Costco has transformed the retail world as the world's first membership warehouse club for the wider public which accepted non-business members. While the idea of charging people to shop in your store seemed very bold and was not followed by any of the retail giants, it proved to be the right move. It allowed Costco more efficient buying and operating practices while giving the members access to unmatched savings.
In , Price Club and Costco merged into Price Costco and thus created the world's most successful warehouse club. In the name of the company was changed to Costco Wholesale Corporation and remained as such until this day.
At the same time, it provided Costco with an additional source of income that fielded its growth. Before Costco's international expansion, there was quite some doubt whether the innovative Costco retailing strategies would result in success outside the United States.
Target's exit from Canada in , Tesco's shutdown of its U. Fresh and Easy chain, and Walmart's store closings in Brazil in show that being successful on the global market is not given even for the biggest retail players. However, Costco's expansion, which began in , succeeded in ways that Target, Walmart, and Tesco failed to achieve. Costco membership sign ups in the first 8 to 12 weeks of a new store opening overseas are generally 10 times greater than at Costco store openings in the United States.
While many other retail chains open international locations as a defensive strategy in order to shore up declining sales, Costco isn't compensating for domestic weakness. Costco's international expansion came in the middle of high profits in the U. And talk about great reception!
In , before Costco opened its doors in Iceland, one out of eight Icelanders had already signed up for membership. On the opening day, search-and-rescue teams were deployed to manage the crowds. On an opening day, , people got their Costco membership.
The store even had to close early on the first day due to traffic jams caused by crowds of shoppers and three-hour wait times just to park.
Its business model is appealing no matter the country. This mission statement is directly linked to its business model and strategy. While they might seem mutually exclusive, Costco is known for both. Costco is primarily a big-box store. Such stores achieve economies of scale by focusing on large sales volumes and are meant to be a one-stop shop for customers. Big-box stores typically carry items in extra-large sizes and lure customers with the promise of saving by buying in bulk.
Costco is no exception - real bargains can be had by purchasing bulk non-perishable items or items with long shelf life. This strategy entails maintaining the lowest prices possible and is used by many retail giants. As said, Costco uses a membership-only warehouse club business model , which means consumers pay a membership fee to access the low-cost products available at Costco stores. Each member is entitled to issue a free supplementary card to someone living in the same household or to a fellow staff member working in the same company.
Non-members may accompany members, but only members are allowed to purchase products in stores. In , Costco had a total of Costco has two tiers of membership — basic and executive plans for consumers and businesses. These membership fees actually represent the majority of Costco's operating profit. Yes, Costco makes most of its money by selling access to affordable products and not by selling those products. Once a customer pays the membership fee, it treats it like a sunk cost.
The investment has been made and now it is time to get value from it. Because of that, customers will make additional trips to Costco to make sure they get value from their investment.
Costco does reinvest the membership fees into low prices for customers and by doing so ensures that everyone wins. From the very beginning, Costco targeted relatively affluent and college-educated customers who would understand the value of membership.
But if Costco employs a cost leadership strategy, why does it target relatively wealthy people? While the price of an individual product generally is the lowest around, shoppers usually have to buy at least a three-pack, which means that the average transaction total is quite high.
That also explains why the vast majority of Costco stores are located in affluent suburban areas both in the U. Product quality is a crucial aspect that Costco focuses on for driving growth and maintaining customer loyalty. Each item Costco sells is meticulously selected. Costco also sources its products directly from manufacturers which eliminates intermediaries and further lower prices for the customers. By selling products in bulk Costco entices customers to buy large quantities of items.
The perception of getting a deal often negates the fact that one may not even need all the products. Customers believe they're saving more money by spending more money , which leads them to spend more in the long run. Costco has a very liberal return policy where customers can return almost anything they have purchased at any time.
Even their membership. Having such a liberal return policy is almost necessary if you want to entice shoppers to try new products which they can only buy in bulk. And yes, members can also claim a refund on their memberships at any time if they are not satisfied with the service, which means anyone can try shopping at Costco risk-free.
There was even a case of a woman who successfully returned a Christmas tree 10 days after Christmas because the tree was dead. From a logistics standpoint, Costco is one of the most efficient retailers in the world. This is because of two factors: inventory management and warehouse design. Costco uses its warehouse-style stores as retail and storage spaces in one.
It utilizes cross-docking, which means that products from a supplier or a manufacturing plant are distributed directly to the retail chain with marginal to no handling or storage time, which reduces inventory management costs and storage space costs. Costco also displays goods in their shipping pallets, instead of arranging individual items on shelves, which further reduces inventory costs. Warehouse design allows forklifts to restock the store, which also makes it easier to rotate seasonal products and enables the treasure-hunt experience.
This purposeful design saves both time and costs. The combination of impeccable inventory management and warehouse design also allows Costco to utilize the just-in-time stocking principle , which is a management strategy that has a company receive goods as close as possible to when they are actually needed.
Once you combine everything mentioned thus far in this chapter, you can see why Costco can cut prices even lower and pass on the savings to their members, thus attracting more membership sign-ups and directly increasing their bottom line.
Logically, you would think, less money spent on decor equals less overhead cost equals the opportunity to lower your prices. As offering superior customer experience is the key to customer loyalty, Costco does its best to be an experience in itself. By putting customers first in every choice and innovation, Costco continues to build its loyal customer base. Consumers go crazy for a deal, and Costco has designed its entire strategy around this core tenet.
The combination of cost, generous return policy, and satisfied employees resulted in a shopping experience that many customers get addicted to. It was believed at the company that culture is not the most important thing, but the only way forward. Costco saw promoting its core values as the only recipe for success. Maintaining integrity, passion, motivation, and customer trust is what enables Costco to outdo its competitors. Shopping features aside, there is something more to Costco that cultivates such a loyal customer base.
Costco also has great food courts which drive visits on their own. And they offer amazing deals, which are even losing them money in some cases. Costco promises to pass savings to their members and to continually provide members with quality goods and services at the lowest possible prices.
Costco has long been known for paying higher wages and offering more liberal benefits than its rivals have—and generating greater sales per square foot, too. Costco pays its employees unusually well for a retailer.
In addition to high wages, the vast majority of Costco employees also get company-sponsored healthcare. Costco can afford to pay such high wages because its employees are extremely productive. The average Costco employee generates nearly triple the revenue compared to the average Wal-Mart and Target employee.
Its spartan warehouses require far fewer employees to run compared to a big-box store. But what keeps customers coming back, and what keeps members renewing their memberships, are consistently good experiences.
With highly paid, happy employees, Costco is able to better deliver on this than traditional retailers like Wal-Mart. High employee retention permits Costco to reduce considerably on training costs. An extraordinary selection of products that is a bit more refined than most but at a pretty good price.
A typical Costco store only carries about 5, items, and there is a bunch of those items that rotate regularly. Having customers deciding to return is important; having them decide to return more frequently each month or quarter is even more important as there is a direct correlation between customer frequency and annual total spending.
Not only that, the more customers spend the more likely they are to renew their membership. Costco has developed three major reasons for customers to increase their frequency of visits:. To create a sense of excitement, urgency, and a need to visit frequently, Costco provides a flow of in-out items continually throughout the year: Buy now, it may not be here next week! Finding these non-repeated in-out offers creates a treasure hunt environment. The store does have a layout, but within that layout, everything is rotated frequently to keep you looking.
This would never work at Walmart or Target — because you would get frustrated. They have a very wide selection of very different merchandise types which offers a unique convenience level as a shopper. The strong coupon values are effective for 25 days in the coming month.
But it is a brilliant way to increase member visits as most of the attractive coupon items have rebate limits of 1, 2, or 4 items in one transaction. You can buy more of the item in the transaction but at regular price. Timothy Green has no position in any stocks mentioned. Dividend Stocks. Company Profiles. Top Stocks. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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This business model allows it to undersell the competition and ensure customer loyalty. Its advertising budget is zero. Its customers return to get the full advantage of their membership dues. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
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