Business Growth Strategy of Costco: A Case Study
Costco is among the leading physical retailers in the United States. It is one of the leading competitors of Walmart. However, Costco’s approach to retail is very different from that of Walmart. While Walmart follows an open for all approach to retail, Costco is a chain of membership warehouses. You need to be a member to shop at Costco. Like Walmart, Costco also strives to offer its customers the price advantage. However, this advantage is limited only to the Costco members. The company operated 785 warehouses in fiscal 2019 of which 546 were located in the United States, 100 in Canada, and 139 in the other international markets where Costco is operational. Mexico, UK, and Japan are among the other significant markets of Costco. The net revenue of the company grew to $152.7 billion in 2019 from $141.6 billion during the previous year.
In recent years, the company has been investing in technology to grow e-commerce sales and strengthen its existing competitive advantage. The popularity of the brand has been driven by its focus on quality, lower prices, and excellent customer service. These are the main factors that the company has been enjoying higher membership retention rates. Costco’s main source of revenue is the United States market followed by Canada. It has not pursued an aggressive international expansion strategy which might bring the company extra revenue and help it find faster growth. Its international footprint is limited to only a few major markets. The retail industry in the United States is marked by intense competition and apart from Walmart and other retailers like Target, Costco is also facing increased competitive pressure due to the rise of the e-commerce brand Amazon.
In this post, we will analyze the main pillars of Costco’s growth strategy. However, prior to that, we will take a look at the customer segments the company is targeting.
A Brief Analysis of Costco’s Target Market:
Costco’s target market is different from that of Walmart or other retailers. Unlike Walmart that targets a large and varied customer segment composed of people from diverse classes including middle class, upper-middle and upper class, Costco targets mainly the affluent class consumers which are the largest part of its customer base. However, since the company offers a large range of products at discounted prices, it also attracts consumers from the middle class.
Costco’s consumers include millennials and baby boomers. To grow its popularity among millennial consumers, the company has grown its focus on technology. Apart from the lower prices, convenience is also an important factor that affects the millennial consumers’ choice of retail brands. Millennials are now the largest segment of the US population and therefore the most important customer segment for US-based retail brands. Another important segment of consumers that Costco targets are small businesses. A large number of small businesses also shop from Costco since its membership offers an enormous advantage on a large range of products.
Pillars of Costco’s Business Growth Strategy
Targeting the affluent consumers:
Costco’s strategy has always been to target affluent consumers who want to save money but also want to shop in a customer-friendly environment. By targeting affluent customers, the company is able to generate strong revenue while dealing in a much-limited product range as compared to Walmart. Costco has also made several arrangements to attract affluent consumers. It offers co-branded credit cards for its loyal customers. In fiscal 2019, the company had a total of 42,900 Gold Star members as well as 11,000 business members. There are also many more benefits apart from shopping for quality products at wholesale prices which attract affluent customers. Affluent customers mostly like to shop in bulk and make larger purchases. Costco’s Kirkland signature brand is also an important attraction for affluent customers. Its Kirkland Signature brand offers high-quality products that earn higher margins than the other products sold by the company. In this way, despite having a much lower gross margin as compared to the other retailers, the company is able to operate profitably by achieving higher sales volume and rapid inventory turnover. Since the company does not have a sizable marketing budget, its focus remains on attracting and retaining affluent customers. This strategy has worked for Costco and its growth rate remains impressive.
Focus on quality:
Costco’s growth strategy also depends on product quality. The company has always strived to provide outstanding quality products and customer service to its customers. It deals in a limited product range as compared to Walmart. However, the product quality is outstanding. The private label brand of Costco Kirkland signature is also known for its range of great quality products. If Costco has been able to maintain its popularity and leading position in the US market, it is mainly because it is able to attract customers by providing good quality products at lower prices. Moreover, there is an important reason that Costco must continue to invest in quality. The company does not invest in marketing and instead depends only on informal marketing channels for promotions. It invests in quality to maintain its popularity among its members. The result is that its membership retention rates are very high. Apart from that, it also helps the company generate stronger word of mouth which results in higher sales and more sign-ups. The company received an overwhelming response in China when it opened its first store there despite investing nearly nothing in marketing and promotions. This shows that Costco’s commitment to quality has paid well in the long run.
One of the differentiating factors that have helped the company build an outstanding and unique identity is its customer service. Costco has established a customer-centric culture that focuses heavily on customer satisfaction. Since its foundation, the company has strived to create a culture that cares for the happiness of both the customers and the staff. This has enabled the company to create higher customer satisfaction and gain higher loyalty from both customers and staff. A higher focus on customer service also helps the brand differentiate itself from the other retail brands. Costco is a membership-based warehouse chain. To achieve higher sales volumes, the company needs to maintain higher membership retention rates. The customers now do not just think of good quality products and prices when they think of shopping. The overall shopping experience matters for the customers like the level of convenience that they have when they are shopping from a particular brand.
Maintain a strong reputation:
Instead of investing heavily in marketing as the other retail companies do, Costco strives to maintain a strong reputation in the market, which it has made possible by establishing a culture of customer service, collaboration, and ethics. The company’s culture exists at the core of its competitive advantage. The company saves on its operating expenses by not investing in marketing. Compared to Costco, Walmart spends billions on advertising and promotions. The retail industry in the United States is marked by heavy competition and it is why the retail brands invest heavily in marketing. However, Costco decided to take a different route right from its beginning. Its approach to marketing is a lot like Starbucks. The company has maintained a clean and strong brand image, which has continued to grow stronger with time due to a consistent focus on quality and customer service.
Unlike Walmart, which was known for paying its associates lower wages to save on operating expenses, the company pays its employees very well, which has helped it gain higher staff satisfaction and lower attrition rates. This also helps the company save on its operating expenses. Moreover, the staff are also a critical source of advantage and help it maintain its edge in the industry through improved performance. Higher staff satisfaction results in superior performance and better productivity. The company also generates strong word of mouth by providing its customers with a nice range of good quality products at competitive prices and excellent customer service. Overall, its brand image is an important source of competitive advantage for Costco and has helped it maintain its leadership position in the retail industry. As a part of its business growth strategy, Costco continues to focus heavily on its reputation and image and continues to invest in the areas that maximize customer and staff satisfaction.
Investing in technology:
By investing in technology over the previous several years, the company has been able to improve the level of customer convenience and customer satisfaction. Technology has become an important driver of competitive advantage in the retail industry and also an important differentiator for the retail brands that are investing heavily in digitalization and cloud technologies for efficiency and speed. Costco has gained fast in the area of e-commerce. Its e-commerce sales were around 4% of its total sales in 2019. In this area, however, the brand has still to do a lot to catch up with the latest trends. However, the company has been investing in digitalization strategically over the past few years to grow its e-commerce capabilities stronger. With the pandemic, the retail brands have moved even aggressively towards digitalization and digital commerce in the United States. It is because the pandemic has brought some lasting changes to consumer behavior worldwide. People’s reliance on digital technology has grown and they are using online channels to fulfill most of their needs including shopping and entertainment. These trends will continue and most likely last longer than the pandemic. As a result, when the number of actual footfalls in the stores has continued to decline, retail businesses like Costco need to maintain an intense focus on technology to grow consumer convenience and attract consumers in larger numbers.
Supply chain management:
Supply chain management, apart from being a critical source of competitive advantage for the brand, is also a core pillar of Costco’s business growth strategy. It is a critical source of efficiency. However, since the company deals in a limited range of products, it has managed a simpler but lean and agile supply chain. Managing operational efficiency in its supply chain allows the company to reduce operating expenses and pass on the benefits earned to its customers. The company has been successful at generating strong results using an efficient supply chain management model. It stocks a limited number of units per warehouse; an average of 3700. A considerably lower number of Stock Keeping Units (SKUs) allows Costco to achieve higher sales volume. The company buys from the manufacturers directly and has successfully eliminated the middlemen just like Walmart did. It has allowed the company to gain a price advantage that it can pass on to its customers. The products bought from the manufacturers are delivered to Costco depots and then to the warehouses using the cross-docking technique. For a retailer, its supply chain and logistics are like the backbone of its business. No retailer can make growth possible without having an efficient and agile supply chain. Costco’s supply chain management strategy has made consistent growth possible for the brand.
Originally published at https://notesmatic.com on November 2, 2020.