At this point, Costco Wholesale is such a well-known name that they don’t even need to advertise anymore – and with good reason. Having been one of the biggest retailers in the US, with hundreds of warehouse locations in over fifty states, there’s no denying its growth.
While the company makes billions every year, it has also managed to keep prices to a minimum. For example, its famous hotdog and drink combo at the food court is still sold for $1.5, the same price it was back in 1985. In addition, Costco limits the markup stores are allowed to charge and has implemented many other measures that have kept Costco at the top of its game since the start. In this Costco business history article, let’s take a look at what makes this company tick, how it has managed to stay ahead of the competition, and more.
Bottom Line Up Front
If there’s any business that demonstrates how to run a business under the cost leadership model successfully, it’s Costco. It focuses on keeping costs and profit margins low and has been true to these beliefs throughout its history.
How It All Began
While many people today think Costco Wholesale was the first company to come up with the warehouse membership business model, Price Club did it first. In fact, when Costco was created, its founders said they wanted to “clone Price Club.” Before Price Club, there was Sol Price, but we’re not here to talk about all that.
Price Club started in July 1976 after Sol Price left his first membership warehouse project due to internal conflicts. While successful, Price Club didn’t have the resources to compete or stay ahead, which gave other entrepreneurs the opportunity to start similar businesses in other states. One of the biggest examples of such competition is Costco itself.
The first Costco Wharehouse store was established in Seattle on 15th September 1983 and went public in 1985. It was started by an attorney named Jeffery H. Brotman and James Sinegal – someone who was already involved in the retail industry and worked under Sol Price and other executives at Price Club itself.
Both these companies had the same business model, and when it came to beating the competition, it was clear that Price Club couldn’t do it alone. So they entered into what is now a historical deal and decided to merge their businesses into PriceCostco.
Both companies ensured their employees that no layoffs would result from this merger, and all members of their respective companies were able to shop at both retail outlets. This meant that Costco members could now shop at Price Club and vice versa, and the two companies combined were able to grow at an unprecedented rate. This desire to stay ahead of its competition has fueled Costco’s growth even later. In 2009, Brotman – one of Costco’s co–founders–told CNN, “When Walmart announced it was going into the discount warehouse business, we had to compete and grow quickly.”
Where It Is Now
Today, Costco Wholesale is one of the most successful retail outlets in the world as well as in the US, and a lot of this success is owed to things like their treatment of their employees – which has led to one of the lowest turnover rates in the retail sector – and their commitment to keeping prices low. While we’re going to go through all this in the next section, let’s take a look at where Costco is today. It has certainly come a long way from where it started, and here are some important things to note:
- According to its annual report, Costco had 105.5 million members in 2020. This is compared to the 98.5 million members it had just the year before.
- It is a Fortune 500 company, currently ranking number 14.
- To maintain its top spot among competition from brands like Sam’s Club – Walmart’s own warehouse selling brand – Costco has had to maintain a policy of rapid growth and keeping operational costs at a minimum.
- According to the American Customer Satisfaction Index (ACSI), Costco is number one with the most satisfied customers back in 2014.
- Costco has locations all over the world that operate in more or less the same way as its US locations do.
Costco’s Business Model
Now that we know the basics of how Costco works, we’re going to talk more about its business model and how the company makes money.
Limited Revenue and Cost of Operation
Costco runs on a lean model for their business – the cost leadership strategy. Under this strategy, a business keeps the cost of operation and consumer prices as low as possible and hopes to attract a maximum number of customers. With enough customers shopping from Costco’s stores, it can earn a significant amount of money even when profit margins are narrow.
There’s little to no advertising for their services, and the warehouses are run in a way that minimizes any overheads. When operational costs are low, Costco can sell goods at wholesale prices. The company currently has a rule to not sell anything for over 14% markup for other brands and 15% for its brand Kirkland Signature. It also has kept its food court prices consistently low since 1985 and even raises its own chickens for its famed rotisserie chicken.
The warehouses are equipped with skylights, meaning the store might not even need to use electric lights on a sunny day. Even on less sunny days, the skylights allow for electricity savings for at least part of the day.
The Online Store
While Costco was never supposed to be an online store – the company wanted to focus more on its physical locations – the pandemic forced them to reconsider its stance on providing its services online. Their online business grew more in 2020 than it had combined in the last five years. It also has partnerships with platforms like Instacart and Ship It that can deliver from Costco.
Employee and Customer Satisfaction
Costco cares a lot about both its employees and its customers. One of the company’s co-founders and its CEO until 2011, James Sinegal, is a massive believer in ensuring employees are getting what they deserve. Good starting wages, health insurance, and other perks keep employee turnover low at the company. Sinegal believes that when employees are treated well, they treat customers well. That makes all the difference in Costco’s warehouses, where customer experience is hardly ever negative.
In an interview, Sinegal claimed that Costco’s turnover rate is only 7% compared to the industry standard of 60% to 70% and that seven cents out of every dollar the company spends goes to its employees. You can hardly beat that kind of dedication to both customers and employees; perhaps this is a huge part of what keeps Costco at the top of its game.
Products and Services
Retail goods aren’t the only way Costco makes money. A lot of Costco’s money also comes from its other businesses like:
- Its auto program
- Costco Optical – one of the top five optical services in the US
- Costco Travel
- Food services
Costco also offers things like a concierge service for the electronic goods it sells, a photo service, and other services that you can often find under the roof of one of its warehouses.
Customer marketing at Costco has always been limited – it isn’t something that fit with Costco’s business model, and it isn’t something that it has ever focused on. Still, it has gained popularity with its customers because of its low prices, high-quality products, and the positive customer experience that it provides. Today and since day one, keeping customers happy has been a big priority for the retail giant, and it has kept this spirit the whole time it has been in operation.
Controversies and Chaos – Can You Sell for Cheap, Maintain Profits, and Source Ethically at the Same Time?
One of the biggest ethical dilemmas today under American capitalism is whether you can offer cheap goods and services and still source them ethically, but Costco does try its best. But despite the many rules and regulations that have been put in place to ensure that the retail giant goes to responsible suppliers for its meat and poultry. Over the years, Costco has been involved in lawsuits, scandals, and more about what kind of things it sells to its customers. It has also been in a spat with other giants over their refusal to lower their prices to a level acceptable to the retail giant.
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