Costco's Unorthodox Strategy To Survive The Big Box Apocalypse

costco store

Photo: Wikimedia Commons

Big box stores are dying. JCPenney, Sears, Best Buy, and more are shuttering stores and recasting their strategies.

“They were hit by a perfect storm of competition from the Internet and supermarkets,” Steve Brazier, CEO of market research firm Canalys, said in a report last year. 

Even mighty Walmart, once indispensable, recently admitted that sales were suffering. 

Yet Costco has remained strong throughout the recession. The company has continued to grow and see sales increase. 

Costco’s founder Jim Sinegal credits the company’s unusual business strategy with its success. 

Sinegal, whose company has been called the “anti-Walmart,” invests in employees and limits the items he sells. 

Costco sells a limited number of items.

Despite Costco's large store volume, it only sells four toothpaste brands. Walmart sells 60. Selling fewer items increases sales volume and helps drive discounts.

Costco relies on customers purchasing high volumes.

People go to Costco to buy in bulk. Buying large amounts of products helps keep costs down for Costco.

Costco has customers pay for memberships.

Costco shoppers pay in order to buy merchandise at the store. This up-front investment increases the likelihood that customers will return and be loyal to Costco.

Costco offers workers better pay.

CEO Craig Jelinek says he views people as an investment. Costco pays its employees an average hourly wage of $11.50 to start. After five years, they make $19.50 an hour and get an 'extra check,' a bonus of more than $2,000 every six months, according to Slate.

Costco aims for high-end customers

Costco does this by offering higher-quality items and occasional brand names, like Coach purses or Dom Perignon champagne.

Costco doesn't advertise.

By not advertising, Costco saves two per cent of its budget each year and can invest more in employee pay and benefits.

Costco offers some of the industry's best health care benefits.

Costco workers pay a 12 per cent out-of-pocket premium for benefits, while Walmart workers pay 40 per cent. This results in lower turnover and more skilled workers, Costco CEO Craig Jelinek said.

Founder Jim Sinegal ignores Wall Street's advice to raise prices.

Having worked in the retail business for 60 years, Sinegal believes that raising prices of items would lead to Costco's downfall.

Costco offers very small mark-ups.

At Costco, no item can be marked up by more than 15 per cent. In contrast, supermarkets mark up merchandise by 25 per cent, and department stores by 50 per cent or more.

Craig Jelinek makes a low salary by Fortune 500 CEO standards.

His salary is about $650,000. While that compensation is hefty, Walmart CEO Mike Duke earned $18.1 million last year.

Costco works with unions.

Unlike rivals like Walmart, Costco works with unions. The Teamsters union represents about 10 per cent of Costco's employees. The contract guarantees employees 25 hours of work a week.

Costco focuses on providing value to small business entrepreneurs.

Small business owners are among the wealthiest people in their communities, but don't have bottomless budgets like bigger corporations. Costco's members magazine has been known to feature small business advice.

Costco is always working to refine selections.

Unlike many mass-market retailers, Costco tries to act as a curator of great values. This makes customers feel like they're on a 'treasure hunt' and are pleasantly surprised by the new items they find there.

Costco refunds memberships or purchases for any reason.

Costco will take most items back with no questions (electronics are the exception). It will also give customers a full refund on membership. This gold standard of service keeps shoppers happy.

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