Costco – The Low Cost Champion

Indians throughout the world are known for their hard work and work ethic. Especially the Indians who left the shores of India. Popularly calledthe NRIs or Desis they become the grain of their adapted country.

So what are the two things that the NRIs look for when they are considering buying real estate in USA? Proximity of a good school for their children and the proximity of a Costco.

Costco is the darling of the masses. It has a steadfast band of loyals who swear by its name. These fanatical bands of faithful customers are the core of Costco, the retailgiant.

Welcome to the world of Costco, the company that stood the concept of doing business on its head. It turned the business of retail, topsy-turvy or conjured a destructive innovation.

Walmart has a reputation for low prices and Target Corporation is known for selling cheap chic (fashion) while Costco’s USP (Unique Selling Proposition) is offering low-priced, limited selection, retail products.

Costco sells less variety but offers deep discounts. More quantity buying will lead more sales to Costco and major savings to its customers. This is Costco’s mantra for sales and profits.

Costco the retail warehouse was founded in 1976 at Kirkland, Washington. As on July 2016 Costco has stores in 705 locations spread across USA and other countries.

It has revenues of US $ 118.7 billion and a net income (profit) of $3.672 billion and employs 1,26,000 people.

Many don’t understand the magnitude of US $ billon dollars. So let me do the math. $118.7 billion dollars is Rs 7,95,290 crore and the net income comes to RS 24,602 crores.

Management studentsassume that companies get great profits as a percentage of gross sales. They present profitability of 30 per cent or even 40 per cent on sales in their sales projections during classroom presentations.
In reality hardly any companymakes that type of profits as a percentage to sales turnover. Case in point is Costco where the net income is only a mere 3.09 per cent of the gross sale.

So what makes it so lucrative? The scale of operation! When the sale is as high as Costco’s the net income swells to a whopping 24,602 crores. Costco is the largest membership warehouse club chain in the United States.

Management students need to understand perspective. The largest Indian company,Indian Oil Corporation (IOC) has a gross sale Rs 350,603 crores and that is not even half of the annual sale of Costco. Costco is hardly 40 years old!

And to top it all, the employee turnover at Costco is 6 per cent (employee turnover is the ratio of employees leaving the company to the total employees employed by the organisation.

It is calculated on anannual basis). Thus Costco is not only a customers’ delight, it is its own employees’ darling too! Typically it is a blood bath in retail sector where employee turnover rates are in double digits and can even jump to a staggering 67 per cent.

In the United States where the concept of warehousing clubs is very popular the competitors of Costco include Wal-Mart’s Sam's Club and BJ's Wholesale Club. In 2016, Costco served 85 million customers whom it refers to as its members.

Costco focuses on selling products at low prices, often at very high volume. These goods are bulk packaged and marketed primarily to large families and businesses. It does not carry multiple brands or varieties.

This results in a high volume of sales from a single vendor, allowing further reductions in price, and reducing marketing costs.

If Costco management feels the wholesale price of a product is too high, they will refuse to stock the product.

Costco also saves money by not stocking carry bags or packing materials. To carry out their goods, customers must bring their own bags or use the merchandise shipping boxes from the company's outside vendors.

Lighting costs are reduced on sunny days, as most Costco locations have several skylights. During the day, electronic light meters measure how much light is coming in the skylights and turn off an appropriate percentage of the interior lights.

During a typical sunny day, it is very common for the center section of the warehouse to have no interior lights at all.

There is no signage about products on display and this adds to the excitement as customers explore and find out retail treasures and feel thrilled.

Sales clerks are minimal and customers have to find the products themselves. Of course some employees are always present and help if the customers are unable to get needed 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. Costco limits its profit margin on items to 15 per cent.

Typically the decor and the fittings are utilitarian and the stores are located in places where the real estate prices are low.

Costco is only open to members and their guests. Memberships must be purchased in advance for one year.

Purchases made at Costco's website do not require a membership; however, a 5 per cent surcharge is added to purchases made by non-members.

Purchases made with Costco cash cards also do not require a membership, and there is no surcharge. The membership fee at Costco is $55 per year.

Costco memberships can be refunded in full at any time before they expire. Costco guarantees almost all of their products with a full refund within a reasonable amount of time.

Exceptions include televisions, projectors, computers, cameras, camcorders, digital audio players, and cellular phones. These may be returned within 90 days of purchase for any reason for a refund.

After 90 days those returns must be done through the manufacturer according to the terms of the warranty.
Over the years Costco has gradually expanded its range of products and services.

Initially it only sold boxed products that could be dispensed by simply tearing off the shrink wrap off a pallet.

It now sells many other products that are more difficult to handle such as fresh produce, meat, dairy, seafood, fresh baked goods, flowers, clothing, books, computer software, vacuum cleaners, home appliances, home electronics, solar panels, jewelry, tyres, art, wine, furniture and caskets.

Kirkland Signature is Costco's store brand, otherwise known in the retail industry as an ‘own brand, house brand or private label’.

It is found exclusively at Costco's website and Costco warehouses and is trademarked by the company.

Costco is a case study of a company that has a 360 degree view of its business and has mastered the art of doing business where all the stakeholders experience a win-win.