Costco's Winning Strategy

                                Costco's Winning Strategy

                                                      By: Andrea Smak and Riesa Weisberg

"Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members." – Jim Sinegal, Co-founder and former CEO of Costco Wholesale. (Company Profile)

             

   Since its start-up in 1983, Costco Wholesale has remained faithful to their mission to “provide members with quality goods and services at the lowest possible prices” (Forbes Magazine), which has allowed it to prosper into the 3^rd largest retailer in the United States (as of 2014) (Canadian Grocer).  Costco prides itself with having a Code of Ethics to provide such a mission for their members, which includes clauses such as: obeying the law, taking care of their members, taking care of their employees, respecting their suppliers, and rewarding their shareholders (Costco Code of Ethics).  This code of ethics is implemented in all the 464 Costco locations in the United States (and Puerto Rico), as well as the additional 191 stores abroad, located in: Canada, Mexico, the United Kingdom, Japan, Taiwan, Korea, Spain and Australia (Canadian Grocer).  These standards have helped to mold Costco’s image as a dependable company in the eyes of the consumer, fueling good business and the efficiency of its unique supply chain.

              The secret to why Costco has been top of its game in the retailing business comes from their method of cutting costs by eliminating steps in the traditional supply chain.  Costco stores have a distinct environment unlike any other retailer, and that is because they double as the wholesaler’s warehouses.  This aids in Costco’s method of having as few people handling their merchandise as possible, before it is sold to the consumer.  They do this because they recognize that every set of hands required to handle, transport, and stock goods, is an additional cost.  Costco buys most of its products directly from the manufacturers, who then deliver the goods to cross-dock depots where the merchandise is allocated to be taken to the individual warehouses (stores) (Canadian Grocer).  The key to minimize how often the product is touched is that they buy and store in bulk.  When the merchandise is being moved and stored, it remains on the large wooden pallets we see while shopping at Costco, being transported as one large unit rather than multiple individual ones.  For this reason, the first time that a product is ever touched is essentially by the consumer, and the first time a Costco employee touches it is at the cash register.  The unique method saves on time and labor, and therefore money, which is why it helps Costco win as a business.  This supply chain differs from the traditional supply chain because it has fewer steps and fewer hands touching the merchandise.  In a traditional supply chain, goods will be moved from the manufacturer to the distributor, a warehouse, and then the retailer.  At each of these locations, multiple workers handle the merchandise for stocking, loading and unloading, and further transportation, which racks up costs. Costco’s system eliminates all these unnecessary steps and costs by avoiding the need for middlemen, trucking their products directly to their stores, and using a forklift to shelve them rather than multiple employees.

                The Costco team seems to not only have formulated a strategy that best supports their business mentality, but one that can also withstand the constantly evolving competitive industry.  However, integrated within their unique supply chain are many give-and-take decisions that set them back in a few fields.  For example, with each store doubling as a warehouse to keep costs low, it is impossible for Costco to have shopping environments as appealing as typical stores.  With their method of moving mass volumes of products throughout their stores, there is no room for fancy displays; they would take away from the efficiency of their process.  Additionally, because Costco has a reputation for selling bulk items, customers are forced to purchase items of high volume.  For example, rather than just buying one individual deodorant stick like they would at a typical store, Costco shoppers have no other option than to purchase a pack of multiple, because that is the only way Costco offers it.  Buying in bulk also means there are fewer options for shoppers to choose from, as it’s cheaper for Costco to only offer a limited amount of brands.  An example of this being that Costco only offers four types of toothpaste (Business Insider).  This limits the choice that consumers love to have, which proves to be a frustration for many Costco customers.

                Though Costco Wholesale is a massive retailer holding predominantly the most commonly favored brands, they make it a point to appeal to the regions they are in by having a diverse set of suppliers. The company desires their supply chain to be filled with various types of suppliers in order to be as well-rounded as possible; they appreciate unique skills and support those who can offer them.  “By developing and maintaining partnerships with certified minority and women owned businesses, we are able to explore new ideas and maintain a fresh approach to our business, while positively affecting the economic development in the communities where we do business”.  If they meet Costco’s standards, small businesses can sign a contract with the wholesaler to be a supplier for various Costco locations within the region of the small business.  Costco also offers “Roadshows” where vendors can display and sell their products at various store locations for a given amount of days (Costco Supplier Diversity).  The opportunity for small business partnerships with such a large corporation is mutually beneficial; Costco can source locally and therefore reduce costs, the business becomes more well-known, and consumers appreciate the availability of products from within their community.  In addition to supplier diversity, other skills and abilities Costco values is linked to extreme efficiency.  This is demonstrated in their unique supply chain so that it runs smoothly.  Despite some disadvantages, Costco buying and selling in bulk is key to keeping costs down, therefore being able to offer lower prices to their consumers.

                            For more information about Costco, go to:

http://www.bizrules.com/10simplerules/CostcoRulebook.htm

http://money.cnn.com/video/fortune/2008/03/03/most.admired.costco.fortune/

http://www.businessweek.com/stories/2008-10-08/costcos-artful-discounts

                                                   Sources:

http://www.canadiangrocer.com/blog/the-secret-to-costcos-success-lies-in-supply-chain-efficiency-40691

http://www.forbes.com/sites/glennllopis/2011/01/31/the-costco-factor-to-win-the-business-game-you-need-to-change-how-you-think/

http://www.businessinsider.com/costcos-unorthodox-business-strategy-2013-3?op=1

http://ext.corporate-ir.net/media_files/NSD/cost/reports/our_mission.pdf

http://www.costco.com/supplier-diversity.html

http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-homeprofile