Evaluation of the Previous successes and Future Difficulties of Costco

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Costco is a membership warehouse club retail store. Its customers need to buy the membership before they can begin shopping and using what they have to their advantage. Costco is known as Anti-Wal-Mart because their views and strategies are completely different from Wal-Mart. Their focus is not just low prices but also great quality. The company holds strong views about corporate social responsibility and its ethics as a business but can they compete with Wal-Mart?

Costco was founded by James Sinegal and Jeffery Brotman near Seattle, Washington. They opened up their first warehouse store in 1983. Over the years Costco grew and merged with a Canadian company called Price Club. Both companies than started under the new name of "PriceCostco" and were run by both the Costco CEO and the Price Club CEO. In the mid 90's the Price Club CEO left the company and all management was left up to Costco. Later in 1997 they changed their name to Costco Wholesale. (en.wikipedia.org/wiki/Costco); since their first store opening, they have opened up roughly about 400 more stores in the United States alone. They have also opened stores in other countries, such as Mexico, Canada, Japan, Korea, The United Kingdom, Australia and a few European countries as well. The layout of the stores in countries outside USA is similar to the layout of stores state side, but they are tailored to the specific tastes of that country. Costco is still opening stores within the United States as well as overseas, but they customize each store to the environment, such as a new store they opened in California that has electric car charging stations in the parking lot to promote a greener form of living and conducting business.

Costco focuses on selling products at low prices but at a very high volume. These products often come in bulk-packaging to save on material and transport and are usually bought by businesses or larger families. "According to Jim Sinegal, the company's president and CEO, Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including sales people, fancy buildings, delivery, billing and accounts receivables. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members."

Furthermore Costco does not focus on carrying an excess of name brands, but focuses on carrying their house brand and many items from the same manufacturer to pass even more savings to their clientele. The clientele only consists of members and their guests and memberships must be purchased in advance for a period of one year. On the other hand Wal-Mart carries all kinds of brands and their markups are double compared to Costco. ("http://www.usatoday.com/educate/college/careers/news18.htm"). Since early on both walmart/samsclub and costco had a business model of being the number one warehouse store in the world and the warehouse concept was made to combine all shopping into one location, with great prices and a members only environment. Costco by the early millennium had achieved that goal and kept their clients and employees happy at the same time. Costco became the first company to grow from zero to $3 billion in sales within a 6 year period. According to the article 'Sweet Spot' Pricing, by Heidi B. Malhotra at Epoch Times, "The Company's warehouse business model calls for keeping costs low and earning the majority of its profit through a membership fee."

(http://www.theepochtimes.com/n2/content/view/46249/)

"Costco's business model is meant to maximize efficiency. The warehouse format keeps costs low, as they buy and sell items in bulk. Shoppers pay membership fees, and in return receive exceptionally low prices." According to Dividend Monk, "The Company reports an annual customer retention rate of 87 percent. The loyalty is earned by offering the best product return policy of any company. For example, one customer returned a mattress after using it for almost a year because it did not stay firm as promised, receiving a full refund on the purchase price. Included in the business model is also a 2 percent cash back policy for all purchases during the year and the same percentage for all purchases on the American Express credit card for executive members. Warren Buffet's Berkshire Hathaway Inc. owns more than $300 million in Costco stock. For Berkshire, this stock holding is tiny compared to its other holdings, but Buffet's ownership is nonetheless a tribute to the company's operating efficiency." (Dividendmonk/costco-wholesale-corporation)

Many people that have shopped or been to a Costco say that their experience was nice and that the employees were helpful and courteous. What makes the experience in Costco so nice or so much better than the competitors? It's the way the employees are treated and the way they are treating and helping the customers and hence this is the company's internal strength over its competitors. The company cares for and values its employees as quoted in a recent article "Costco is known as the {anti-Wal-Mart} in business, with its high wages, benefits, and the presence of unions and relatively low executive pay at the company. The overall picture is one of an employer that values its workers and reaps the benefits through a loyal productive and efficient cadre of employees" (American rights network); From what is out in public and from what I have read, in order to keep their employees happy and keep the internal strength strong, they have negotiated some of the best wage and benefit packages of any retail store in the industry. It is known that Costco employees average about $16 per hour on the sales floor and are known to bring in 25% more profit per employee than their competitions' store employee. With the great pay come great benefits such as only paying 8% of benefit costs, the Costco Corporation picks up the rest of the 92% tab. The philosophy of the management is that a happy worker is a productive worker and that salary gaps between employees and CEO's are far lower than at comparable businesses. This is the way the company tries to motivate their employees to try harder and to be better workers. With such compensation, the workers will be honest and they will want to work and motivate others to achieve their goals as well as goals that the company has set for them.

With all major success come flaws; internal and external flaws that can affect the way the company functions and the way the business is run. Its business model is such that majority of the profit is through membership fee. In the article by "Ann Zimmerman", Wal-Mart spokeswoman Mona Williams says the company's "entire package of wages, benefits and career opportunities is at least as good as that offered by Costco," and like she mentioned in the article that includes "bonuses, company-paid life insurance and a discounted Wal-Mart stock-purchase program." Furthermore it seems Sam's Club has a "cost advantage" over Costco, she adds, because it can "leverage efficiencies" from Wal-Mart in areas such as merchandise sourcing and logistics, keeping basic membership fees a third cheaper than Costco's.

("http://www.reclaimdemocracy.org/articles_2004/costco_employee_benefits_walmart.html").

This internal strength can also be considered an internal weakness because now during the rough economy Costco is spending more money than really should. Even though Costco is a huge company, they are not immune to the economic issues that we are all having. Costco has reported a decline in their net income from a year ago this time. Costco has always been accused by the Wall Street for not marking up their prices and not considering about the stockholders. With consumer spending cut and everyone tightening budgets, this can lead to a bad effect towards their employees. Employees can see a cut in salaries, possibly a hike in paying for benefits and even a chance to be laid off. This tough economic time can be bad towards employee attitudes and this can translate into the customer not being taken care of properly. From personal experience I can say that when pay cuts are administered and layoffs are announced, employee moral falls and in turn customers are not treated the same. This negative way of thinking can lead to a greater loss in profits and potential loss of good clients. This will not be good towards employee motivation and can cause employees to get lazy and lose sight of their goals, or what they have to achieve and accomplish for the sake of the company.

Next we can look at and analyze the way the company works and is managed, with a team effort and individually. I believe that Costco has a flat management structure. They customize each store to the environment and have a habit of changing stores to fit the needs of a particular group or region. For instance the store in northern Wisconsin will have a different setup then the store in southern Georgia, in terms of item placement on the shelf and advertising. The standards of one city might be different than the standards of another city and only local management can determine the correct setup for the store in order to meet the customer needs. The idea of this is to keep the merchandise on the shelf for as short time as possible, good inventory turnover means more profit for the store and managers. Each store has a manager as well as assistant managers. Every employee listens to a group leader and that leader reports back to a manager. Those managers then talk to store owners and they report back to district managers and heads of the company. Each position in the company has a manager that they talk to, making it easier on everyone since, not one person deals with everyone and has to take care of issues. This shows us that the company has full confidence in their managers and it allows them to do what's best for the store and for the company. Again this idea helps move the product more quickly and is an internal strength for the company. Costco is known to promote from within the company. Over 98% of the managers started out as sales people working the floor. (phx.corporate-ir.net) This advancement from a sales position to a manager position helps the company keep employee loyalty high and the culture of the company is kept at bay. With this structure it keeps the managers aware of what is going on at the bottom position, since they went through that stage. This helps managers' work more closely with their subordinates, promoting teamwork and communication. Teamwork is an important part in the company because if everyone works together and communicates with one another, the job gets done more quickly, productivity increases and overall employee emotional status stays on par with a happy worker. As we see with many companies, if a team functions well, then the company functions soundly too. This all comes back to being caring to your employees and then your employees caring for your customers, which will bring in more revenue and more clients.

This brings me to my third point which is corporate social responsibility. Since everyone now is trying to be green and environmentally friendly, Costco is doing many things to help the environment and score points with the people that it serves. The main aim of the company from the corporate to the stores is to give it back to the local communities they serve. This strategy will eventually bring more people to sign up for their membership and the existing customers will retain their memberships. The Costco store doesn't go for plastic or paper bags but they give out recycle cardboard boxes to customers for putting the merchandise. Like I mentioned above, Costco builds its stores to their customer needs, as they did with their recently opened store in California. Since smog is a big deal in California and people are pushing for electric cars, Costco decided to open a store and build electric charging stations in the parking lot for its customers. This not only helps the environment but it also helps Costco's loyal customer base. They use renewable paper and cardboard and in the day time Costco uses timed lighting which depends on how bright it's outside. Moreover, they use the solar panels to lessen their expenditure on electricity; although, they sometimes do excessive packaging for small items which is like a crime against planet. "The series of sites will allow Schultz and his wife, for example, to travel up the coast without worrying about having enough electricity to make it home." "We're pretty careful, so we watch our range. My wife says, "Jack, you're down to two squares." So we head home," Schultz said. "This absolutely will help a lot. We can go many more places." "The Costco station - designated for "Electric Vehicle Parking Only" - is the first of many to come to the warehouse stores in Southern California, said Edmund Fitzgerald." (thefreelibrary.com)

This idea of opening up electric charging stations up and down the west coast is great corporate responsibility. It shows customers that the company is looking out for the environment as well as looking out for its customers. It is a step in the right direction and will definitely promote business and help the giant retailer grow even bigger. Since economic times are bad and revenue has fallen, a possible solution to the spending problem could be a companywide temporary cut in pay. Yes this will upset employees, but if the employees see that CEO's and other high ranked staff members are taking pay cuts as well, they will feel that the company understands their position and that they are feeling the pain of everyone. This temporary fix can save the company much needed money and they can possibly ride out the storm instead of suffering like everyone else. Another idea along the lines could be less benefit pay for insurance/health care. If the company decides to pay less towards the benefits, employees must pay more out of pocket. This will also upset the employees, but is a better alternative than getting laid off. If we look at detailed financial statements we can determine which method would save the company the most money and show the employees that the certain method would actually benefit them more then hurt them. This will no doubt hurt employee motivation, but having the choice between either losing your job or taking a pay cut, employees will usually choose to take the pay cut, since they are still getting a pay check and paying their dues.

Seeing as promoting from within is good for a company, there are some negatives. The concern with this is that if someone from outside of the company is qualified for the management position, they will not be able to get in or get hired because of company policy. Yes there is a little play room for hiring upper management, but it might not be enough to let some talented individuals share their ideas and possibly help the company expand. This policy does have benefits, but promoting from within can be a weakness as well. Mistakes can be made where long time sales staff might be talented enough to help customers, but not have the applicable skills to manage other employees. This inexperience can lead to unforeseen risks and a company might lose more then what they hoped to gain. If internal promotion does hurt the company, a solution is to go around the rules and bend them a little. They can always use this window of opportunity to launch hiring from the outside.

Social responsibility is a very important matter for a company the size of Costco, but with hard economic times not easing up and retailers closing shop; it might be in the best interest of the mega retailer to markup their prices little higher down the expansion of the electric charging stations. Yes it is a good idea to rebuild and make their stores seem more likable by the government and green conscious people, but expanding into the electric fueling market is costly and another alternative might be to space out the filling stations to be separated more equally. It can save the company money and then when times get better in the future they can continue forth with building the stations. Another solution to this problem can be to build greener stores or modify and modernize the older stores to be more efficient with alternative lighting and live roofs. This can be a simpler solution and will stimulate the economy by providing jobs and eliminating old, outdated equipment.

In conclusion Costco does have some uphill battles ahead of them, like most retailers and companies do during the recession. If they look at and analyze the ethics and motivation of the company, the teamwork and management structure and the corporate social responsibility, they can see what they need to fix and what's the best method for fixing it.

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