Costco Is Getting Stronger Summary

In his article, “1 Big Reason Costco Is Getting Stronger”, Andres Cardenal discussed the success Costco has experienced (2014, p. 1). In addition, he compared Costco’s strengths to its competitors, Wal-Mart and Target. Cardenal presented why he believes Costco may continue to grow even stronger.

According to Cardenal, Costco has significantly outperformed other retailers such as Wal-Mart and Target (2014, p. 1). Since 2006, Costco revenues have increased 127.8 percent as of June 2014. During the same time, Wal-Mart revenues have increased 70.24 percent while Target revenues increased 60.94 percent (Cardinal, 2014). Based on reported sales for May 2014, Costco’s comparable sales, excluding the impact of gasoline prices and exchange rate

fluctuations, increased 6 percent at the company level (Cardenal, 2014, p. 2). Although Wal-Mart does not report monthly sales data, it reported that first quarter comparable store sales, excluding fuel, declined 0.2 percent on the total company level in the United States. In addition, Sam’s Club performance was worse, where comparable store sales, excluding fuel, fell 0.5 percent during the first quarter of 2014. Also, Target, still suffering from the data breach the company experienced in December 2013, reported that its total revenue for the first quarter increased 0.2 percent. However, comparable store sales declined 0.3 percent during the quarter (Cardenal, 2014, p. 2).
Costco is unique in that it makes most of its profit from the sale of membership fees, as opposed to profit margins on products (Cardenal, 2014, p. 2). Because of this, Costco can sell its merchandise at cost or less, allowing the company to charge extremely low prices. In the discount retail industry, where competitive pricing is critical for success, this is a huge competitive advantage. While Wal-Mart and Target operate at a gross profit margin of 25 percent and 30 percent, Costco sells its products at a significantly lower gross margin of 12.5 percent (Cardenal, 2014, p2).
Another differentiating factor for Costco is its superior customer service. In the American Customer Satisfaction Index, the company has a ranking of 84, the highest in the discount retail industry. Comparatively, Wal-Mart’s Sam’s Club has a score of 80 in the index. As stated by Cardenal, “customer loyalty is a central variable to consider in such a competitive industry like discount retail” (2014). Costco boasts membership renewal rates that are consistently more than 85 percent, and in big markets like the United States and Canada, they were even better at 90.6 percent in the first quarter of 2014.
In addition, Costco gains competitive strengths as it becomes bigger over time improving its position as the cost leader in the industry.

Costco is an excellent example of the economic term “cost leader” which is defined as a company that can make a product more cheaply than other companies making the same type of product (Cambridge Dictionary). As Costco grows, its ability to offer competitively low prices increases, allowing Costco to continue to increase market share and attract more members. Because of its size, Costco achieves greater purchasing power with suppliers, enabling the company to negotiate better prices and more favorable payment options for its merchandise. Also, economies of scale and supply-chain efficiencies create more cost savings as the company’s sales volume grows. By selling more products, Costco can spread its fixed costs among more units, further reducing the impact of fixed costs per unit. This process is a good example of the economic theory of economies of scale, which means that as a company grows and production units increase, a company will have a better chance to decrease its costs. According to economic theory, economic growth may be achieved when economies of scale are realized (Heakal,

2012).
As Costco grows and becomes more successful, the volume it sells will increase, allowing the company to pass on bigger savings to its customers. As Cardenal stated, “this produced a self-sustaining virtuous cycle by which a Costco membership becomes more valuable as the company grows over time” (2014). Costco is a prime example of a cost-leader as discussed in economics classes. It is an organization that other companies strive to emulate. In fact, Costco is in a great position to continue outgrowing its competitors and generating substantial returns for investors for many years.