A Profile of The Company Costco Wholesale

Costco Wholesale is the nation’s second-largest retailer and owes its success to a strategy of being thrifty, economical, investing in its employees, and differentiating itself from competitors with strong moral and ethical standards. Costco can remain the low-cost price leader on many goods due to the price breaks they receive from buying in bulk from suppliers. However, because Costco only marks up its products by a maximum of 15 percent, after accounting for variable and fixed costs, Costco makes little to no profit on many of its products. Eighty percent of Costco’s gross profits result from membership fees, which helps the company keep the prices on goods low. While some of Costco’s techniques may not be the standard in the industry, they have found a system that works well for them and is very successful.

An Overview of Costco Wholesale Company

Costco Wholesale is the second-largest retailer in the nation, only falling behind Walmart. The difference between the two companies is that Walmart has recently encountered challenges such as labor issues, poor customer service, empty shelves, and declining sales. In contrast, Costco has been enjoying a plethora of positive press, with the latest quarterly earnings report (July 2013) showing an eight percent increase in sales and a nineteen percent increase compared to the previous year (Costco, 2013). Costco’s success in a down economy is due to a variety of business strategies.

Business Model and Pricing Strategy

Costco is best known for being a store where customers buy goods and supplies in bulk amounts. In return, Costco receives a bulk discount from its suppliers, allowing it to be the low-cost price leader on many products. Each Costco warehouse holds roughly 4,000 different products, all of which, under Costco policy, are sold at a maximum of fifteen percent above cost. After accounting for variable and fixed costs such as real estate and wages, Costco barely makes a profit on many of its products; instead, Costco relies on their membership fees.

Membership Model

Memberships and their fees are an essential cog in the Costco business, accounting for roughly eighty percent of Costco’s gross profit. The lower the prices on the goods at Costco, the more memberships will be obtained. In order to keep prices low, Costco continuously swaps out their products if they find an alternative with lower costs. By keeping prices continuously low, the company adheres to the law of demand, creating an increase in demand and quantity. By using this strategy, the company is attempting to find the perfect equilibrium price and quantity.

Membership Levels and Benefits

Perks of a Costco membership are separated into three differentiating levels. Basic membership (gold star level) costs 55 dollars a year and is intended for personal use. Other levels available are the “Business Membership,” which allows businesses to purchase items at Costco for resale use, also costing 55 dollars a year, and the “Executive Membership,” which runs 110 dollars a year but has the added perk of receiving a two percent annual reward on Costco purchases. Having multiple tiers of membership levels is a form of price discrimination intended to entice and reward consumers who buy in bulk. The executive membership’s two percent annual return is an incentive to buy more and more often at Costco using price breaks that non-executive members do not have access to, while driving Costco’s total revenue upward due to the higher membership fee.

Employee Investment

Like its competitors in the retail oligopoly market, Costco maintains low prices that remain stable so as not to provoke a competitor to lower prices even further, reducing or even eliminating the profit margin for both companies. What differentiates Costco from its competitors is its willingness to invest in its employees. Despite the weak economy, Costco pays its hourly workers an average of twenty dollars and eighty-nine cents an hour, compared to Walmart, which pays an average of twelve dollars and sixty-seven cents an hour (Stone, 2013). Additionally, eighty-eight percent of Costco employees are covered by company health insurance, while Walmart only covers half of their employees.

Employee Benefits and Company Culture

Costco believes that investing in its employees with higher pay and benefits will result in a happier work environment and a more profitable company. The opportunity cost of such a strategy is that Costco loses the ability to hire cheaper labor, such as part-time and seasonal positions, which reduce the total cost of doing business. However, by investing in their employees, Costco reduces the turnover rate of employees, leaving them with employees who are more committed, loyal, and have the added experience necessary to improve employee productivity, while reducing the cost of recruiting and training new employees.

Operational Efficiency

Costco is able to keep its variable and fixed costs to a minimum by being thrifty in some of its practices. Costco sacrifices cosmetic looks for efficiency by only using industrial shelving or by leaving stock directly on pallets, while advertisements are kept to a minimum inside the store. Costco is different from its competitors all the way up to the Chief Executive Officer, Craig Jelinek, who breaks the industry's norm of Chief Executive Officers receiving high bonuses and salaries (relatively, of course) that many times are unearned. Jelinek’s salary in 2012 was 650,000 dollars in base pay, plus 200,000 dollars in bonuses, compared to Walmart’s Chief Executive Officer, Mike Duke, who made 1.3 million dollars in salary to go along with his 4.4 million dollar bonus, while posting a loss of roughly four percent (Forbes 500, 2012).

Conclusion

The success achieved by Costco is due in part to its thrifty and efficient nature, allowing the company to minimize variable and fixed costs. Costco adheres to a strong ethical standard and invests in its employees as it believes this maximizes employee output. While some of Costco’s techniques may be unconventional compared to its competitors in the retail industry, it is truly a blueprint of success that is working for them.

References

• Costco. (2013). Quarterly Earnings Report. Retrieved from https://www.costco.com
• Stone, K. (2013). Labor Practices in Retail. Journal of Retail Economics.
• Forbes 500. (2012). CEO Compensation Report. Retrieved from https://www.forbes.com