Costco that make the company so successful. Costco’s

Costco Marketing Plan

 

Executive Summary:

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Costco is the largest membership warehouse club chains in
the United States. As of July 2013, it is the fifth largest retailer in the
United States and the ninth largest in the world. Costco is headquartered in
Issaquah, Washington, and was founded in Seattle, Washington. Costco has
locations in the United Kingdom, Canada, Australia, Mexico, Taiwan, South Korea,
Japan, and the United States. Costco offers their customers with low prices on
selected local and a limited selection of nationally branded products in a wide
range of merchandise categories. Businesses and families can rely on Costco to
offer high quality goods and services at everyday low prices. Rapid inventory
turnover, high sales volume per warehouse, leveraging an efficient operating
structure, reduced handling of merchandise, and making themselves the low cost
operator in retail are all key elements that make the company so successful. Costco’s
main priority is to benefit their members by creating value for purchasing
everyday products and services.

 

Company Description:

 

The company was founded by James Sinegal, current President
and CEO of Costco, and Jeffrey Brotman, Chairman of the Board of Directors. In
October of 1993 Costco merged with a company called Price Club to form
Price/Costco, Inc. Price Club was the first company to establish the concept of
a membership warehouse. In 1999, the company changed its name to Costco
Wholesale Corporation and moved back to Washington. Costco is currently one of
the largest retail stores in the industry.

 

Business Mission:

 

Costco’s mission statement is to focus on bringing high
quality goods and services to the market at the lowest possible prices every
day, but to do it with integrity at every level of the company while valuing
the interests of the stakeholders. The mission statement is well understood
throughout the organization. By providing low prices on consumables like fresh
foods, health and beauty care items, high-quality apparel, electronics, jewelry
and other general merchandise, the company pioneered the retail concept that
encourages members to visit regularly to achieve savings. Costco would only carry
an item that could be sold for 20-40% less than its competition.  In addition to offering low prices on
top-quality goods and a variety of convenient services, Costco strives to be a
valuable asset to every

 

community where they do business. This means providing good
jobs at good pay, being involved in community activities and charities,
contributing to local tax revenues, offering a profitable business opportunity
to their suppliers, and most importantly, taking care of their members.

 

Marketing Objective:

 

–         
Costco is known as one of the largest retailers
in the industry. In 1997, on average, Costco warehouses reached $83 million in sales
and the average sales per warehouse was $67 million. Their sales have doubled
and even tripled some of the nearest club competitors in the industry.

 

–         
Costco has all the tools necessary to help them
continue to be the low cost operator in retail. Costco stores are set up with
as little frills as possible. Many items are kept in their original packages or
left their pallets when they were shipped to the store. This helps to reduce
Costco’s overhead costs. Also, Costco has a lot of buying power which allows
them to buy more products at once for lower prices per item. This can help them
save money and allow their members to save money as well

 

–         
Costco will aim to increase the number of
warehouse club memberships. If the number of warehouse club memberships
increase, then there is a greater chance that sales will increase as well. Also,
a larger number of memberships allow the company to buy items in larger
quantities and to pass along savings to the customers.

 

Situation Analysis:

 

As of July 1998, Costco operated about 278 membership
warehouse stores across 24 US states. It has 16 million members that have
provided almost $400 million in fees.  
Costco has a net income of $312 million on sales of $21.5 billion.   The company has a wide assortment of
products, ranging from appliances to fresh food. Clients become a member by paying
an annual fee to shop at a Costco warehouse. Costco warehouses were designed to
operate efficiently and communicate value to their members. The membership is
designed to promote customer loyalty and provide a recurring revenue stream,
which in turn helps the company lower retail prices. By offering national
brands, Costco reinforced the perception of bargain pricing. Qualifying for a
Costco membership only required an evidence of a steady job and a payment of
$35 for businesses and $40 for members of the public. Costco’s renewal rates among
members were 84.5%, while for active business members that rate was even higher,
with renewal rates nearly 97%. Costco has developed a portfolio of new services
including

 

auto and home insurance, mortgage and real estate services,
long distance telephone plans, credit card processing, and check and business
forms printing.   These new services
would only be obtained by signing up for the “Executive” membership for an
annual fee of $100. Costco discovered that 32% of the members, who tried the executive
membership, have also renewed it.

 

Market Analysis:

 

Costco is one of the most dominant warehouse club operators
over the past 15 years. It has 4000 high quality products in each store from
groceries to electronics. The advantages of Costco’s products are that they can
control their prices and save on overhead costs (packaging), while maintaining
the quality. They also offer refunds on all of their products to further
enhance customer satisfaction and help customer retention. In addition, Costco
strives to be environmentally conscious by using recycled material for
packaging. A few years ago, Costco made online shopping available to its
consumers to keep pace with other retail chains. Their revenue form online
shopping within their first 3 years was close to $100 million. Costco has a
close relationship with some of its suppliers. They buy directly from them, which
allows the company to eliminate any delay in receiving the products and give
their customers the opportunity to purchase as quickly as possible. Suppliers,
who provide the material to the company to produce goods and services, can
cause problems, if they have a shortage or delay in producing on time because
this will impact customer satisfaction. Companies should monitor supply
availability, because shortages due to labor strikes or political factors can
cause customer dissatisfaction, and as a result, loss of sales. Costco and
their suppliers gain maximum administrative efficiency, by reducing S
expenses (with 8.4% of net sales, was the lowest in the industry) and improving
accountability with their suppliers. With Costco’s razor thin margins (1-14%)
they were able to adopt an operating philosophy of efficiency on a larger
scale. With this type of philosophy, Costco reaped the benefits of the
productivity cycle and grow its bargaining power with its suppliers.

 

Competitor Analysis:

 

There are over 1,178 warehouse club locations that exist
across the U.S. and Canada, including Costco’s North American warehouses. There
seems to be a warehouse club in every major city, if not several club
operations. Currently, the leading stores in the category of warehouse
membership clubs are Wal-Mart’s Sam’s Club, Costco, and BJ’s Wholesale Club. Wal-Mart
has become the largest retailer in the world and has expanded further into many
other food merchandising formats. Other significant competitors that have
emerged into the market are Target and Kohl’s. Low-cost operators, selling
single category narrow

 

range of merchandise, such as Lowe’s, Home Depot, Office
Depot, PetSmart, Best Buy, and Barnes & Noble, has significant market share
in their respective categories. These stores can be known as category killers
to the market, they have the ability to dominate their targeted merchandise
segment.

 

SWOT Analysis:

 

Strengths:

•             Strong
brand and scale of operations- Costco is known to be one of the largest chain
of stores. They have many warehouses which are located throughout the US,
Canada, United Kingdom, Korea, Japan, Taiwan, and Mexico. Having Costco stores
located throughout these various countries has allowed them to be capable of
leveraging the brand equity which has shown an increase in sales.

•             Efficient
store management- Costco’s inventory turnover rate is known to be one of the
highest in their industry. From 2001-2005, Costco had an inventory turnover
rate of 11.5, while one of its leading competitors, Walmart, only reached a
rate of 7.

Weaknesses:

•             Slow
growth of private labels- Costco has their own private label which is known as
Kirkland Signature. There are many Kirkland Signature Products that Costco
sells at their stores. However, the company has seemed to be slow with the
growth of this product. Kirkland Signature has only been able to account for
about 17% of Costco’s total sales. If Costco is able to gain the interest of
customers in purchasing more of their private label products, it will help them
become even more successful in their industry.

•             Limited
choice for customers- Even though Costco is a successful company, one of their
problems that could set their competitors ahead of them is that they offer a
considerable less amount of products. Costco stocks 4000 types of household
items whereas Wal-Mart stocks nearly 100,000 types of household items. This
limitation can set Costco back because if customers are dissatisfied with the
product Costco has to offer and there isn’t enough alternatives to choose from
then they will go somewhere else like Wal-Mart. Just because Costco is huge in
size, it does not necessarily translate to a variety of products.

Opportunities:

•             Positive
outlook for internet sales- Since the growth in technology more people have
been drawn to using the Internet as a form of purchasing. The US online retail
sales were $104 billion in 2005 and are expected to increase by 17% annually
through 2008. Costco has created an interactive online webpage which allows
customers easy access to information, price, and images of products that they

 

offer. They also offer many services and have descriptions
about each on their webpage. Costco also has membership and location
information as well as information about the company accessible to potential
and existing members.

•             Increases
in home improvement expenditures- Homeowner remodeling expenditures have grown
approximately six percent annually in the last 25 years. This could give a
great opportunity for Costco to focus and possibly have more products that
could help homeowners in the remodeling process. Costco currently sells
furniture, appliances, hardware, household items, and most of the basic
essentials necessary for remodeling. Costco could expand and sell more
intricate items needed for specific tasks to be accomplished in the remodeling
process.

•             Expanding
electronic equipment- With the technological advancements that have taken place
throughout the years, this has given Costco a great opportunity and could
continue to give them even better opportunities for the future. The value of
electronic equipment produced worldwide is expected to approach $1.6 trillion
by the year 2010. The demand for electronic products is still increasing.
Costco is one of the leading retail consumer electronics and appliances
company, could benefit from this increase in the demand.

Threats:

•             Decline
in housing market- Recently, there has been a decline in the sales of both new
and existing homes. This poses a threat for Costco because the demand for their
products could decline which could result in a decrease in sales.

•             High
interest rates in the US- With the high and increasing interest rates in the
US, it could affect the habits of consumers. Because of the inflation,
consumers might consider spending less, which could result in a decrease in
sales for the Costco Corporation.

•             Increasing
retail rental rates- Since 2004, rent has increased by more than five percent
and they are expected to continue rising. With this trend, it may trigger
Costco’s operating expenses to increase. With the increase in interest rates,
if their sales decline and their operating expenses increase, there will be an
even bigger decrease in company profit.

 

Objectives:

 

Costco continues to discover new goods and services that
will create value for their members. They focus their research on their
customers wants, consumer behavior, and what are the latest trends in the
marketplace. They will continue to provide products and services at discounted
prices to meet the needs of their consumers. In addition, Costco will compete
for prime locations to build new warehouses. They

 

will look to compete with other club chains by targeting
other geographic regions where they will generate considerable amount of sales.

 

Marketing Strategies:

 

Costco’s members were affluent, upscale households with
average annual income of $57,000, compared to the US average of $38,000. These
members visited the warehouse on average, every 2 and a half weeks, spending an
average of $94 per shopping trip. When Costco decides to open a new warehouse
in an area, they have marketing teams that contact local businesses trying to
persuade them into purchasing a business membership. They also use direct mail
marketing to attract potential customers that meet their customer profile. The
rest of their market strategy is based on the reliance of their members using
word-of-mouth to attract new members to the company. A study found that 44% of
Americans with household incomes between $30,000 and $50,000 were past or
present warehouse club members.  While
for Americans with incomes over $50,000 the membership rate was close to 50%.
Costco was especially popular in the Northwestern states (Washington and
Oregon), where they had a strong market penetration.

 

Product:

 

Costco offers their customers low prices on selected private
and a limited selection of nationally branded products in a wide range of
merchandise categories. Costco’s Kirkland Signature private label is known for
its quality and value. Costco currently carries 330 private label items which
make up 15% of their sales (Annual Report 2006). Their major products are
appliances, books, DVD movies, VHS movies, music, computer and peripherals,
electronics and camera, furniture, hardware and outdoor living, health and
wellness, jewelry and apparel, and wine and food. Their major services are auto
and home insurance, auto financing and refinancing, real estate agent service,
mortgage services, life insurance, travel, small-business loans and lines of
credit, and health insurance. Costco Travel general manager, Peter Gruening
commented, “Our whole reason for existence is to add a benefit to a Costco
membership, and we do that by selling travel” (Harris, 2007). This is true for
all of Costco’s services; they are trying to create as much value as possible
for their members. High-end products that are not available at stores can be
purchased online at Costco.com. Costco shoppers can also purchase online items
at kiosks located throughout each store. Costco will only carry products that
will provide its members with significant cost savings. They carry only around
4,000 units, while other retails carry from around 40,000 to 60,000 units or
more

 

Some offerings rotate in and out of the warehouse based on
season, and other factors. As a result, members tend shop more often to see
what is new to the warehouse.

 

Price:

 

Costco’s philosophy is to aggressively buy from a handful of
vendors, then drive the cost down for members and sell in volume. Costco
refuses to mark up any item more than 14%, in contrast to supermarkets and
department stores, which often carry markups of 25% to 50%. Individual
memberships can be purchased for an annual fee of $50, up from $45 since May of
2006. Business memberships can also be purchased for $50 per year, with add-on membership
cards available for an annual fee of $40. Finally, Executive memberships are
available to all members in the U.S and Canada for an annual fee of $100.

 

Distribution:

 

The Costco Wholesale Corporation is based in Issaquah,
Washington. They have 504 store locations as of December 2006, with 371
warehouses in the United States, 70 in Canada, 5 in Japan, 5 in South Korea, 4
in Taiwan, 19 in the United Kingdom, and 30 in Mexico. Being located on prime
real estate sites is not a top priority of Costco. The belief is that their low
prices will attract customers rather than the location or elaborate facilities.
Costco has had success using an infill strategy when selecting an area to build
a warehouse. An infill strategy is the use of land within a built-up area for
further construction (Wikipedia.com). They have learned that their stronger
markets can support increasing numbers of their warehouses in closer proximity
to each other. Furthermore, Costco enters new markets, but they do not do it as
aggressively compared to entering existing markets. Costco is tentative when
entering new markets because they rely on word-of-mouth advertising, and they
are fearful of the lack of familiarity with the warehouse. Obviously, it would
hurt their business if they are not able to reach their target market.

 

Promotion:

 

a. Advertising: Costco limits its advertisement to direct
mail to potential new customers. Forming and maintaining good customers
relations is a key part of Costco’s business, most advertising is done

 

through word-of-mouth after a membership base has been established.
Word-of-mouth is where Costco obtains most of their customers.

 

b. Public Relations: Costco allows their customers to sample
many of their products as they walk through their warehouse. It gives customers
the ability to try a product risk-fee. Wall Street analysts have criticized
Costco for many years for treating employees too well and offering generous
benefits at the expense of their investors. In March of 2007, the lowest wage
will increase 10 percent to $10.50 an hour and the top scale will rise 4.3
percent to $20. On the other hand, many customers continue to shop at Costco
because of how well they treat their employees. Costco provides their customers
with a 100% satisfaction guarantee on memberships and merchandise. They will
provide a complete refund at the purchase price if the customer is not
completely satisfied, with the exception of electronics after 90 days.

 

c. Personal Selling: When a Costco warehouse opens in a
given location, marketers contact businesses around the area to see if they
would be interested in becoming a member. When it comes to Costco employees
selling goods and services at their warehouses, they are generally informative,
cheerful, and are known for their experience because of Costco’s low turnover
rate. The difficult part is that they are very thin on the floor and it may be
difficult to locate an available employee.

 

d. Sales Promotion: Costco limits its marketing and
promotional activities to new warehouse openings. They do use direct marketing
to existing customers to promote merchandise. The Executive Membership program
offers additional benefits to customers. They receive an annual 2% Reward on
most Costco purchases, and extra benefits on member services. Costco and
American Express have come together to offer even more benefits to small
business owners that have a membership with Costco. They are providing
businesses the ability to purchase a TrueEarnings (SM) Business Card. The card
offers businesses 5% annual rebate for gasoline purchases, 3% cash back for dining,
2% cash back for traveling on airlines, for hotel stays, car rentals and
cruises, including booking through a travel agency; and 1% cash back virtually
everywhere else, inside or outside of Costco warehouses.

 

Contingency Plans

 

When striving
to achieve their mission statement, Costco will follow their Code of Ethics in
every aspect of their business. Their Code of Ethics is to (1) obey the law,
(2) take care of their members, (3) take care of their employees, (4) respect
their suppliers, and if all of these are met, Costco believes that they will
achieve their ultimate goal which is to (5) reward their shareholders. Costco has direct buying

 

 

relationships
with many producers of national brand name merchandise. They have the ability
to purchase from alternative sources without significant damage to their
operations. Rapid inventory turnover, when combined with operating efficiencies
by volume purchasing, efficient distribution and reduced handling of
merchandise in no-frills, self-service warehouse facilities allows Costco to
reach their marketing objectives. These steps ultimately lowered operating
costs for Costco which is a key reason to their success in achieving their
marketing objectives.