Costco Wholesale: A Warehouse Powerhouse
Warehouse giant Costco is effectively leveraging its operating model to sustain a business advantage and drive growth.
Business Model:
Costco has over 600 warehouses and 80+ million cardholders. [1] Their business model is built on three key aspects: memberships, low prices, and a great value.
Memberships
To shop at Costco, one must pay for a membership or go shopping with a member. Three membership levels are offered: Gold Star ($55/year), Business ($55/year), and Executive ($110/year). All memberships grant access to all warehouse locations, with additional rewards and services available for the Executive member. [2] Memberships continue to grow; reach of over 80 million cardholders in 2015 was up from over 75 million in 2014. [3]
Low Prices
Costco offers a variety of goods at competitive prices. Leveraging efficiencies and scale, Costco strives to pass savings from its business on to its customers. [4]
Great Value
Costco competes on both a quality and quantity perspective. A variety of name brands can be found on the shelves as well as private label items. Costco also leverages bulk quantities to drive cost per unit down resulting in a greater value for the customer. A “100% Satisfaction Guarantee” policy gives consumers further confidence they are getting a great value. [5]
Operating Model:
Costco’s operations rely heavily on the following characteristics to sustain its business model and create value: store layout, labor, SKUs, and scalable operations.
Store Layout
Costco Stores are “no frills”. With cement floors, metal shelves, and pallets of goods, Costco is a far cry from typical grocery stores. Wide aisles accommodate large carts and many customers to maneuver quickly through the store. Perishable items are located towards the back taking customers on a journey throughout the warehouse as they shop.
Labor
Walk through a Costco and you will see strategically placed employees. The bakery, meat counter, and other services related items will have an employee to guide customers through the purchasing process. However, walk around the clothing and you will have trouble finding an employee. Costco does not leverage salespeople in these spots. Instead, you will find these employees at the checkout lanes, efficiently scanning carts full of goods through the checkout at lightning speeds. Efficiency is key in the labor model; every additional person adds costs that the consumer must ultimately pay for, which is counter to their business model.
SKUs
On average, a warehouse offers 3700 SKUs to customers. [6] With fewer SKUs, Costco is able to focus its efforts on only selling the items most demanded by its customers
Scalable Operations
With over 600 warehouses [1], Costco uses its size and experience to continue to grow its footprint. Several new warehouses recently opened in fiscal year 2016 (below list) which will leverage current supplier relationships and past experience to grow operations.
![Source [8]](https://i4tsk12in2b2y7uts14c528g-wpengine.netdna-ssl.com/wp-content/uploads/sites/4/2015/12/new-stores.png)
As Costco continues to leverage its operating model to scale its business, the volume of business gives Costco buying power which aligns with Costco’s business model to offer low prices and a great value. [4] The low cost business model leverages the “no frills” warehouse aspect of the operating model to minimize the costs of a typical grocery store to return the value to its customers through low prices. Likewise, the strategically placed labor and lack of salespeople in every department throughout the store further controls costs to allow warehouse members to benefit in the form of lower prices. In addition, the SKUs at Costco help maintain a competitive advantage; diverse supplier relationships [8] as well as a private label brand, Kirkland, allows Costco to remain competitive in offering high quality products.
Performance
Costco’s integrated business and operating models ultimately drive performance. In 2015, Costco recorded revenue of $113.7 billion. In addition, they recorded $2.6 billion in cash membership fees, leveraging a key aspect of their business model to drive performance. [1] Net sales and net income continue to benefit from connecting their operations efficiently to their business model. [6]
Costco is set up for continued high performance. In a digital age where many items are purchased online, Business Insider highlights in a recent article how Costco continues to offer items that consumers prefer to purchase in a store, such as produce and gasoline. [9]
Sources:
[1] Costco Today Presentation, October 8, 2015 http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-audioarchives
[2] http://www.costco.com/join-costco.html
[3] Historical Highlights, http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-homeprofile
[4] http://www.costco.com/membership-information.html
[5] http://www.costco.com/member-privileges-conditions.html
[6] 2014 Costco Annual Report http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-reportsannual
[7] Recent Openings, http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-irhome
[8] http://www.costco.com/supplier-diversity.html
[9] http://www.businessinsider.com/costco-is-amazon-proof-2015-12
Great job Kim! I had never thought of Costo in this manner before, but it is clear after taking TOM that this company is clearly a well-thought out machine. I thought your analysis of Costco’s labor policy (i.e., employees placed in strategic areas) and its minimalist approach to layout were particularly interesting. Despite being in a day and age where people prioritize customer service and high quality experiences, Costco has continued to succeed and thrive based on its unique model and low-cost, large quantity products. I wonder if that will continue to be the case or if the increased competition will one day catch up to Costco and force it to adapt.
At the end of the day, Costco’s business success depends on membership loyalty, demonstrated through memberships and shopping frequency– as you point out this is definitely supported by their operating model. The business model of a club membership is smart because it psychologically makes the customer want to use the membership to make purchases or to help friends make purchases. Costco’s operating model focuses on enhancing a convenient shopping experience to keep retention levels high.
Once the operating model is up and running, and customers in the market have developed brand awareness, Costco has also been successful in new store growth. In looking at the placement of two of the new Milwaukee-area Costco sites (New Berlin and Menomonee Falls), you can see that Costco has strategically placed these stores along two other highway arteries that lead to MSA suburbs in the northwest and southwest, expanding their reach, while (as you mentioned) at the same time leveraging the existing supplier relationships that already support the existing stores along highways to the north and west.