Costco Case Study

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Darla J. Smith
Business Capstone
Professor Kim Oesterle
June 13, 2011

Costco is a membership warehouse pioneered by discount merchandising sage Sol Price. Jim Sinegal left the Price and started Costco with Jeff Brotman in 1983. After opening the first Costco store within approximately 18 months the pair had opened nine stores in five states. In December, 1985, Costco became a public and raising additional capital for expansion. Costco is a member based wholesaler that has annual membership fees at a cost of $50 to $100. Costco’s business model depends on high sales volume coupled with quick inventory turnover, made possible by low prices and limited product selection among a wide variety of branded and private label products. This business model is appropriate for this chain and has many benefits.

* By gearing the business approach to rapidly turning over inventory, the company is often able to sell new merchandise and pay suppliers before the invoice is due, even when the company pays early to benefit from early payment discounts. * The company is not required to maintain high levels of working capital or take out loans, with interest to pay suppliers. The generic competitive strategy employed by Costco is that of the best-cost provider in the wholesale club category. The best-cost provider strategy is a mix of low-cost provider and differentiation. This strategy is aligned with Costco’s abilities and resources: a streamlined supply chain, purchasing power, good supplier relationships, high sales volumes, quick inventory turnover, and excellent customer service. The three components of the company’s strategy are low pricing, limited product selection and what the company calls “treasure-hunt merchandising”, or high-end products acquired in closeouts and liquidations. While Costco strives to beat the competition’s pricing, it also delivers exceptional value in its high-end offerings and customer service, giving consumers...
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