After being established in 1983, Costco has built itself into the fifth largest retailer in the world that sells a variety of everyday and high-end items in 800+ locations worldwide.
As Costco continues to rise above its competitors such as Amazon, Walmart, and Kroger, we take a look at the various competitive advantages that have helped turbocharge its growth.
Keep on reading to find out about Costco’s 9 competitive advantages that have made it so successful!
Costco’s 9 Competitive Advantages That Make Them Successful
1. Costco Buys Items In Bulk
One of the major sources of competitive advantage for Costco is that it purchases items in bulk quantities directly from manufacturers.
As a business focused on offering the lowest possible prices to its customers, Costco has made it a core component of its strategy to source items in large quantities to get massive discounts from manufacturers.
By buying quantities of items a lot more than what any of its competitors would buy, Costco manages to clinch a lower price per individual item.
Moreover, instead of absorbing this cost-saving in terms of profit, it drives the price down on each item, benefiting the customer.
You can easily see this if you walk inside a Costco warehouse – you will find entire crates laden with the same product filling up a large section of the warehouse, giving a sense of the large quantities that Costco orders from manufacturers.
Note that Costco is not the only retail chain to take advantage of this strategy. Other retail chains such as Walmart also buy items from manufacturers in bulk quantities and so enjoy similar discounts as Costco.
2. An Employee-Friendly Organizational Culture
It is no secret in the business world that great companies are built on top of thriving organizational cultures that place employees in high regard.
Costco has learned this lesson well and has a unique culture that values employee well-being, health, and career growth.
We can see this reflected in how Costco has been the only major retailer (from the likes of Walmart, Kroger, etc.) that has made it to Glassdoor’s list of best employers 4 times since 2017.
Along with that, Costco is known to pay its employees fairly high salaries. According to Costco’s CEO, the company pays its employees an average rate of $24 per hour which is almost 3 times the minimum wage in the U.S. and twice what competitors pay their employees on average.
In fact, the difference can be seen in how Walmart pays almost half of its workforce less than $15 an hour, resulting in high employee dissatisfaction.
All of this contributes to Costco employees being satisfied, motivated, and dedicated to their jobs. This inevitably brings greater productivity to Costco since fewer employees can do the work of more, and customers always receive top-notch service at all times.
Since this is a rare trait to find in other retailers, high employee satisfaction has become one of Costco’s strongest competitive advantages.
3. Sells Bulk Items At Low Prices
If you observe the kind of purchases customers make from Costco, you will notice that most people buy items in packs and large quantities.
For example, you will find people buying a packet of 5 tubes of toothpaste instead of just 1 tube or an entire carton of soda cans instead of a single can.
Costco has intentionally designed its business model to have customers behave this way. Instead of stocking single items, it only stocks bundles of items at its warehouses and offers huge discounts to customers for buying large quantities instead of single items.
This is an important factor that differentiates Costco from its competitors – whereas you can (and you most likely will) buy single items from a Walmart or Kroger store, you will prefer to buy the same item in bulk quantities if you are buying from Costco because of the lower prices.
Because of this, Costco experiences a greater sales volume than its competitors. In turn, this nullifies the effect of seemingly low-profit margins, i.e. higher turnover enables Costco to make up the profit by selling more goods at the same time than its competitors.
4. A Loyal Customer Base
A major difference between Costco and other major retail chains is Costco’s effective way of building customer loyalty through its unique business model.
Instead of earning profits by marking up the prices on products (the strategy used by Walmart, Target, etc.), Costco sets a fairly low (close to 15% compared to Walmart’s 24%) markup on its products and earns its profit through yearly membership fees.
To shop at Costco warehouses and take advantage of all the daily and monthly discount deals and coupons, customers have to become either Gold or Executive members of Costco by paying an annual membership fee of $60 and $120 respectively.
Once a customer becomes a member, they can easily make back the amount paid for the membership fee throughout the year through Costco’s discount coupons and cashback rewards.
Membership renewal rates demonstrate how popular and effective Costco’s membership model is, with 91% of all members renewing their membership in 2019 in the U.S. and 88% doing so in Canada.
Costco’s continual emphasis on driving prices as low as possible, being ‘the last one to raise prices and the first one to lower them’, and its superior customer service compared to its competitors makes its members want to remain loyal, giving it a solid competitive advantage.
5. A No-Frills Attitude For Warehouses
People who have visited stores of retail chains like Walmart and Kroger will immediately feel a striking difference in the general ambiance upon entering a Costco warehouse.
Whereas other stores have endless lights to illuminate every inch of the store and employees hurtling in all directions to assist customers, Costco warehouses are illuminated by the skylight during the day and employees are relatively sparse.
On top of that, the entire design aesthetic of Costco warehouses is quite simple and bare-bones, including only features that a customer would require.
In fact, Costco stores are ‘warehouses’ in the real sense because of all the items packaged inside crates and pallets.
Cutting down on non-essential features such as excessive lighting and accessories, and stocking items directly in crates and pallets for customers enables Costco to save a lot of money that would otherwise be spent on operating costs.
Having this same principle applied across all 800+ warehouses means that Costco does not have any extra overhead costs and so it can spend more money on driving prices further down, delivering greater savings to its customers.
This automatically becomes a competitive advantage for Costco because its competitors end up spending a great amount of money on their operating costs because of all the extra features and accessories meant to help customers.
6. Strong Partnerships With Suppliers
In the retail business, having strong partnerships with a trusted list of suppliers can offer a strong competitive advantage to retail chains. Costco is among the few that have been able to establish this particular advantage.
When retail chains buy from suppliers in bulk quantities, suppliers offer discounts, i.e. lower their profit margins because they know that a large number of their items are sure to be sold.
Since Costco has such a strong emphasis on keeping prices low for customers, suppliers tend to be more willing to lower their own prices as well.
This is because they are aware that Costco will not pocket the extra profit margin created by the supplier’s reduced prices. Instead, this will be carried over to the customers and this will, in turn, greatly increase the sales volume of those items.
Therefore, by repeatedly demonstrating its commitment to keeping prices as low as possible for customers, Costco has been able to build strong partnerships with its suppliers that willingly lower their own prices, giving Costco a huge advantage over its competitors.
7. Narrow Product Mix At Warehouses
Walking inside a massive Costco warehouse and seeing the crates and pallets of items stocked everywhere may make you think that Costco sells a huge variety of products. However, nothing could be further from the truth.
As it turns out, Costco intentionally limits the variety of items it sells at each warehouse, focusing only on product variants and categories that have a high turnover, i.e. those that get sold very quickly.
To get a sense of this difference, consider that Walmart supercenters sell over 100,000 varieties of items whereas Costco warehouses (that have a similar size to Walmart supercenters) sell close to 4,000 categories of products only.
For example, whereas you might find 4 different types of Gillette razors at a Walmart store, you will only find a single type from those 4 being sold in bundles at Costco. Costco meticulously analyzes shopping trends and figures out which categories sell the most.
This way, Costco only stocks items that sell very quickly (have a high turnover) and so buys these items from suppliers in massive quantities (getting bigger discounts) and sells them at ridiculously low prices, absorbing the low-profit margins through the fast sales.
8. A Popular Private Label Brand
Costco has its own private label brand named ‘Kirkland Signature’ under which it sells a variety of items such as apparel, household essentials, health and beauty products, and fresh and organic foods.
The idea behind selling products through Kirkland is that Costco sells these at significantly lower prices compared to the same products sold by other brands.
It actively looks for high-priced categories where customers are not getting the lowest possible prices and introduces a Kirkland product in that category at 20% lower prices while maintaining the quality of the product.
For example, seeing that Gillette’s razors are high-priced, it recently introduced a Kirkland Signature three-blade razor that would rival Gillette’s razors by being significantly cheaper.
This gives Costco a huge competitive advantage over competitors who do not have their own private label brands and have to restrict themselves to expensive national brands only.
These Kirkland-branded products have become quite popular among regular customers, so much so that these contribute a large part to the total revenue earned by Costco. In 2018 alone, Kirkland’s signature products generated close to $39 billion in sales.
9. An Efficient And Optimized Supply Chain
Before items can be bought by customers, they must be transported in huge quantities from the manufacturer and brought to each Costco location based on each warehouse’s requirements.
Costco handles this entire supply chain quite efficiently, focusing on minimizing the ‘fingerprints’, i.e. the number of times items change hands before reaching the end-user.
Consequently, Costco now receives its items in the required quantities directly from manufacturers, avoiding all third-party distribution companies along the way and the costs associated with those.
The technique used by Costco to do this is called cross-docking, a logistics procedure that ensures almost no handling time or storage costs for items that are to be received by Costco. Several other retail chains such as Walmart use cross-docking to minimize supply costs.
Ultimately, the amount of money Costco saves by optimizing its supply chain in this way goes into reducing the prices of its items and helps attract and retain customers even more.
To learn more, you can also see the competitive advantages of other successful companies such as Walmart and IKEA. Additionally, don’t forget to see our other posts on Costco statistics and why Costco is so cheap!
Costco has built a successful retail business worldwide and given strong competition to e-commerce giants like Amazon by focusing on the oldest trick in the book – giving customers the lowest possible prices and relying on them to bring more customers through word-of-mouth reviews. This is Costco’s core competitive advantage, and all other efforts to save costs go into strengthening this differentiating factor.