Summary
The article is about how Costco (5th largest retailer in the US) is receiving criticism from Wall Street financial analysts because their prices are too low and labour costs too high relative to their competition. These factors, analysts say, are not good practices for a discount retailer. But CEO Jim Sinegal disagrees. He believes that giving good pay (42% higher than Sam's Club) and benefits and keeping prices low for customers is good business. And share prices seem to be agreeing with Mr. Sinegal's philosophy. At the time of publication, Costco's share price had increased 15% and Wal-Mart's (the largest retailer in the world) share price had fallen 5%. Wal-Mart has been criticized of paying employees the lowest wages in the industry. The following is the philosophy of Costco:
The article states that Wal-Mart (which owns Sam's Club - a Costco-like store) and Costco are bitter rivals."Costco has used Mr. Price's formula: sell a limited number of items, keep
costs down, rely on high volume, pay workers well, have customers buy
memberships and aim for upscale shoppers, especially small-business owners. In
addition, don't advertise - that saves 2 percent a year in costs."
Connections
First, there is a case study in the book about Price Club (which later merged with Costco) stating its business philosophy of retailing. The text states that the Price Club has its stores look like a warehouses, sells high volumes of fewer brands, sells memberships, etc. is a new approach to retailing. It seems that Costco is still following that philosphy. Second, Costco is a retailer, despite having the word wholesaler in its name. Even though some retailers go to Costco to get supplies, or even inventory to sell in their business, by definition in the text, Costco is not a wholesaler. The last connection is the channel of distribution. It's hard to categorize Costco as a normal channel of distribution because Costco deals with suppliers directly cutting out the need for a wholesaler, so it appears that Costco is the producer-retailer-consumer channel of distribution.
Reflection
It's interesting to see that 15 years later, the philosophy of Costco hasn't changed and that philosophy is paying off. In fact, Costco is the largest warehouse retailer despite having 100 fewer stores than its main competitor (Sam's Club) at no. 2. I personally like the fact that I can get high quality items at low prices and it makes me feel good because the workers are well compensated. The lack of variety and help in the store does frustrate me at times but I guess that's the compromise for low prices. I still wonder though, how I can never leave the store without spending hundreds of dollars on things I don't really need.
