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Marketing Strategy of Costco -
December 7th, 2010
Costco (NASDAQ: COST), is the largest membership warehouse club chain in the United States. As of July 2009[update] it is the third largest retailer in the United States and the ninth largest in the world. As of October 2007[update], Costco is the largest retailer of fine wine in the world.
Costco is headquartered in Issaquah, Washington, United States and was founded in Kirkland, Washington with its first warehouse in nearby Seattle. Costco has locations in the United Kingdom, Canada, Australia, Mexico, Taiwan, South Korea, Japan, and the United States.
Founded by James (Jim) Sinegal and Jeffrey Brotman, Costco opened its first warehouse in Seattle, Washington, on September 15, 1983. Sinegal had started in wholesale distribution by working for Sol Price at both FedMart and Price Club. Brotman, an attorney from an old Seattle retailing family, had also been involved in retail distribution from an early age. Sol Price died on December 14, 2009 at 93.
In 1993, Costco merged with Price Club (called Club Price in the Canadian province of Quebec). Costco's business model and size were similar to those of Price Club, which was founded by Sol and Robert Price in 1976 in San Diego, California. Thus, the combined company, PriceCostco, was effectively double the size of each of its parents. Just after the merger, PriceCostco had 206 locations generating $16 billion in annual sales. PriceCostco was initially led by executives from both companies, but then Sol and his son Robert Price founded Price Enterprises and left in December 1994.
I. Company Description
In September of 1983, Costco Wholesale Corporation began operations in Seattle, Washington. The company was founded by James Sinegal, current President and CEO of Costco, and Jeffrey Brotman, Chairman of the Board of Directors. In October of 1993 Costco merged with a Delaware company called The Price Company to form Price/Costco, Inc. The Price Company was the first to establish the concept of a membership warehouse. In 1999, the company changed its name to Costco Wholesale Corporation and moved themselves back to Washington. Costco is currently one of the largest retail stores in the industry.
II. Business Mission
Costco’s mission statement is to focus on bringing high quality goods and services to the market at the lowest possible prices every day, but to do it with integrity at every level of the company while valuing the interests of the stakeholders (Annual Report 2006). The mission statement is well understood throughout the organization. Costco offers their customers with low prices on selected private and a limited selection of nationally branded products in a wide range of merchandise categories. Businesses and families can rely on Costco to offer high quality goods and services at every day low prices. Rapid inventory turnover, high sales volume per warehouse, leveraging an efficient operating structure, reduced handling of merchandise, and making themselves the low cost operator in retail are all key elements that make the company so successful (Annual Report 2006). Costco defines its business in terms of benefiting their customers. Creating value to a Costco membership card is a top priority throughout the company.
In addition to offering low prices on top-quality goods and a variety of convenient services, Costco strives to be a valuable asset to every community where they do business. This means providing good jobs at good pay, being involved in community activities and charities, contributing to local tax revenues, offering a profitable business opportunity to their suppliers, and most importantly, taking care of our members (Costco Story).
III. Marketing Objective
• High sales volume per warehouse- Costco is known as one of the largest retailers in the industry. One Costco warehouse reached more than $300 million in sales, and the average sales per warehouse was $127 million. Their sales have doubled and even tripled some of the nearest club competitors in the industry (Annual Report 2006).
• Be the current low cost operator in retail- Costco has many ways that can help them continue to be the low cost operator in retail. Costco stores are set up with as little frills as possible. Many items are kept in their original packages or left their pallets when they were shipped to the store. This helps to reduce Costco’s overhead costs. Also, Costco has a lot of buying power which allows them to buy more products at once for lower prices per item. This can help them save money and allow their members to save money as well (Costco Story).
• Open 33 to 35 new warehouses in 2007 (Annual Report 2006)- The $1.4 to $1.6 billion that Costco intends on spending during 2007 for real estate, construction, remodeling, and equipment for warehouse clubs and related operations will help Costco with their goal opening the new warehouses, in the US and Canada.
• Increase the number of warehouse club memberships- If the number of warehouse club membership’s increase, then there is a greater chance of a sales increase for Costco. Also, a larger membership allows the company to buy items in bigger quantities and to pass along savings to customers. “Customers who buy more items may feel that the membership fee is worth paying, because the cost is spread over all the products they buy” (Julie Bick 2007).
IV. Situation Analysis
Warehouse clubs and supercenters have grown in popularity over the last several decades. As they continue to expand in the market, their increasing dominance will likely force more structural changes in the retail trade industry. Many retailers are setting limits and creating scarcity on products to entice their customers (Bick, 2007). For example, some retailers carry limited-edition items that are unique to their stores, then stock those items for a given amount of time. Companies are also competing to find efficient ways to lower operating costs. The ability to lower operating costs gives retailers a competitive advantage over their competitors. Selling products over the web is another key trend in the industry. Costco alone expanded their sales of 59% over the internet (Annual Report 2006).
There are over 1,178 warehouse club locations that exist across the U.S. and Canada, including Costco’s North American warehouses. There seems to be a warehouse club in every major city, if not several club operations. Currently, the leading stores in the category of warehouse membership clubs are Wal-Mart’s Sam’s Club, Costco, and BJ’s Wholesale Club (Lamb 409). Wal-Mart has become the largest retailer in the world and has expanded further into many other food merchandising formats. Other significant competitors that have emerged into the market are Target and Kohl’s. Low-cost operators selling single category narrow range of merchandise, such as Lowe’s, Home Depot, Office Depot, PetSmart, Best Buy, and Barnes & Noble, has significant market share in their respective categories (Annual Report 2006). These stores can be known as category killers to the market, they have the ability to dominate their targeted merchandise segment.
Costco has a variety of customers that shop at their warehouses. A large portion of Costco’s customers are businesses. Start up businesses use Costco to purchase office furniture, supplies, and other products that will help run a business. While many established businesses rely on Costco to maintain their performance through a variety of goods and services. Costco also attracts individuals not connected to businesses seeking quality goods and services at discounted prices. Costco gains business from pretty much anyone in the general area of a Costco warehouse. Families large and small are all members of the warehouse club store. Most families tend to be middle to upper class. People will join the warehouse if they believe that the value they receive from Costco’s products and services will cover the $50 dollar membership fee. More than a third of Costco’s 48 million customers have a household income over $75,000 and they average 22 visits a year (Boyle 2006).
Radio frequency identification (RFID) is the latest trend in the retail industry. Inventory can be very costly and time-consuming to most retailers. By offering real-time inventory visibility, radio frequency identification enables inventory managers to monitor and control inventory supply at all times. By automating the inventory tracking process, stores can keep costs down by maintaining optimal inventory levels. With RFID, stores will not over stock and will also have the appropriate number of items at their store. The use of RFID also makes it easier to obtain demand for a given product. For example, Costco managers can monitor quick-selling items with increased accuracy, ensuring that their inventory supply is stocked accordingly (Microcsoft.com).
• Strong brand and scale of operations- Costco is known to be one of the largest chain of stores. They have many warehouses which are located throughout the US, Canada, United Kingdom, Korea, Japan, Taiwan, and Mexico. Having Costco stores located throughout these various countries has allowed them to be capable of leveraging the brand equity which has shown an increase in sales.
• Efficient store management- Costco’s inventory turnover rate is known to be one of the highest in their industry. From 2001-2005, Costco had an inventory turnover rate of 11.5, while one of its leading competitors, Walmart, only reached a rate of 7 (Datamonitor, 2006).
• Slow growth of private labels- Costco has their own private label which is known as Kirkland Signature. There are many Kirkland Signature Products that Costco sells at their stores. However, the company has seemed to be slow with the growth of this product. Kirkland Signature has only been able to account for about 17 percent of Costco’s total sales. If Costco is able to gain the interest of customers in purchasing more of their private label products, it will help them become even more successful in their industry.
• Limited choice for customers- Even though Costco is a successful company, one of their problems that could set their competitors ahead of them is that they offer a considerable less amount of products. Costco stocks 4000 types of household items whereas Wal-Mart stocks nearly 100,000 types of household items. This limitation can set Costco back because if customers are dissatisfied with the product Costco has to offer and there isn’t enough alternatives to choose from then they will go somewhere else like Wal-Mart. Just because Costco is huge in size, it does not necessarily translate to a variety of products.
• Positive outlook for internet sales- Since the growth in technology more people have been drawn to using the Internet as a form of purchasing. The US online retail sales were $104 billion in 2005 and are expected to increase by 17 percent annually through 2008. Costco has created an interactive online webpage which allows customers easy access to information, price, and images of products that they offer. They also offer many services and have descriptions about each on their webpage. Costco also has membership and location information as well as information about the company accessible to potential and existing members.
• Increases in home improvement expenditures- Homeowner remodeling expenditures have grown approximately six percent annually in the last 25 years. This could give a great opportunity for Costco to focus and possibly have more products that could help homeowners in the remodeling process. Costco currently sells furniture, appliances, hardware, household items, and most of the basic essentials necessary for remodeling. Costco could expand and sell more intricate items needed for specific tasks to be accomplished in the remodeling process.
• Expanding electronic equipment- With the technological advancements that have taken place throughout the years, this has given Costco a great opportunity and could continue to give them even better opportunities for the future. The value of electronic equipment produced worldwide is expected to approach $1.6 trillion by the year 2010. The demand for electronic products is still increasing. Costco is one of the leading retail consumer electronics and appliances company, could benefit from this increase in the demand.
• Decline in housing market- Recently, there has been a decline in the sales of both new and existing homes. This poses a threat for Costco because the demand for their products could decline which could result in a decrease in sales.
• High interest rates in the US- With the high and increasing interest rates in the US, it could affect the habits of consumers. Because of the inflation, consumers might consider spending less, which could result in a decrease in sales for the Costco Corporation.
• Increasing retail rental rates- Since 2004, rent has increased by more than five percent and they are expected to continue rising. With this trend, it may trigger Costco’s operating expenses to increase. With the increase in interest rates, if their sales decline and their operating expenses increase, there will be an even bigger decrease in company profit.
V. Marketing Strategy
Target Market Strategy:
Costco’s primary target market is small businesses. When Costco decides to open a new warehouse in an area, they have marketing teams that contact local businesses trying to persuade them into purchasing a business membership. They also use direct mail marketing to attract potential customers that meet their customer profile. The rest of their market strategy is based on the reliance of their members using word-of-mouth to attract new members to the company.
Costco offers their customers low prices on selected private and a limited selection of nationally branded products in a wide range of merchandise categories. Costco’s Kirkland Signature private label is known for its quality and value. Costco currently carries 330 private label items which make up 15% of their sales (Annual Report 2006). Their major products are appliances, books, DVD movies, VHS movies, music, computer and peripherals, electronics and camera, furniture, hardware and outdoor living, health and wellness, jewelry and apparel, and wine and food. Their major services are auto and home insurance, auto financing and refinancing, real estate agent service, mortgage services, life insurance, travel, small-business loans and lines of credit, and health insurance (Datamonitor). Costco Travel general manager, Peter Gruening commented, “Our whole reason for existence is to add a benefit to a Costco membership, and we do that by selling travel” (Harris, 2007). This is true for all of Costco’s services; they are trying to create as much value as possible for their members. High-end products that are not available at stores can be purchased online at Costco.com. Costco shoppers can also purchase online items at kiosks located throughout each store (Annual Report 2006). Costco will only carry products that will provide its members with significant cost savings. They carry only around 4,000 active stock keeping units, while other retails carry from around 40,000 to 60,000 stock keeping units or more (Annual Report 2006). Some offerings rotate in and out of the warehouse based on season, and other factors. As a result, members tend shop more often to see what is new to the warehouse (Bick 2007).
The Costco Wholesale Corporation is based in Issaquah, Washington. They have 504 store locations as of December 2006, with 371 warehouses in the United States, 70 in Canada, 5 in Japan, 5 in South Korea, 4 in Taiwan, 19 in the United Kingdom, and 30 in Mexico. Being located on prime real estate sites is not a top priority of Costco (Annual Report 2006). The belief is that their low prices will attract customers rather than the location or elaborate facilities. Costco has had success using an infill strategy when selecting an area to build a warehouse. An infill strategy is the use of land within a built-up area for further construction (Wikipedia.com). They have learned that their stronger markets can support increasing numbers of their warehouses in closer proximity to each other (Annual Report 2006). Furthermore, Costco enters new markets, but they do not do it as aggressively compared to entering existing markets. Costco is tentative when entering new markets because they rely on word-of-mouth advertising, and they are fearful of the lack of familiarity with the warehouse. Obviously, it would hurt their business if they are not able to reach their target market.
a. Advertising: Costco limits its advertisement to direct mail to potential new customers. Forming and maintaining good customers relations is a key part of Costco’s business, most advertising is done through word-of-mouth after a membership base has been established (Annual Report 2006). Word-of-mouth is where Costco obtains most of their customers.
b. Public Relations: Costco allows their customers to sample many of their products as they walk through their warehouse. It gives customers the ability to try a product risk-fee. Wall Street analysts have criticized Costco for many years for treating employees too well and offering generous benefits at the expense of their investors (Harris, 2007). In March of 2007, the lowest wage will increase 10 percent to $10.50 an hour and the top scale will rise 4.3 percent to $20. On the other hand, many customers continue to shop at Costco because of how well they treat their employees. Costco provides their customers with a 100% satisfaction guarantee on memberships and merchandise. They will provide a complete refund at the purchase price if the customer is not completely satisfied, with the exception of electronics after 90 days, diamonds 1.10ct or larger, and cigarettes (Costco.com).
c. Personal Selling: When a Costco warehouse opens in a given location, marketers contact businesses around the area to see if they would be interested in becoming a member (Annual Report 2006). When it comes to Costco employees selling goods and services at their warehouses, they are generally informative, cheerful, and are known for their experience because of Costco’s low turnover rate. The difficult part is that they are very thin on the floor and it may be difficult to locate an available employee.
d. Sales Promotion: Costco limits its marketing and promotional activities to new warehouse openings (Annual Report 2006). They do use direct marketing to existing customers to promote merchandise. The Executive Membership program offers additional benefits to customers. They receive an annual 2% Reward on most Costco purchases, and extra benefits on member services (Costco.com). Costco and American Express have come together to offer even more benefits to small business owners that have a membership with Costco. They are providing businesses the ability to purchase a TrueEarnings(SM) Business Card. The card offers businesses 5% annual rebate for gasoline purchases, 3% cash back for eating out, even takeout or delivery, 2% cash back for traveling on airlines, for hotel stays, car rentals and cruises, including booking through a travel agency; and 1% cash back virtually everywhere else, inside or outside of Costco warehouses. Costco does not accept MasterCard or Visa credit cards, so the TrueEarnings(SM) Business Card tends to be a popular option to Costco members.
Costco’s philosophy is to aggressively buy from a handful of vendors, then drive the cost down for members and sell in volume. (Harris 2007) Costco refuses to mark up any item more than 14%, in contrast to supermarkets and department stores, which often carry markups of 25% to 50% (Boyle, 2006). Individual memberships (Gold Star memberships) can be purchased for an annual fee of $50, up from $45 since May of 2006. Business memberships can also be purchased for $50 per year, with add-on membership cards available for an annual fee of $40. Finally, Executive memberships are available to all members in the U.S and Canada for an annual fee of $100.
Costco operates in a warehouse-type setting. The average size of their warehouses is around 140,000 square feet. (Annual Report 2006 8) Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities of each item (Annual Report 2006 8). The first things you see when you walk into a Costco are the most expensive products. These include bargain diamonds, and flashy toys such as iPods and enormous flat-screen TVs (Regnier, 2006). Costco does this to get the impulse shopper to make large purchases. President and Chief Executive Officer Jim Sinegal looks for something special out of his employees. He looks for the ability to know just what item to sell best in a given spot at a given time (Boyle, 2006). This makes each warehouse slightly different from each other. Costco managers understand that their customers can feel over whelmed when entering a warehouse because of the large size. It is the job of the store manager to understand their customers in a given location, and then present items in a way to entice these customers to maximize their sales.
6.) Personnel and Customer Service
Costco keeps their labor costs low by squeezing more sales out of fewer people. Costco employees are paid pretty well having their minimum wage at $10.50. This allows Costco to have higher quality employees. The higher wages gives Costco a larger pool of applicants during the selection process, as well as lowering turnover of employees. But, Costco limits the amount of employees they have on the sales floor. People that go to Costco usually do their own homework before they make a big purchase, instead of trying to get expert advice from Costco employees (Regnier, 2006). There are no commissioned sales people that work at Costco. With no commissions, customers do not feel pressured by Costco workers to purchase a given product. As a whole, people are satisfied with the benefits they receive from being a Costco member; this is illustrated by a strong renewal rate of 87% (Annual Report 2006).
VI. Implementation, Evaluation, and Control
Costco continues to discover new goods and services that will create value for their memberships. They focus their research on their customers wants, consumer behavior, and what are the latest trends in the marketplace. Then they provide products or service at a discounted price to meet the results of their research. In addition, Costco researches prime real-estate for the location of their warehouses. They look and compete for destinations that will generate considerable amount of sales.
Organizational Structure and Plan
When striving to achieve their mission statement, Costco will follow their Code of Ethics in every aspect of their business. Their Code of Ethics is to (1) obey the law, (2) take care of their members, (3) take care of their employees, (4) respect their suppliers, and if all of these are met, Costco believes that they will achieve their ultimate goal which is to (5) reward their shareholders (Costco.com).
Costco has direct buying relationships with many producers of national brand name merchandise. They have they ability to purchase from alternative sources without significant damage to their operations.
Rapid inventory turnover, when combined with operating efficiencies by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities (Annual Report 2006) allows Costco to reach their marketing objectives. Their depots receive container-based shipments from manufacturers and reallocate these goods for combined shipment to their warehouses (Annual Report 2006 8). The goal is to do this in twenty-four hours. These steps ultimately lowered operating costs for Costco which is a key reason to their success in achieving their marketing objectives.
Financial Projections/ Implementation Timetable
Costco is projecting to have their E-commerce business and Costco.com to reach over $1 billion in 2007, and to reach $5 billion in five years (Annual Report 2006). In 2002 Costco had 294 stores across the United States; currently they have 504 stores, over a 40% increase (Annual Report 2006). Costco plans to venture across sea to open future stores in Great Britain; as well as heading south of the border into Mexico. Because of how well developed is Costco’s marketing strategy they will most likely be earning profits at every location. In the last few years Costco average total revenues have been climbing at an average of 5 billion dollars. (Annual Report 2006).The normal trend seems to be as Costco opens more stores they increase revenue significantly. The NASDAQ market is where Costco’s common stock is traded. In 2006 Costco recorded a little over 8,000 stockholders. (Annual Report)