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Wholesale Foods

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  • April 2010
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Case Study 2
Latoya Sims
Costco Wholesale
Costco’s business model was to generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories. 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 Costco to operate profitably at significantly lower gross margins than traditional wholesales, mass ,merchandisers, supermarkets, and supermarkets. Costco’s high sales volume and rapid inventory turnover generally allowed it to sell and receive cash for inventory before it has to pay many if its merchandise vendors, even when vendor payments were made in time to take advantage of early payments discounts. Thus, Costco was able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than by having to maintain sizable working capital to facilitate timely payment of suppliers. The cornerstones of Costco’s strategy were low prices, a limited product line and limited selection. A key element of Costco’s strategy to keep prices low to cap the margins on brand name merchandise at 14 percent to 20 to 50 percent margins to other discounters. The margin’s on Costco’s private-label Kirkland Signatures items which included juice, cookies, coffee, spices, tires, house wares, luggage, appliances, clothing and detergent where a maximum of 15 percent, but the fictionally higher markups on Costco’s private-label items still resulted in the company’s private-label prices being about 20 percent below comparable name-brand items. Even though Sam's Club has more stores, Costco outperforms them it in sales and volume. In fiscal 2008, sales per square foot at Costco's stores averaged almost...

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