Costco Wholesale Corporation: Mission, Business Model, and Strategy

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Costco Wholesale Corp.: Mission, Business Model, and Strategy

In 2008, Costco’s sales totaled almost $71 billion at 544 warehouses in 40 states, Puerto Rico, Canada, the United Kingdom, Taiwan, Japan, Korea, and Mexico. More than 50 of Costco’s warehouses generated sales exceeding $200 million annually and 2 stores had sales exceeding $300 million. Sales per store averaged $130 million annually, about 75 percent more than the $75 million per store average at Sam’s Club, Costco’s chief competitor in the membership warehouse retail segment.

The membership warehouse concept was pioneering by discount merchandising sage Sol Price who opened the first Price Club in San Diego in 1976. Originally conceived as a place where small local business members could obtain needed merchandise at very economical prices, Sol Price soon concluded that his fledgling Price Club operation could achieve far greater sales volumes and gain buying clout with suppliers by also granting membership to individuals—Price’s decision to add individual memberships was the trigger that launched the deep discount warehouse club industry on a steep growth curve. Within a few years, Sol Price’s Price Club stores emerged as the unchallenged leader in member warehouse retailing, operating primarily on the West Coast.

The wholesale club and warehouse segment of retailing in 2008 was estimated to be a $120 billion business in the U.S., and it was growing about 20 percent faster than retailing as a whole. There were 1,200-plus warehouse locations across the U.S. and Canada; most every major metropolitan area had one, if not several, warehouse club operations. The three main competitors were Costco Wholesale, Sam’s Club (713 warehouses in six countries— the U.S., Canada, Brazil, Mexico, China, and Puerto Rico), and BJ’s Wholesale (177 locations in 16 states). Costco had close to a 53 percent share of warehouse club sales across the U.S. and Canada, with Sam’s Club (a division of Wal-Mart) having roughly a 37 percent share and BJ’s Wholesale and several small warehouse club competitors having about a 10 percent share.

Competition among the warehouse clubs was based on such factors as price, merchandise quality and selection, location, and member service. However, warehouse clubs also competed with a wide range of other types of retailers, including retail discounters like Wal-Mart and Dollar General, supermarkets, general merchandise chains, specialty chains, gasoline stations, as well as Internet retailers. Wal-Mart, the world’s largest retailer, not only competed directly with Costco via its Sam’s Club subsidiary but its Wal-Mart Supercenters sold many of the same types of merchandise at attractively low prices as well. Target and Kohl’s had emerged as significant retail competitors in certain merchandise categories. Low-cost operators selling a single category or narrow range of merchandise, such as Lowe’s, Home Depot, Office Depot, Staples, Best Buy, Circuit City, PetSmart, and Barnes & Noble, had significant market share in their respective product categories.

Costco was founded in 1983 by Jim Sinegal and Seattle entrepreneur Jeff Brotman (now chairman of the board of directors). The first Costco store began operations in Seattle in 1983, the same year that Wal-Mart launched its warehouse membership format called Sam’s Club. By the end of 1984 there were 9 Costco stores in five states serving over 200,000 members. In December 1985 Costco became a public company, selling shares to the public and raising additional capital for expansion. Costco became the first company to reach $1 billion in sales in less than 6 years. In October 1993, Costco merged with The Price Company. When the two companies merged in 1993, Jim Sinegal became CEO, presiding over 206 PriceCostco locations generating $16 billion in annual sales. When the company reincorporated from Delaware to Washington in August 1999, the name was changed to Costco Wholesale...
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