“Costco Wholesale is a multi-billion dollar global retailer with warehouse club operations in eight countries” (Costco). Costco’s business model is to create high sales as well as rapid inventory turnover by offering members the lowest prices on a small selection of high end products in a wide range of merchandise. Costco’s business model is built upon customer memberships, and these members renew annually. This shows how important customer loyalty is to Costco because they need their members to renew. Therefore, Costco’s business model is great, all customers want to find good quality bargains and Costco is setup to keep their customers coming back to find them.
The main strategy of Costco is offering wide range of products at the lowest possible cost. Costco sells everything from food to toiletries. Compared to other retailers and warehouses, Costco will offer around 4,000 items compared to Walmart which is offering 150,000. Costco’s pricing is a major component to its strategy. By offering a large quantity count of items, Costco is able to be more efficient and make its stores easier to manage. Costco also offers many services in or around its centers to attract customers. “These services include food courts, one hour photo centers, gas stations, pharmacies, optical centers, print and copy centers, and hearing aid centers” (Costco). Another part of Costco strategy is what they call treasure hunt merchandising. This is when they sell desirable goods which aren’t carried often. These are limited time offers that keep Costco customers coming back. “Because of Costco successful strategy its warehouses are ranked as 4th largest retailer in the United States and 8th largest in the world, which is a great indicator when evaluating business strategy of retailers” (Woolf).
Costco’s human resource strategy is a big contributor to the success of the business strategy. Almost all business executives believe that prices can’t be low if a company pays high wages and benefits however, Costco is proof that this isn’t always the case. The executives at Costco know the impact and importance that good employees can have in an organization. Costco’s former CEO James Sinegal once said “Wall Street grumbles that Costco cares more about its customers and employees than its shareholders; it pays workers an average of $17 an hour and covers 90% of health-insurance costs for both full-timers and part-timers. Yet revenues have grown by 70% in the past five years, and its stock has doubled” (Rockwood). This allows Costco to attract a large pool of high-quality candidates who are committed to their jobs. Costco also puts a huge emphasis on their employees which can be best explained from another quote by Sinegal; “Even employees who work at Costco, who make the type of wages that we pay, are being hit at the gas pump. We’re working very hard to schedule people from the same part of town so they can drive together. We’re encouraging van pools. We’re even testing 10-hour days, something we’ve never done in the past. If we can schedule some employees for four 10-hour days, that’s one day they don’t have to drive to work. They’ve got a 20% savings in their gas right there” (Rockwood). Not only does the human resource department contribute to Costco’s success, but it also sets them apart from its competitors.
Perhaps the biggest distinction between Costco and its competitors is the care the company has for its employees. While rivals like Walmart also try to have the lowest prices for customers, they do it at the expense of their employees. There are countless cases of the disrespect and lack of compassion that Walmart practices on its employees. When customers hear about this, either current or prospective, it will most definitely draw them away from Walmart and towards Costco. Another reason Costco stands out are because of the services they offer that were stated above. Take ink refills, for example. “If you have an inkjet printer, you know exactly how expensive it can be to burn through color cartridges. Refilling at Costco is a more attractive option” (Bowman). This is an advantage for not only Costco but their customers. Everything that Costco does improves the customer experience that can’t be found at any competitor.
One major component of Costco’s competitive position is their ability to sell high-quality products at reduced costs, with membership costs making up for lost profits. Both BJ’s and Walmart operate on a similar business model. Both of these competitors sell memberships that are cheaper than Costco’s. Also, BJ’s offers a significantly larger variety of products compared to both Costco and Walmart. Compared to other membership-only warehouse clubs, Costco does not stand out. However, Costco does differentiate itself substantially while having a business strategy that allows for such competitive advantages without sacrificing profits. For example, if competitors wanted to match Costco’s excellent employee relations, they would either result in being forced to layoff a number of employees, or increasing costs substantially. This strategy is successful because it was implemented during Costco’s foundation and remained unchanged, while competitors who try to do it now would suffer heavy losses attempting to recreate it. As a result, Costco’s decision of having few employees and high sales per employee leads to their competitive advantage of having high employee relations and wages, which are believed to also lead to giving Costco a more upscale reputation and loyalty, and their competitors can’t even try to copy them.
The main ethical and social responsibility this case addresses is the treatment of employees as well as the importance of shareholder value. In today’s business world, so many companies believe that their top priority is keeping shareholders and investors happy. This means executives will make decisions with the sole purpose being to increase profits for shareholders. This is normally a problem because it hurts other aspects of businesses, like the welfare of employees. Costco rewrites the formula and puts the value of the shareholder at the bottom of the priority list. This means Costco is not cutting wages or cutting hours of employees. They also aren’t raising the prices of their goods, which would hurt the customers. While many believe this way of operating would hurt the business, it has done just the opposite. Both revenue and stock has continued to grow. This means companies don’t have to make a profit at the expense of their employees. I believe this makes Costco a great examples for not only future businesses, but retailers who exist today.
