Reference no: EM131725406

Costco nearly $2.5 billion in profit that come from over 700 stores (up from 600 in 2011). Costco focuses on low prices and high volume with a target market of small businesses and large families. The low prices in part comes from an operational strategy that leads to a cost advantage. The assortment is limited; there is usually only one brand for any category, which gives Costco significant market power and logistic efficiencies. Where a typical Walmart Supercenter carries over 140,000 products, Costco carries fewer than 4,000. The items are generally bulk-packaged, which means customers buy more of the item on their Costco trips and the brand involved can justify having Costco sell the brand at a sharply lower price. It has a well-regarded house brand, Kirkland, that is sold at a very low profit margin—around 15 percent mark-up—and generates about 12 percent of the sales. Most products are delivered to the warehouse on shipping pallets and these pallets are used to display products for sale on the warehouse floor. Costco does not have a large advertising budget. Costco has a membership model, which generates a close customer relationship and commitment plus significant revenue since the memberships represent about 15 percent of the value of the firm. The in-store experience is unique with many tasting opportunities, some upscale brands, and a lot of energy. The meat and produce selections have an outstanding quality reputation and include many organic options. Costco was behind in e-commerce in 2016, generating only about 3 percent of sales. The firm had a slow start and a rather poor web presence compared to Amazon and even to its other competitors.

FOR DISCUSSION

1. Why is Costco immune from the Amazon threat? Will that continue going forward? What are the strengths and weaknesses?

2. How should Costco react to the Amazon threat? Besides create a more competitive website, is there anything that Costco could do to leapfrog competitors on the e-commerce side?

3. How does Amazon’s recent purchase of Whole Foods threaten Costco? What should Costco do in response?