A big-box, no-frills, minimally stocked operation that requires a membership fee to offset low margins on goods and services, Costco was founded in 1983 by James Sinegal and Jeffrey Brotman with a mandate to provide a minimal selection in an extensive range of products that excel in their class and at the same time provide good bargains. The lack of advertising and its associated costs, the low overhead, the negligible markup, the high sales volumes, a respected high-quality signature brand and co-branding with well-known high-end manufacturers, the infrequent and unexpected availability of highly valued and desired goods, and road shows of premium specialty items at affordable prices contribute to Costco’s success. However, Costco’s respect and care for its employees as well as its customers has also helped its success.
Costco relies on word of mouth from satisfied customers rather than costly advertising to secure business and loyalty. The use of skylights and reduced lighting on sunny days, the use of shipping pallets to act as displays on the barren concrete retail floor, the lack of shopping bags and other forms of packaging materials contribute to their cost savings. Only one credit card company, American Express, is used exclusively and in return, no fee is charged to Costco on transactions, which magnifies savings to both the consumer and the seller.
Great attention is paid to providing high quality goods that are also sought after by consumers. There is little choice available in the 4,000 core goods that are stocked, only 25 percent of which continually change, but those goods chosen are purchased in large lots to minimize costs and prices. Even in its food court where a limited number of items are available for an extremely reasonable price, a family of five can be fed for less than $10. Costco guarantees a full refund at any time for the products that it sells. Electronic products must be returned within 90 days to secure a full refund; however, to further entice customers, Costco offers a free two-year warranty. Kirkland, its signature brand, is well priced, of good quality, and upgraded frequently. Costco has been innovative in its packaging of goods, its merchandising mixture, and limits its overall markup to 14 percent.
There are also great values in higher-priced merchandise that appears occasionally for a short period of time. Whether the product is diamonds, boutique wines, leather sofas, or exotic cheeses, they are of high quality with never more than a 14 percent markup. These special lots pique shoppers’ interest and drive repeated visits. The periodic rotations of unusual goods such as oriental rugs further induce customers to shop frequently.
According to analysts, Costco’s unskilled employees in the United States receive an average wage of $17.25 per hour, which is 42 percent higher than the wage paid by its major rival. Costco also covers 92 percent of the cost of the healthcare benefits that are provided to all employees, including part-time workers. High profits result from the respect shown to employees and in return there is low turnover and a higher rate of productivity. The accompanying low rates of theft help propel Costco above its poorly paying rivals. Costco has proven that healthy profits and well-paid employees are not mutually exclusive.
- Costco Wholesale, www.costco.com (cited March 2009);
- Duff, A Private Label Success Story (DSN Retailing Today, 2005);
- David W. Fuller, Anita Thompson, and Mary-Jane Butters, Costco Wholesale Household Almanac (Costco Wholesale, 2007);
- “Discounters: Costco’s Battle to Change Beer and Wine Distribution,” BusinessWeek (n.4065, December 31, 2007);
- Euromonitor PLC, Costco Wholesale Corp. (Euromonitor, 2003);
- Institute of Grocery Distribution, Costco Wholesale (Institute of Grocery Distribution, 1992);
- Duane E. Knapp, The BrandPromise: How Costco, Ketel One, Make-a-Wish, Tourism Vancouver, and Other Leading Brands Make and Keep the Promise That Guarantees Success (McGraw-Hill, 2008.
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