Costco's Business Model

What is Costco’s business model?

The company’s “strategic intent” is easily identified as Costco maintains their commitment to provide the lowest cost possible for customers. Costco operates a low-price strategy business model.

Ultimately, Costco’s low prices, limited selection, and huge range of products and merchandise, lead to a high inventory turnover. When this is paired with operating efficiencies created by volume purchasing and efficient merchandising and distribution, Costco can make a low margin profit and dominate the industry.

Costco Strategic Group Map

High Price Low

Mass merchandisers

Supermarkets

Supercenters COSTCO

Sam’s Club

BJ Wholesale

Quality Mass merchandisers

Supermarkets

Supercenters

Low High

Is the company’s business model appealing?

Why? The business model is especially appealing because it has shown to succeed through good and bad economic conditions. “Price conscious consumers gravitate toward discount retailers like Costco, hoping to get the most out of their money.” Costco maximizes membership commitment to confidently purchases in large volumes and provides low pricing levels. The repeat customers and dependable sales allow for high efficiencies in the value chain systems.

This business model is simple and cost-effective, allowing Costco to remain profitable, with low gross margins. “Costco’s high sales volume and rapid inventory turnover generally allowed it to sell and receive cash for inventory before it had to pay many of its merchandise vendor[s].” Consistently higher sales volumes lead to stronger supplier relations which lead to lower prices or provide higher margins.

Why not?

Costco’s business model is appealing to Costco but not to new entrants to market. The reason for this is that the efficiencies developed through supplier relations and merchandising make it difficult for competitors to offer the same low prices. Buyers remain loyal through memberships and are not likely to switch stores...