Introduction
Costco Wholesale Corporation is a multi-billion dollar global retailer operating membership-only warehouse clubs worldwide. As of August 2018, Costco had a total of 759 warehouses in the United States, Canada, Mexico, United Kingdom, Japan, South Korea, Taiwan, Australia, Spain, Iceland, and France. Costco provides a wide variety of services including, concierge services, auto programs, business services, optical services, travel services, food services, an online photo site, and an online shopping site. According to an article by Adam Levine Weinberg, Costco’s total sales rose 9.7% to $138.4 billion for the full 2018 fiscal year.
Costco fosters many strategies and techniques making it more successful than its main competitor, Sam’s Club. Fulfilling its social responsibilities, innovating and responding to changes, controlling, and managing information in the most efficient manner contributes to Costco’s success. Although Costco is an extremely successful retailer, it faces challenges just like any other company. Costco faces the need for overdue policies for animal rights and obtains a limited product mix. One of the primary risks Costco faces today is the increasing change to online shopping from traditional retail shopping. According to a source, Costco’s weaknesses and threats are directly related to its business model. In short, Costco’s business model is constructed by the following principles and practices.
Social Responsibility
In Chapter 4 of MGMT, social responsibility is defined as “a business’s obligation to pursue policies, make decisions, and take actions that benefit society” (82). According to Costco’s website, their mission statement is “To continually provide our members with quality goods and services at the lowest possible prices.” Aside from prices and profits, Costco aims to fulfill their economic, legal, ethical, and discretionary responsibilities. Costco’s code of ethics consists of obeying the law, taking care of their members and employees, respecting their suppliers, and rewarding their shareholders. In accordance with their mission statement and code of ethics, Costco’s aim is that their business remains responsible, resilient, and relevant.
Costco provides competitive wages and benefits to its 225,000 employees worldwide. They compensate their employees to minimize employee turnover and maximize employee productivity, commitment, and loyalty. Costco aims to represent the communities in which they work with by fostering a diverse workforce and an inclusive environment. Costco’s Open Door policy encourages an atmosphere of openness and support, allowing companies to discuss any issue with any level of management. Costco’s employees hold an important role in teaching and reinforcing its corporate culture.
Costco contributes to the health and wellbeing of its communities. In their optical departments, Costco provides low-cost, quality eye-care through independent optometrists. Costco provides prescriptions in their pharmacies, immunizations such as the flu shot, hearing aid services, health screenings, and other programs. Costco contributes to charities focusing on education, children, and health and human services. The Red Cross, United Way, Children’s hospitals, food banks, and a variety of educational and scholarship programs are some of the charitable organizations that Costco contributed to in 2017. Feeding America and World Vision ar some of the local community organizations that Costco has donated to.
Costco has the ability and willingness to learn and adapt to their impact and global challenges such as climate change, human rights issues, and compromised natural resources. However, according to a website, Costcocruelty.com, an investigator documented evidence of cruelty and neglect of pigs at a Christensen Farms facility. The purpose of this website is to expose and to end exploitation of animals, persuading people to feel differently about Costco and to take action. Stars like Brad Pitt and Bill Maher also raised awareness of animal cruelty among Costco’s suppliers, affecting Costco’s market share.
Costco has a global supplier Code of Conduct prohibiting human rights abuses. The Code of Conduct addresses human trafficking, physical abuse, unsafe work environments, excessive or forced overtime, illegal child labor, failure to pay adequate wages, restricting freedom of movement, and many other aspects. If a violation of this Code on Conduct occurs, Costco takes action to terminate the business relationship or allow the supplier to implement a plan for remediation depending on the nature and extent of the violation. Roberta Greenspan’s analysis of Costco’s corporate social responsibility states that these efforts are effective in addressing all interests of its employees, customers, investors, and communities. Satisfying the needs of all aspects, therefore, contributes to the many successes of Costco.
Innovation and Change
According to MGMT, organizational innovation is “the successful implementation of creative ideas in organizations” (137). To be more successful than its competitors, Costco has gained a sustainable competitive advantage through their innovative minds. Innovations that are credited to Costco include their pharmacies, gas stations, eye-care clinics, and the warehouse customer experience. Costco’s business model is developed of innovative and counter-intuitive strategies, contributing to their success.
Through their membership-only business model, Costco has the advantage of obtaining information about their customers to make smart business decisions. However, this membership-only business model limits the amount of customers possible. According to Costco’s Retail Innovation Change by Barbara Farfan, Costco has a retail strategy of limiting their number of products. Costco has 10,000 products whereas most large supermarkets have 40,000 products. As for Costco’s competitor, Walmart, they have 100,000 products. With the many pressures of its competitors, Costco could lose out with its low product mix and consumer preferences.
Costco is known to have an older customer base, specifically the baby boomers. Today’s tech-savvy individuals are not gravitated towards buying bulk items from a warehouse. Although online shopping is a threat to Costco, there has been technological innovations to improve and expand its e-commerce to keep up with its competitors. Costco’s recent efforts have kept them in the game. As a result of increasing the number of items available online, simplifying the checkout processes, and making the timeliness of delivering online orders more convenient, Costco’s online sales have increased by eight percent in the most recent quarter. Costco now offers same-day delivery for orders of $35 of all groceries including fresh and household items. Two-day delivery is also offered for orders of $75 of non-perishable foods and household items. Aside from investing in becoming technologically advanced, Costco continues to attract their traditional consumers with free samples and other advantages that can only be experienced in person. Another counterintuitive retail strategy Costco utilizes is the minimal in-store signage, influencing customers to wander and navigate around the stores.
Costco’s success also comes from their innovations that go hand in hand with their social responsibility. According to Fast Company, Costco has installed sensors in some of the warehouses. Created by Apana, the system uses algorithm to monitor water usage and alerts the company of unusual activity including possible leaks and breakdowns. This system has reduced Costco’s water usage by 22 percent with thousands of dollars saved, benefiting the company and environmentalists as well.
Control
According to Williams in MGMT, control is “a regulatory process of establishing standards to achieve organizational goals, comparing actual performance against the standards, and taking corrective action when necessary” (352). For Costco, control is critically important to their success. Costco is known to have permanently capped its margins, having a steady, low profit margin of about 10 percent. As a result, consumers justify paying for a membership at Costco when recognizing the consistently low prices of their products.
Costco may use a normative control method to control what goes on in the organization. In MGMT, Normative control is defined as “the regulation of workers’ behavior and decisions through widely shared organizational values and beliefs” (360). Costco’s values and beliefs are widely shared through the enforcement of their policies and organizational cultures. Some of the highlights of Costco’s organizational culture are the focus on employee satisfaction, internal collaboration, and employee training and growth. As previously mentioned, Costco is known to highly compensate and provide great benefits to their employees to minimize employee turnover and maximize employee productivity, commitment, and loyalty. Furthermore, Costco has constructed an environment that provides opportunities of learning and growth. Focusing on customer service and customer satisfaction is also a part of Costco’s values and beliefs. Costco values people as human beings.
Managing Information
Managing information plays a significant role in Costco’s success. Holding such information assists Costco in managing inventory, marketing products, and more. According to Costco’s website, cookies are utilized to monitor online activity to help optimize consumer shopping experiences. The information gathered is not associated with the personal information of the consumer. Costco collects personal information through signing up for membership, registration to use Costco.com, signing up for news or notifications, when you place an order, and when you participate in a survey. The reason for collecting such personal information is the ability to alert consumers of recalls or safety issues, communicate membership opportunities and programs, and provide consumers with coupons, offers, and product recommendations.
Safeguarding their members’ information while utilizing it to make strategic action is important in relation to Costco’s social responsibility. To protect personal information from loss, misuse, or alteration, Costco has physical, administrative, and technical security measures. Costco’s commitment to privacy ensures a feeling of security for their consumers. When Costco faces any threats to their customer’s personal information, they are ready to take action. For example, Costco recently suspended access to their site Costcophotocenter.com because of a possible security compromise of the third party vendor, PNI Digital Media.
According to Costco Wholesale Automates Information Management Processes from the Retail Information Systems website, Costco uses Paxonix’s PaxPro Software to automate the information management processes of its packaging graphics and marketing communication efforts. This software increases efficiencies and accelerates time, allowing staff to focus on greater innovations. EnFlex’s eWebConnect software, a Linux enterprise application, is installed at each Costco warehouse. This software enables staff to take responsibility for warehouse control systems to reduce the local energy consumption and operating expenses. In doing so, EnFlex’s eWebConnect software links existing warehouse control systems to the Costco Microsoft SQL server database to deliver an information systems that is cost effective. Costco also provided alarm management, custom and automatic report generation, and advanced diagnostics to monitor the health of the system and its components. Costco selected Elavon for reliable credit card processing and mobile payment processing.
Conclusion
Costco is one of the most successful and largest retailers in the world. Their ability to fulfill their social responsibilities, innovate and respond to changes, control, and manage information efficiently and effectively contributes to this success. Costco had been able to sustain a competitive advantage over other membership-only retailers and has also faced online retailers that have been thriving in today’s world. In pursuance of mainating this success, Costco must face their weaknesses and threats within their business model and throughout society. Controversial animal welfare issues, acquiring a limited product mix, and competing with technological advanced businesses are some of Costco’s challenges that are being faced today.
Not only does Costco believe focusing on animal welfare is ethical, but failure to comply with animal rights allows the inability to maximize market share. Costco could strongly enforce their policies on animal welfare and work on becoming less lenient toward suppliers that violate their policies. Efforts can always be made to further to consult and implement animal welfare policies.
Costco’s limited product mix has its benefits and its costs. Having a limited product mix increases sales volumes, maximizes revenue, and assists driving discounts. However, consumers may make the decision to choose Costco’s competitors based on their needs not being met with a small selection of products and brands. Benchmarking their competitors and their success of selling different products may be a solution to expanding their product mix while maintaining their sales volumes and increase customer satisfaction and their market share.
Costco can focus on bringing customers to their stores by improving their sample offerings, in-store restaurants, and other benefits that can only be accessed by walking into a Costco warehouse. However, this effort can only do so much to reduce Costco’s challenges. Adapting to societal changes in means of technological advancements would be the primary answer to overcoming this challenge, even if that means breaking the ties from its business model. Costco should break their reluctance and shift their focus to improving the digital experience for their customers by adopting an omnichannel focus, provide better delivery deals compared to their online competitors, and execute different marketing strategies to target tech-savvy millennials.
Costco can utilize a service similar to Scan & Go to improve their customer’s experience. Producing advertisements and commercials may be a smart way to grasp the attention of Costco’s future customer base. To further target this customer base, Costco has an exclusive offer for college students a Costco cash card when becoming a regular member or an executive member. College students may be more attentive to a membership specifically for students with equal benefits at a lower cost. Costco has been innovating at a pace to keep its business healthy and alive. It is important that Costco further fulfills its responsibilities and responds to the needs of its employees, customers, suppliers, and society as a whole. Meanwhile, adapting to technological changes and keeping its business model up to date also contributes to the desired long-term success.
