Costco Wholesale Corporation Term Paper

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Costco has become a familiar name in homes across the country. Costco is a membership-based discount warehouse with a range of products including; food, clothing and electronics. Costco was created in 1983 by James D. Sinegal and Jeffrey H. Brotman. The main benefits associated with shopping at Costco include discount shopping and having the ability to buy in bulk. At Costco's members and their guest can purchase products that cost much less than products at regular retail outlets and grocery stores. The ability to buy in bulk is also a benefit being a member of Costco's. This is especially true for restaurants because they are able to purchase a large volume of products at a discounted price. Buying in bulk is also excellent for large households. (Zellner)

Costco is an excellent company for society and individual communities. Costco provides communities with jobs and low priced items. The purpose of this discussion is to illustrate that Costco will continue to serve average and middle-class consumers based on its business strategy and the benefits associated with being a member of Costco.

Background Information and Company Profile

The founders opened the first store in Seattle and began to offer common stock in 1985. (Lamiman)

After opening the first store in Seattle Costco's "expanded to empty spaces in cities like Portland, Ore., and Tampa." (Helyar) Jeffrey Brotman is the Chairman of the Board, while James Sinegal is the company's Chief Executive Officer. Other company executives include; Richard Galanti (Chief Financial Officer), Richard D. DiCerchio, (Senior Executive Vice President), and Carson, Sr., M.D., Benjamin S. (Director). (Company Officers List for COST) The company's headquarters can be found in Issaquah, Washington.

According to Reuters Costco currently has 61,800 employees and operates 397 warehouses throughout the world. 309 of these stores are located in America while the company's other stores are located in the United Kingdom, Korea, Japan, and Canada. The company Reuters explains,

Costco's typical warehouse format averages approximately 139,000 square feet. Floor plans are designed for economy and efficiency in the use of selling space, in the handling of merchandise and in the control of inventory. Because shoppers are attracted principally by the availability of low prices on brand name and selected private-label goods, the Company's warehouses need not be located on prime commercial real estate sites or have elaborate facilities." (Full Company Description for COST)

Retail Strategy

Costco practices a low cost high value retail strategy. This strategy allows the company to sell high quality products at a low price. The company is able to maintain this strategy for several reasons including; its ability to provide a large range of products, providing deep discounts on name brand products, and providing memberships at different levels. Over the next few paragraphs we will discuss these factors in detail.

Costco provides a myriad of services and products. According to t an article in Better Investing, "Costco's merchandise categories are similar to those found in many other retail chains. Its stores stock food, clothing, electronics, household staples, books, music, software, gifts and holiday decorations. Its warehouse complexes include pharmacies, optometry shops, tire departments and gas pumps." (Lamiman) Offering such a wide range of products allows the company to maintain the competitive advantage. It also makes the company popular amongst consumers.

Providing a wide range of products also makes the company popular with the general public and businesses. The company's retail strategy also allows it to offer deep discounts on name brand products. Costco's approach is quite different from that of its competition. The article in Better Investing explains, major difference is that Costco carries limited selections of national brand and private-label merchandise -around 4,000 items at a time, on average. In contrast, a typical supermarket or discount store reportedly may stock up to 60,000 items. Management reports its merchandise turnover rate is above average, and the nofrills, low-cost warehouse format helps the chain produce profits despite its lower margins." (Lamiman)

The article also asserts that Costco's maximum gross margin is 14%. This is well below the average gross margin for the industry and allows Costco to offer discounted merchandise to consumers. The company also offers a large selection of private label products and national brands that are discounted. (Lamiman) The company's CEO explains that Costco's approach to business and the types of customers that the company serves,

We understood that small-business owners, as a rule, are the wealthiest people in a community," says Brotman. "So they would not only spend significant money on their businesses, they'd spend a lot on themselves if you gave them quality and value. Jim [Sinegal] saw that you had to be just as much a merchant as Saks Fifth Avenue. You couldn't entice a wholesale customer with 20-pound tins of mayonnaise; you had to romance him with consumer goods." (Helyar)

Another key component in the retailing strategy of the company is membership-based subscription. These memberships can be held by the general public and to businesses. There are also various levels to the membership plans. The first level cost $45 and is referred to as the individual membership. (Lamiman)

There is also a membership designed for businesses and executives which cost $100. (Membership Details) The third level is known as the executive membership and offers such benefits as; mortgage loans, traveling deals and car insurance. (Lamiman)

Competition

All of the above mentioned factors allow Costco to compete with other discount warehouses such as Sam's and BJ's. Costco's strategy has been the benchmark company for wholesale clubs everywhere because the company is extremely successful. One of the main reasons why Costco is so successful has to do with the company's ability to negotiate the lowest prices with suppliers. (Lamiman) The company can then pass these savings on to the consumer.

Although Costco is a very successful company it does face some challenges form Sam's and BJ's. The article in Better Investment asserts,

Although Costco is maintaining its lead ahead of Sam's Club, the two membership warehouse chains remain locked in toe-to-toe competition. Sam's Club, a division of Wal-Mart, has been undercutting Costco's prices in an effort to regain market share. Sam's Club has put a lot of pressure on its rival's profit margins. In fact, Costco's management announced in August that it was reducing its 2003 earnings estimates for both the fourth quarter and the full year. The share price immediately slipped downward 19%...Another major competitor is BJ's Wholesale. Some industry observers suggest it's a possible acquisition target of Sam's Club." (Lamiman)

Another challenge that the company faces is the increased costs association with employee retention and benefits. At the current time Costco has an extremely low turn over rate when compared to many of its competitors. (Employers Can Learn From Costco) It is believed that this low turn over rate can be attributed to the fact that Costco gives employees great benefits and good salaries. (Employers Can Learn From Costco) Costco's approach has been criticized because it seems to be costing the company a great deal of money. (Employers Can Learn From Costco) Executives at Costco believe that taking care of employees will be beneficial to the company in the long run. (Employers Can Learn From Costco)

Even though Costco is currently facing some challenges and setbacks with the competition, it is a strong company. The company will be forced to find more cost effective ways of doing business so that competitors such as Sam's do not overtake the market. Costco will continue to be a competitive force in the area of discount warehouses for years to come. (Zellner)

Investment and Costco's merging with "The Price Company"

Costco has been extremely effective at making good investments that have benefited the company. One such investment was the merger with the Price Club Company.

This merger took place in 1993 and was beneficial to Costco because the Price Company invented the concept of membership-based discount warehouses. (Lamiman) The name of the company was changed to Costco in 1999. (Lamiman) Their expertise aided Costco in becoming the monumental success that it is today.

Locations and tracking customers

The locations that Costco's chooses to put warehouses can be suppressing. The company chooses low rent location so that it can save even more money and pass the savings on the consumers. In addition putting a store in lower income neighborhood allows the company to provide jobs in those communities.

Costco has also made it a practice to customers based on their zip codes. This is important because it allows the company to get feedback from customer and stock inventory accordingly. Tracking customers also allows Costco's to review consumer spending patterns and making change to the company accordingly.

Financial Condition

As we mentioned earlier Costco is an extremely successful company with a solid financial outlook.

In fact the company reports net income of $721 million for the year ending August 2003.

The company reports that this is a 3% increase over the net income that was realized in the year before. In addition, revenues rose nearly 10% from 38.8 million…[continue]

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