Promotional Marketing- Costco Analysis

The strategic objective of Costco is based on the concept of offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories while producing high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self service warehouse facilities, enables Costco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. (1)

They are performing very well from a strategic perspective. No, Costco does not enjoy a clear competitive advantage over Sam’s. It does however enjoy a competitive advantage over BJ’s. the nature of this competitive advantage includes the fact that BJ’s has too many products, which makes rapid turnover harder to achieve. I think that Costco has a winning strategy because they are selective with the

turning over inventory, the company is often able to sell their products and pay suppliers before the invoice is due, even when the company pays early to benefit from early payment discounts. This frees up capital which allows Costco to finance new inventory purchases with supplier payment terms. Costco then passes

For operations, Costco's in charge of managing their store brand Kirkland Signature. Since they have domain over that brand, they are better able to control the caliber of their product. They also maintain the packaging assembly-line in order to accomplish the goal of having an efficient shipment arrangements, and low shrinkage rates. This way Costco can have low rates for quality goods. By keeping their operational costs low they can continue to pass the savings onto their customers.

Costco’s business model is called a subscription business model. This is a business model where customer must pay a subscription price to have access to the product/service. Customers who want to shop at Costco must buy a membership with the promise of lower prices to make up for the initial upfront cost; the current membership cost is $55 in the US. The service that Costco provides is its ability to use economies of scale to bulk buy a large amount of foods at low prices and then to pass these savings onto its customers.

Costco’s inventory management strategy focuses on three main points: (a) point-of-sales system (POS), (b) vendor managed inventory and (c) low volume of stock keeping units. Costco takes aid from innovative inventory system that provides real time inventory information called Collaborative Retail Exchange (CRX). The system monitors and re-orders at the optimum inventory as part of the continuous re-order system. The CRX system analyses the sales for the previous weeks and inventory level which acts as information to the suppliers. Costco Wholesale follows a Bulk-buying strategy. It aims at selling products in large volume and comparatively low prices. The company also follows lower number of stock keeping units (SKU’s), an average of ~4,000

Costco’s infrastructure skills and capabilities support operations for achieving low cost global leadership in warehouse retail sales and better than industry average. Costco’s culture strives to provide a limited variety of quality merchandise goods from private label and some well established brands.

Costco does not have distributors or retailers to supply its products to the end users. They do, however, have reseller who buy their products for their business and sell to the end user. For example, Costco’s business membership offers tax-exempt purchases to restaurant and small grocery store owners; they then sell those purchased goods to the end user.

This results in a high volume of sales from a single vendor, allowing further reductions in price, and reducing marketing costs. If Costco management feels the wholesale price of a product is too high, they will refuse to stock the product.

The trunk shows are a unique distribution method for wedding gowns, and this is a unique strategy for Costco as well. There are a few reasons why this method would have been chosen. The first is that the wedding gown business is highly seasonal, and that would encourage Costco to keep gowns in store for a relatively short period of time. However, the more important element is that this strategy meshes very well with the pricing strategy. Costco's objective is to sell a large number of wedding gowns in a short period of time. The trunk show accomplishes just that, by placing a tight time frame on the purchase decision. Brides-to-be are compelled to visit the store when the trunk show is on, and only then. This allows Costco to maximize the daily throughput of wedding gowns, and minimize excess inventory. Any unsold inventory from one show simply is taken to the next one.

Another important aspect is a limited selection of goods. Whereas Walmart or Target may have upwards of 150,000 items sold in their stores. Costco will have less than 4000. They also have their own private label which is only equal to 15% of what they carry in the stores, but it equals out to over 30% of their total sales currently. Another aspect of the product selection is that instead of buying many

Costco is one of the nation’s top three retailers and the world’s largest membership warehouse chain, Costco wholesale Canada operates about 80 membership warehouse clubs across Canada. The company never advertises, charges its 64 million members to shop there and doesn’t mark up any product more than 15 percent, even at this lowest profit margin, 15% for Kirkland private brand, the products were 20% lower than comparable to other brand products. Costco works with this business model and generating $93 billion in annual sales.

Costco’s CEO, Jim Sinegal, quoted, “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”.2 They stored the inventory on racks above the items being sold in the warehouse. That reduced their labor cost and saved them a lot time on handling and stocking. They treat their manager as enterpeneur and allows them to decide what item should be sold in their store. They odered most of the inventory directly from the manufactures. It either came directly to the store or went to their distribution center called crossdocking depots. The point of these deposts were to reduce the transportation cost by making sure all truck are full when they come the store.

The strategy for Costco was that the company continued to buy merchandise at volume discounts from manufacturers, rather than distributors. The stock is usually shipped directly to selling warehouses to minimize freight costs. Stocked items are placed directly onto the selling floor or are still stacked on their pallets, reducing handling and stocking labor. The number of sales and service employees is also minimal, with a large percentage of the employees holding part-time status. Warehouses are almost entirely self-service, from finding and buying items, to loading them into a customer's vehicle. (Miller, 2011)

At the end of 2012, Costco was a successful business, but there are some issues that they would need to deal with. These issues mainly arise from their previous successful ventures as a warehouse wholesale company. The first issue is that Costco has competitors that can actually be and are a threat to their success. Competition allows a company to improve itself and prove its prowess to its customers. However, when a competitor is able to provide the service at a much reduced cost, problems will arise. As for the second issue, it seems that Costco’s efforts to become an international company are moving slowly. They have not reached a point where their US and Canadian warehouses provide a backbone for their finances. Costco’s third issue is that their finances are too reliant on acquiring new members and not on selling their products. If they cannot keep acquiring new members at a steady rate, their financial infrastructure could suffer.