Analysis of Costco's Key Success Factors

Costco, the nation's largest discount wholesale merchandiser, was founded in 1983 by Jim Senegal and Jack Brotman (Gamble, Peteraf, Strickland & Thompson, 2016). Since the company's inception it has been a leader in the retail industry, and a shining example of the success of the warehouse club model. Costco debuted with a stellar financial performance that solidified their legacy within the national retail marketplace. Additionally, Costco became the first United States based company to generate $1 billion in revenue in less than six years of operation. Since then, Costco has expanded to a globally recognizable brand with nearly 700 locations worldwide (Gamble et al., 2016).

The legendary CEO of General Electric, Jack Welch once said:“Strategy means making clear-cut choices about how to compete” (Farfan, 2019). Considering Jim Senegal’s leadership style, and the business strategies that he implements within the company, one can argue that Costco’s business model is evidence that the aforementioned statement is true. It is evident that many of the decisions that Senegal has made regarding Costco were strategically designed to fit within the company's mission statement. Costco, as a brand, has two goals. The first being to provide the highest quality products possible, and the second being to provide those products at the lowest competitive prices possible (Farhan, 2019).

Costco’s membership based services are what allows them to keep prices lower than their competition. Due to the fact that they are generating extra income upfront they can ensure that their customers are getting the best price for every item offered (Gamble et al., 2016). Early on, Senegal realized that people were shopping at Costco to save money, so he capitalized on it. In an effort to minimize the operating costs of the business, Senegal decided that all stores would have concrete floors, minimal decor, and all products would be displayed on pallets (Gamble et al., 2016). This approach allowed Senegal to provide his customers with a substantial amount of savings. Furthermore, limits were set company wide on the amount of profit that Costco was willing to make on each product. Costco decided they were willing to accept a 14 percent profit margin on nationally distributed products, and approximately a 20 percent profit margin on their private label brand (Gamble et al., 2016). Making strategic decisions that were aligned with the company’s two main objectives allowed Costco to choose how they wanted to compete, and what role they wanted to play in the discount retail marketplace.

Another aspect of Costco’s success can be attributed to the positive way that they treat their employees. Through the lens of Costco as a whole, the customer always comes first, but no task can be accomplished without a skilled and dedicated workforce. In terms of finances, Costco is known to pay more per hour than their closest competitor, Sam’s Club. Cashiers at Costco can expect to earn between $14 and $15 per hour, whereas cashiers at Sam’s club can expect to make about $11 per hour (Miller, 2020).

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Costco also offers benefit packages for both full-time and part time employees, which is something none of their competition does (Gamble et al., 2016). At Costco, all employees are entitled to healthcare plans that include coverage for mental illness, substance abuse, and full dental coverage (Gamble et al., 2016). While Costco offers standard benefits they also offer enhanced options for their employees, which can be used to demonstrate what their workforce means to them. An important element that they offer is referred to as a dependent care reimbursement plan, which allows employees to pay for daycare with their pretax earnings, which can save families thousands of dollars per year (Gamble et al., 2016). It is evident that Costco puts forth an immense amount of effort into taking care of their employees, and those employees reciprocate with their dedication and loyalty. The fact that Costco has an employee turnover rate of under six percent, and an executive turnover under one percent is proof of their success (Short, 2017).

It seems as though Costco has a considerable competitive advantage over Bj’s Wholesale Club, which can be proven by comparison of their financial ratios. One can argue that Costco’s largest competitive advantage stems from the fact that they have the most stores nationwide. In 2019, Costco had 785 stores, while Bj’s had only 216 stores (Costco Wholesale, 2019). Having nearly four times as many stores means that Costco is accessible to nearly four times as many people. With that being said, consider Costco’s emphasis on customer satisfaction, and it can be deduced that four times as many people are having four times as many positive experiences. This is further reflected in the fact that in 2019 Costco had over 98 million paid members, while BJ’s only had 5.5 million paid members (Costco Wholesale, 2019).

The numbers above clearly have an effect on their respective companies' finances. The current ratio of any company, which is current assets divided by current liabilities, essentially states a company's ability to pay its debts within the next year. A ratio of 1:1 is considered the benchmark, and can be interpreted as the company will be able to stay in business for the next year. While it is only one of many financial determinants, it is a significant indicator of the health of a business. Since 2018 Costco has had current ratios that have been over one, but Bj’s has consistently come in at just under one (Macrotrends, 2014).

All things considered, Costco’s emphasis on following their internal Code of Ethics has had the greatest direct effect on their business’s culture. Costco’s Code of Ethics has Five Pillars, which are, obey the law, take care of our members, take care of our employees, respect our suppliers, and reward our shareholders (Gamble et al., 2016). Adhering to these Five Pillars has had an extremely positive effect on Costco’s organizational culture. Obeying the law forbids the organization from committing any fraud, and encourages team members to be law abiding. This way, the company will always be in good standing with the government and the marketplace. Taking care of their members and constantly trying to improve their experiences benefits them because they will always have the best chance of maintaining profitability and growth. If they can remain profitable, then they will be able to take care of their employees to continually higher degrees. This will then allow their employees to take better care of their paid members. By respecting suppliers, Costco suppliers will always do what they can to provide them with the best products at the best prices. If they can execute pillars one through four, then they will finally be able to reward their shareholders who will continue to invest in them, and perpetuate future success.

Overall, the revenue stream that is most vital to Costco’s continued success is the revenue they receive from their membership fees. Between the years of 2011 and 2015 their membership fees accounted for the majority of their net income. In 2015, Costco’s net sales were $113,666,000,000.00, and total membership fees were $2,533,000,000 for a combined total revenue of $116,199,000.00 (Gamble et al., 2016). Once Costco’s costs were deducted, they made a net profit of $2,377,000,000.00. Taking everything into account, the value that Costco offers their customers in the form of lower prices is a result of their membership fee. It is simple, Costco knows they will profit at the end of the year due to the membership fee, so they feel less pressure to make an outstanding profit on each individual product.