Costco Generic and Intensive Strategies

The US retail sector is experiencing intense competition. A lot of recovery has happened since the pandemic and most retail brands experienced significant revenue growth in 2022.

Costco is one of the retail leaders in the US that also has a significant presence in several other overseas markets like Canada, Mexico and Japan. It operates a chain of membership only retail warehouses. By the end of 2022, there were 847 Costco warehouses operational worldwide including 583 in the US. Costco’s single largest market is the US which accounts for a large part of the company’s net revenue.

Like its leading rival Walmart, Costco also promises its customers quality products at lower prices. However, its business model is not entirely the same as Walmart. Costco has taken a membership base approach and its product assortment is smaller compared to Walmart. However, its competitive position is not based only on its customer friendliness or product quality but also its unique culture. The company had around 119 million members at the end of 2022 and it enjoyed 93% membership renewal rate in the year. Costco enjoys strong brand awareness and customer loyalty.

In this post, we will discuss the generic and intensive strategies adopted by Costco for achieving growth and a leadership position. Founded in 1983, Costco is among the largest physical retail brands in the US and generated more than $200 billion in net revenue in 2022.

Generic Strategies adopted by Costco:

There are three main generic strategies given by Michael E Porter that include cost leadership, differentiation and focus. Porter has divided the third category into two subcategories including cost focus and differentiation focus. 

The cost leadership strategy is followed by almost all the leading retail brands including Costco and Walmart. This strategy can be a quick way to growth since lower costs attract customers in large numbers. Businesses adopt this strategy when they believe they can sell products at competitive prices to their target market. 

The differentiation strategy includes differentiating your product and brand from the rivals to offer different benefits to the customers. Generally, the higher the differentiation, the faster a business can achieve growth since it offers unique benefits. 

Cost focus strategy involves sellign products to a specific customer segment at lower prices. Differentiation focus on the other hand involves targeting a specific customer segment with a differentiated product or service. Achieving a high level of differentiation in the retail industry is difficult and mostly it is the small points of differentiation in terms of product assortment and business model that work for retail businesses. 

Cost leadership strategy of Costco:

Costco promises to deliver its customers good quality products at lower prices. Its low cost strategy has helped the business grow its popularity and acquire a large customer base. The company offers a nice range of products in several merchandise categories. Its focus is on helping its customers save more money while buying good quality products.  Compared to Walmart, Costco’s product assortment is smaller but it still sells a vast range of products of daily use and groceries as well as other products.

Retail brands like Costco buy products in very large volumes from the manufacturers directly. They also save in other operational areas. Costco itself does not spend a fortune on marketing and promotions. Since the company buys products in very large volumes from manufacturers, it acquires merchandise at very low prices and then passes on the benefit to the consumers in the US and the other markets. Supply chain management plays a critical role in helping Costco deliver its promise of lower prices to its customers.

The cost leadership strategy has worked in favor of Costco as the company has been able to grow its customer base faster since its foundation and now serves around 119 million members.

It also sells its own premium products under its Kirkland Signature brand. The cost leadership strategy has helped the brand achieve higher customer loyalty as membership renewal rates are as high as 90% globally and 93% in the US and Canada. People love to shop from Costco and it has been seen in several new markets where Costco quickly gained a large customer base after opening its first store.

Differentiation:

As already mentioned, differentiation is difficult in the retail sector where companies are competing aggressively for customer base and sales. Most leading retailers adopt the same strategy of selling products at low prices to consumers. However, Costco has used differentiation as a secondary strategy for growth. It has slightly altered its business model to become only a membership based warehouse chain. It offers memberships that are not too expensive and only Costco members can enjoy shopping at Costco warehouses. The company generates a substantial revenue from memberships also. Another key point of differentiation is its unique culture that focuses on employee and customer satisfaction. The company has been nominated for one of the best employers in the US several times. It is also said that its organizational culture is the leading differentiating factor about Costco and the main force behind its success.

Intensive Strategies adopted by Costco:

The intensive growth strategies adopted by businesses worldwide for achieving faster and superior growth include four main strategies – market penetration, market development, product development and diversification.

The market penetration strategy is a commonly used strategy to grow sales. It involves penetrating the existing markets deeper and selling more to customers in the existing markets. Another key strategy is to enter new markets and sell to new customer segments. This is also a commonly used strategy and used by brands enjoying solid brand awareness and popularity. The product development strategy involves developing new products and services for your customer base. Sometimes well known businesses would expand their product line by adding new products and services which can also be key to growing sales and revenue.

Market penetration:

Costco has used this strategy initially and is still using it to grow its sales and revenue. In 2022, the company opened 14 new warehouses in the US market alone. Opening new warehouses allows it to penetrate the US market deeper and reach more US based consumers. While Costco is a leading brand in the US physical retail sector, the company had only 583 warehouses operational in the US as compared to more than 5300 Walmart stores. So, there is still a lot of scope for the company to expand its business domestically. In the other markets too, the company is planning to increase its number of warehouses to reach more consumers and achieve deeper penetration. Since it is a familiar name in the US and several more markets, it is able to reach more consumers easily through new openings.

Market development:

While Costco is a US based brand, it is not limited to only the US market but is continuously expanding its presence beyond the US borders too. Market development involves entering new markets and selling to new customer segments. Costco opened its first store in 2022 in NewZealand. The company has also entered some other new markets in recent years including China where it has two stores operational. Market development strategy is adopted by large brands that have a strong base already and enough capital to enter new markets. Costco is using this strategy to  grow its business beyond the American borders.

Product development:

Product development strategy is not among the leading intensive strategies adopted by Costco. However, the company also sells a broad assortment of its own inhouse products under the premium Kirkland Signature brand. Costco started this brand in 1995 and its main aim behind developing its own private label brand was to offer brand quality products at discounted prices. Since then Kirkland Signature products have accounted for a significant part of Costco’s sales and are highly popular among customers. Costco also sells a nice range of co branded products under its Kirkland Signature brand. 

Conclusion:

Costco likes to do things differently than the other US based retail brands. There are several things that are quite unique to Costco including its culture and its strong focus on employee satisfaction. The company aims to offer its customers a large assortment of good quality products at lower prices. Like Walmart, Costco also follows the cost leadership strategy for  growth. However, there is something different about Costco. You need to be a member to shop at Costco. Customers can buy a nice range of premium quality products at discounted prices from its Kirkland Signature brand. Costco also places a strong focus on customer service. The company had 847 warehouses operational at the end of 2022. However, the company is planning to expand its presence globally into several new markets. China is a particularly important market due to its size and the company has two warehouses operational there. Both market development and market penetration strategies can help Costco achieve superior growth in the future. The company already enjoys strong customer loyalty in its existing markets and in several new markets it has been received by customers with a lot of enthusiasm.