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Why Do We LOVE Costco - Case Study

Updated: Aug 29, 2022

  • Was Written on May 30 2020 for MBA 512 Strategic Management Class at Stony Brook University.

Discussion Question #1:

How does Costco differ from other warehouse clubs like BJ's and Sam’s Club?

All three warehouses are very similar in concept but are somewhat different in their business strategy. The main differences I found in my research are in Costco’s target market, reward offering, and business model.


Target Market

Costco’s target markets are members that are wealthier than its competitors, targeting upper-middle to middle-class families. Costco’s shopper typically has a 90K+ annual income per family, and they tend to spend 150% more than BJ’s or SC’s shoppers.


Reward Offering

Unlike the competing warehouses, Costco offers insurance, financial, and travel services in addition to shelf food, house goods, jewelry, and electronics.

Costco’s membership is the most expensive out of the three, but also offers the most value. On average, Costco gifts its member with the opportunity to earn two times more in its cashback program than the other two warehouses. A family that spends $4.2K monthly can earn $1,000 each year in cashback. On the flip side, a family that only shops at $250 monthly, can earn $60 each year in cashback, which is the exact amount for membership cost.

Also, Costco’s customers share on the internet that Costco’s products tend to be of a higher quality. Costco not only sells products but manufacturing them too. The warehouse makes its food packaging, meat processing, and jewelry.


Business Model

Similarly to its competitors, Costco offers products to be purchased at bulks, with a very specific limited selection of each product. The shelves are packed floor to ceiling and are proudly selling the warehouse brand, Kirkland. The members trust Costco that with its limited selection, Costco is only offering the very best, and perceive Kirkland as a symbol of quality.

The membership is the most expensive out of the three, which members perceive as a sign of higher value. “Pay more for a better service”. Yet, the return policy at Costco is forgiving. A customer testified online: “if you buy something that gets cheaper within 30 days of when you purchase it, Costco refunds the difference if you ask“. (Howard, 2019)

The most important aspect of the model is the decision to make a fixed markup on all store’s products. This makes some products at Costco significantly cheaper than the regular stores and even in comparison to Costco’s competitors. The fixed markup on all Costco’s products is 14% on everything, and 15% on the Kirkland brand.


Discussion Question #2:

Does Costco compete with non-membership retailers, such as Walmart and Target? Why or why not?

Costco does compete with non-membership retailers, and in fact, is winning. Costco is currently the wider most frequently visited retail store, with the highest annual members spent in the U.S. Members testify online that visiting Costco feels like a ritual ceremony, where you always find interesting “treasure” and cool things that are often used. Members also testify online that they usually spend about 25% more than they intended, at Costco.

In a specific comparison to Walmart, Costco enjoys a smaller turnover rate from its employees. Only a 24% turnover rate in comparison to Walmart (49%) thanks to the higher pay employers enjoy in comparison to regular stores. Online testimonies show that Costco cares more for its employees than its stockholders.

Costco manages to compete with other non-membership retail stores by offering more value, and more enjoyable experience.


Discussion Question #3

Can Costco compete successfully on a large scale outside of the United States and Canada? Why or why not?

As a Marketing major, I believe that expending is always possible and should be the goal of every business. Expending can only be achieved with the right marketing and business strategy while taking into consideration the culture, mentality, and needs for the new international location. Expanding internationally will require some adjustments. For example, the mentality of – “bigger is better” is very suiting to America, but might not perceive similarly in other countries. The concept of grocery stores as a huge storage closet could be perceived as a forsaken store that is poorly maintained.


 

References

  • Best, R., 2020. Who Is The Average Costco Customer?. [online] Investopedia. Available at: <https://www.investopedia.com/articles/insights/061516/whats-average-costco-consumer-cost.asp> [Accessed 29 May 2020].

  • Costco Wholesale. 2020. Make The Most Of Your Membership. [online] Available at: <https://www.costco.com/executive-rewards.html> [Accessed 29 May 2020].

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