Case Costco
Costco is one of the largest retail sales companies in the United States, and it also has stores in several other countries. Despite low profit margins in the retailing industry, the company is more profitable than most competitors, and it is growing rapidly. In the University of Michigan’s annual survey of customer satisfaction with U.S. retailers, Costco has high ratings.
The company’s basic strategy is to provide quality products at the lowest available prices, and the products include clothing, electronics, and food. Costco’s leading competitor—Walmart’s Sam’s Club—offers more variety and some lower-priced items, but Costco’s products are generally of a higher quality. Marketing costs are low because Costco does not do any advertising; there is no public relations manager or expensive advertising agency. Instead, Costco depends entirely on happy customers who tell their friends about the fantastic bargains available at Costco stores. Around 20 percent of the products consist of limited-time supplies of deeply discounted luxury goods and other special bargains. This strategy of temporary special bargains creates customer excitement and increases purchases of items that shoppers had not intended to buy when they visited the store. Costco’s merchandise buyers have to experiment and take big risks with luxury items, because a lot of money is tied up in inventory if the items do not sell quickly. The buyers need to rely on their intuition and creativity to find items that will be popular and profitable. Innovation in design and packaging is also important for making some types of products such as food items more appealing to customers.
Charging customers for the privilege of shopping at Costco provides a steady source of revenue for the company and increases customer loyalty. Costco has two types of members: businesses and individuals. Even though the cost of membership is a little higher than for competitors, Costco has a high rate of card renewals. To increase the value of the memberships and attract additional customers, Costco also offers services such as travel plans, health and home insurance, banking, and financial planning. Individual shoppers average two Costco visits per month, and many travel great distances to stock up on supplies. Unlike most discount stores, Costco has many affluent customers who are “treasure hunting” for the special bargains on luxury goods rather than merely looking for low prices on basic commodities.
The methods Costco uses to minimize costs include a no-frills approach to their stores, and the company keeps layouts standard in its stores to reduce costs and give shoppers a feeling of familiarity at every location. The products sold in each store are similar, except for foods, which vary according to local tastes. Inventory costs are reduced by having only a limited variety of product sizes, and by packaging many products for bulk sales. Products move right from the delivery truck to the sales floor, and the signage looks like it was made with a cheap laser printer. There are not even any shopping bags for customers. Computer tracking of sales makes it possible to determine when more fresh foods are needed in the display cases and reduces costs from waste and overproduction.
Costco has generous pay, excellent health benefits, and a good 401(k) plan for its hourly employees in the Unites States. The company policy is to promote from within the ranks, and workers at all levels have good opportunities for advancement. The company has one of the most loyal and productive workforces in the retailing industry. The high level of organizational commitment is reflected in the low turnover rate for employees, which is well below the average rate for the industry. Low turnover has benefits such as less cost for recruiting and training new employees. The savings from lower turnover costs, lower employee theft, and higher employee productivity more than offset the higher cost of compensation at Costco. The operating profit per hourly employee in the United States is nearly twice as high at Costco as at Sam’s Club.
Important values at Costco include hard work, respect for customers, and high ethical standards. Employees are encouraged to suggest ways to improve the stores and product mix, and creativity is valued. Each morning before the store opens there is a conversation about ways to be more efficient and to provide better customer service. All employees are trained to be friendly and helpful when customers need assistance. When shoppers need assistance in locating an item, employees are expected to show them where it is rather than merely pointing to a distant spot or providing vague directions.
Jim Sinegal, the founder and CEO of Costco, has a strong concern for his employees and is perceived as dedicated, caring, and hard-working. He takes no special privileges as the CEO, and his salary is less than the salary of most CEOs. He understands how important it is to have talented people working for the company, and he does many things to attract and retain them. Sinegal communicates a strong concern for high performance, but he is not coercive or overly critical. He is careful not to discourage his product buyers when they take risks on new products. Employees are empowered and encouraged to “think outside the box.” At the annual Managers’ Conference, he meets with more than 1,000 Costco managers and product buyers to review the past, discuss the present, and plan the future. He also has monthly budget meetings with groups of around 70 store managers to talk about the importance of exercising tight cost controls, getting the details right, and adhering to the Costco credo. Sinegal tries to visit every Costco store each year, and he spends nearly half of his time on the road checking out his stores and some of the competing stores.
Written by Gary Yukl
Read Case Costco (end of Chapter 12).
In 500 words, answer the following questions:
Explain the success of Costco in terms of the three performance determinants in flexible leadership theory (adaptation, efficiency, and human capital).
What leadership behaviors and theories help to explain the strong influence of the CEO on the company and its continued success?
