packs. This really favors larger families who need to buy in bulk at a discounted price. It is also perfect for those who dislike shopping often and want to stock up when they do go out. The only issue this could cause is with smaller families, since a family of two would not really need everything super-sized.

Costco had the opportunity to go green and invest in energy saving systems. By 2014 they had rooftops solar photovoltaic systems on 77 locations in an attempt to minimize the companies carbon footprint. Their metal warehouse design met requirements of the Silver Level LEED Standard and are considered “green” warehouses. They also use energy efficient lighting and mechanical systems. This decision is very important because this generation is all about going green and saving the environment. Customers appreciate the business’s decision to go green and could even sway potential customers into the stores. Costco is also thinking about the long run with this decision and implementing energy saving systems in every new store, and even upgrading current stores.

Costco’s key issues today include keeping up with the growing online ordering generation, smaller families who do not need to buy in bulk, and changing customer preferences. For a business to be successful, they should keep up with customer demands and their changing preferences. At Costco, that is kind of hard to do when they are so limited on their product variety. Since they carry everything in bulk, switching products constantly to meet customer needs would be basically impossible. They are also limited on floor space, since most of their inventory is on the floor stacked up. The newer generation has also proven to be a problem since their family size is much smaller than it used to be. Many families may only have 2-4 members, so buying in bulk is not always necessary and could even be a pain hauling and storing such large items. Costco’s main problem is also because of the new generation and their love for online shopping. We can see how successful amazon became because of their low prices, quick shipping, and quality products. Millennials love to online shop because of the convenience, and Costco’s online market cannot compete.