Costco business model and operations

¶ … Costco's business model? Is the company's business model appealing? Why or why not?

Costco (NASDAQ:COST) is one of the leading mass merchandisers who operates using a membership warehouse business model that is heavily reliant on the efficient functioning of its globally-based supply chain. Based on the scalability of its supply chain, initial success with the Canadian market led to the company expanded into the United Kingdom and Japan in 2003. The company also has operations in Seoul, South Korea and in Mexico, where the Costco has successfully relied on a joint venture to gain market entry and sell successfully. The Costco supply chain is highly unique in that the company seeks to create the majority of their product mix form private label products (Field, 2006) which gives them more accuracy and control over costs (Boyle, 2008). As national brands are also stocked, Costco relies on advanced supply chain techniques including Vendor Managed Inventory (VMI) that distribute the risk equally between supply chain partners. The supply chain serves the main warehouse business in addition to Costco Home, the home furnishings business, and Costco Business Center. Memberships include Business, Gold Star and Executive members.

Costco concentrates on the uniqueness of their product mix in conjunction with exceptionally strong cost controls of generic brands. This has given the mass merchandisers the ability to stay profitable even in the midst of a global recession. Second, Costco has been successful in creating a high degree of customer loyalty throughout their base in the U.S. And is beginning to see their online site, Costco.com, generate significant revenue as a result of cross-channel shopping by its most loyal customers (Steverman, 2008).

The Costco business model is inherently appealing in that it concentrates on streamlining the supply chain through continually seek to innovate core processes including order management and inventory turns management (Chu, Rockwood, 2008) in addition to creating exceptionally loyal customers, and successfully branching into higher-end specialty jewelry and luxury products that the company has found to be exceptionally successful with affluent customers looking for a bargain (Sherman, 2008).

Due to all of these factors, the company's business model is appealing and profitable. What is one of the more significant aspects of their business model is the consistent ability to generate consistently high levels of Return on Equity (ROE) and Return on Investment (ROI) in addition to keeping one of the most watched measures of financial performance in retailing, Revenue per Employee significantly growing over time. For a financial analysis of Costco during the time period of the case study, please see Table 1, Costco Wholesale Corp Ratio Analysis, in the Appendix of this document. As can be seen from the analysis, Costco has been successful in transforming the efficiencies of their supply chain (Boyle, 2008), advanced strategies for lean supply chain risk mitigation and shared risk ownership (Chu, Rockwood, 2008), consistent high levels of customer loyalty (Steverman, 2008), and an emerging strength in selling higher-end merchandise through its retail stores and online (Sherman, 2008). All of these factors taken together are contributing to the success of Costco.com and Costco.ca in Canada. Costco wisely created the essential supply chain, cross-channel and coordination systems first before creating their online stores, to ensure their e-commerce strategies would be able to scale over time.

2. Does the data in case Exhibit 2 indicate that Costco's expansion outside the U.S. is financially successful? Why or why not?

The data in Exhibit 2 illustrate how challenging it can be for any retailer with a strong retail-based supply chain in westernized nations to scale into other cultures. The fact that less than 25% of revenue on a consistent basis is generated outside of the U.S. indicates that Costco may be challenged by cultures significantly different than the U.S. Just like people, corporations can have biases and even forms of ethnocentrism inherent in their cultures, a prime example of this being WalMart (Hammond, Axelrod, 2006). Clearly further analysis is necessary to understand why Costco struggles in other regions of the world, yet the company's financial performance on a global level continues to be exceptional due to the factors cited earlier.

What is needed is for the company to concentrate on how to better understand the cultural dimensions of the nations they are operating in today and planning to sell into in the future. The Cultural Dimensions Model (Hofstede, 1998) would be an invaluable framework for the company to use in defining market entrance, market growth, and market strategy maintenance strategies throughout the individual country and region markets they hope to succeed in. The need for more of a focus on how their supply chains can scale into these other regions is also vitally important as well, as today the majority of their suppliers are more oriented towards supplying the U.S. And Canadian markets over being able to scale globally themselves (Boyle, 2008). In conclusion, the Costco is being profitable with their expansion strategies into foreign countries, yet they are not achieving the level of growth they are capable of based on the success of their business models' potential as shown in the U.S. The company will need to confront the issues mentioned here in order to successfully grow over the long-term.

5. Are Costco's prices too low? Why or why not?