The paper "Costco’ s Business Strategy" Is a great example of a Management Assignment. The $125 billion North American retailing industry consists of 3 main competitors Costco Wholesale, Sam’ s Club, and BJ’ s Wholesale Club. In the warehouse, clubs operate an industry where there exist no-frills, and there is self-service, where customer can select their goods from a relatively narrow assortment of discount priced products, which are usually sold in case lots. Costco wholesale is the third largest wholesaler in the United States and the seventh-largest in the world, the wholesale company is clearly a leader in its field (Thompson, 2009).
Costco was founded in 1983, using its membership business model. In 2012, Costco Company has a total of 598 warehouses around the world. The revenues for the company for the period ending 2011, stood at $88.8 Billion, with the net income standing at a record high of $1.46 Billion. For the same period. 93 warehouse of Costco generated sales exceeding $200 million per year, this was an increase from 53 warehouses in 2010, 4 stores had sales exceeding 300 million, with one store exceeding 400 million.
The company operates a membership card system to its clients, which entitled them to shop at any Costco warehouse; this business model generated nearly $1.9 Billion in membership fees for the company. The business strategy of Costco is to continue to provide high-quality products at the lowest cost possible to the market while providing exceptional customer service. The business model of Costco is geared towards generating high sales volume and rapid inventory turnover by offering low prices to fee-paying embers in a wide range of product categories (Gamble, 2013). In this business model, Costco operates profitably at significantly low-profit gross margins.
Therefore, the membership fees are an essential element that provides essential revenues to boosts Costco’ s profit margins to acceptable levels. The second important factor of the Costco business model is that due to its high sales volume, and rapid inventory turnover, it allowed the company to receive money for the inventory before it pays its suppliers and merchandise vendors. This also allowed Costco to pay its suppliers early enough to take advantage of early payment discounts. The key element of Costco's strategy was to provide its customers with low prices, the company only stocked well that it could offer to customers at discount prices.
The company’ s mark-up profit margins were put at 14%, while those of the competitors were at 20%. This profit margin was significantly low enough just fractionally above the breakeven point (Greenhouse, 2005). A significant percentage of the company’ s profit came from the membership fees of the members. The membership fees attributed to over 70% of the company’ s membership fee revenue. On the products that are stocked; a normal supermarket stocked over 40,000 items, with superstores stocking between 125,000 to 150,000 products.
Costco stocked only 3,600 active items on its stores. With 85% of the products consisting of brand names, while the rest its the company’ s private label of Kirkland (Cascio, 2006). Kirkland represents about 20% of the company’ s sales and the CEO believes there is still room for more improvements. The growth strategy of Costco is to increase the number of its branches by 5% annually; the growth could be higher depending on the profit margins for the previous year.
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