1. How does Costco differ form other warehouses clubs like Sam’s clus?

Costco differs from other warehouse clubs in following ways-

 Wide numbers in terms of membership i.e. 672 membership warehouses which is

generating $150 million sales figures
 Membership cost is as low as $50/ year for an individual & businesses
 They have rock bottom prices which is very affordable for people
 They have name-brand products in a merchandise category
 They have around 4000 products ranging from alcoholic beverages to fresh food,
pharma & tires
 They also offers members insurance, financial & travel services
 They have that capability to minimize the cost by negotiating with suppliers
 They never want their members to pay more than 14% above the firm’s cost of goods

2. Does Costco compete with nonmembership retailers, such as Walmart and Target? Why or why
not?

Yes, Costco will be in competition with Walmart & other big giants non-membership retailers
because of following factors-

 They have wide variety of offerings in terms of pleasing the members

 The charging cost is very reasonable & affordable for members
 Whatever non-membership retailers are giving, the better things is being given by
Costco in terms of varieties, quality & cost effectiveness
 672 membership warehouses so big advantage
 They are giving members insurance part which is a big plus for all the members
 They are not working on making money but they are restricted with 14% figure for all
their members

3. Can Costco compete successfully on a large scale outside of the united states and Canada? Why
or why not?

Yes, Costco will be able to make it outside US & Canada because the facilities which is given by
Costco is at par & definitely they can rock outside these 2 countries. For that, they need good
infrastructure & team who can coordinate the members & generate the sales figures. The most
important thing is word of mouth wherein people in other countries can share the feedback of this
company. Reviews will be read by the people & then taking the decision accordingly. Everyone
wants the benefits of the membership taken so Costco is providing all types of benefits & once,
Costco starts the journey of opening the warehouse outside US & Canada, they will definitely do the
best.

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

Costco implements a subscription-based model for customers and applies quite innovative
strategies to run the business. It charges around $55 in US for a subscription and then offers low
prices products throughout the year. In this subscription, Costco offers its service and not goods so it
is obvious that the company should be able to prove its worth of subscription.

Operation wise, Costco applies upper margin limit by which caps its margin to a set limit and
financial data suggest that it has around 10-11% margin on goods sold. It also sells its own branded
goods by Kirkland Signature and as there no middle chain, it commands higher margin.

Costco also pays quite higher wage to its employees at around $21 per hour and because of this
employee productivity has been higher and plus there is very low level of attrition. In this it saves on
recruiting and training of new employees which cost more generally.

Another smart strategy is keeping lower SKUs or stock keeping units which is beneficial in terms that
lower SKU means there is lower tracking and managing cost. Further because of lower space,
suppliers tend to offer low prices for their products to be shelfed at Costco which further benefits the
company.

Overall, Costco has been in the business for more than 40 years and it has 663 stores worldwide
and if we consider its subscription renewal rate then it stands at 91% in the US and Canada while
87% at international levels. So, we can conclude that it is successful at this juncture even outside US
and Canada.

5. Does Costco compete with membership retailers such as Wal-Mart and Target? Why or why not?

Yes, Costco compete with membership retailers such as Wal-Mart and Target.

Costco pays higher to the employees. So it has less turnover rate (24%) than Walmart (50%).
Costco cares more about its employees and customers than its stakeholders. At all times, Costco let
their employees that they matter. Costco held a nearly 55% share of warehouse club sales across
the USA and Canada, with Walmart holding roughly 36% share. Costco also keeps prices low by
keeping store displays at a minimum and offering fewer items. Customers always find something
new at its stores. Costco and Walmart compete directly with one another with increasing frequency.

6. What is Costco’s business model? Is the company’s business model appealing? Why or why not?

Business Model is used to exemplify the methods and ways which we used to generate planned
revenue. The Costco’s business model is to generate high sales volume and rapid inventory
turnover by offering low prices on limited selection of national branded and select private-label
products in wide range of merchandise categories. Costco’s offers these products to their members
who are of two types’ business members and gold star members.

This business model is tempting because it gives a test to Costco’s management to continue to
devise strategies and methods through which they can keep hold of existing members and catch the
attention of new members. Otherwise they will suffer failure because there will be a risk that
discontented members will not renew their membership. This business model takes company
towards total quality management.

7. What are the chief elements of Costco’s strategy? How good is the strategy?
Strategy is the organization’s pre-selected means or approach to gaining its goals or objectives,while
keeping in view current and future external conditions. Costco’s strategy’s elements are:

• Low prices

• Limited product lines and selection

• Treasure hunt shopping environment

By keeping low prices Costco’s is following cost leadership strategy which is good because on this
base they can compete with their competitors. By limited product lines and limited selection they are
offering limited 4000 items which are less as compared to its competitors. Costco’s is adopted
market development strategy by capturing new markets for existing products. By treasure hunt
shopping environment they provides such product at low prices to its members which they believe
will not be available in next visit. This works as an incentive and members try to take maximum
advantage and therefore Costco’s sales volume increases. At Costco’s warehouse products are not
offered in every size. The strategy they followed is that by offering every size their efficiency will
decrease therefore it is said intelligent loss of sales.

8. Do you think Jim Sinegal was an effective CEO? What grades would you give him in leading the
process of crafting and executing Costco’s strategy?

Yes, I think Jim Sinegal is an effective CEO. He has a vision and proper plans that where Costco’sis
and where it will be in long term time period. He plays an active role in overall strategy formulation,
implementation and execution. He acts as producer, director and knowledgeable critic.He cut to the
chase quickly, exhibiting passionate intent to detail and pricing. He used to firing a stream of
questions at store managers about sales volumes and stock levels of particular items. He used to
regularly analyze position of certain products in stores and give his comments on any aspect of store
operations that caught his eyes. Jim Sinegal lead its team by front and the position where Costco’s
wholesale stand is proof that he is and effective CEO.

9. What support can you offer for these grades? How well is Craig Jelinek performing as Sinegal’s
successor? 

In referencing Figure 2.1 in Chapter 2, Jelinek has continued the basic strategic vision, mission and
core values of Sinegal. He set objective that he felt were important, which fell in line with the
beginning basic objectives of Sinegal and continued with the crafting of the vision, implementing a
strategy and then effectively tweaking the objective as needed. He is not a person that is going to go
with the status quo. He wants to continue the vision of the company and move it forward with
increased sales and growth.

Costco is a Washington based wholesale corporation which is one of the largest warehouse
partnership company in Washington with its branches in many countries.

10. Describe the culture at Costco.

The Costco Wholesale become one of the largest retailer in the world. The success behind the
company is none other than its unapologetic culture which nurtured by its founders. Their
organisational culture is one of the main reason behind its success.

The companies guaranteed organisational culture makes the employees more passionate on their
work and to work with values and to establish values, habits and tradition among them. This
organisational culture of employees make the consumers more happy and satisfied.

11. How does Costco motivate it employees?

Both the employees and employer are interlinked for the existence of both. Without a better
corporation and understanding each other the employee and employer cannot achieve more heights.
The Costco company is having more than 2,25,000 employees worldwide. The company is well
known for their attitude and valuing their employees. The Costco leadership make it clear that they
value their employee more than any thing and let us discuss how the company become a model for
treating their employee and how they motivate them.

Since 2012 most of their managers and executive joined out in their warehouse and the promotion
that the company given to them make to achieve more. The company argue that it is easy to
understand that how and what would affect the warehouse if you have once worked in. This attitude
makes the employees more active because unlike other companies these employees have more to
achieve if they are active and sincere in the company.

The another thing is that, the company is giving better wages and facilities to their employees. They
pay more than any other retailers with an average employee earn $21/ hour . More over that, they
are providing insurance and other benefits to 90% of their employees. The company argue that they,
don't want their employees worrying about other things so they can focus more on their job.

12. What environmental issues does Costco face?

The giant retailers were on the threshold few years back for its violation of rules related to
environment.

The Environment Protection Agency claim that the company federal violates the Claen Air Act by not
maintaining leaks of its powerful ozone harming refrigerant named R-22. Which is said to be 1700
times more harmer than the Co2 emmission . The company has paid a large amount of fine in
supplement to regulating its refrigerant in between 2004 and 2007.

13. How is Costco a socially responsible company?

Costco is well known for its a social responsibility as well. The Costco mainly engaged in four
sustainable responsibilities.

Engaged in and conscious of the welfare of its employees , care for the employees and members
reside, environmental consciousness and social responsible vendors are their noted sustainable and
social responsibilities.

Their leaders are claiming the credits for their social responsible conscious values an the global
reporting initiatives confirm their claim.

As per the 2015 sustainability report, Costo highlights many elements such as ,
climate change statement, carbon emissions footprint, development and site design, energy
management, packaging designs, recycling, and waste stream management and etc.
The company also receives best employer award in 2017 from Forbes magazine for its employee-
centric culture.

1) What is Costco’s business model? Is the business model appealing? Why? Why not?
Business Model is utilized to embody the strategies and ways which we used to produce arranged
income. The Costco's plan of action is to create high deals volume and fast stock turnover by
offering low costs on constrained choice of national marked and select private-name items in wide
scope of stock classes. Costco's offers these items to their individuals who are of two kinds'
business individuals and gold star individuals.

This plan of action is enticing on the grounds that it gives a test to Costco's administration to keep on
formulating methodologies and techniques through which they can keep hold of existing individuals
and grab the eye of new individuals. Else they will endure disappointment in light of the fact that
there will be a hazard that malcontentedly individuals won't recharge their participation. This plan of
action takes organization towards complete quality administration.

2) What are the chief elements of the Costco Strategy?

Procedure is the association's prechosen means or way to deal with picking up its objectives or
destinations, while keeping in view present and future outside conditions. Costco's technique's
components are:

• Low costs

• Limited product offerings and determination

• Treasure chase shopping condition

By keeping low costs Costco's is following cost authority methodology which is great in light of the
fact that on this base they can rival their rivals. By constrained product offerings and restricted
determination, they are putting forth restricted 4000 it ems which are less when contrasted with its
rivals. Costco's is received market advancement methodology by catching new markets for existing
items. By fortune chase shopping condition, they gives such item at low costs to its individuals which
they accept won't be accessible in following visit. This fills in as a motivating force and individuals
attempt to exploit and subsequently Costco's business volume increments. At Costco's stockroom
items are most certainly not

offered in each size. The technique they pursued is that by offering each size their proficiency will
diminish subsequently it is said insightful loss of offers.

3) What are the core values and principles stressed by the Costco CEO, Jim Sinegal?
There were two fundamental beliefs or business standards seem to put out at Costco. The
fundamental business guideline movement of Costco is to give high an incentive to clients by
offering worldwide and nearby label items at low costs. It is seen that the human asset the board of
the Costco was organizing and coordinating its representatives all around pleasantly.

It very well may be seen from the case that remarks of Jim Sinegal's

made it extremely obvious that he was exceptionally dedicated to catch these qualities as division of
Costco's association culture. Jim Sinegal needed

to state that these two central exercises reflected in workplace of Costco which makes them gainful
all through the world when contrasted with other regular wholesalers and merchandisers.

4) What is the competition like for Costco in the North American wholesale club industry? Please
do a five forces analysis of the industry.
Of the three best wholesalers the challenge is generally one-side as Costco had 65% more all-out
income in 2009 than its next greatest rival Sam's Club. It would be hard press for new contestants to
come into this imprint as these three wholesalers have over 37% offer, in view of populace, of the
market and have been set up for right around 30 years. Simply the advertising and appropriation,
and marking would be difficult to go up against with these industry goliaths. Since these were
wholesalers, they didn't have much challenge from item substitution as they had the capacity to sell
merchandise of higher quality at costs significantly less costly than general stores and other retail
chains. They did this by purchasing item for different wholesalers who needed to dispose of
overabundance item. With regards to haggling power Costco was the pioneer as it had the capacity
to offer lower costs, in the 14%-15% mark-up extend versus 20% for its rivals. They had the capacity
to include this incentive by evacuating every one of the tricks and cost related with regular
wholesalers and retailers.

5) How well is Costco performing financially? Please use the measures that we have gone
over in class i.e. sales/revenue, net profit, earnings per share, stock performance etc. Use
updated data/information.
From a budgetary point of view, Costco is exceptionally fruitful. Display 1 demonstrates productive
years for Costco Wholesale in 2005-2008. In 2008 Costco deals total to be around 71 billion at 544
stockrooms in 40 states. There was more than 50 of the distribution centers that surpassed the deals
200 million every year and two of the stores had deals past $300 million. There are stores that has
shut yet the quantity of stores that are open is altogether more.Costco has been performing
admirably from a money related point of view. Their total compensation has ascended from $631
million out of 200 to $1.46 billion of every 2011, making their normal development rate 7.9%. While
there is dependably opportunity to get better, Costco is an over all monetarily steady enterprise.
2011 Liquidity – Moderate – Current size connection of 1.14 demonstrates the enterprise will pay its
present liabilities in with snappy resources completely once. The normal exchange is 2.4. Be that as
it may, a Current greatness connection that will be closer 2.0 would give an extra most all around
loved fluid position. Capital of $1.6M is positive and speaks to a more grounded liquidity considering
it's over the organization's yearly profit so far and superior to anything the exchange normal of
$895K2011 Leverage – Low – Debt-to-Equity greatness connection 17.1%, exchange 62.7%. Low
influence size connection and high occasions premium earned extent connection of 21.03 is
unimaginably captivating for future loan bosses, which can clear the technique for extra stockroom
growth within what's to come. 2011 Earnings Power and Persistence – Moderate - DEPS upgraded
by 13.0% to $3.30. The profit yield is at 1.1% that is essentially not exactly the exchange normal of
2.30%. The market sees this stock as a not too bad speculation as their P/E proportion of twenty
4.08 is over the exchange normal of 17.4.

Costco Wholesale Corporation (Costco), one among the couple of biggest distributers giant
differentiates itself applying one of a kind methodologies identifying with generation and tasks, and
marketing which make it emerge from whatever remains of the retailers who are additionally said to
be competitive in the retailing and wholesaling business all inclusive. Costco is one of the innovative
wholesalers joined by powerful supervisory crew and committed, roused and satisfied workforce with
the mission "to ceaselessly give its individuals the best quality items at the lowest conceivable costs"
(Costco Annual Report 2006). A portion of the crucial guideline of the Costco is that they comply with
the law, they deal with their individuals, they deal with their employees, they regard their providers,
lastly, they remunerate their shareholders. Some of the reasons how Costco can serve those most
noteworthy quality merchandise of national brands for the least conceivable costs is that they
dispose of various expense related with delivery expenditures, record of sale, stock, sales reps, and
extravagant structures. What's more, they successfully work themselves in the aggressive condition
serving an individual customer as well as a legitimate clients (an organization), and independent
company clients.

6) How does Costco compare with Sam’s Club and BJ Wholesale? Does Costco enjoy a competitive
advantage over these companies? What is the nature of the competitive advantage, if any?
I trust their execution in general deliberately is great since they give what the client hopes to get.
Besides by doing this they have acquired 130million every year at each store which is 75% more
than Sam's club, Sam's club gets 75million from each store. I feel that they extraordinarily appreciate
the upper hand is the reason they keep on structure such huge numbers of areas and can make the
benefit required so as to manage the cost of the huge measure of stores that have been assembled.
BJ's from my point of view is no challenge for Costco except if they work in city's the place there are
no Costco's. Seeing that BJ's has just 177 stores contrasted with Costco is the reason I accept there
is no fruition, which thus would be the idea of Costco' upper hand over BJ's on the grounds that
Costco has 713 areas. This by itself brings their series of wins which keeps them in front of Sam's
Club and BJ's.

SWOT Analysis for Costco

Strengths Weakness

Strong market presence Limited product mix

Expansive supply chain Exclusivity to members

Strong brand Low profit margins

Opportunities Threats

Diversification of products Competition with retail stores like Walmart

Expansion of product mix Online competition like Amazon

Expansion of locations Animal rights trend

Expansion to international market

The Costco Craze
Costco is an amazing retail success. Since opening its first store in Seattle in 1983, it has grown to a worldwide
giant that has turned retailing on its head. Here’s a brief description of some of the characteristics of Costco
(taken from Wikipedia, which may be the Costco of online references…):
Costco focuses on selling products at low prices, often at very high volume. These goods are usually bulk-
packaged and marketed primarily to large families and businesses. Furthermore, Costco does not carry
multiple brands or varieties where the item is essentially the same except when it has a house brand to sell,
typically under the Kirkland Signature label. This results in a high volume of sales from a single vendor,
allowing further reductions in price, and reducing marketing costs. If Costco management feels the wholesale
price of a product is too high, they will refuse to stock the product. For example, on November 16, 2009,
Costco announced that it would stop selling Coca-Cola products because the soft-drink maker refused to lower
its wholesale prices. Costco resumed selling Coca-Cola products on December 14, 2009.Costco also saves
money by not stocking extra bags or packing materials; to carry out their goods, customers must bring their
own bags or use the merchandise shipping boxes from the company's outside vendors.
Lighting costs are reduced on sunny days, as most Costco locations have several skylights. During the day,
electronic light meters measure how much light is coming in the skylights and turn off an appropriate
percentage of the interior lights. During a typical sunny day, it is very common for the center section of the
warehouse to have no interior lights powered on.
Most products are delivered to the warehouse on shipping pallets and these pallets are used to display products
for sale on the warehouse floor. This contrasts with retail stores that break down pallets and stock individual
products on shelves. Costco limits its price markup on items to 15%
Costco is known for treating its employees well. (Craig Jelinek , Costco CEO got a lot of publicity after
recommending that the nation should raise the minimum wage to $10.10/hr.) It offers them health insurance,
good pay, and a chance for advancement. Yet, it still makes more than $10,000 in profit from each employee
as compared to $7,400 in profit per worker for WalMart.
https://www.youtube.com/watch?v=cysRawnadPc
This video explores why Costco is so successfu.
Read more about Costco below:
Costco: Breaking All the Retail Rules
Does It Pay to Be a Costco Member?
Cheap Eats Keep Them Coming Back
Then I want you to answer the following questions (I expect at least 1-2 paragraphs for each question):
1. How does Costco differ from other retailers?
Costco is far different from other retailers. As the full name "Costco Wholesale "
suggests, costco is a wholesaler not a retailer so this makes a huge difference with
other retailers like walmart etc. Costco buys stuff in huge quantities which implies
that they also have to sell it as soon as possible. They sell stuff in bulk, which makes
it cheaper for customers to buy from here.

2. Why doesn’t Costco advertise?

As far as advertisement is concerned, the products that are being sold by Costco are
the products that sells itself, they doesn't need any advertisements . The customers
 who buy merchandise regularly from Costco gets great benefits if they become
members.

3. Why does Costco keep the price of its hot dogs and other fast food so low? How does it do it?
Now, the secret behind keeping the prices of hot dog , chicken and other stuff so low
is their strategy. No doubt they bear some sort of loss in selling these hot dogs etc
stuff but this is what attract customers to buy the costco memberships. Selling more
and more of memberships is Costco's profit. In other words, we can say that selling
hot dogs at low prices is their investment and more customers attracted to buy their
membership is the return on investment.

4. Does it pay to be a Costco member? How would an economist calculate the cost of membership?
Yes ,there are charges for being a member at Costco. Ranging $60 to $120.
5. Why does Costco charge a membership fee?
Membership fees is the major source of income for the Costco. Bulk sales don't
really make the company money. According to data, in 2018 the company sales was
$138 billion. And the cost of that merchandise was $123 billion leaving $15 billion for
the business. Now other additional expenses, free samples by costco etc combines
to $14 billion. Which implies the leftover $1 billion to be the net income. But the
company reported $3 billion net income in 2018. Now from where the other $2 billion
came? Answer is from memberships

6. Costco claims to break all the rules in retailing yet continues to be one of the most successful
companies in the big box supermarket industry. In the context of the four P’s, select four
unique Costco tactics identified in the video and explain in one or two sentences how each of
them help drive Costco’s success in the market.
At Costco, customers can get everything they need from groceries, fine wines,
televisions, toys, to Promotions: Costco has managed the art of reeling you in using
free samples. Costco understands that the more consumers feel and taste the
product, the longer they will stay in the store and look for things

7. Given all the recent changes in this segment of the retail market, name ONE critical
competitive challenge facing Costco TODAY. Then elaborate on the steps you think Costco
should take to stay relevant in this competitive retail space?

The retailer has a unique business model that could impact its long-term outlook,
earnings, and share price. At its most basic, the company's approach is to keep
prices so low that they are barely above cost and make up on lost potential revenue
by selling memberships. The company also sells some of its own brands and makes
a little more on these items. It offers some things online, but the bulk of its business
is in-person, in-warehouse sales. In a nutshell, Costco makes a lot of its money off
those memberships.
KEY TAKEAWAYS

 Costco has a business model that depends heavily on repeat shoppers buying
memberships.
 By selling memberships, Costco can sell products at prices that barely cover costs.
 One problem with Costco's model is that buying in bulk is not ideal for some
consumers, especially those that live in cities where it might be difficult to move large
items from the store to their homes.
 Many consumers also want the convenience of online shopping, which Costco has
been slow to adopt.
  Costco also faces risks from changing consumer preferences because its model
depends on high volumes of sales.
1. Who is Costco's target persona? (target audience)
The target audience for Costco is the high-profile customers who have a higher spending power.
This is the reason why they accept only limited kind of payments like cash, cheque and American
Express credit cards.

2. What does Costco want this target persona to know? (topic of content)
Costco wants its target audience to know that they sell their products at the lowest cost available
and there is every chance that they get a good discount on designer brands as well.

3. Which format does Costco use to communicate this message? (video, blog, post, infographic)
Costco generally uses the direct communication method through email where all customers are sent
a monthly reminder on the discounts available at the store.

4. Which information distribution channel does Costco's target persona visit regularly? (pinterest,
facebook, youtube)
Costco target audience regularly visit the FACEBOOK page and it has 1.1 million likes on its
FACEBOOK page.

5. What is Costco’s competitive strategy? Who are Costco’s major competitors? Describe
Costco’s business model. Describe the tasks that Costco must accomplish for each primary value
chain activity. How would Costco’s information systems contribute to Costco’s competitive
strategy, given the nature of its business?

Costco is among the leading global retailers which provide customers with a wide range of
merchandise, ranging from small to well-known brands. The company began operations in 1983.
Over the years, Costco has been a retailer in a low-cost membership-only leader, in warehouse club
of merchandise. Moreover, Costco does not offer frills warehouse business models as its
competitors do. Costco’s major competitors are BJ’s Wholesale Club and Sam Club (Costco, 2010).
Applying the tools presented in this SSP, Costco provides a detailed analysis for transforming
business operations relative to industry rivals.

Costco‟s business model is to sell premium merchandise at a lower price to members (a captive
group of shoppers). Sam‟s club is their biggest competitor. They need to procure the right
merchandise mix targeting their members by building a strong understanding of their base of
members. They need to have an efficient supply chain and then be able to track the success of their
promotions and marketing efforts.

6. Who is Costco target market? Describe demographically and by different types of market
segmentation e.g. psychographic. How does this compare to the competition? Provide as much
information and sources of information

In business marketing, market segmentation and targeting specific markets aids organizations by
reducing the risks involved in decisions of how, where, when, and with whom the brand, product, or
service will be advertised, directed, or promoted to. Positioning the product or service to the accurate
target while controlling the marketing budget are tactics used by marketing professionals to assure
reaching the largest target group and controlling costs (Boundless, 2014). Attracting the right
customer is the ultimate objective of targeting specific markets by directing the research and efforts
in a manner consistent with and specific to those segments’ characteristics. Segmentation divides
the consumers into groups with similar desires by examining demographic, psychographic,
geographic, and behavioral individualities (Kotler & Keller, 2012). Branding and strategy are equally
important and will be discussed later in the positioning statement.

Target marketing and segmentation for Costco Wholesale is unique to other retail business as it
operates as a members-only warehouse club. Costco initially opened the doors as Price Club in
1976 and operates domestically and internationally in 663 locations worldwide, and is headquartered
in Issaquah, Washington (Costco Wholesale, 2014). The original target focus for the warehouses
was designed and targeted to accommodate small-to-medium-sized business for the purpose of
purchasing for affordable resale, and has since become popular to the individual personal needs and
desires as well with their Kirkland Signature private label brand products. Costco claims that each
warehouse offers products that are of top quality, the most exclusive, at the lowest price, and offers
the largest product category available in the market for one-stop-shopping. Costco keeps prices
down with low overhead by offering a no-frills warehouse approach. Costco currently has 76.4
million paid membership cardholders, serves 41.9 million households, and employs 189.000 full and
part-time individuals as of August 2014 (Costco Wholesale, 2014).

Market Segmentation

To be of value market segments must be measurable, substantial, accessible, differentiable, and

actionable (Kotler & Keller, 2012). Segmentation of demographics for Costco is vast as the current
product offerings include all genders, ethnicities, incomes. age groups, and social classes. When
considering demographics, it is important to consider the average or typical characteristics of the
target market. As mentioned earlier the target market or focus for this company is supplying the
small- to medium-sized business and targets the middle- to the high-end consumer with its private
label brand Kirkland Signature. Categories of products currently include major appliances, furniture,
electronics, luxury items, special events, seasonal items, hardware, sporting goods, housewares,
apparel, health and beauty products, jewelry, tobacco, alcohol, apparel, office supplies and
equipment, groceries, gasoline, photo and media services, and partners with many other companies
to offer savings in many other areas such as home improvement, pharmacies, optical services and
the like (Costco Wholesale, 2014).

From a psychographic point of view where activities, interests, buying habits, attitudes, and opinions
are concerned, Costco continues to grow and rate favorably with customers. Consumer Reports
magazine reports that Costco is the leader and is the preferred retailer in the opinion of the readers
based on factors such as product quality, value, friendliness of store and staff, ease of returning
items, and overall service. Costco was also considered the value leader by providing the best bang
for the buck. Walmart, Sam’s Club, and Target fell below Costco’s ranking in terms of popularity and
value for consumers (Keshner, 2010). Psychographic characteristics typically go beyond the external
focus and are not as easy to quantify but do identify why consumers buy a particular product or
service (All Business, 2014).

Geographically Costco currently operates 461 warehouse locations in 45 U.S. States. Additionally,
173 warehouses are also operated internationally in Puerto Rico, Canada, Australia, Japan, South
Korea, the U.K., and Mexico. Majority-owned subsidiaries are also located in Taiwan and Korea.
Costco specifically tailors a product to each of these ethnically diverse locations. Currently, 28% of
net sales are generated from international operations with plans to expand in these markets soon.
When considering opening a new warehouse location Costco considers the region and
neighborhood, the size of the area, population density, and climate (Costco Wholesale, 2013).
Behavioral characteristics appear to be directly related to how Costco operates, treats their
employees, and is true to their core values. Some examples of employee treatment include paying a
fair living wage, offering benefits to 88% of the current pool of employees, continuing to offer
Thanksgiving as a paid day off, promotion from within, embracing equality, and paid wage increases
during the recent recession. As a result of this remarkably fair and equitable treatment, all Costco
employees are loyal with executive turnover at less than one percent and annual total turnover is
below six percent (Short, 2013). Costco has created the astonishing feat of treating employee well
while producing a profit and adding value to the consumer. As evidenced by the Consumer Report
survey, Costco’s customers believe they are purchasing the best value for their money, great
service, and in a friendly, no-frills environment. These behaviors are consistent with the human need
to be treated well and be offered the best value for the hard-earned dollar.

Two (main) attributes of any supply chain:

Time

Time in this context means delivery of products to store shelves. There is a

misconception that delays (alone) cause supply chain disruption. Many times the early
arrival of some products creates unforeseen warehouse space shortage affecting other
products or business processes.

Cost

The companies cannot always pass on the increase in cost price to their customers.
The retail store management might consider switching suppliers or discontinuing any
product.

There are infinite possibilities that may cause supply chain disruptions. Many
companies adopt “vertically integrated business model” for better management of the
supply chain.

In a vertically integrated business model, the primary business takes over control
(partial or full) of the supply chain.

There are two (main) methods of vertical integration:

 Controlling the supply chain through active participation (e.g. investment in

suppliers’ business in any form)

 Setting up (from scratch) a separate production and/or manufacturing facility

America and the retail market

With a population of 328 Million, America’s total retail sales in the year 2018 clocked up
over US $5.16 Trillion. People know of the popular American retail giants like Walmart
and Amazon, but there are many other retail chains which control a significant share of
America’s retail sales. One such retailer is Costco.

Costco at a glance

Costco “wholesale” is a multinational retail giant. It markets itself as a “membership-only

warehouse club” and rightly so. You have to become a member to buy from Costco.
Costco earned annual membership fees of US $3.14 Billion (for the year ended 2018)
which is 2.27% of its Net Sales. The layout of its stores matches those of warehouses.

Costco is lean on overheads. Pallets are stacked up with products containing items in
bulk packaging. Costco is not your roadside store. It is a shopping warehouse for large
families and small businesses.

Key Information:

Annual Revenue (for the year ended 2018):

US $138.4 Billion

Number of members (card holders – all categories):

94.3 Million

Total number of warehouses:

768 (November 2018)

533 locations in 44 U.S. States & Puerto Rico, 100 locations in nine Canadian
provinces, 28 locations in the United Kingdom, 13 locations in Taiwan, 15 locations in
Korea, 26 locations in Japan, 10 locations in Australia, 39 locations in Mexico, 2
locations in Spain,1 location in Iceland and 1 location in France.

Number of Employees (US):

163,000 (full and part-time)

Number of Employees (Worldwide):

239,000 (full and part-time)

Chicken and Costco

Costco’s ready to eat Rotisserie chicken is a favourite meal of American households. It

sells 60 million (approx) meals each year at the rate of US $5 per meal. Carrying on
with our approximate sales figure the annual revenue from Rotisserie chicken sales is
US $300 Million.

The American poultry market is dominated by 3 companies; Tyson, Pilgrim’s Pride and
Perdue. All three of them are facing lawsuits for unethical business practices. There
have been recalls of poultry products because of contamination. Cartelisation of poultry
business has further suffocated business growth in the poultry sector. All of these
factors have hiked poultry prices. Costco, operating on low margins cannot afford to
offer Rotisserie chicken at US $5 in this business environment. Therefore, the store
adopted a vertically integrated business model by setting up its own poultry processing
center.

Costco and Nebraska Plant

CNBC (22 Jan 2019) reports,

“In fall 2019, Costco will open a chicken farming operation in eastern (Fremont)
Nebraska. This venture will provide Costco with 100 million chickens, 40 percent of its
yearly chicken needs, allowing it to partially escape the American chicken oligopoly run
by the likes of Tyson, Pilgrim’s Pride and Perdue”.

The initial estimates of the project cost are US $275 Million. Work is being carried out to
launch the facility in September 2019.

Costco: Will the new business model succeed?

A shift to vertically integrated business model is not always successful. However, the
following factors increase Costco’s probability of success:

 Costco’s financials are strong.

 The estimated annual revenue from sales of Rotisserie chicken is US $300

Million (approx 60 million chickens) whereas estimated project cost is US $275
Million (for processing 100 million chickens). The project budgets are confidential
information and are not shared by companies, but these figures alone show that
the project will be a game changer for the company.

 It is not Costco’s first such business venture. Since the mid-1980s, Costco has
maintained the prices of its hot-dog-and-soda deal at US $1.50 (mainly) because
the company produces the hot dogs at its Costco Tracy Meat Plant in Tracy,
California.

Nebraska poultry plant will reduce the risk of chicken supply chain disruption and will be
economically beneficial for Costco, but local business conditions and farmer unions
might jack up the project outlay or subsequent operational costs.
Costco is planning to vertically integrate by owning production of 40% of its rotisserie
chicken supply chain.
Vertical integration is an effort to keep the price at $4.99 to attract customers.  The
issue is that the main chicken suppliers are producing fewer whole birds, down from
50% of the supply in the 1980s to just around 15% of the supply today.
Bird size has also increased as the demand for chicken has increased.  Most whole
chickens today are too big to fit on the Costco rotisserie production equipment. 
Costco needs 6 pound birds and the typical whole chicken is now 7-8 pounds from
suppliers.
Costco can control the size of the bird and plans to cut costs per bird by 35 cents by
developing their own poultry complex.