Case Assignment 2

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Case Study Assignment 2
“Costco Wholesale”

1.What is Costco's business model? Is the company's business model appealing? Why or why not? Costco’s business model is to generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories.(1) Management believes that 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, mass merchandisers, supermarkets, and supercenters. (2) Costco’s business model is appealing to many consumers because of several reasons. First, because of its low prices and bulk product offerings, Costco is an ideal place for customers to stretch their dollars during slow economic times. (3) Second, Consumers prefer not to have to travel to different places in order to shop. One of the biggest reasons why giant retailers like are successful is because their stores are more than just a place for people to buy food -- these stores provide ancillary services like places to eat or get a hair cut. Many of Costco's stores already provide ancillary services like in-store food service, one-hour photo centers, optical dispensing centers, pharmacies, gas stations, hearing-aid centers, printing/copy centers and car washes. Costco uses these services to attract customers into their stores for more than just buying bulk items -- by the end of 2009, 96% of Costco warehouse stores had food courts, optical dispensing centers and one-hour photo centers. Costco was voted as the best place to shop in the US and improving on these services will help to increase traffic flow into Costco stores and will help generate sales. (4) 2.What are the chief elements of Costco's strategy? How good is the strategy? The chief elements of Costco’s strategy are low prices, a limited product line and limited selection, a ‘treasure hunt’ shopping environment, limited marketing and advertising and growth. (5) A key element of Costco’s pricing strategy to keep prices low to members is to cap the margins on brand-name merchandise at 14%, and on their private-label Kirkland Signature items at 15% (compared to 20 to 50% margins at other discounters and many supermarkets). (6) Costco limits their product selection to approximately 4,000 products vice the up to 150,000 products that Wal-Mart Supercenter or SuperTarget might have. Costco also deliberately limits the selection in each product category to the fast-selling models, sizes, and colors and maintains a commercial/professional selection of appliances, equipment, and tools to keep their small business clientele. (7) Costco further entices buyers by constantly changing up to 25% of their 4,000 products on the floor also known as Treasure Hunt Merchandising. Costco tries to maintain a sense of urgency in its customers by selling high –end or name-brand products that carry big price tags at rock bottom prices; examples include $800 espresso machines and $29.99 Italian-made Hathaway shirts just to name a few. (8) Costco searches for these opportunities on the legal gray market from other wholesalers or distressed retailers looking to get rid of excess or slow-selling inventory. (9) Costco’s low prices, and word of mouth reputation means it does not have to engage in extensive advertising or sales campaigns. (10) The bulk of their marketing and promotional activities are conducted for new warehouse openings and to increase membership base. Opening additional new warehouses, increasing a loyal membership base, and employ well-executed merchandising techniques are the three main elements of Costco’s growth strategy. Costco concentrated on opening new warehouses in cities that they...
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