Costco: Innovations on How to Remain an Effective Global Leader

Modern supermarket chains are quite profitable for large-scale enterprises with an acceptable level of efficiency. A large amount of capital, recruitment system, cooperation with distributors, and chains of own supplies allow successful competition in international markets, often displacing national networks. At the same time, many successful supermarket chains recognize the client as the main value, which implies the need to establish management that is able to transform a firm into a customer’s dream. The level of communication with the customer affects the business owners, presidents and vice presidents, sales and project management, cashiers, and technical support in one way or another. Consequently, client-focused companies start to gain a competitive advantage in the condition of globalization. At this point, any supermarket chain can remain an effective global leader only if the target orientation of their management is a client.

Costco Identification and Analysis

Costco Wholesale Corporation is a US-based retailer and one of the largest retailers in the world (Costco Wholesale Corporation, 2016). The company has warehouses with a system of self-service and ranks first place in this market segment (Thompson, 2009). Since Costco Wholesale warehouses sell the goods of a small number of suppliers, the company is able to get discounts for the products (Meyer, 2015).

Considering the organization’s profile, it should be mentioned that Costco Wholesale Corporation is registered at the address 999 Lake Drive, Issaquah, WA 98027, United States. The company’s ID is 83201, it is publicly traded on the NASDAQ electronic trading system, and its stock symbol is COST. Telephone and fax of Costco Wholesale Corporation are 425-313-8100, and the official website is costco.com (Costco Wholesale Corporation, 2016).

In early 2012, the company gave a workplace for 114,500 people (Moskowitz, 2014). Its major rivals are Target Corp. and Wal-Mart Stores Inc. However, if the self-service warehouse sector is concerned, Costco Wholesale Corporation is ahead of the above-mentioned companies.

A Brief History of Costco, its Vision, and Mission

Costco Wholesale Corporation was founded in 1983 in Seattle, Washington, the USA by entrepreneurs James Sinegal and Jeffrey Brotman. From the very first days of its existence, the sphere of the organization’s activity was retail. Wal-Mart founder Sam Walton had a long-standing view on the company Price Club, founded in 1976 by Sol and Robert Price. However, in 1993, Costco Wholesale conducted a merger with Price Club, and the name of the formed enterprise was Club Price. After the M & A-transactions, PriceCostco owned 206 outlets with annual revenues of $ 16 million (Tai & Chuang, 2014).

Numerous reasons can explain and emphasize the interest in investigation of this particular company. First, it is distinctive in size and popularity, as long as it is currently one of the world’s largest self-service warehouse networks. Furthermore, the company sells a limited number of goods but at very reasonable prices. The members of the club system Costco Wholesale can also receive an additional discount. Regularly conducted attractive marketing campaigns contribute to its attractiveness as well (Meyer, 2015). Therefore, Costco warehouses are located not only in the US, but also in Canada, Mexico, UK, Japan, Taiwan, Australia, Spain, and South Korea. The decor of these sales factories is extremely simple: concrete floors and simple fluorescent lighting with minimized costs. What is more, Costco Wholesale sells cheap goods under its own brand – Kirkland Signature, which was firstly presented in 1995.

Second, Costco Wholesale has its own vision, and the original vision statement says that Costco is a place where efficient buying and operating practices give the members access to unmatched savings (Lombardo, J. 2015). This vision emphasizes the unique position of club members by demonstrating their membership in a specific circle. Vision implies that the purchasing activity must be efficiently providing the customer with some savings, and this is the goal the company strives to fulfill (Lombardo, J. 2015).

Costco Wholesale Corporation’s mission statement aims to continually provide the members with quality goods and services at the lowest possible prices (Lombardo, J. 2015). Such an attitude makes the mission express a similar idea more clearly – most savings are obtained through lower prices and membership in a certain circle of people. However, the mission in addition to the vision presents the quality as the new idea not shown in visions (Thompson, 2009). Apart from the above mentioned, the company is characterized by the unique direction of the strategic plans.

The Firm’s Current Strategic Plans

It is necessary to point out that Costco, being a network of wholesale stores, is one of the most customer-oriented companies. The organization is trying to actively focus on the clients in order to make its management structure more customer-centric. The adoption of this strategy is rather sensible, because in the light of globalization issues, it can bring the firm’s competitiveness to a high level. Any customer can go online and become acquainted with the company’s prices, and compare them to those of competitors (Tai & Chuang, 2014). Thus, management structure of Costco in this case has the impact on the firm performance.

At the same time, many rivals in the same field of activity try to pay more attention to the mission than to profit. Their leaders realize that they will not be able to win and retain customers, if they do not win and retain the best employees first. The most talented people prefer to follow the mission, which is the goal that goes beyond ensuring profits for shareholders. Despite all the efforts invested by the companies in the dual task of focusing on clients and inspiring employees, the vast majority of them have not achieved much success. Consequently, the structure of the rivals’ organizations remains stubbornly focused on profits.

On the contrary, Costco has built its management structure around the clients, maintaining their loyalty, enthusiasm, repeated purchases, recommendations, as well as emotions and actions that determine the economic results of the individual customer rather than those of the company (Tai & Chuang, 2014). What is more, the organization’s strategy is to offer the customers a wide range of high quality products at the prices lower than the competition ones. Good products at reasonable prices with efficient service contribute to the tools of this strategy and attract customers.

The latter do not just buy the membership in Costco to get the benefits, but they really enjoy being the part of this big team. Costco became the first company that has grown from nothing to sales of 3 billion dollars in less than six years. In the Fortune 500 list in 2014, the company ranked fourteenth place (Costco Wholesale Corporation, 2016). In addition, Costco occupied the first place among retailers, according to customer satisfaction rate with 84 points out of 100. Evidently, the customers of the organization are satisfied: about 90% extend a membership card for the following year (Costco Wholesale Corporation, 2015).

It should be mentioned that Costco uses a number of tools as the elements of its strategy. The company listens to customers and tries to solve their problems quickly. Costco is in fact faster than its competitors, because every effort is dedicated not to force the client to wait. Obviously, the company is proactive and steering, which is caused by the fact that the customer always appreciates those who seek to solve the problem before he or she becomes aware of it. Costco proves to be reliable and always provides additional savings. Furthermore, the company is ready to answer all the customers’ questions, thus demonstrating the knowledge of products and services they offer. In turn, Costco also asks customers to give the feedback in such a way showing that their opinion is valued. Overall, the company monitors the market thoroughly, constantly refreshes their knowledge, and knows its customers closely.

Special attention should be paid to Costco’s unique business model, which consists in selling goods at low prices. The production, which comes in large packs, is purchased mostly by families and legal entities. Focusing on the small circle of producers, it maximizes the sale of certain brands of products, which allows obtaining further discounts from producers. In addition, such strategy significantly reduces the level of Costco’s costs and gives the advantage of the high rate of inventory turnover. Another peculiarity of Costco is the absence of brand diversity. This policy significantly increases the sale of the same suppliers, which are ready to offer discounts and make deliveries on preferential terms. If Costco’s management believes that the price of a particular commodity is too high, the vendor will simply refuse to store the product.

Costco permanent members of the club consist of about 81 million people – not only in the US but also around the world (Costco Wholesale Corporation, 2015). The network of about 700 stores operates worldwide, a large number of which is located in the US and Canada. Annual membership in the Costco system costs about $55 and 91% of customers renew the membership every year. Generally, membership cards price varies depending on the category, from $ 55 for a Business and Gold Star to $ 110 for the leading level (Costco Wholesale Corporation, 2016). Those club members who pay an annual fee of $ 55 obtain a possibility to get a refund at any time, if they are dissatisfied with their status. Paying $110, people get accumulated a return of 2% of the purchase price, which is sent to the buyer in the form of a check at the end of the year (Costco Wholesale Corporation, 2016).

Costco has earned a reputation not only of one of the cheapest trading companies in the world, but is also considered one of the best employers in terms of payment and additional benefits. Furthermore, Costco buyers put it on the first place among the specialized retail stores. Costco also saves huge amounts of money on bags and packaging materials.

As conceived by the founders of the business model, the buyer must take care of the purchased transportation. The business model of wholesale and retail giant continues to successfully unwind, despite the recent economic recession. Almost a cult reputation of Costco is built on a combination of price and choice that gives its current status. This approach has allowed Costco continue to expand, despite the competition from a network of supermarkets Walmart, and Amazon an Internet auction. However, the company has few problems that will be further discussed.

A Description of the Problems Facing the Company

Costco had various problems during its development, which will be displayed with the degree of their relevance for today’s operation. First, as well as many other supermarkets, it faced a low ROI. The company has a trading margin of 14%, not fixing it as its competitors do. At this stage, the issue is relevant only in comparison with competitors, whose ROI are higher because of the fixed margins (Costco Wholesale Corporation, 2016). ROI of Costco is more dependent on the number of customers, their loyalty, and club dues.

Missed sales or the lack of tradable goods was another urgent problem of Costco’s management. Many shops are located near the supermarkets of competitors (Bauner & Wang, 2014). For this reason, the company has lost its sales. Earlier, Costco tried to determine the assortment, which was unsatisfactory. In addition, excess reserves (organizational problem), the unpredictability of consumer demand (marketing issue), accumulated return (Costco introduced discounts on returned goods), the problems with basic software to integrate goods and materials, poor performance of suppliers/distributors (it disclaimed troubled suppliers), and a complex and tedious process of inventory were and still are the weak points of the corporation (Moskowitz, 2014). Currently, these issues do not threat the company that, since all of them are the problems of interaction, and successful solutions have already been taken over every problem. Nevertheless, consideration of the potential difficulties must always remain the priority.

The Firm’s Culture and its Influence on Solution and Contribution to Problems

Corporate culture is a set of behaviors that are acquired in the process of adaptation to the external environment and internal integration, effectively shared by the majority of members (Guiso, Sapienza & Zingales, 2013; Shabankareh, Madani & Shiralizadeh, 2015). Costco culture improves its focus: all the employees know the purpose of their work and the overall goal of the company, understand why they should concentrate on their own responsibilities, and contribute to the achievement of this common goal.

Costco culture also motivates its employees: the company creates the appropriate conditions were in such a way increasing the effectiveness of their work. Culture strengthens the team: using internal corporate systems, the company strengthens the voluntary communication between employees and as a result, all departments operate as a single mechanism (Moskowitz, 2014).

To solve the problems of interaction, Costco has closed the administrative levers of control by means of the cancellation penalty system, with control over the employee and other intimidating measures (Moskowitz, 2014). As a result, the construction of business at certain conditioned reflexes diverting the main places of worship of power has not happened. Despite the minimal bureaucracy, this approach assumed many factors of emotion and subjectivity in the decision-making process. There is a problem of insufficient training of middle managers, high staff turnover, and randomly assigned managers (Moskowitz, 2014). Another issue is that until now Costco stores accepted only American Express credit card, so that all customers (members and non-members of the club) who do not have these credit cards, are forced to pay by cash. However, the interaction of the staff in the shops with the leadership resulted in the decision to start accepting Visa cards soon.

Now, customer oriented company offers not only goods but also health care in its stores. To order prescriptions at Costco pharmacies, one does not necessarily have to be the member of the club. As the result, many people take the advantage of this privilege, because these pharmacies can often propose the lowest prices for many drugs. Additionally, Costco offers a free health screening for the problems such as diabetes, osteoporosis, cardiovascular and pulmonary diseases. Thus, the Costco’s culture regarding its clients and staff affects the overall performance of the company, creating and reaffirming the loyalty and trust of the customers. At the same time, the main volume of club members, in turn, provides the profit and may thus contribute to the problems.

Recommendations

Costco adopts the correct orientation in the world of sales. The company has several small problems in management, but it is working on their correction. The following are the recommendations that may assist in strengthening the company’s position.

The value of sales is showing a buyer the best conditions to be able to make informed choices from a wide range of goods with proper quality at an affordable price and in the shortest possible time (Guiso, Sapienza & Zingales, 2013). Therefore, Costco should consider the option that has a value to the customer. For instance, widening range to give a possibility to increase a choice, rare goods, the emphasis on quality as a guarantee of low probability to buy fake products, and the dissemination of information regarding quality control (Costco Wholesale Corporation, 2016). What is more, the company can save the customer’s time posting the products topically. Costco may also increase the comfort of acquisition by improving comfortable environment (temperature, floor quality, minimal decor), providing the ability to take the goods into hands for the assessment, ensuring the presence of baskets and trolleys, considering the seller’s advice on demand, accepting cash and non-cash payment cards of different banks etc. (Costco Wholesale Corporation, 2016). All this is expected to increase the company’s costs negligibly, but will further enhance the focus on the customer, enlarge the company’s turnover, and lower overhead costs per unit of output.

Conclusion

Costco Wholesale Corporation is the largest US-based retailer, which was founded more than three decades ago. The vision and mission of the company underline the unique position of the club members, who may have significant savings due to the effective consumer activity in purchasing quality products.

The modern strategy of the company is more customer-oriented than profit-oriented. The company dedicates the effort to sustain loyalty, enthusiasm, repeated purchases, recommendations, and other activities of its client, believing that customer satisfaction will lead to success. In fact, Costco customers are satisfied: about 90% of them extend their membership card for the following year. However, the company has a number of problems that are already on the path of resolution. The issues include low ROI due to the lack of fixed trade margin, stock surplus, the unpredictability of consumer demand, etc. As long as the customers is the main wealth of the company, ROI of Costco and its position among rivals in the same market segment is more dependent on the number of customers, their loyalty, and club contributions. The solutions to organizational problems are also being actively discussed, and the recommendation system aims to further enhance the focus on the customer. These actions may increase the company’s costs, but at the same time, are bound to enlarge its turnover and thus income, proving that client-oriented strategy deserves application.