Costco Sources of Competitive Advantage


Costco is among the leading retail brands in the US with an impressive market presence and a large customer base. Despite the dominance of Walmart in the US market, Costco has created a distinct image for itself and continues to grow in the face of heavy competitive pressure. Apart from being popular for its quality products, Costco is famous for its customer service and organizational culture. However, the company has achieved its leading position without investing anything in marketing or advertising. The retail industry in the US is marked by heavy competition. Maintaining a high growth rate without investing in advertising and promotions is nothing less than a miracle in an intensely competitive environment. 

Companies are investing aggressively in technology, marketing and human resources for faster growth. However Costco’s business model is different from the other retail brands. Apart from operational efficiency, customer focus is at the core of its business model. It is also among the leading reasons behind the level of success Costco has achieved. To ensure faster growth, it has started investing in e-commerce. It continues to deliver lower prices to its customers and that too without losing focus of HR management. A great work culture and continuous focus upon employee empowerment have resulted in stringer overall performance and higher productivity.

Read more about how the company has achieved an edge and built several sources of sustainable competitive advantage.

Brand image:

One of the biggest strengths of Costco is its image of a customer friendly retail brand. Apart from its focus on pricing, Costco has always worked to build a customer friendly image. It is a brand trusted by millions of its members. Its focus on customer service, product quality, low prices and HRM have helped it build a strong image. The retail industry is marked by heavy competition and in such a scenario, trust is a major advantage for any brand. Costco has consistently focused on building trust and the result is high brand equity. This helps it overcome the competitive pressure which is quite high. However, a good brand image is more important than ever in the twenty first century for customer retention, sales and higher customer loyalty.

Customer base:-

Costco is a membership based warehouse chain. Its customer base may be limited compared to Walmart but still it is large. The brand charges for memberships but also offers special benefits in form of low prices, discounts and other benefits. The number of Costco members grew to 94.3 million in 2018 from 90.3 million in 2017. The company also enjoys a high customer retention rate in the US as well as the overseas markets.

Customer loyalty:

Costco enjoys very high customer loyalty. This is an important advantage that the company has achieved through a relentless focus on product quality, customer service and lower prices. It has managed a large supply chain and efficient operations which have helped it reduce its operational costs. These benefits are then passed on to the customers. There are other things about Costco also that have made it popular and trusted by its customers. The company has maintained an excellent culture and received industry-wide appreciation for its HRM and business practices.

Pricing strategy:

Costco offers its customers a distinct and differentiated customer experience. However, apart from that it also focuses upon consistently lower prices and offers great deals and discounts to its customers. The company sources from a  large number of suppliers and procures materials in bulk. This allows the company to obtain products on low prices and the advantage is then passed on to the customers. On the other hand, it has been able to cut down on operational costs by focusing on managing operational efficiency. Managing its supply chain and logistics efficiently have also helped the company cut down on operational costs. However, it does not mean that the company pays its workers low wages. It spends on its employees to keep them satisfied and happy.

Differentiated business model:-

Costco’s business model is different from that of Walmart and other leading retail brands. It is a chain of membership based warehouses. There are small annual charges for membership. However, the benefits that it offers its members are also  excellent. Its differentiated business model has also helped it achieve higher operational efficiency and build strong customer loyalty. Apart from a large range of products, its private label brand Kirkland is also a major attraction for customers. The company’s differentiated business model has helped it control operational costs and sustain its profitability.

Consistent financial performance:-

The financial performance of Costco has remained strong because of pricing, customer service and a great customer experience. These things have helped it deliver as per customers’ expectations and in turn the company continues to grow profitably.  It operates 768 warehouses of which 533 are located in USA. Its sales have continuously grown every year. Revenue of the brand rose from 118.7 Billion dollars in 2016 to 129 Billion dollars in 2017 and 141.6 Billion dollars in 2018.

HRM and organizational culture:

Costco’s image in terms of HR is vastly different from Walmart’s. It has earned a lot of appreciation for its great culture, operational efficiency, and excellent employee management. While its biggest competitor, Walmart has faced a lot of criticism over its wages and work environment, Costco has continuously been hailed as one among the America’s best employers for its wages and benefits as well as great work culture. Costco has managed a great work environment that fosters dedication, collaboration and creativity. Its focus on culture and HRM has helped it build a strong image and drive performance throughout the organization. Not just in the area of employer employee relationships, but Costco’s performance in terms of supplier relationships has also been great.

Private label brands:

One of the primary strengths of Costco is its private label brand Kirkland. Kirkland is a private brand and a primary attraction at Costco for a large percentage of the customers. Costco has continued to add new products under its Kirkland Signature brand whose popularity has continued to grow. Kirkland brings a large part of the entire revenue that Costco generates every year. In 2018, Kirkland generated around 39 Billion dollars in sales. In 2018, Costco achieved the net sales of around $138 Billion. Kirkland generated close to 30% of the total sales. It is known for its quality and exceptional value. The Kirkland signature range includes  apparel, organic and fresh foods, household basics, sporting goods, and health and beauty products.

Sources: Costco Annual Report 2018.