Reference no: EM131462619

Question: More than 20 years after Costco opened its first warehouse club store in Seattle, Washington, the company's philosophy can still be summed up as "pile 'em high, price 'em low." Costco stores are anything but fancy; in fact, the first store was located inside a warehouse. Yet nearly 50 million consumers and small-business owners pay $50 (fee may vary) annually so they can save on everything from mayonnaise, wine, and prescription medicines to handheld computers, truck-size snow tires, and fine art. In fact, customers never really know what products they will find each time they visit one of the 529 Costco warehouse stores around the world. Surprises are all part of the shopping experience at Costco. "The art form of our business is intuition," says CEO James D. Sinegal. His buyers must choose carefully, because the typical Costco carries less than 10 percent of the number of products displayed in a Wal-Mart store. Moreover, Costco aims for a profit margin of no more than 14 percent, which means inventory must sell quickly. If products sell slowly, they will tie up precious cash that could be better spent on newer or more popular merchandise. Therefore, Costco's buyers watch for particularly hot products and product categories.

When the chief electronics buyer noticed the cost of plasma-screen televisions dropping, for example, he took what he calls "an educated gamble" and placed a sizable order. The gamble paid off: the televisions, priced below $5,000, sold out quickly even before the year-end holiday shopping season. Costco carries a broad and varied merchandise assortment, all priced low to move quickly. It sells 55,000 rotisserie chickens every day and $600 million worth of fine wines every year. It also sells 45 million hot dogs and 60,000 carats of diamonds annually. The hot dogs retail for $1.50 each, while a single piece of jewelry can retail for as much as $100,000. Well-known manufacturers' brands share shelf space with Kirkland Signature, Costco's private brand. Members may walk past stacks of best-selling books on the right and color printers on the left as they push their shopping carts down the aisle. This variety enhances the store's appeal, says the CEO: "Our customers do not drive 15 miles to save on a jar of peanut butter. They come for the treasure hunt." Among the treasures they might find: an $8,000 Suzuki grand piano, a $6,000 100-CD Wurlitzer jukebox, and a seven-carat diamond ring for $125,000. Such items now comprise 5 to 10 percent of Costco's sales. Despite the low prices, Costco offers a generous return policy. Customers can return anything at any time. If dissatisfied with their membership, they can even get a full refund on that. The sole exception is computers, which cannot be brought back after six months. No receipt? No problem at Costco.

Customers have ample opportunity to exchange or return items because they visit the stores frequently. Research shows that, on average, members visit Costco stores more than 11 times a year and spend $94 on each visit. Costco's main competitor is Sam's Club, owned by Wal-Mart. Given WalMart's buying power and channel leadership, Sam's Club can buy products at very low prices and get them to stores with unusual efficiency. Nonetheless, Costco tops Sam's Club in a number of ways. Each U.S. Costco store rings up, on average, $112 million worth of merchandise annually. By comparison, the average yearly sales of each U.S. Sam's Club store are $63 million. While the average sales per square foot at Sam's Club is $497, Costco's equivalent figure is a whopping $797 per square foot. Although Sam's Club charges a lower membership fee, Costco's members are quite loyal, with a renewal rate of 86 percent. And they have a median income of $72,000, compared to Sam's customers, with a median income of $50,000. In recent years, Costco has expanded by offering new services at low prices. For example, members can log on to the retailer's website (www.costco.com) and sign up for long-distance telephone service, apply for a mortgage, buy life insurance, or price a vacation trip. The company has also started a new chain of stores, Costco Home, which specializes in home furnishings. In warehouse retailing, however, Sam's Club remains the competitor to beat. Before Sam's Club opened stores in Canada, Costco prepared for the increased competition by remodeling some of its stores. And price wars sometimes break out when the two competitors battle for customers. The parent company of Sam's Club is by far the largest company in the world, but Costco is so adept at warehouse retailing that it continues to hold its own.15

1. How would you classify Costco as an in-store retailer? Why?

2. How is Costco's strategy different from that of Sam's Club?

3. Evaluate Costco's objective of achieving a 14 percent profit. Justify your answer.