Costco was founded in 1983 by Jim Sinegal and Jeff Brotman who were previous colleagues in California within other membership warehouse stores. “The company’s business model was to generate high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories” (Thompson, p. C-35). This analysis will review the “cornerstones of Costco’s strategy; low prices, a limited product line, limited selection and a ‘treasure hunt’ shopping environment” (p. C-35).
Furthermore, it will identify if Sinegal’s strategic approach identifies with Thompson’s five competitive strategies and Porter’s five forces. In conclusion, consulting recommendation will be advised. Thompson describes a five strategy phases for crafting and executing on strategy as; low-cost provider, a broad differential, a focused or niche market based on low cost or differentiation, and best-cost provider. “A low-cost leader’s basis for competitive advantage is lower overall costs than competitors. Whereas, Siengal’s Successful low-cost leaders are exceptionally good at finding ways to drive costs out of their business” (p. 8). Sinegal’s approach focused on four major strategies, the first was to “sell top-quality national and regional brands at prices consistently below traditional wholesale or retail outlets” (C-35). This tactic was to keep prices low to members by capping the margins on brand-name merchandise by fourteen percent and their in-house Kirkland brand at fifteen percent. The philosophy was to keep members coming in to shop by wowing them with low prices. Siengal next alignment with Thompson’s strategies was broad differentiation.
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The essence of broad differentiation is being able to offer unique product attributes that a wide range of buyers finds appealing and worth paying for. Siengal took broad differentiation to an elevated level by limiting the selection in each product category to fast-selling models, sizes and colors. In addition, his competition typical supermarkets such as Wal-Mart Supercenter and Super Target may have one hundred and fifty thousand items for shoppers to choose from in comparison to Siengal’s four thousand. Another valuable approach Siengal demonstrated was his understanding of the fast paced technological changes in retail.
He purposefully would only stocked limited selection to move products more swiftly. Costco’s strategies prove time and time again that they were not trying to be too much to too many. There goal of staying focused on quality-low cost helps them outcompete their rivals and being in position to win buyer favor by means of low-priced offerings. This focus on low-cost versus differentiation has led to Siengal’s no PR department approach. His marketing objectives are limited. His marketing and campaigning is limited to special grand openings, direct mailer to members, and direct calls to businesses within the area of a new warehouse opening.
Costco’s treasure hunt has enticed its customers to shop for the sizable number of items that are high-end or brand name products with high retail prices at affordable Costco wholesale pricing. All in all, Costco demonstrates the best-cost provider strategy by blending its low-cost and differentiation. “Best-cost provider strategies create competitive advantage by giving buyers more value for their money – an approach that entails (1) matching close rivals on key quality/service/features/performance attributes, (2) beating them on the costs of incorporating such attributes into the product or service, and (3) charging a more economical price.
A best-cost provider strategy works best in markets with large numbers of value-conscious buyers desirous of purchasing appealingly good products and services for less money” (p. 104). As an advising consultant to Costco, I am 100% in agreement with his strategic viewpoints. My recommendations are as follows: Recommendations for Costco: • Succession plan for current CEO – Age 79, need strong successor in public eye • PR – A little PR is better than no PR • Updates on Ethics & Compliance – more publically known (PR) • Accept Food Stamps – grow customer base • Packaging – some stock could contain less quantity Payment Choices – Accept VISA and Master Card and charge 2% fee (Comparable to Sam’s Club) • Check out – Consider Self-check out lanes • Non-Member Day – quarterly event allowing non-members to trial store for one day which in turn would increase prospect members Using the five-force model of competition, Exhibit 1 represents an analysis of Costco Wholesale’s competitive environment. The forces characterize an industry by considering the threat of new entrants, power of buyers and suppliers, threat of substitutes and the impact among rival competitors. The threat of substitutes is the strongest for Costco.
This threat comes from specialty discount stores, broad product discounters and hypermarkets followed by online sellers as an alternative threat. Both act to increase the power of existing buyers, particularly for shoppers who are satisfying needs versus wants. Costco’s overall generic strategy of being a best-cost provider has been effective and sustainable in the retail industry today. Costco’s strategic vision for being a low price, high volume retailer is well known all over the country. With this existing strategy, Costco could continue on with a solid future.