Strengths and Weaknesses of Costco's Business Strategy

This assignment is based on the well-recognized firm named Costco. It is the second largest retailer after Walmart and sells its products in many countries like US, Canada, Mexico, United Kingdom and many more. This company sells products in large stock as it is a wholesale business. Jim Sinegal was the co-founder and CEO since 1983. He got retired and transferred his business in the hands of Craig Jelinek in 2011. Now, he is continuing the business in effective manner.

Costco’s Business Model

In our perspective, a company’s business model is its strategy and operating activities that will create value for the customers, while at the same time will generate ample amount of revenues to cover its cost and expenses and produced profit. In reference with the book, there are two elements of company business model which are: Customer value proposition and its profit formula. According to the case, the Costco business model is to deliver the highest quality of goods and services at the lowest prices possible and providing excellent customer service and adopting a strict code of ethics that includes taking care of employees and members, respecting suppliers, rewarding shareholders, and be socially responsible towards the society and environment. Another element of Costco business model is to generate high sales volume and rapid inventory turnover. Which means after paying off their debt they will have significant amount of cash in their hands. Costco CEO said that they are trying to keep their product price low as much as possible, which makes it difficult for the rivals to match their price. For example, they sold a hot brand of jeans for $29.99, which was of $50 in a department store. According to their annual reports they were facing loss if they have not charged their customers membership fees. They have been successful so far in making the customer value proposition and they also maintain the profit from 2000 to 2016. In 2015, they hit the highest profit which was $2,377 million. They provide the customers higher value and they keep their price low which makes the customer more attractive to their value proposition. A creative strategy of membership fees, distinctive strategy of keeping the highest quality or branded products price low sets them apart from the rivals and it creates a competitive advantage for the Costco It is the most reliable ticket to earn the average above profits than the rivals. Costco business model matches well to its strategy, which creates a sustainable competitive advantage and allows them to attract sufficiently large number of buyers who have a lasting preference for its product over those offered by rivals.

Costco’s strategy

Costco has been developed a very fine business strategy along with appreciable business elements over the years. Costco has its own name in the business market because it always comes up with the business tactics which can make it shine more than the competitors in the market. Its main mission is to provide the good quality products at the lowest prices. The chief elements of Costco are: 1) lowest prices on reputed brand products, 2) well-structured inventory which leads to fast turnovers, 3) providing membership fees.

For implementing their lowest price strategy, they have launched their own products such a Kirkland and claimed that they are better than other competitive brands. Also, they choose to sell the limited but good products on low prices so that their customers can get attract to their highly reasonably priced deals. The treasure hunt deals are proved to be appealing for the customers who want new and bulking deals. For making profit from the treasure hunt scheme, they get collaborated with wholesalers to get good things at low prices. Their main motive behind treasure hunt initiative is to give a positive reinforcement to their pre-existing clients to retain them. On the name of inventory turnover, they sell high volumes with low margins because they have got the idea to make a balance between purchasing things and reselling it again to the consumers, accordingly. For the membership, they have business membership and the gold star membership, and they keep their approaches of membership up to date in order to let their customers renew their membership. They have evidence-based statistics which are the proves of expansion on revenue from previous years. Their business model is cost effective and the CEO of Costco Jim Singel has been taken the responsibility of increasing the profit by all effective ways. He keeps close eyes on every possible aspect as well as on the product. Costco justified its cost-effective business strategy by attracting high volume of customers all around the country. They have given a high competition to rivals by considering effluent to low income customers in their target list. Their high productivity and expenditure ratios are transparent, and this statistic is a biggest proof of their success. In a way they are satisfying needs of both the suppliers and the customers.

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Jim Sinegal’s leadership style and Craig Jelinek’s approach

Jim Sinegal was an effective leader and CEO. He tried to involve in all warehouse operations. He used to visit 8 to 10 stores daily as a store clerk to make good relations with employees and to find out the visiting experiences of the customers. Jim Sinegal wander through the aisles and try to fix the problems associated with reputation of the company.

Being an effective leader, Jim Sinegal has a special knack in crafting and executing strategies. So, we would assign grade A because of his mind-blowing strategies. He wanted to keep the prices of the product low as much as possible as he did not want that someday any competitor enters the market and beats the prices of the Costco. He wants to establish an organization that will be there 50 years from now. In addition to this, product selection, growth strategy and most important Treasure hunt merchandising is used a tool to increase the regular visit of the customers.

Craig Jelinek continues the mission, vision and values of Jim Sinegal. He has a same objective of offering low prices with best quality. He follows the ethics of obeying laws, respecting customers, taking care of employees. Jelinek focuses on expanding the business globally and increasing the sales. There is always a risk for the business when new CEO is appointed. But under his leadership, growth rate is high as compared to most of the competitors, share price goes up and significant growth in dividends. It is all because of better understanding of the business and strategies. (Newsmax, 2019).

Based on the information given in the case study Costco’s business philosophy, values and code of ethics are:

• Obey the law: Obeying the law is important as it gives the framework to the business how to act and operate. Costco follows all the rules and regulations of every community where they operate their business. They pledge to follow all the laws and the legal requirements, respecting all the government official’s, meeting all the safety and security standards, meeting all the requirements related to employment law and ecological standard, comply with antitrust law, following the proper laws and regulations related to foreign laws while operating the business outside the country and working in accordance with foreign corrupt practices act or the law of the other countries.
• Take care of our employees: Employees are one of the most important assets of the company. Costco provides their employees with ample growth opportunities for their personal and career growth. They pledge to provide employees with Competitive wages, Employment benefits, safe and healthy work environment, Career opportunities and a work environment which is free from all the bias and harassment.
• Take care of members: Members are the reason for the existence of the business. As we all know that Costco’s members have lots of shopping alternatives like Walmart, superstore etc. So, the company needs to maintain the member's trust for that they pledge to provide Top quality products at the best price, highest food safety standards, 100% satisfaction guarantee, warranty on products and services, pleasant shopping environment and experience, best customer service and provide products that are ecologically sensitive.
• Respect our suppliers: Suppliers must prosper along with the company for the success of the business. They strive to treat all the suppliers and their representative respectfully, honour all their commitments, protect all supplier’s assets, no gratitude’s and always do what is right.
• Reward and shareholders: As a company trades its stocks with NASDAQ stock exchange, its shareholders are its business partners. To be successful, we need to provide our shareholders with good returns as they invest their money in the Costco. They pledge to provide in the same way to their present and future shareholders, as well as the employees will also be rewarded for their time and efforts.

Costco from financial perspective:

The various financial ratios of the years 2014, 2015 and 2016 showed that Gross Profit Margin and total return on assets is increasing at slow pace (from 12.59% to 13.32%), which is a good indicator to yield high profit in future. One and only ratio that fluctuated with 3-4% is return on stockholder’s equity. In 2014, it was above average which has reached to 21.92% in the next year. It decreased approximately 2.5% in 2016. EPS is also fluctuating with little variation (from 4,65 to 5.33). Costco is weak in maintaining current ratio (from 1.22 to 0.98). It should be higher than 1 and the best one is 2:1. This ratio has decreased continuously which shows that Costco do not have enough current assets to pay off the current liabilities. Debt in comparison to total assets is better than before. Company can generate enough cash in future because its debt to equity ratio is below 1 (0.34). There is not much variations in the inventory turnover and inventory days. It means that whatever the company purchases get sold off at the same ratio in relation to previous years. Overall, Costco is doing well but weak points are always there. Company should work on those weakness to grab more opportunities.

Recommendations

• Online services and self-checkout: Every organization is expanding with the help of technology. Online-services has made the life of people so easier. Take an example of Amazon which provides online shopping and home delivery services. Another example is Superstore where we can order online all the required items and they prepare the cart for us. We just have to go there and park the car, employees put the stuff inside. In addition to this, there is also self-checkout option at the superstore which is not available at Costco. It would reduce the workload of employees and they do not need more employees as cashier.
• Improve Margin: Costco is generating huge amount of revenue from membership fees. This is the reason that Costco prices are not too high. Still, there are people who could pay more for the price of product depending on the quality, but they do not want to pay the membership fees. Costco should increase the margin by keeping membership fees low.
• Diversification: Walmart is at number one because it sells 1000 times more variety of products which satisfy every need of customers as compared to Costco. No doubt, that Costco is following a strategy to keep less variety in all items, but we cannot neglect that the people living in Canada belong to different cultures and countries. Their choices regarding each item is different. Costco must increase the variety keeping in mind all the residents.
• No benefit for small household: Costco sells products in large quantities. Small household requires only number of items per week. They cannot buy that stock as that will expire after some time. So, visiting Costco and doing shopping is only valuable for large households. Costco should open a store to sell small quantities as well.
• Expand product-line: whenever buyers visit Costco, they see only few brands such as Adidas, Puma, Reebok but only few items related to such brands are there. Experience of customers with those products is no so good. Those might be defective pieces company sells. But to increase sale and customer loyalty Costco should contact the famous brands and sell their products.
• Advertisement: Costco do not advertise at all. It only sends mail to the prospective member as well as coupons to existing customers. But this is not enough in this era where people are addicted to social media. Number of people do not visit Costco because they do not have membership cards. They have no experience what type of products Costco sells or what quality they provide because there is no advertisement. So, Costco could provide one- or two-month free trail for shopping to bring new customers to the business if they do not want to spend money on advertisement.

Referencess

1. Newsmaxfinanace. (2019, February 9). Retrieved from www.newsmax.com: https://www.newsmax.com/finance/benreynolds/costco-ceo-company
2. Gamble, J. E., Thompson, A. A., Jr., & Peteraf, M. A. (2019). Essentials of strategic management: The quest for competitive advantage. Dubuque: McGraw-Hill Education.