Costco Companies, Inc.Marketing 658

Frank Fisher

Background Information

• As of July 1998, Costco operated 278 members-only warehouse clubs in 24 states, the U.K., Mexico, Canada, and Asia.

• In 1997 Costco had a net income of $312 million on sales of $21.5 billion. – 16 million member households. – Earned $400 million in annual fees.

• For Costco, bigger was not only better but imperative. The only way to continue to reduce costs was to move more people and products through its building. Possible expansion opportunities included:– Domestic– International– Product Diversification– Different Formats

Background Information

• After P&G approached Costco with a proposal to purchase their customer membership data Costco decided to leverage their list of loyal members by offering a natural market for anything that required the purchaser to trust the supplier.

• In response to member requests, Costco developed a portfolio of services by creating a new “Executive” membership program, for a $100 annual fee:

Background Information

“Was the company straying too far from its core competency?

“As a company, we’ve never really had to market

before” – Pat Turpin (VP of Executive Member

Services)

How does Costco market its new Executive Membership Services program?

Critical Issue

Does Costco expand outside of its core competency to attract new customers?

Critical Issue

Critical Issue

Case Contradictions

Costco’s core operating philosophy was based upon “taking costs out of the supply chain,” as a result, Costco preferred to do operations by itself. “We don’t make good partners.” –Jim Sinegal (CEO)• Salmon & Tyson Foods: Costco worked with the suppliers to improve

supply chain logistics, all the while bringing price down by buying in bulk.

• Entering the Service industry (Auto, Home, Mortgage…)

Qualifying for a Costco membership was not difficult, requiring only evidence of a steady job and payment of $35 for a business, $40 for a member of the public minimal barrier • Costco believed that 75% of its members would qualify for the

services (insurance, auto, home), since Costco’s 16 million members were already pre-screened for income and other qualifying variables.

Case Contradictions

Costco’s 16 million household members might not experience the same consistent savings that other members would (accident histories, telephone usage patterns, credit card acceptance rates).

• Contradicts 1st core operating philosophy to be “efficient and simplistic”

“We aren’t MBAs so we don’t do complicated things.”

Operating Expenses Breakdown

Coupon Book Statistics, etc…

Survey Feedback & Questions

Membership Breakdown & Demographic info.4

3

2

1

Missing Case Facts

Personal Insight

Rapid Inventory Turnover High Sales Volume Reduced Operating Costs

Proven Operating Philosophy Value-Added Services

“Out-of-the-box” No Savings Consistency Increase Customer Acquisition?

Kotler Text Teachings

• Do the Services distort Costco’s value proposition?

• Retention Dynamics:– Will the new Executive Membership reduce the rate of customer defection?– Or Increase the longevity of the customer relationships?– Is this focusing a disproportionate effort on high-profit customers?

• Do the Services align with Costco’s core competency?

• Will this damage Costco’s brand equity?

Identity Meaning Response Relationships

#1 Launch Executive Membership Program

1 Increased “Value” of Costco membership experience.

2 Memory of “Bad Service” could potentially decrease customer retention.

2 Increased membership fee.

3 Revenue diversification.

1 Services are misaligned with core competency.

3 Increased SGA expenses (advertising).

PRO

SCO

N S

#2 Increase Product Diversification

1 Continue to act as buying agent for its members.

2 Broadening assortment to compete could negatively impact its core competency of “intellgent loss of sales.”

2 Consistent with core competency: efficient & simple.

3 Continue to drive product costs down through volume purchases.

1 Reduce inventory turnover.

3 Increased distribution costs.

PRO

SCO

N S

#3 Expand Peripheral Services

1 Currently a $1 billion business for Costco in 1997 with profitable growth opportunity & minimal impact to SGA expenses.

2 Reduced sales floor.

2 Controlled service experience for the customer (Costco ran operations itself).

3 No negative impact to operating philosophy.

1 Limited to scale economy services & products.

3 Increased number of employees & overhead costs.

PRO

SCO

N S

Costco Solution

Expand Peripheral Services!

Costco Solution

“The only purpose for Costco in having the Executive membership is to make it more

attractive for people to come to the warehouse and buy from us.”

-Galanti (CFO)