Costco Business Strategy

Costco is among the leading retail brands in the United States with a strong customer base and enjoying strong popularity. The company was founded in 1983 and since then has experienced a lot of growth and expansion. It is also operational in many countries outside the United States. Compared to Walmart, Costco’ physical footprint is much limited. However, the company achieved more than $200 billion in net revenue in 2022. It has always focused on being a customer centered brand but that does not mean it has compromised on employee satisfaction. It delivers its customers quality products at lower prices. Costco deals in a product assortment that is quite limited compared to Walmart. Despite that it enjoys strong customer loyalty and generates some revenue from membership fees apart from product sales. 

Costco’s premium inhouse brand Kirkland Signature also enjoys strong popularity and customer loyalty. Costco is hailed for having done several things right including customer experience, employee satisfaction, supply chain management and other operational areas including instore operations. 

Costco has managed to create a unique identity for itself, which is very different from the other retail brands operational in the US. Its customers are highly loyal to the brand and through some strategic moves the company has achieved an excellent level of success in the US and some other markets. As of the end of 2022, it had only 847 stores operational overall, compared to more than 10,500 run by Walmart globally. While Walmart has more than 5,300 stores operational throughout the US, Costco had only 583 at the end of 2022. 

In this post, we will conduct an analysis of Costco’s business strategy and how it has helped the retail brand achieve significant growth, customer loyalty and maintain its competitiveness.

Focus on customer satisfaction:-

Costco’s focus most of all has remained on creating the highest customer satisfaction. However, this is something not achieved easily in the retail sector since customers do not have to bear significant switching costs. So, if a customer is dissatisfied with anything, he can easily switch from one brand to another. Differentiation is equally difficult in the retail sector and therefore highest customer satisfaction can be a guarantee of higher loyalty and higher sales.

Customer satisfaction does not depend on a single factor. While pricing and product quality play a significant role in this area, there are many more factors that affect customer satisfaction. Customers want a seamless experience and that’s something Costco specializes in. Shopping at Costco is a more personalized and seamless experience. The company encourages its employees to care for customers’ convenience at every stage and every touchpoint. Moreover, the company sells products at lower prices and it has also remained very cautious about its brand image. Costco cares for quality, shopping experience, prices and customer service. All these factors have led to higher customer satisfaction. The company enjoys very strong membership renewal rates. Globally, its membership renewal rate was 90% in 2022 and 93% for the US and Canada. It demonstrates how much people love to shop at Costco and like coming back to its warehouses.  

Product quality:-

Product quality is a significant pillar of Costco’s business strategy. Quality is among the most significant factors driving sales and popularity in the market. If you cannot guarantee product quality, you cannot expect that customers will keep returning to your stores to buy again and again. So, quality drives sales as well as customer loyalty. Costco has maintained a sharp focus on product quality. It sources directly from the manufacturers and does not sell several brands of the same product. This helps it maintain product quality and lower prices also. Costco has also maintained extensive quality check practices to ensure no inferior quality products are sold to the customers. Even the smallest products are checked several times for quality including toilet paper at Costco. Technicians test the quality of all the products brought to Costco warehouses before they are sold to the customers.

 The main idea behind its Kirkland Signature brand was also to deliver premium quality to consumers. In this way, the company developed its own premium brand that had national brands like quality but came at competitive prices. The Kirkland Signature brand has found strong popularity and enjoys strong sales. It is also among the leading factors that drive higher popularity and stronger demand for the retail brand.

Lower pricing:-

Like Walmart, Costco also guarantees everyday lower prices. The lower pricing strategy is crucial in the retail sector to draw more customers and gain higher customer loyalty. Most shoppers at Costco make bulk purchases. These shoppers would shop at once for a month or three months. Costco is a chain of membership only warehouses which means you need to be a member at Costco to shop at one of its warehouses. In this manner, the company also generates some revenue by selling memberships. However, the major benefits that the members receive include high quality products at very low prices. The company sources directly from the manufacturers and thus obtains goods at very low costs.

Costco started its own in house premium Kirkland Signature brand that people could buy premium quality products at discounted prices. Its customers can shop for a large range of premium quality products including fashion products at competitive prices from Kirkland Signature. These factors have helped the company create strong demand and build high consumer loyalty. Its lower pricing strategy has proved to be a real driver of fast growth and it is also why the company is experiencing higher customer loyalty compared to the other retailers. In this regard, Costco competes with the largest retailer Walmart which is known for its aggressiveness in terms of setting competitive prices.

Supply chain management:-

Supply chain optimization is a critical ingredient of success in the retail sector. A well optimized supply chain does not just help minimize operating expenses and wastage, it also helps cater to changing consumer demand patterns with higher efficiency. Costco has managed its supply chain efficiently. Costco buys products directly from the manufacturers in large volumes. It helps the company obtain products at very low prices. Once the products have been purchased from the manufacturers they are routed to the cross docking depots or to the warehouses directly. Cross docking is a practice that helps businesses streamline their supply chains and move goods to the market faster and more efficiently by minimizing warehouse storage costs, space requirements and inventory handling. In this manner, the company has managed a lean and agile supply chain. The company is also investing in digitalizing its supply chain to make it more efficient and improve productivity.

Organizational culture and employee satisfaction:-

Costco is superior to the other retailers in one more area which is its company culture. The work culture at Costco is very different from other retailers and for several years, the company has ranked among the best employers in the United States. Its focus on employee satisfaction is just as strong as its focus on customer experience and quality. Instead of promoting heavy competition among the staff and trying to use micromanagement techniques, the company has created a culture that fosters inclusion and diversity and encourages the staff to support each other. 

Costco is also better than the other retailers when it comes to paying its employees. The wages and benefits at Costco are considerably better compared to the other retailers and even Walmart is trailing Costco in this area. The focus on employee satisfaction is particularly intense at Costco since the company believes that its employees are among its most important assets and critical to delivering higher customer satisfaction. It pays its employees well and provides them with a safe and happy work environment. As a result, while employee satisfaction at Costco is higher, the company’s performance and productivity are also high. Moreover, higher employee satisfaction has resulted in higher employee retention rates and employee attrition related costs.

Inexpensive marketing:-

Most retailers spend a large fortune in marketing in the US. It is because of the high competition and the lower switching costs for customers. As a result, maintaining customer loyalty is also difficult and requires strong focus on marketing and promotions to create demand and to retain customers. However, Costco does things differently and in its own unique manner. While Walmart spent more than $4 billion on advertising and promotions in 2022, Costco still does not use paid advertising methods. It saves on marketing and instead spends on promoting higher employee satisfaction.

Costco mainly relies on its popularity and word of mouth for marketing. It does use digital channels for marketing and promotions but they are mainly its own website and app as well as the free social media channels. The company enjoys strong customer loyalty, which is an important reason that it does not need to invest in marketing and promotions. Moreover, it runs a chain of membership only warehouses and since its customer base is limited to only its members, the company can promote deals to them directly through mail and apps.

Creating brand equity:-

Another important reason that Costco does not need to invest in marketing is because instead of just driving higher sales and achieving solid revenue growth, the company has focused on creating a unique shopping experience. It has also invested in building a strong and inclusive organizational culture. Overall, the focus of Costco has remained on achieving higher customer trust rather than driving higher sales through lower prices which is a common strategy followed in the retail sector. So, Costco has developed a customer focused brand which has seen a  lot of growth and has won the trust of a large customer base. Brand equity does not just drive sales or customer loyalty, but also helps a retail giant against the competitive pressure and other key challenges in the market.