Costco Case Study

My newest case study is now available through the Harvard Business Publishing catalog. The case is titled Costco Wholesale Club: The Gas Station Strategy. The case examines the company's competitive strategy, and then it dives deeply into the rationale behind this year's grand opening of the first Costco standalone gas station.

New Case Study - Costco Wholesale Club: The Gas Station Strategy

I'm pleased to announce the publication of newest strategic management case study, Costco Wholesale Club: The Gas Station Strategy.  The case explores the company's business model and the decision to open its first standalone gas station in the nation.  The case study also examines the psychological principles at play when people shop at Costco.  The case study was published by the William Davidson Institute at the University of Michigan.  

Jimmy Kimmel: Costco Etiquette

Wal-Mart, Sam's Club, and Costco: A Key Strategy Lesson

The Wall Street Journal published an article today (by Sarah Nassauer) titled "Sam's Club Aims to be Less Like Wal-Mart."   The article quotes the Rosalind Brewer, chief executive of Sam's Club:  "“We want to be less of a Wal-Mart."  The article goes on to explain Brewer's thinking:

The new strategy means carrying fewer products that appeal to households that earn $45,000 a year—Wal-Mart’s sweet spot—in favor of targeting wealthier shoppers with more organic food, brand-name clothes and 1,000-thread count Egyptian cotton sheets, she said during a recent interview.  Sam’s struggle to shake an early focus on mainstream consumers has become a liability as club stores have evolved into a favorite among more affluent shoppers who are able to pay a membership fee for access to discounts on items from large screen TVs to bulk boxes of peaches. At the same time, big- box retailers and grocery stores have embraced discounted bulk sizes, without a membership fee. Rival Costco Wholesale Corp. has thrived, building stores in wealthy enclaves and delivering strong annual sales gains.

The story of Costco and Sam's Club offers a key strategy lesson for all managers.   Think about the wholesale club business for a moment.  Who is the typical consumer?  The data show that they have a substantially higher income than the usual Wal-Mart customer.  Does that surprise you?  Consider the wholesale club business for a moment.   You have to pay an annual membership fee.   You buy in bulk.  Therefore, while you may save on a per unit basis, the total cash outlay on a typical shopping trip is quite high.  You need an SUV to get the goods home, because they are bulky.  Moreover, you need a good-sized house with an ample pantry space to store the goods.  In short, the wholesale club model is more attractive to customers with a higher level of disposable income than many Wal-Mart shoppers.

Consider Costco's success.  They figured out who the customer was in this business, and they tailored their entire business model to this consumer.   For that reason, Costco locates in wealthier suburbs, and they offer premium goods in many categories.  They have become the largest retailer of wine in the country.  They know their customer.   Why has Sam's Club stumbled a bit in the past?  Wal-Mart built Sam's Club and tried to leverage all that was successful and effective about their value chain in the discount retailing business.  However, the activities and choices that were well-suited for discount retail were not necessarily tailored effectively to the wholesale club  business.  You see the temptation though.  Successful firms want to leverage their existing capabilities, choices, and activities when they move into a new market segment.  Yet, that effort to leverage what they do well may become a stumbling block if the new segment has some crucial differences for which they should account. Costco could build a business model well-suited to the more affluent customer because they were building from scratch. 

Could Amazon Become the Costco of the Web?

As many readers know, Amazon has seen its stock price suffer in the past year, as some investors finally are asking the question: Will this company ever make significant profits?   I often ask my customers:  Would it be awesome if Amazon could become the Costco of the web?  Initially, many students are puzzled by the question.  Those who haven't taken a look at Amazon's annual reports initially assume that Amazon is just as successful financially as Costco, if not more so. After all, Amazon is a dominant e-commerce player. Costco is a traditional brick-and-mortar retailer.  When they look more closely, they see that Costco is a very successful, highly profitable retailer.  Amazon would be very successful if it could ever achieve that type of profitability.   

I then ask students:  How is Amazon's business model like Costco's?  An astute student or two notices a key parallel.  Amazon Prime is much like a Costco membership.  I ask:  How much of Costco's profits is accounted for by its membership revenue? Answer: All of it!  The membership revenue is more than the total net income of the firm.  Then, I ask:  How is Amazon Prime different than Costco's membership revenue?  Answer:  Use of Costco does not come with much incremental expense for the firm, beyond the cost of goods sold for the products that are purchased each time a customer visits the store.  However, for Amazon, all that free shipping means significant incremental expense each time a customer orders goods on the site. Hmmm... so Amazon Prime may not ever be the same type of profit driver that Costco's membership fee is.  

With all that in mind, I was intrigued by this recent article on Fortune.com titled "Inside Amazon Prime."  Here's a key excerpt:

Because Amazon does not typically disclose data about Prime, it’s unclear how frequently shoppers use the service. But what is clear is that Prime members spend significantly more than more casual Amazon shoppers, according to RBC Capital Markets. Prime members said they spent an average of $538 annually with Amazon, far more than the $320 by non-Prime members.  Also nearly certain: Prime costs Amazon dearly. Greeley declined to disclose specifics, but he suggested as much in an interview. “When you look back, the program was launched in 2005 at $79,” he said. “You factor in just simple inflation, transportation and fuel costs, the price would be over $100 today, in just 2005 dollars.” Translation: Prime doesn’t pay for itself.  Indeed, Forrester analyst Sucharita Mulpuru estimates that Amazon loses at least $1 billion annually on Prime-related shipping expenses. It’s a staggering cost that pushed Amazon to hike the price for Prime by $20 to $99 in April.  “On the one hand, Prime adds to their bottom line, but it’s like a leech that sucks their blood,” says Mulpuru. “When they throw in things like lending library and streaming, it just gets more and more expensive for them.”