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Promotional Marketing- Costco Analysis

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    Our general findings about Costco are that it is an all-around great, moneymaking, expanding company. To start off, Costco is a membership warehouse that offers its customers low prices on exclusive, private-label products in a wide assortment of merchandise categories that generate high sales volumes and quick inventory turnover. A combination of this turnover, resourceful distribution, merchandise with “no-frill” and a self-service warehouse gives this company extensively lower gross margins than your typical, everyday warehouse or supermarket.

    To prove that Costco is a moneymaking company all one has to do is glance at the sales figures. Even though 2010 was a rough year for everyone economically, Costco managed to acquire $76. 3 billion in sales, which is a nine percent increase from last year’s sales. Not only did the company’s sales increase but also their net earnings exceeded $1. 3 billion along with their earnings per share increased by 18%. Since Costco is acquiring more than enough revenue they decided to expand their company even more, and open 14 new units in 2010, which are all located in the U. S. and in Canada.

    Apparently consumers were looking forward to the opening of new Costco’s, because eight of the new buildings had opening day sales that surpassed $500,000 and three of the stores made close to a million dollars in sales within that first day. Since Costco has had great success with the opening of its stores in 2010, they plan to open 28 new stores by the end of 2011 (Greenhouse). Even though customers must pay a membership fee of $50 to shop at Costco, it is worth the time and amount of money they will save. Customers can save time by shopping at Costco because they have everything you need in one stop.

    Their assortment of products includes; sundries (snack foods, alcoholic and nonalcoholic beverages, cleaning supplies), hard lines (major appliances, electronics, office supplies, sporting goods, seasonal items), food (dry and packaged foods), soft lines (apparel, jewelry, home furnishings), fresh food (meat, bakery, deli, produce), along with gas stations, pharmacy and a one-hour photo. Our overall thought about Costco is that they seem to be doing something right with the amount of people who shop there and amount of sales earned every year (Greenhouse).

    An interesting fact about Costco is that they are one of the first companies to grow from zero to $3 billion in sales in less than six years. To increase their profits they decided to combined Costco and Price Club in 1993. By combining the company and being under the name PriceCostco, they established over 206 locations and had accumulated over $16 billion in annual sales. The man behind the store is Jim Sinegal (Greenhouse). He founded Costco Wholesale Club in 1983 and has been the president and chief executive since 1993.

    Jim Sinegal has a very simple philosophy of keeping costs down and passing the savings on to the members. Since 1997, the company has expanded into more than 570 locations around the world. In 1997 the very first Costco opened in Japan in Hisayama. They now have nine stores in Japan which include: one in Fukuoka, Chiba, Machida City, Hyogo, Yokohama, Kawasaki, Sapporo and two in Saitama (Costco. com). Current Promotion Strategy Costco’s target market is small businesses and upper/middle class families. Since the U. S. has about 24. 6 million people who are married with children under the age of 18, along with 24. million small companies, it gives Costco a reason to target these two areas in the U. S. The average income for a typical U. S. consumer is $48,201, however, the average income for Costco’s target consumer is over $100,000. Because of this is it makes it hard for Costco to reach the prospective market since the average income is mu Costco has many different strategies that help them compete against other stores. Some of the top ways they compete is by cutting costs, selling private label merchandise, selling large volumes of merchandise and Costco is only open to Costco members.

    In order to cut costs, Costco has a based chain, The Issaquah (Wash. ) that eliminates several pricey expenses. Other retailers generally use elaborate display cases, salespeople, advertising and billing, but since Costco doesn’t do this they can put a 15% markup limit on all items and offer great bargains on their merchandise (Regnier). One of the private label brands Costco sells is Kirkland Signature products. Kirkland Signature Products are of equal or better quality then other national brands, which include: diapers, film, frozen foods, luggage, tires, lothing, house wares and more. Since not every store carries Kirkland products if you’re a consumer who uses them you would have to go to Costco to purchase them, which makes Costco have a larger consumer base. Costco not only caters to the average consumer, they also accommodate small and medium sized businesses. By selling such large amounts of merchandise Costco has helped small and medium sized businesses reduce costs on purchasing for resale. Another great aspect of Costco is its high inventory turnover.

    Since its inventory turnover is so great, they can acquire cash from a sale of a sizeable portion of inventory before they have to pay back their suppliers. Costco’s inventory and merchandise is so huge that they actually had to increase the size of their shopping cart four times. Another great asset about Costco is how exclusive they are (Costco. com). In order to shop at your local Costco a customer must have a membership. The reason for Costco doing this is because some products are sold at cost or lower so the membership makes up for the revenue.

    You may think most customers aren’t willing to pay the membership fee, but Costco’s members are so loyal they have an 86% renewal rate. Because of this, Costco has acquired very strong and competitive brand equity and use this to their advantage in current promotion strategies. When a customer walks in Costco and sees how low the prices are and how quickly certain bargain priced merchandise sells, they feel the need to come back as much as possible in hope of finding another good deal. Due to the low cost merchandise a consumer feels obliged to come back more frequently and not anywhere else (Regnier).

    Packaging has recently been a big drawing factor in types of merchandise consumers choose to buy. When shopping at Costco, consumers want a lot of merchandise packaged into small boxes. Designs do not matter. Consumers know they are getting warehouse packaging when shopping here. As of January 2011, Costco had 581 warehouses nationwide. Being located on prime real estate sites is not a main concern for Costco. They work on the idea that their low prices will attract customers rather than the location or elaborate facilities.

    Stores range in size from 70,000 to 205,000 square feet with the average size of 143,000 square feet (Costco. com). The site is nothing more than a typical warehouse with bare concrete floors, merchandise stocked to the rafters, and the only signs in sight are aisle numbers. They succeed on a strategy that allows them to select land within a built-up area and then build their warehouses. They depend on their strongest markets to support increasing numbers of warehouses in closer proximity of each other. The majority of Costco warehouses are not located in high traffic, highly populated areas.

    They are typically found on the outskirts of towns (Greenhouse). Costco Wholesale implements their promotional mix by using a functional business strategy. They use an in-house publication to market to their members and cut cost by not marketing to non-members. Human Resources are handled by promoting employees from within the company. Besides the companies that they partner up with and execute the many services that Costco offers, they do not higher other companies for implementation purposes (Greenhouse). Costco typically relies on word of mouth advertising.

    Generally advertisement is acquired upon new store openings when they reach out to surrounding local businesses to becoming members. Their magazine, Costco Connection, is distributed to the members to show off new products, give away coupons and show what is going on sale. Forming and maintaining memberships is a key factor for Costco’s business. Once a membership base is formed in an area, the rest of advertising is by word-of-mouth through their 50 million membership holders. Costco estimates that they save 2% a year in costs because they keep their advertising expenses so low (Regnier).

    Cathy Wanklin, regional marketing manager for Costco’s Midwest division, illustrates the word-of-mouth advertising strategy by saying “If you take a Costco cake to a bridal shower and there are 15 women there, 14 of them will tell their friends about this great cake for $15 that serves 40 people…That’s why one in ten Americans now has a Costco card in their wallet” (Greenhouse). Personal selling is a big part of the promotional strategy too. Costco employees that sell goods and services at the warehouse are generally informative, cheerful and are known for their experience because the turnover rate is low.

    Costco keeps their labor costs low by squeezing more sales out of fewer people. This means that there are limited workers on the sales floor and it may be difficult to locate sales help because payroll is used for other operations. Employee’s average wage is $17. 00 per hour at Costco, which is considered high pay compared to other discount retailers such as Sam’s Club whose average pay is 42% lower (Mahdavi). Costco uses various types of public relations to get their message out there. Costco does support charities by giving within the communities they do business with.

    They have a Charitable Contributions Committee that is “charged with overseeing our charitable giving and encouraging decentralization of charitable giving so that the greatest impact is where Costco’s employees and members live and work”. They specifically support programs focused for children, education, health and human resources. Other than the Charitable Contributions Committee, Costco virtually has no public relations department. Their goal is to always maintain a good public attitude and make sure customers are more than satisfied. Costco offers daily samples for many of the products throughout the store.

    As customers walk through the store they can find a near kiosk sampling new or popular items. This gets customers to try a product risk-free. It has been said that many customers continue to shop at Costco because of how well they treat their employees (Mahdavi). Costco limits its marketing and promotional activities to new warehouse openings, occasional direct mail marketing. Daily free samples are a form of promotional sales, however through our research we found that it is not Costco’s doing. The food or products being sampled all throughout Costco is put on by the companies of each item.

    Companies send their own reps to Costco warehouses to prepare, distribute or demonstrate on sight to the customers. Usually there are about five to ten kiosks throughout the store on a given day giving out free samples. Email blasts are an example of direct marketing they use to existing customers to promote merchandise (Regnier). Regular direct marketing programs that Costco practices are The Costco Connect, a magazine published for members only, coupon mailers, weekly email blasts from costco. com and handouts to members as they enter the store that promote selected merchandise.

    Occasional direct mail marketing is sometimes sent to prospective new members, typically when a store has just opened. Joel Benoliel, Senior Vice President of Membership and Marketing at Costco, said, “It’s not our culture. It’s like an addiction. Once you start, you can’t stop … when you increase this spending, you decrease profitability … with us; marketing is really talking to our members. Marketing to us is completely different from the way other retailers view it. It’s all about word of mouth. ” (Regnier). Strategy Evaluation Costco’s strategy of keeping overhead costs low in order to pass savings long to its customers through low prices is evaluated as strength because they have successfully established the strategy and have built a large loyal customer base using this focus. They have a strong brand and presence in the market with all locations scattered throughout the nation and in other countries, allowing them to be capable of leveraging the brand equity to increase sales. Recently Costco launched their mobile-friendly website and developed apps for iPhone, Blackberry and Androids. Getting mobilized was a smart move for the company as they will likely increase online sales with this opportunity.

    Although the app cannot manage transactions the website can be pulled up using a search engine on the smartphone and purchases can be made. Another strength Costco made for their marketing strategy was integrated a SMS campaign. This is great because all members’ phones are eligible since it does not require a smartphone to receive text messages. The SMS campaign is opt-in or out and informs members about new deals and featured items. Costco intends to stick with their marketing plan which is basically no formal advertising for the purpose of cutting costs.

    Their marketing relies on word of mouth, email newsletters, Costco Connection member magazine, SMS text messages, and occasional direct selling promotions related to new store openings. With this approach they may not be reaching their full membership potential. Some may consider Costco too focused on business customers with their bulk size products and not offer enough small quantity units for other customers. The lack of self-checkout and warehouse locations not being on prime real estate are also weaknesses. Costco’s email marketing strategy could be improved.

    Customers receive email newsletters displaying current promotional products and deals during that time. However, the emails appear to be cluttered with too much information and products, it is a bit overwhelming to viewers. When customers open the email they are bombarded with a cluster of pictures and prices which half of them are irrelevant to that customer or are not interested in. As such a successful company, we believe Costco could invest in advanced software to track customer’s purchases and target relevant items in the emails or not display so many items.

    Recommendations We have come up with a couple of ways to improve Costco. First, a way to improve Costco’s customer base is to expand their target market. As of now, their target market is men and women in middle to upper class whose average salary is over $100,000. This target market shops at Costco not only because they can afford the membership, but many are entrepreneurs or small business owners who have the money to spend on the luxury items like Dom Perignon Champagne and designer watches.

    Even though this approach is obviously working for the company, why not change it up and reach out to the lower/middle class who make less income? Costco could do this by lowering the membership fee or eliminating it completely. By getting rid of the membership fee, more consumers could shop there, which could increase sales even more. As for improving Costco’s advertising, they should consider using non-member days. We suggest that twice a year Costco could have specific days that allow non-members a trial run at the store. They would still be abiding by all the payment methods that are instilled and paying the same prices.

    The purpose of a trial or non-membership day is that people in the area are welcomed and it raises the probability of a prospect customer becoming a member. A second recommendation regards payment methods, specifically credit cards. The current payment methods at Costco Warehouses are limited to cash, check, debit, American Express and Costco Credit. We suggest Costco allow their customers use other types of credit cards but charge a 2% fee when customers purchase by credit. Recent statistics show that Sam’s Club’s average checkout sales increased 35% after the first week once they allowed their customers to pay with MasterCard.

    The third promotional suggestion we recommend for Costco is a shared membership. This shared membership would only be for a certain period of time, one month, six months, a year, whatever Costco decides. Under the shared membership, two families would split the membership expense and the benefits that only one account normally gets. Families would be limited to only one trial of this promotion. The purpose of this promotion is that when the promotion ends, one of the two families would be more likely to join Costco as a full member for good once they got the Costco experience.

    Another way to do a shared membership is by implementing household plans. Household plans would require cardholders to pay $20 extra (or whatever price Costco believes worth it) for every additional household member shopping at the stores. We believe that parents would pay $20 extra for an additional card so their college students living away from home can buy in bulk and save on several trips to the grocery in the long run. The purpose of household plans would be to use existing relationships to leverage new ones and overall increasing membership rates.

    Who knows, that college kid will probably get their own account in a few years once they are out of college or have a family of their own. Gas stations are currently installed in 343 of the 540 warehouse locations and accounted for over $6 billion in sales in 2010, averaging sales $17. 5 million at each location. If they were operating gas stations at the 197 warehouses without, they could be looking at an increase to net sales of $3. 5 billion. Gas stations have proved themselves highly profitable for nearly every retailer that has opened that avenue and they do a whole lot more than just contribute sales from gasoline.

    Gas stations as an ancillary business drive higher sales in all categories when used as a promotional tool through discounting gasoline prices as a part of rewards program. The demand for gasoline around the world is high and can be expected to stay that way for at least the next fifty years, making this a safe, smart investment for Costco. A mobile wine app is another approach Costco should be considering. As the largest retailer of wine, they could use their best category to develop a smartphone app featuring price comparisons and schedules of when each wine will be sampled in the stores for customers above 21 years old.

    The app would attract customers and get them in the retail centers to test the offerings and prices, also giving Costco the chance to cross-sell and up-sell other items that the customers may have not initially came to the store for but added to their purchase when they got there. If the customer is at Costco and come across a wine they are interested in they could pull up the app and read reviews right then and there to see what other customers said about their experience with that item.

    The fine wine app approach gives a more elegant spin to what Costco is normally portrayed as. This could improve the brand image from a low-scale retail focus to a more quality mindset. As Baby Boomers grow older and with younger generations being more heavily medicated then past, pharmaceuticals is one of the few industries that can be viewed as stable in turbulent economic conditions and will most likely see growth as Americas population ages. With the growth of the pharmaceutical industry will come higher sales nd pharmacy division of major supercenters and discount clubs will become increasingly important. Costco should waste no time in adding more central fill locations to supply their warehouses. In 2010 pharmacy sales totaled $3. 6 billion, an increase of ten percent from the prior year as a result of the addition of central fill locations. This is a critical time and if Costco wants to stay competitive in an increasingly important market they must act fast so they can reduce costs can adjust their prices accordingly.

    References

    Mahdavi, S. (2007, April). Costco and the customer. Retrieved from

    http://bmctoday.net/crstoday/2007/04/article.asp?f=CRST0407_19.php

    Regnier, P. (2006, June 1). Hunting Big Savings at Costco . Money Magazine, 35, 7. Retrieved

    March 22, 2011, from http://money.cnn.com/magazines/moneymag/moneymag_archive/2006/07/01/8380748/index.htm

    Greenhouse, S. (2005, July 17). How Costco Became the Anti-Wal-Mart – New York

    Times. The New York Times – Breaking News, World News & Multimedia. Retrieved March 20, 2011, from http://www.nytimes.com

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