AIB Featured Business Costco
Famous for turning the experience of warehouse shopping into an adventure, Costco, the world’s largest membership warehouse chain, has thrived by turning convention on its head. The company never advertises, charges its members to shop there and does not mark up any product more than 14%. It’s a business model that works, generating $116.2 billion in annual sales.
Costco began with Sol Price and his son, Robert, opening the first Price Club warehouse in July 1976 in San Diego, California, thus giving birth to a totally new concept: a retail warehouse club. Costco Wholesale Corporation began operations in 1983 in Seattle, Washington. In October 1993, Costco merged with The Price Company to form Price/Costco, Inc., a Delaware corporation. In January 1997, non-warehouse assets were spun off to Price Enterprises, Inc., and the company changed its name to Costco Companies, Inc.
There are 697 warehouses worldwide, with eight locations in Australia. In November 2015, Costco opened its eighth Australian warehouse in Moorabbin, featuring its first fuel station in Victoria. Membership ranges from $AU55 a year for a business and $AU60 a year for a gold star.
The warehouses present one of the largest and most exclusive product category selections to be found under a single roof. From groceries and clothing to automotive supplies and office equipment, Costco is known for carrying top quality national and regional brands, at prices consistently below traditional wholesale or retail outlets.
According to Craig Jelinek, Costco’s CEO and Director, “Costco is able to offer lower prices and better value by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, a fancy building, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members.”
To achieve this strategy, Costco buys nearly all of its merchandise at volume discounts from manufacturers, rather than distributors, and stock is usually shipped directly to selling warehouses to minimize freight costs. Warehouses are often on industrial sites or in other areas where property costs are at a minimum, and stocked items are placed directly onto the selling floor or are still stacked on their pallets, reducing handling and stocking labor. The number of sales and service employees is also minimal (200,000 globally), with a large percentage of the employees holding part-time status. Warehouses are almost entirely self-service, from finding and buying items, to loading them into a customer’s vehicle.
Surviving 21st century challenges was no easy feat for Costco. With a bull run of over six years straight of profit-earning increases, Costco experienced an unexpected decline in earnings in the first half of 2001. Much of this was beyond the company’s control, as the West Coast of the U.S. suffered from an energy crisis that sent energy prices skyrocketing. The company responded to the crisis by equipping California stores with backup generators to keep refrigeration units running in case of blackouts, turning down air-conditioning, and designing new warehouses with as many skylights as building codes permit to allow the company to turn off lights during the day.
Though the energy crisis was much to blame for the slide in profits, there were several other factors that contributed. The economy was in a slowdown, decreasing overall retail sales. In addition, the company was dramatically expanding, having already opened 27 new warehouses that fiscal year (a 90% spending jump), bringing the total to 360 warehouses in the U.S., Canada, Mexico, the United Kingdom, Korea, Taiwan, and Japan. Also, the profits could not match the year-earlier profits that were driven much by Y2K-related buying.
Despite the slowdown, Costco sales (in stores open at least a year) rose 5% in 2001, a crucial statistic in the industry. Revenue from membership fees (which had been increased the previous year) increased 23%, and Costco continued to maintain an impressive 86% renewal rate in memberships, the highest in the industry. The company had about 16 million active members and over 35 million cardholders.
In addition to its already existing e-commerce Web site for members, Costco.com, that had been launched in 1998, Costco officially launched the “B2B” (Business to Business) portion of their online shopping Web site in April 2001. This new feature allowed businesses in the U.S. to order products online for delivery, with some areas, Seattle, Los Angeles, and San Francisco, having the option of next-business-day local delivery from the Costco fleet. By further branching into e-commerce, and with plans to continue the company’s expansion at the rate of 40 new warehouses a year, Costco continued its rapid growth with no slowdown in sight.
Costco has developed a sort of cult following among thrifty shoppers and supporters. They return repeatedly for the treasure-hunt thrill of constantly changing inventory, low prices and high volume. The bare-bones operation has not only changed how people shop, but how much they buy. There no frills retail revolution has led to a wholesale shopping craze.
What do you think?
The “Costco Effect” has captured the routine tendency of its members to succumb to the store’s discount-chic allure and spend more than they expect, often buying more than they need. Its success has come because it defies so many of the standard rules of retail. Have you developed a similar peculiar business model that eventuated in a runaway success? I’m interested to learn more about when standard rules may not apply, but a simple idea seems to prevail. Comment your views below and join the conversation.
This article was written by Jelena Milutinovic on behalf of the Australian Institute of Business. All opinions are that of the writer and do not necessarily reflect the opinion of AIB. The following sources were used to compile this article: CNBC; Costco; The Huffington Post; Reference for Business; Success Story; Wikipedia
Image credit: The Sydney Morning Herald