Mgt 455 - Costco Sales Model

Prof.Baril

MGT 455

Jesse Ramos

Costco

As we take a look inside Costco and the heart of dynamic model of business, we find out why and how has Costco grown and succeed through time. Costco’s success is done by four categories: 1) Sales Model. 2) Products. 3) Services. 4) Labor.

Sales Model: 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, generally under the Kirkland Signature label. This results in a high volume of sales for the brand in question, allowing further reductions in price and marketing costs. A typical Costco warehouse carries only 4,000 distinct products, while a typical Walmart Supercenter carries approximately 140,000 products. If Costco feels the wholesale price of a product is too high, they will refuse to stock the product. For example, in Nov 2009, Costco announced that it would stop selling Coca-Cola products because the maker refused to lower its wholesale prices. Costco resumed selling Coca-Cola products the following after some negotiations. Costco also saves money by not stocking extra bags or packing materials; to carry out their goods, customers must use a shopping cart, bring their own bags, or use empty merchandise shipping boxes from the company's vendors.

Products:  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. Most products sold at Costco have an 8% to 10% markup, while Kirkland Signature brand products have a 15% markup. The company runs very lean, with overhead costs at about 10% of revenue and profit margins at 2%. It has no public relations department and does not buy outside advertising. Costco's annual membership fees accounts for 80 percent of Costco's gross margin and 70 percent of its operating income.