Costco Case Study
1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?
• Costco’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 selected private-label products in a wide range of merchandise categories. Management believed that rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities, enabled the company to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.
• Yes, this model is appealing for the following reasons: o Allows the company to sell and receive cash for inventory before it had to pay many of its merchandise vendors o Allows company to take advantage of early payment discounts o Company is able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than having to maintain sizable working capital to facilitate timely payment of suppliers
2. What are the chief elements of Costco’s strategy? How good is the strategy?
• The chief elements of Costco’s strategy are low pricing, limited product selection, and a treasure hunt shopping environment.
• Pricing: a key element of their pricing strategy is to cap its markup on brand-name merchandise at 14% and markups on their private label items can be no higher than 15%. This strategy keeps customers coming in to shop by wowing them with low prices.
• Product Selection: this portion of the strategy only provides members with a selection of about 4000 items. Their product range covers a broad spectrum but the selection in each product category is limited based on fast-selling models, sizes, and colors.
• Treasure-Hunt Merchandising: while the product line consists of 4000
• Costco’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 selected private-label products in a wide range of merchandise categories. Management believed that rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities, enabled the company to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.
• Yes, this model is appealing for the following reasons: o Allows the company to sell and receive cash for inventory before it had to pay many of its merchandise vendors o Allows company to take advantage of early payment discounts o Company is able to finance a big percentage of its merchandise inventory through the payment terms provided by vendors rather than having to maintain sizable working capital to facilitate timely payment of suppliers
2. What are the chief elements of Costco’s strategy? How good is the strategy?
• The chief elements of Costco’s strategy are low pricing, limited product selection, and a treasure hunt shopping environment.
• Pricing: a key element of their pricing strategy is to cap its markup on brand-name merchandise at 14% and markups on their private label items can be no higher than 15%. This strategy keeps customers coming in to shop by wowing them with low prices.
• Product Selection: this portion of the strategy only provides members with a selection of about 4000 items. Their product range covers a broad spectrum but the selection in each product category is limited based on fast-selling models, sizes, and colors.
• Treasure-Hunt Merchandising: while the product line consists of 4000