Costco Wholesale Corporation entered the wholesale club industry in the early 1980s. The idea behind a wholesale club was to maximize profits by minimizing operational costs and maximizing inventory turnover ratio. The company experienced tremendous growth from 1997 up to 2001 and has caught the attention of its competitors. Costco Wholesale is one of the largest retailer stores in the market. The company has differentiated and positioned itself well in the market through its mission statement. The company’s mission statement well understood throughout the firm. Business Model
Costco’s business model relies on high sales volume doubled with quick inventory turnover, made possible by low prices and limited product selection among a wide variety of branded and private label this chain and has many benefits. For one, 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. This frees up capital, as Costco finances most new inventory purchases with supplier payment terms. Fittingly, the company passes these savings on to consumers in the form of low prices. Another benefit of this model is that the company is not required to maintain high levels of working capital or take out loans, with interest to pay suppliers. Management believed 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, enabled the company to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters. * Yes, this model is appealing for the following reasons: * Allows the company to sell and receive cash for inventory before it had to pay many of its merchandise vendors * Allows company to take advantage of early payment discounts * Company is able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than having to maintain sizable working capital to facilitate timely payment of suppliers Strategy
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. That is, 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. This approach works well with the company’s target market CEO Sinegal signaled that he intends to keep this strategy during his tenure, arguing that low price, high value products are precisely what it takes to achieve staying power in this industry. A long-term strategy is recommended and he hopes to heed this advice, being especially careful not to differentiate to the point of losing its price competitiveness. While Costco strives to beat the competition’s pricing, it also delivers exceptional value in its high-end offerings and customer service, giving consumers more for their money. This strategy works well for Costco, given its customers are the most affluent of all the warehouse clubs, with average incomes around $75,000. However, these customers are also value conscious, as evidenced by the members who opt for executive memberships, although it costs more per year, to take advantage of a 2% discount on most purchases. While this group only accounts for about a fourth of the company’s memberships, they represent nearly half of its net sales. The...
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