For my first report, I decided to look into the global business strategy of Costco Wholesale. Costco Wholesale is a membership warehouse club that is known for selling bulk inventory. The company is a multibillion dollar company that is quickly expanding globally. As of 2018 the company has 762 warehouses within 11 countries, and 94.3 million members. Costco is focused on quality and costs of their goods. Since their main goal is to have quality products at a low cost the companies’ average markup of a product is kept relatively low at a max of 15%. The company also only carries approximately 4,000 SKUs versus an average of 30,000 SKUs at other retailers This means you may find 10 brands of peanut butters at a competing grocery store, but there will only be 2 brands of peanut butter at Costco. The company makes most of their money off of membership and renewal fees, with a renewal rate of 90.1% in the US and 87.3% worldwide as of 2018. These factors are some of the reason Costco is different then their main competitors in the retail industry such as Walmart, Target and Amazon. Another large difference between Costco and competitors is that Costco does virtually no advertising and is virtually not concerned with the “frills” aspect of the store.
This means Costco will not have large fancy displays, and they rely on reputation and consistency to gain and maintain customers. They occasionally will send out flyers to potential customers when they are opening a warehouse in a new location, my family received one when a Costco was being built near me. Costco, like competitors such as Walmart and Target have in the past, is trying to grow globally. Unlike competitors, Costco is doing pretty well outside the US. As of 2018, Costco had opened over 200 international warehouses in countries such as Canada, Mexico, the UK, and ten more. Target has exited Canada, while Walmart has faced many difficulties overseas. The purpose of this report is to observe how Costco is doing globally, why they are successful globally, why and how competitors failed outside the US, and what Costco can do to maintain this success.
Costco’s international expansion began in 2013. The original plan was to open 55 warehouses globally. As of 2018 Costco has over 200 international warehouse locations, which included 100 locations in Canada, thirty nine in Mexico, twenty-eight in the United Kingdom, twenty-six in Japan, thirteen in Taiwan, fourteen in South Korea, ten in Australia, two in Spain, one in Iceland, and one in France (Farfan, 2019). Within the first eight to twelve weeks of opening the international warehouses, they saw on average between 30,000 and 40,000 membership sign ups. In the United States this number is usually between 3,000 and 12,000 (Forbes 2015 Article). Not only are they getting large numbers to become customers, but they also have approximately an 87% membership renewal rate(Forbes 2018 Article). With the exception of locations in Japan, customers across the globe also have access to Costco’s online warehouse (costco website). Costco’s strategy is the same across the globe. Costco, no matter what the location, strives for low cost, quality goods. Costco sells everything from food, to household goods, TV’s, kitchen appliances, furniture, jewelry, and so much more (Costco website). In the US and Canada, customers can also book there vacation through Costco.
The Costco strategy is what sets them apart from all other major retailers, keep things simple. All products are displayed in a warehouse fashion, no fancy displays or signs, just items on crates as seen in Figure 1. There are on average eight times less SKUs then other retailers, this makes shopping a simpler experience. The customers don’t have to stand there and debate which type of jelly to buy, because there is only two types of jelly. One of those types of jelly will also be Costco’s own brand, Kirkland Signature. Most items in Costco can be found under the kirkland name, Costco produces home and kitchenware, groceries, hardware, pet supplies and so much more under the Kirkland Signature name (costco website). The best part is that people rave about Kirkland brand items and especially the food, many people prefer it to name brand counterparts (bon appetit blog). The Kirkland Signature brand represents what Costco is all about, quality, value, and affordability.
Another way Costco’s strategy of keeping things simple is displayed in their marketing and advertising efforts. Costco spends next to nothing on advertising and marketing, and have absolutely no public relations department. They are one of the only “big cap” companies, a company with a market capitalization larger than 10 billion, that operates this way. (forbes 2004). In 2018 alone, Walmart spent approximately 3.1 billion dollars on advertising costs worldwide, in 2017 Target spent an average of 1.48 billion dollars on advertising, Amazon total markeitng expenditure amounted to 10.07 billion U.S. dollars 2017.
Costco is a very successful business, they have grown steadily since their launch and growth since 1976. Looking at their stock over the past five years it has almost doubled in price from 122.7 to 236.27. Costco is known for making most of their profits off of memberships fees and renewals. Looking at their gross profit it has risen three billion to just over 18.5 billion in 2018. They can grow at this rate due to their minimal expenses and pure profit from their memberships fees. Costco is known as very stable company in their financial aspect, their gross margin profit has stayed at 13% for the past five years. This shows that the company has been consistent with moving their inventory out and being profitable while doing so. Another factor to look at with this company is their operating profit ratio, this shows how much of a company’s total revenue is made up of operating income. Costco’s ratio is 3% meaning their revenue is made up of much more of a variety than the operating income. Looking at the exhibits you can see how Costco continues to grow in revenue. As it was stated before the majority of their revenue comes from memberships fees and relies on their growing membership base. This company has been able to keep cost low with large warehouse stores that are minimalistic. This allows them to have no storage cost, because their warehouses are their stores.
With Costco being in retail, one of the most lucrative and competitive industries today they have some serious competitors. Costco competes with companies like Walmart, Target and Amazon, some of the most successful and competitive companies. Costco has been able to stay steady in market share while competing with these big dog companies in the retail industry. Looking at Exhibit 2, you can see that Costco is not as profitable as their competitors but over the last five years they have still been able to grow and compete. If you are looking at average profitability, Costco will fall below, due to them competing with some of the most profitable companies today. If you take into consideration the gross profit compared to the expenses from the figure below you can see that Costco is above average for the industry. They are able to keep their expenses low and can be competitive with the bigger companies.
Costco Wholesale is a highly competitive company, they face many companies because they are so diverse, they compete with mostly large retailer and supermarkets. Costco has been able to perform well in the industry when looking into their Earning per share. As you see in exhibit below Costco’s EPS is well above the industry average. They have ranked third for a holding stock at 23.1% which is well above the industries growth of 15.3%. The EPS show the portions of a company’s profit that is allocated to each share of common stock. With a larger earning per share the company can generate a significant dividend for its investors or give the money back to the company for financial growth. This number can show great performance of a company in a given industry, if people are willing to buy a stock of a company it shows they are trustworthy and growing. Costco similar to Walmart in their industry have been able to keep their inventory fluctuating and being able to keep their stock moving. Walmart is able to time their supply chain perfectly keeping most of their inventory on the road or on their shelves. Costco turned their stores into their warehouses, splitting their expenses and saving them a lot of money. This simple solution has given their business a competitive advantage.
I was fortunate enough to conduct an interview with the assistant general manager of the Costco location in Syracuse, Monica. This particular warehouse is where my family and I recently joined as members. This conversation was very insightful into Costco’s strategy stateside and internationally. Monica informed me that each Costco you walk into anywhere in the world is the same in regards to look and values. All Costco’s have a variety of different products, even Costcos located within 50 miles of one another could have different items. This is determined by demographics of shoppers, any local products, and population. The main value that are instilled in all employees of Costco is if you take care of people, people will take care of you. Monica believes that member service is what sets Costco Wholesale apart from their competition. The service at Costco can be described as “Above and Beyond” according to Monica. She even informed me that floor employees are not allowed to say no to customers. This means if a customer asks for a special request or item exchange base level employees are instructed to tell the customer they will look into it, and to bring a manager to the customer to speak with. The manager will then do anything in his or her power to please the customer.
Costco employees are expected to stand by Costco’s mission and take care of everyone. Costco stands by this by offering great salaries, even entry level employees with no experience receives a minimum wage of $13, which is above the national minimum wage. They also are a top tier employer and offer “amazing benefits package”. Monica is in her 24th year with Costco and says she has no plans to leave and hopes to retire from Costco. Monica says even when she does retire she plans on working part time for Costco because of how well she is treated. Monica says not just meeting the shopping needs of customers, but exceeding expectations is what brings people to Costco. Monica informed me that in no way that Costco is trying to beat out Amazon, they understand Amazon is a “super power”. She said that Costco is adapting and making necessary changes in order to compete with Amazon and other major retailers such as Walmart and Target. Costco is putting a lot of time and effort into growing the e-commerce portion of their business, and they even have an e-commerce space in their physical warehouses for customers to use.