Value Chain Essay

The strategic objective of Costco is based on the concept of offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories while producing high sales volumes and rapid inventory turnover. This 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, enables Costco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. (1)

Pricing, product selection, treasure hunt merchandising, low cost emphasis, and growth are the chief elements of Costco’s strategy. It is a very good strategy because

Costco has a simple strategy for being one of the leaders in the wholesales, which is concentrating on driving sales. If the sales of a company are good than everything else will take care of itself. While other companies such as Wal-Mart, Target and BJ’s pour money into marketing; Costco has a no-frills approach and doesn’t advertise. Costco focuses on selling fewer items which increases sale volume and

Costco has many risks associated with its financial and operational performance. One of the biggest risks that Costco is facing todays is the competition from other retailers and wholesalers, such as Wal-Mart and Target. Costco compete with its competitors for customers, qualified employees and management personnel, suitable sites and suppliers. The retail business is extremely competitive and continues to get even more completive. Such events as the evolution of retailing in online channels has improved the ability of customers to compare prices and products and as a result enhanced competition. Any significant increases of competition may adversely affect Costco’s financial performance, and make Costco incapable to compete successfully in the future.

Conducting a value chain analysis provides a snapshot for identifying a firm’s relative competitive performance, core competencies, and for focusing on customer centric activities. Costco’s customer driven focus allows primary and support business activities to work in unity creating a stronger competitive advantage and thereby increasing profitability. Profitability and shareholder value rely on coordination of both sets of business activities to create a firm’s competitive advantage.

Costco’s business model is focused on producing high sales volumes and rapid inventory turnover by offering members low prices on a limited selection of national name brands and select private-label products in a wide range variety. Costco is focused in low-cost strategy is concentrated on a narrow buy segment and out competing rivals by having lower costs, therefore being able serve a niche consumers at a lower price. (Gamble, John and Thompson, Arthur (2009)

The value chain, made by Michael Porter, is really important to see how a company structure is created. The value chain is constituted by two parts: support activities (firm infrastructure, human resource management, technology development, procurement) and primary activities (inbound logistic, operations, outbound logistic, marketing and sales, service). (Johnson et al. 2011, p.97-99)

Costco Wholesale Corporation (Costco), with its subsidiaries operates membership warehouses that offer its members low prices on a limited selection of branded and selected private-label products in a range of merchandise categories.

Costco does not have distributors or retailers to supply its products to the end users. They do, however, have reseller who buy their products for their business and sell to the end user. For example, Costco’s business membership offers tax-exempt purchases to restaurant and small grocery store owners; they then sell those purchased goods to the end user.

Due to the market; bargains were more important to consumers. Fifty-six of Costco warehouses exceeded $200 million in sales in fiscal 2010, and two of these units each did more than $300 million. This rate of revenue is highly attributable to the strong entrepreneurial culture that encourages its employees and management’s teams to be creative and contribute new ideas to allow the company to constantly evolve and improve. It has been well publicized that Costco rewards and compensates its employees well. It is a well oiled machine that reciprocates its success with its customers and employees.

“The key elements of Costco strategy are extremely low prices, a limited selection of naturally branded and private label products, a treasure hunt shopping environment, strong emphasis on low operating costs, and ongoing expansion of its geographic network of store locations.” To provide low prices Costco caps its markup on brand merchandise at 14% compared to 20% to 50% at other supermarkets. The equals out to a sales revenue that only equales several million dollars. This number excludes all other operating factors including the membership fees. Another important element of the strategy is that unlike other retailers they don’t offer window displays or any other thrills with in the stores. They know because of the reputation and because of the value that they offer their customers that the items that they sell offer value over all else.

Costco is the best cost provider in the wholesale club category and the strategy is associated with Costco’s capabilities and resources, which includes; a streamlined supply chain, good supplier relationships, purchasing power, high sales volumes, quick inventory turnover, and excellent customer service. The three vital components of the company strategy are low pricing, limited product selection and high-end products acquired in closeouts and liquidations. While Costco strives to beat the competitors pricing, it also delivers exceptional value in its high-end offerings and customer service, giving consumers more for their money. Given its customers are the most affluent of all the warehouse clubs, with average incomes around $75,000 and this strategy works well for Costco. However, these customers are conscious not only about money but also value for the product, this fact is supported by the members who choose for executive

At the end of 2012, Costco was a successful business, but there are some issues that they would need to deal with. These issues mainly arise from their previous successful ventures as a warehouse wholesale company. The first issue is that Costco has competitors that can actually be and are a threat to their success. Competition allows a company to improve itself and prove its prowess to its customers. However, when a competitor is able to provide the service at a much reduced cost, problems will arise. As for the second issue, it seems that Costco’s efforts to become an international company are moving slowly. They have not reached a point where their US and Canadian warehouses provide a backbone for their finances. Costco’s third issue is that their finances are too reliant on acquiring new members and not on selling their products. If they cannot keep acquiring new members at a steady rate, their financial infrastructure could suffer.

With 91 percent renewal rate in 2015, Costco’s value-added services to its members still remain one of its biggest advantages in the retail market. It is because not only Costco offers its members with wide range of high-quality products at low prices, but also it provides one of the best services in the market. In order to keep high value on membership, Costco generally accepts returns of merchandise. On certain electronic items, it has a 90-day return policy and provide technical support services and an extended warranty. In addition, Costco provides consumer services, insurance services and business services to its members. Its members are also qualified for additional discounts from its business partners, such as Avis Rental Car. In 2015, there are 81 million card carrying Costco members in the U.S., translating to 33% of all adult Americans. The number of cardholders and high membership renewal rate strongly demonstrates how successful Costco maintains its customer loyalty, which is the foundation of its business.

The Industrial Revolution reshaped the world and expedited how business was conducted through the use of railroads and steam engines. Department stores soon evolved after and revolutionized how shopping was done and centralized a variety of merchandise at one central location (Tayan, 2003). With the introduction of 20th century operational management strategies such as Just in Time (JIT) and Lean Manufacturing, companies had to alter its operational efficiency and the way it conducted its business in order to grow and stay competitive. Costco Wholesale Corporation entered the wholesale club industry in the early 1980s (Tayan, 2003). The idea behind a wholesale club was to maximize profits by minimizing operational costs