This paper aims to analyze the market strategies used by the wholesaler Costco, evaluate their sales strategies and provide recommendations to improve performance.
Background
Jim Sinegal founded Costco together with Jeff Brotman in Seattle in 1983 (Thompson & Strickland, 2001). They combined rapid inventory rotation and operational efficiency, thus enabling Costco to operate profitably with lower margins compared to the competition. With the liquidity of their sales, they were able to obtain discounts for advance payments and financed a large part of their inventories with the payment terms to their distributors, instead of having working capital. Costco's strategy involves cost leadership where they offer low prices for products. Its growth strategy has relied on open new stores, creating an even bigger and loyal member base and employing marketing techniques to induce members to buy at Costco more often and higher volumes per purchase.
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The organizational philosophy comprises five principles: Obey the law and work under ethical principles, caring for its members, offering them quality products and guarantee, since they are the raison d'être of the business, caring for their employees as their main asset, offering them great benefits and career path within the company, as well as a comfortable organizational environment, respect their suppliers, as partners in the businesses and make them prosper together with the company and reward our shareholders, also as business partners, operating in a way that is profitable in the long term.
Maintaining corporate culture is the key to Costco's success, since having low prices and unique opportunities manage to build loyalty and increase its membership base. Furthermore, Costco’s standard inventory does not have different presentations of its different products, since they consider a greater loss to have higher inventories than the loss of a customer. Costco has a large market share. However, it does not have a great differentiation strategy regarding its closest competitor. Costco is a company that operates mainly by rotating cash, using this to pay its suppliers and obtains discounts for advance payments.
In just 35 years since its establishment, Costco it has achieved rapid growth, currently employing 189,000 people around the world and operating 671 stores located on four continents (Thompson & Strickland, 2001). The further expansion allowed the company to achieve accelerated sales growth in less than six years. Specifically, for the next three years, it is expected that the company will have an annual average increase of around 9.4%.
Nevertheless, this wonderful history of continuous success has not been the product of chance. An innovative strategic approach in the most sensitive areas of the business has allowed it to grow steadily, achieving satisfactory results even in times of instability in the global economy. New products and services, strategic partnerships, expansion to international markets, penetration into new market niches and a human resources program focused on the protection and development of employees, among others, have enabled Costco Wholesale to occupy the top position in the retail sector.
To understand and explain about the culture of Costco need to define what is market segmentation. Consumers today are more educated and have access to information that allows them to perform searches and be more demanding when buying, especially when choosing a brand and selecting where they will buy. Companies focus on directing their efforts towards markets, specific groups or segments and create campaigns, promotions, and strategies by segment. A market segment is a group of consumers who share similar needs and desires. Many companies identify the characteristics and needs and create effective marketing strategies to motivate purchase.
The market segments are divided into four: Geographic - divide the market by regions, nations or states; psychographic segmentation - the consumer is measured by personal characteristics, lifestyles, and social class; demographic targeting - consumers are categorized by age, gender, religion, race, and occupation. Consumer behavior: consumers are divided by knowledge, attitudes, and responses to products.
Strategies
Costco was established to serve wholesalers, retailers, and individuals who buy in bulk, and by purchasing an annual membership, can buy various products for their business or personal use, at better prices than in traditional stores. The company is in the business segment of retail discounts. According to reports from consumers, users of membership systems can save a lot of money and usually are traditional retailers. The development of the concept of memberships is a strategy that has been successful during past years in creating loyal customers. Club discounts offer attractive incentives and drive this segment to grow regardless of the economic conditions. The growth of these chains which focus on the ‘Club’ segment or membership is based partly on selling to small-scale consumers. The industry is expected to continue growing with Costco being the leader.
Traditionally Costco focused their campaigns to attract older customers with purchasing power through the industry clubs and retail discounts. The Costco market is divided into two segments: small business owners and the general public. In past years these strategies have been changing to try to attract a younger audience. Technology is playing a very important role in how consumers buy and choose products and services. Every company, no matter which market segment one may want to reach must include strategies influences on social platforms. Costco has implemented the inclusion of these platforms and has improved its information technology system to attract the young. Firms that adopt the ‘pay to buy’ membership style accrue two crucial advantages: Return customers and competitive differentiation. In my opinion, one of the features that represent the success of this business model is the guarantee that the member will be back to make yet another their purchase. Costco has a 90% renewal of memberships annually, which means it's a great percent.
Due to the high membership that guarantees purchases. That said, their market strategies invest very little money in advertising campaigns or promotions. The company uses direct promotions through emails and its website and promotes certain products with their partners.
Some disadvantages of the strategies used by Costco may include a low presence in social networks, little presence of stores in urban areas, little or no advertising, and little choice of brands or product lines to buy in stores.
After analyzing the strategies used by Costco to promote and manage their products and services in the segment of partners, it is very effective. Costco is a different and successful company that has positioned itself in the segment of wholesale trade and adopting unique strategies that have been very difficult to be copied by competitors. I understand the strategy of creating partners helps ensure loyal buyer that feels unique to be part of that small group of people who can benefit from the offers and products that only Costco offers.
References
Thompson, A. A., & Strickland, A. J. (2001). Strategic management: Concepts and cases . Boston, Mass: McGraw-Hill/Irvi
