Costco Wholesale Corporation

Costco Wholesale Corporation

Organizational Profile

P.1. Organizational Description

The company’s first location, opened in 1976 under the Price Club name, was in a converted airplane hangar on Morena Boulevard in San Diego. Originally serving only small businesses, the company found it could achieve far greater buying clout by also serving a selected audience of non-business members. With that change, the growth of the warehouse club industry was off and running. In 1983, the first Costco warehouse location was opened in Seattle. Costco became the first company ever to grow from zero to $3 billion in sales in less than six years. When Costco and Price Club merged in 1993, the combined company, operating under the name PriceCostco, had 206 locations generating $16 billion in annual sales (Costco.com).

P.1.a. Organizational Environment

P.1.a (1).

Costco is a membership warehouse club, dedicated to bringing their members the best possible prices on quality brand-name items and merchandise.  Costco has 100’s of locations worldwide and offers their customers the convenience of specialty departments and exclusive membership services.  To shop at Costco the customer must first pay for a yearlong membership to the club.  There are different levels of memberships available.  The cost of the basic membership is $55 for the Gold which lets you shop at the club.  Costco also offeres a business membership for $55 which always businesses to purchase for resale.  The Executive membership allows the customer to earn 2% back of all purchases, free cards for the household and travel benefits.  The executive membership cost is $110.

Costco’s warehouses present one of the largest and most exclusive product category selections to be found under a single roof. Categories include groceries, candy, appliances, television and media, automotive supplies, tires, toys, hardware, sporting goods, jewelry, watches, cameras, books, housewares, apparel, health and beauty aids, tobacco, furniture, office supplies and office equipment. Costco is known for carrying top quality national and regional brands, with 100% satisfaction guaranteed, at prices consistently below traditional wholesale or retail outlets. By carefully choosing products based on quality, price, brand, and features, the company can offer the best value to members.  Members can also shop for private label Kirkland Signature products, designed to be of equal or better quality than national brands, including juice, cookies, coffee, housewares, luggage, clothing and detergent. The Company also operates self-service gasoline stations at a number of its U.S., Canadian, Australian, Japan, Spain and United Kingdom locations.

P.1.a (2).

Costco Wholesale Corporation is the second largest retailer in the world. This position indicates Costco’s effectiveness in following its mission statement and vision statement through appropriate strategic objectives. A firm’s vision statement guides the overall direction of organizational development. In Costco Wholesale’s case, the vision statement emphasizes customer experience and satisfaction.

Purpose

Costco has a purpose to take care of their members, take care of their employees, obey the law, respect their supplier and reward their shareholders. Their members are the reason for their success. If they don’t keep their members happy, they feel little else that they do will make a difference.

Vision

In Costco Wholesale’s case, the vision statement emphasizes customer experience and satisfaction. Costco is a place where efficient buying and operating practices give members access to unmatched savings.” This implied vision statement has the following main points about Costco:

1. Efficient operations
2. Unmatched savings
3. Access through membership

Values

The core values of Costco plays a significant part by giving the right foundation for its employees. They refer to these values as a “code of ethics:”

1. Obey the Law
2. Take care of their members
3. Take care of their employees
4. Respect their vendors

Mission.

Costco’s mission is to continually provide their members with quality goods and services at the lowest possible prices.  The mission statement says that Costco aims “to continually provide our members with quality goods and services at the lowest possible prices.”

P.1.a (3).  

Costco has a reputation of taking care of its employees.  Costco offers competitive wages, great benefits, a safe and healthy work environment, work that is challenging and fun, many career opportunities, a harassment and discrimination free atmosphere, an open door policy and many opportunities to give back to their communities through volunteering and fund-raising.

Costco employs part-time and full-time employees.  Costco is well-known for paying its employees high wages. In America, a Costco worker earns, on average, about $21 per hour and receives health benefits, ample vacation time and a 401(k) match. As illogical as it sounds, Costco’s high employee wages are part of its cost-savings plan. With employees earning a decent wage, they are more productive and less likely to quit. Costco is able to reduce employee turnover and save money.

P.1.a (4).

Costco tends to defy many of the standard rules of retail. It is a distinctly “no-frills” operation. Its floors are bare concrete slabs, which are more durable and easier to maintain than linoleum or carpet; its ceilings steel beams and huge skylights, to save electricity. Merchandise is stacked on the same industrial pallets on which it is shipped, saving millions in labor costs.  Costco wants to create an image of a warehouse type of environment.

Costco does not follow the rules of advertising.  At this point Costco doesn’t send out weekly flyers, however; instead, they use word of mouth advertising and keep the same loss leaders week after week.   The biggest Costco loss leaders in America right now are rotisserie chicken, the hot dog & soda combo and gas. These chickens are placed in the store along with the cheap fruits and vegetables in hopes the customer will grab a chicken and other products to make their trip worthwhile.

P.1.a (5

Costco is regulated by the U.S. Department of Labor, or DOL, and the Federal Trade Commission, or FTC, but the U.S. Department of Homeland Security plays an ever-larger role in the area of web content and cyber security.  Costco also is governed by a Board.

P.1.b. Organizational Relationships

P.1.b (1).

The business and affairs of the Company are managed under the direction of the Board. A director is expected to spend time and effort necessary to properly discharge such director’s responsibilities. The director is expected to regularly attend meetings of the Board and committees on which such director sits, and to review prior to meetings material distributed in advance. A director who is unable to attend a meeting is expected to notify the Chairman of the Board or the Chairman of the appropriate committee in advance of such meeting (“Costco Wholesale Corporation – Investor Relations – Highlights,” n.d.).

The Board shall be free to choose its Chairman in any way that it deems best for the Company at any given point in time.  At least one regularly scheduled meeting of the Board shall be held every fiscal quarter. Special meetings may be called as required by the needs of the Company. Directors are encouraged to make at least one visit annually to a Company facility.  The Board encourages the Chief Executive Officer to bring members of management from time to time to Board meetings (“Costco Wholesale Corporation – Investor Relations – Highlights,” n.d.).

P.1.b (2).  Customers and Stakeholders:

Costco Wholesale’s organizational activities aim to maximize performance in all areas of its business.

Customers are the second-priority stakeholders in Costco Wholesale’s business. Customers are significant because they affect Costco’s revenues. The interests of this stakeholder group include quality and affordability of products. To address these interests, Costco maintains agreements with suppliers to offer low wholesale/bulk prices (Greenspan, 2015).

Costco needs to satisfy the interests of investors as one of its main stakeholder groups. Investors are significant stakeholders because they determine the capital available to grow the business. The interests of this stakeholder group are profitability and business growth (Greenspan, 2015).

Communities are the least priority stakeholder group in Costco’s approaches. These stakeholders are significant because they affect consumer and employee perception about Costco. They also influence the firm’s supply chain. These stakeholders are interested in support for households and community development, as well as environmental protection (Greenspan, 2015).

Communities are the least priority stakeholder group in Costco’s approaches. These stakeholders are significant because they affect consumer and employee perception about Costco. They also influence the firm’s supply chain. These stakeholders are interested in support for households and community development, as well as environmental protection (Greenspan, 2015).

P.1.b (3). Suppliers and Partners:
Costco Wholesale Corporation is committed to protecting the working rights and safety of the people who produce the merchandise it sells, while recognizing and respecting the cultural and legal differences found throughout the world.

Supplier is responsible for ensuring compliance with Costco’s Code of Conduct by all Facilities and their Suppliers or subcontractors who produce or provide materials or services which are used in the manufacturing, processing, harvesting or production of merchandise sold to Costco.

Supplier and Facility shall comply with all national, local, provincial or other applicable labor and employment laws and regulations of the country where the merchandise is produced. Included are those laws that prohibit forced or bonded labor and indentured servitude. Additional laws which must be followed are those which regulate: wages; working hour restrictions; employees’ right to associate freely; use of foreign contract or migrant workers; discriminatory hiring and employment practices based on race, color, religion, sex, age, physical ability, or national origin.

Supplier and Facility shall recognize that environmental responsibility is global. In manufacturing and processing operations, adverse effects upon the community, environment and natural resources are to be minimized while safeguarding the health and safety of the public.

Supply chain requirements focus on clear communication, accuracy, timeliness, cost value, competency, and ethical conduct.

Costco Wholesale Corporation has a global supplier Code of Conduct which prohibits human rights abuses in their supply chain. Practices such as human trafficking, physical abuse of workers, restricting workers’ freedom of movement, confiscation of passports and worker documentation, unsafe work environments, failure to pay adequate wages, excessive and/or forced overtime, illegal child labor, and many other aspects of worker welfare are addressed by the Code. Their suppliers contractually agree to follow the Code and to require that their sub suppliers also to comply.

P.2. Organizational Situation: What is your organization’s strategic situation?

P.2.a. Competitive Environment

P.2.a (1). Competitive Position:

Costco’s key competitive advantages are economy of scale, less reliance on making a profit from the sales of goods and more emphasis on profits derived from membership fees and from ancillary department sales and services such as the food court and hearing aid centers.

Costco’s key competitors are the Target Corporation, The Kroger Co. and Walmart Stores, Inc.  Costco is still the nation’s largest wholesale club and it serves 71 million members in 40-plus states and in Puerto Rico, Canada, Mexico, the UK, Japan, South Korea Taiwan and Spain.

Costco derives most of its profit from its membership fees, selling its goods in bulk at near-cost. Wal-Mart uses a more straightforward Everyday Low Prices strategy, and its warehouse business, Sam’s Club, has always played second fiddle to Costco.

P.2.a (2). Competitiveness Changes:

One of the biggest change for Costco in 2016 is it is changing to Visa.  In the past Costco would only accept the American Express card, cash or debit cards.  Some members only carried American Express because of their Costco membership.  With the switch to Visa Costco can see an increase in memberships.

Another aspect Costco is changing is their outreach to the millennial generation.  Most of the stores are in suburban areas and millennials tend to shop in urban areas.  Targeting younger people will be difficult as they don’t tend to buy a year’s worth of toilet paper or have the space in their urban apartments to stock it, but Costco is taking baby steps to reach this generation.

P.2.a (3). Comparative Data: What are your KEY available sources of comparative and competitive data from within your industry? What are your KEY available sources of comparative data for outside your industry? What limitations, if any, affect your ability to obtain these data?

Source: Based on data from Costco Wholesale Corp. Annual Reports

P.2.b. Strategic Context: What are your KEY business, operational, societal responsibility and human resource STRATEGIC CHALLENGES and advantages?

STRATEGIC CHALLENGES

• Business: The membership-only model limits the total number of customers that shop at the warehouse.  This model encourages customers to buy at Costco stores, but also limits the total number of customers. Non-member consumers might feel unwelcome at Costco stores.  Costco has the weakness of the limited array of goods and services. Customers might go to other retailers like Walmart, which has a wider array of goods and services.
• Operational: The entry of new membership warehouse club retail companies threatens Costco’s potential to succeed in overseas markets. In overseas markets, new membership warehouse clubs are opening.  The aggressive marketing of other retail firms also threatens Costco.
• Societal Responsibility:  Needs to reach a younger generation and get more involved with Social Media.  On Facebook Target who has 22.7 million likes, Walmart has 34.7 likes and Costco only has 1.1 million.  Costco’s Twitter page in inactive.  Also Costco does not have a wide online store.  You can shop for items and have them shipped to your home, but Sam’s Club offers a click n pull, you can buy anything available in the store, check out, pay and they will be ready for you to pick up within 24 hours.
• Human Resource: With increasing labor costs in the US Costco has set the bar high in paying their employees.  If minimum wage were to double Costco would have to reassess their own pay scale, which could reduce the company’s profits.  Costco has a large number of employees.

STRATEGIC ADVANTAGES:

• Business: Costco uses a membership-only warehouse club business model. In this model, consumers pay a membership fee to access the low-cost products available at Costco stores. Non-members may accompany members, but only members are allowed to purchase in these stores. However, non-members can use Costco Cash Cards to shop at the company’s stores. Competitors Sam’s Club and BJ’s Wholesale Club also use the same business model.

Costco’s generic strategy is cost leadership. This strategy entails maintaining the lowest prices possible. Costco’s strategy also combines the membership warehouse club business model to differentiate it from other retail firms.

• Operational: Costco has a word of mouth marketing strategy.  Costco spends a minimal amount of money on marketing.  In their clubs they offer samples throughout the store, psychologists explain that sampling succeeds in large part due to reciprocity, the idea that the gift of a free tasting should be returned with a purchase. Samples can drive purchase rates about 50% for some items that people would normally not buy.  They also offer low prices in the food court and these deals engender a positive feeling about Costco.

Also Costco has a high inventory turnover that significantly reduces inventory costs. The company’s business model encourages members to purchase in high volumes keeping its sales volume and therefore inventory turnover at a high level.

• Societal Responsibility: Slowly expanding their online market.  Costco does offer free shipping on the products you can buy online.  Also with their Executive Members enjoy an annual 2% Reward (up to $750) on most Costco purchases. They also receive additional benefits and greater discounts on many Costco Services including Travel, mortgages and insurances.
• Human Resource: Very strong in as they pay a competitive wage and offer excellent benefits.  This has reduced a high volume of employee turnover for the company.  Costco values and respects their employees.

P.2.c. Performance Improvement System: What are the KEY elements of your PERFORMANCE improvement system, including your evaluation, organizational LEARNING, and INNOVATION PROCESSES?

Costco Wholesale Corporation is a highly viable business. The business has the essential strengths to take advantage of opportunities in the retail industry. The firm’s low prices make it attractive even during times of economic difficulties. The company has opportunities to address threats to its long-term viability. The firm could use its website and its network of suppliers to compete against new membership warehouse club retail companies. Costco is expected to continue to grow in the years to come. Expansion in overseas markets could also further boost the company’s success (Greenspan 2015).

References

• Costco Benefits.
• Costco Careers.
• http://www.costco.com/about.html
• Costco Wholesale Corporation (2015). Charitable Giving.
• Costco Wholesale Corporation – investor Relations – Highlights. (n.d.). Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-govhighlights
• Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86(1), 59-100.
• Ditlev-Simonsen, C. D., & Wenstop, F. (2013). How stakeholders view stakeholders as CSR motivators. Social Responsibility Journal, 9(1), 137-147.
• Greenspan, R. (2015, November 02). Costco wholesale’s stakeholders: A CSR analysis – panmore institute. Retrieved May 22, 2016, from http://panmore.com/costco-wholesale-stakeholders-csr-analysis
• Ofodile, U. E., Altschuller, S., Dolize, A., & Fessler, M. (2012). Corporate Social Responsibility. The International Lawyer, 46(1), 181.
• Perez, A. (2015). Corporate reputation and CSR reporting to stakeholders: Gaps in the literature and future lines of research. Corporate Communications: An International Journal, 20(1), 11-29.