Capabilities

6.4.1 Tangible-operating management: Finance

Why they can success in the retail business, we think that it is because they have strong business model as well as strong management team. Let me explain the strong business model first.

- Costco’s business model is predicated on providing its members the lowest prices for high quality goods. This doesn’t mean the cheapest or lowest priced products in a given category. You can find cheaper unbranded toilet paper or laundry detergent elsewhere. Rather it means providing the lowest relative price for a name brand or high quality item. For example, a member can purchase name brand Tide detergent for the lowest price on a per ounce basis at Costco. In fact, the prices are so good that Costco essentially breaks even on the merchandise they sell to their members and makes their money on the memberships. As the result, the low price means the unit price

- The low prices on merchandise can’t really be matched by competitors because competitors need to actually make money on selling the merchandise while Costco doesn’t really have this “problem”. The incredible value drives very high membership renewal rates among existing members and persuades new members to join so they too can benefit from the low prices. In recent years Costco has sustained renewal rates ranging from 88% to 90% - very high for any industry especially retail.

- At the same time, Costco continues to add more verticals and categories that members can save on if they purchase

- the greater scale helps Costco negotiate better price from suppliers

Figure 22 Operating Management

The second point is strong management team. The key elements of Costco’s operating strategy is because they have strong team who has clear understanding of the retail business and know what their membership want.

6.4.2 Tangible-Expansion

Because they have the high profit in each warehouse stores in global, they can extend their stores year by year. So far, their stores still concentrate in U.S. which accounts for 506 stores, and the stores in U.S. are still increased now (figure7).

Otherwise, they extend the warehouse stores not only in U.S., but also in global. You can see the figure 8 which show every country has already been extended the Costco’s warehouse stores. Therefore, we think they have capability to extend their stores.

Figure 23 Numbers of U.S. Warehouse

Figure 24 Geographical Summary of Costco's Warehouse Stores

6.4.3 Intangible-Marketing

Every element of Costco’s business model is aimed at one thing – increasing and improving the value proposition of a membership. This is a done through both improving prices on products and services (ex: adding gas stations, optical, photo centers, insurance). This ultimately makes (1) switching costs higher; (2) the membership stickier and (3) generate some additional operating margin on the additional items sold.

- Membership

The key differentiating aspect of these warehouse clubs versus other retailers is that you must be a member to shop there. They charge an annual membership fee in exchange for lower prices. Costco's renew rate in USA is 90% and average 80% around the world. It indicate that member approve the value of Costco.

- Low price, large quantities and limited featured product

Costco doesn't mark up their price more than 15 percent on their every product and average markup price at Costco is 11%, which compares with other retailers such as Walmart ( 24% ), and supermarkets ( 30-35% )

Costco control their product amounts below than 4,000 types which compares with other retailers such as supermarket (40,000 types) and Wal-Mart (125,000 types)

Costco's product selection is special and deliberated to create the product differentiation. And their product placement and price discount is not fixed and irregular (For example : Levi's pants has a discount, but if you don't buy it, next time maybe this pants sold out or restore to the original price ) so it can trigger member to have a treasure hunting experience and also creates a sense of urgency to buy.

- Treasure Hunt & drive consumer frequency - discovery and exploration About 25% of Costco’s products are called “treasures”. These items from luxury brands to seasonal products. Costco has embraced what they often call the

“Treasure Hunt” – their quantity and discount time are limited and irregular to trigger customer's desire and provide member a fun shopping experience.

6.4.4 Intangible-Human Resource

- Automated System (Maintains Scheduling)

Sinegal has played a central and instrumental role in making and maintaining

a valuable culture at Costco. For him retail was a people business and therefore it was important to get the people part of the story right. It is the most valuable and important part of the equation and getting it right meant having solved the most important part of the puzzle. How happy your people are would decide how happy your business is. Therefore, Sinegal’s focus was on wining people’s dedication by keeping them happy and satisfied. At Costco, they hire good people and thereafter train and pay them well. Apart from it, the opportunities of advancement are also better at Costco. In return, what Costco gets is higher dedication and productivity from its employees. However, all this investment is at last worth it because it all translates into sales and profits. Therefore, their check the bill service is pretty fast and employees will check the situation whether needs more employees to do check the bill with self-motivation. Moreover, employees put customers’ goods orderly not making mess or confusing. Employees work fast and accurately..

- Training

Employees in Costco have training courses to their working content. Costco not only wants their workers do well but hopes they can grow when they work. Include great wage, benefits, safe environment, challenging work etc