Costco Case Analysis
BUS-670
CK MILLER
M4 CASE STUDY
Costco Wholesale in 2012: Mission, Business Model, and Strategy
1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?
Costco’s business model is based on a best-cost strategy. They take the low-cost provider approach and combine that with creating value for the various stakeholders by focusing on excellent customer service, a strict code of ethics, treating employees like family, respecting suppliers, rewarding shareholders, and a strong sense of environmental stewardship.
They have implemented unique cost-saving strategies in their production, operations, and marketing which have allowed them to attract the most affluent customers in discount retailing. The central focus of their business model revolved around high sales volumes and rapid inventory turnover by offering fee-paying members attractively low prices on a limited selection of goods which consist of a mixture of nationally branded and selected private-label products in a wide range of merchandise categories.
This is a very appealing business model as it provides the ability to operate profitably at much lower gross margins by securing vendor volume purchasing agreements, efficient distribution, no-frill self-service warehouse facilities and supplemental membership fee revenue. Another attractive feature is due to the high sales volume and rapid inventory turnover design of this business model, the accelerated cash conversion cycle permitted Costco to collect the funds for inventory prior to vendor payables becoming due. This provided for vendor financing and the ability to take advantage of early payments discounts which further reduced operating costs. As a testament to the success of this business model, from 2008 through 2011, Costco was able to increase the number of warehouses by 15.6%, revenues by 22.6%, and net income by 14.0%.
2. What are the chief elements of Costco’s strategy? How good is the
CK MILLER
M4 CASE STUDY
Costco Wholesale in 2012: Mission, Business Model, and Strategy
1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?
Costco’s business model is based on a best-cost strategy. They take the low-cost provider approach and combine that with creating value for the various stakeholders by focusing on excellent customer service, a strict code of ethics, treating employees like family, respecting suppliers, rewarding shareholders, and a strong sense of environmental stewardship.
They have implemented unique cost-saving strategies in their production, operations, and marketing which have allowed them to attract the most affluent customers in discount retailing. The central focus of their business model revolved around high sales volumes and rapid inventory turnover by offering fee-paying members attractively low prices on a limited selection of goods which consist of a mixture of nationally branded and selected private-label products in a wide range of merchandise categories.
This is a very appealing business model as it provides the ability to operate profitably at much lower gross margins by securing vendor volume purchasing agreements, efficient distribution, no-frill self-service warehouse facilities and supplemental membership fee revenue. Another attractive feature is due to the high sales volume and rapid inventory turnover design of this business model, the accelerated cash conversion cycle permitted Costco to collect the funds for inventory prior to vendor payables becoming due. This provided for vendor financing and the ability to take advantage of early payments discounts which further reduced operating costs. As a testament to the success of this business model, from 2008 through 2011, Costco was able to increase the number of warehouses by 15.6%, revenues by 22.6%, and net income by 14.0%.
2. What are the chief elements of Costco’s strategy? How good is the