Research Paper Education E-ISSN No : 2454-9916 | Volume : 10 | Issue : 11 | November 2024

COMPREHENSIVE ANALYSIS OF COSTCO'S BUSINESS

MODEL

Sam Irfan
Research Scholars Program, Harvard Student Agencies, In collaboration with Learn with Leaders

ABSTRACT
This research paper examines the distinctive elements that constitute the business model of Costco Wholesale Corporation,
focusing on its achievements from 2014 to 2024. The paper attributes Costco’s success over this decade to a unique business
approach grounded in its mission statement and its “membership-only warehouse club” model, which serves as the framework for
its operations. The study utilizes various analytical business tools, including Porter’s Five Forces, the Ansoff Matrix, and Porter’s
Generic Strategies, to evaluate the internal and external factors behind Costco’s sustained growth. Findings indicate that within
Porter’s Five Forces framework, competitive rivalry, the bargaining power of consumers, and the threat of substitutes are primary
concerns for Costco. In contrast, the bargaining power of suppliers is less critical. Costco’s core cost leadership strategy, centered
on maintaining low costs and prices, is complemented by differentiation through exclusive membership benefits, distinguishing
it within a competitive retail landscape. Market penetration and development emerge as focal points for Costco’s current fiscal
strategy, evidenced by discounts, savings offers, and international expansions, including new locations in Jiangning, China,
Zaragoza, Spain, and three upcoming stores in Japan. The analysis also emphasizes Costco’s focus on promotion, pricing, and
place within its marketing mix, contributing to its steady growth, exemplified by a 7.75% year-over-year increase, even during
economic downturns.

KEYWORDS: Costco Business Model, Retail Industry Analysis, Cost Leadership Strategy, Market Penetration, Porter’s Five
Forces

INTRODUCTION This research paper explores the various elements of Costco’s

Costco Wholesale Corporation is a multinational enterprise business model and the contribution of each to its recent
(MNE) with 884 stores worldwide as of 2024. Founded on success.
September 15, 1983, in Kirkland, Washington, by Jeffrey H.
Brotman and Jim Sinegal, Costco ranks among one of the Goals and Significance
most financially successful corporations globally. In 2024, it This research aims to assess Costco’s business model and its
was ranked 11th among the Fortune 500 companies, boasting a success over the past decade (2014–2024) using four business
market capitalization of $395.74 billion as of August 2024 and analysis tools: (i) the Ansoff Matrix, (ii) the Marketing Mix,
a 7.75% increase in revenue. Operating within the retail sector, (iii) Porter’s Five Forces, and (iv) Porter’s Generic Strategies.
Costco is currently the third-largest retail business worldwide. These tools will comprehensively analyze Costco’s unique
Its extensive product line includes home appliances, jewelry, business strategies and how each component has driven
mattresses, electronics, and even car rentals. its financial growth. This study provides insights into the
competitive dynamics of the retail industry and the role of
Costco’s growth strategy has shown clear results in recent well-defined business models in achieving long-term success.
years, with revenue reaching $253.70 billion in the last twelve By examining Costco’s recent growth trajectory and dissecting
months, a 7.75% year-over-year increase. For the fiscal year the components of its model, this paper seeks to understand
ending September 3, 2023, Costco reported an annual revenue how each aspect has contributed to its financial achievements.
of $242.29 billion, marking a 6.76% growth rate (Stock
Analysis). This success is attributed to its unique business METHODOLOGY
model, which leverages bulk buying (economies of scale) and This study employs a secondary qualitative methodology
large warehouse storage to keep operational costs low and to analyze Costco’s business model, focusing on its unique
support sales at narrow profit margins. Costco’s profit model approaches to cost leadership, market penetration, and member-
is bolstered by its membership plan, priced at $65 annually, focused strategies. This approach involves a comprehensive
which follows a “membership-only warehouse club” approach review of literature, industry reports, and case studies that
(Cascade Strategies, 2023). Notably, membership fees examine Costco’s operational tactics and strategic tools, such
generated $4.6 billion last year, accounting for approximately as Porter’s Five Forces and the Ansoff Matrix. Using secondary
73% of its profits (The Motley Fool, 2024). sources allows for a broad understanding of how Costco has
sustained growth and competitive advantage in the retail sector.
Copyright© 2024, IERJ. This open-access article is published under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License which permits Share (copy and redistribute the material in
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 Research Paper E-ISSN No : 2454-9916 | Volume : 10 | Issue : 11 | November 2024

However, a limitation of this methodology is the reliance on rating ranging from High, Moderate, or Weak.
pre-existing data, which may not capture the latest changes in
Costco’s business strategies or external factors impacting the Costco Competition/Competitive Rivals
market. Industry Growth: The retail industry was valued at USD
21,237.64 billion in 2022 and is projected to reach USD
Costco’s Mission Statement 41,368.44 billion by 2030, growing at a CAGR of 7.69% from
At the core of Costco’s business model is its mission statement, 2023 to 2030 (Verified Market Research, 2024). Although not
which guides the company’s strategies and objectives. A mission growing as fast as sectors like IT or renewable energy, the retail
statement is central to any business model as it establishes the industry’s large size and steady expansion make it a stable,
primary goal while supporting strategies to fulfill that mission. significantly growing sector.
Costco’s mission statement and accompanying Code of Ethics Force: Moderate
form the foundation for all aspects of its business model and
strategic decisions. Number of Competitors: Costco faces significant competition
from retail giants such as Amazon, Walmart, Target, Whole
Costco’s Mission Statement and Code of Ethics Foods, Home Depot, Carrefour, Best Buy, Aldi, and numerous
(Adopted from Costco) mid-sized and local stores.
“Here at Costco, we have a very straightforward but important Force: High
mission: to continually provide our members with quality
goods and services at the lowest possible prices. To achieve our Similarities in what’s offered: Costco’s products and services
mission, we will conduct our business with the following Code are relatively homogenous compared to competitors in the
of Ethics in mind: retail industry.
• Obey the law. Force: High
• Take care of our members.
• Take care of our employees. High Exit Barriers: Costco has high exit barriers due to its
• Respect our suppliers. extensive investments in trucks, warehouses, and infrastructure
across various retail sectors. Exiting the industry would be
If we do these four things throughout our organization, then costly due to these fixed assets.
we will achieve our ultimate goal, which is to reward our Force: High
shareholders.”
Overall Competitive force: High
Costco’s Porter’s 5 Forces
Supplier Power
Number of Suppliers: Costco deals with a wide range of
suppliers, reducing the bargaining power of any individual
supplier. The absence of a single supplier will not significantly
impact Costco’s operations.
Force: Weak

Switching Costs: For a large retailer like Costco, there is

considerable competition among suppliers to secure a contract.
Thus, switching costs are low as Costco’s product line includes
a variety of goods that are not dependent on unique suppliers.
Force: Weak

High Supply and Low Forward Integration: There is an

abundance of suppliers, and most have low forward integration,
meaning they do not have significant control over their products
Source: Platinum Pro once they reach Costco’s warehouses.
Figure 1: Porter’s 5 Forces Force: Weak

Porter’s Five Forces, first published in the Harvard Business Overall Supplier power: Weak force
Review in 1979 by Michael Porter, analyzes the competitive
forces within an industry. The five forces—Competitive Buyer Power
Rivalry, Supplier Power, Buyer Power, Threat of New Entrants, Switching Costs: Consumers face low switching costs when
and Threat of Substitutes—determine the competitiveness and choosing where to shop, as many businesses offer similar
profitability of an industry. This section specifically applies products at comparable prices.
Porter’s Five Forces to the retail industry, where Costco Force: High
operates. Each force will be broken down into specific factors
impacting Costco’s competitiveness, followed by an overall Number of Buyers: Costco serves a broad customer base

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across various demographics, benefiting from its established Ansoff Matrix Analysis
brand and low prices.
Force: High

Availability of Substitutes: Consumers have numerous

alternatives to Costco’s offerings, increasing their bargaining
power. The ease of switching to other retailers for the same
products gives consumers more control over their choices.
Force: High

Threat of Substitutes or Substitution

Customer Willingness to go Elsewhere: Customers are willing
to shop at competitors if they believe they can find better deals
or more attractive alternatives.
Force: High Figure 2: Adopted from Strategic Coffee

Availability of Close Substitutes: Many substitutes, similar or The Ansoff Matrix is “a strategic planning tool that provides a
nearly identical to Costco’s products, are available due to the framework to help executives, senior managers, and marketers
relatively homogenous nature of the retail industry. devise strategies for future business growth” (Wikipedia,
Force: High 2024). Developed by Russian-American strategist Igor Ansoff,
it outlines four growth strategies—market penetration, market
Overall force: High force development, product development, and diversification—each
with varying levels of risk. Below is an analysis of how Costco
Threat of New Entrants: Costco benefits from large economies employs these strategies:
of scale, particularly through bulk purchasing, which provides a
significant cost advantage over potential new entrants. Market Penetration: Costco’s market penetration strategy is
Force: Weak primarily based on its membership model. Members pay a fee
of $65 (for Gold Star and Business memberships) or $130 (for
Shoppers’ low switching costs: With low switching costs for Executive membership) to access Costco’s warehouses, where
consumers, new entrants can capture market share relatively they enjoy discounted products. Costco further encourages
easily. retention and attracts new members with benefits, such as
Force: High holiday savings offers, resale eligibility, and exclusive discounts
on Costco travel services. This strategy is considered the least
Barriers to Entry: Although the retail industry has relatively risky as it involves penetrating existing markets with the same
low entry barriers, new entrants still face significant challenges products.
in terms of fixed costs, regulatory requirements, and the need
for substantial capital investment. Market Development: Costco’s market development strategy
Force: Moderate involves expanding into new geographical areas, specifically
international markets. Recent expansions include Costco’s
Overall force: Moderate force stores in Jiangning, China, and Zaragoza, Spain, with three
additional locations planned in Japan. These stores offer the
Porter’s Five Forces Strength of force
same product assortment as their U.S. counterparts, which
helps mitigate risk, as consumer demand for essential goods
Competitive rivalry High
is global and not heavily influenced by regional preferences
Bargaining power of buyers/consumers High (Verified Market Research, 2024). While this expansion strategy
Bargaining power of suppliers Weak does carry some risks due to cultural and market differences,
Threat of substitutes or substitution High Costco’s broad product range reduces the impact of such risks.
Threat of new entrants or new entry Moderate
Product Development: Costco has also ventured into product
Porter’s Five Forces analysis reveals that Costco faces significant development, particularly with changes to its food court
challenges in three out of the five forces—Competitive Rivalry, offerings. For example, by 2024, Costco will be introducing
Buyer Power, and Threat of Substitutes—all of which are high. sushi at certain locations, alongside new food options like
The company also faces moderate difficulty with the Threat of chocolate chip cookies and chocolate ice cream. Additionally,
New Entrants. The weakest force impacting Costco is Supplier Costco is remodeling its app to facilitate a more seamless
Power, which is of minimal concern due to Costco’s ability experience between online and in-store shopping. These
to switch suppliers easily and its reliance on a wide range of innovations in product offerings are designed to attract and
suppliers. retain customers, enhancing the overall shopping experience.

Diversification: While not a primary focus, Costco’s

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diversification strategy involves adding new products and 19. Optical services
entering new markets simultaneously. In 2024, Costco 20. Hearing Aid Center services
introduced Swiss-crafted gold, which became available in select 21. Gasoline
stores in Japan, with a limit of five pieces per membership for 22. Business Services
pre-order. This diversification into luxury goods, alongside the 23. Home Services
opening of new store locations, represents an attempt to appeal 24. Life Services
to different market segments, although it carries a higher risk Adopted from Andrew Thompson’s 4Ps of Marketing
than the other strategies.
Costco’s recent diversification efforts demonstrate its ability
Porter’s Generic Strategy: Costco to adapt and expand to meet consumer demand. Additional
Porter’s generic strategy framework categorizes competitive services offered, such as photo printing and life insurance,
strategies into three main types: (i) focus, (ii) cost leadership, and reinforce Costco’s competitive advantage in convenience and
(iii) differentiation. Costco Wholesale Corporation primarily variety (Thompson, 2024).
employs a cost leadership strategy, leveraging its bulk-buying
capabilities and large-scale warehouses to achieve economies Price in Costco’s 4Ps Marketing mix
of scale. This approach allows Costco to keep average costs low Costco employs a market-oriented pricing strategy, setting
by minimizing transportation and storage expenses, enabling prices based on current market conditions. This aligns with
the company to offer lower prices to consumers and appeal its mission to offer quality goods at affordable prices, helping
broadly in the competitive retail sector. to retain customers while driving revenue growth even during
economic downturns. Additionally, Costco uses high-low
Costco’s revenue model is also shaped by this strategy, as a pricing, attracting consumers with low-priced staples while
substantial portion of income is generated through high sales encouraging them to browse and purchase higher-margin items.
volume achieved by offering quality products at narrow
profit margins. This approach has led to a loyal customer Place in Costco’s 4Ps Marketing mix
base, with a membership renewal rate of 93% as of 2024. In Costco operates primarily through its warehouses, allowing
addition to cost leadership, Costco incorporates an element customers to browse and purchase goods in-store. Costco’s
of differentiation through its unique membership model. This app and e-commerce website are well integrated, offering a
model, which accounts for the majority of Costco’s profits, seamless purchasing experience for both in-person and online
incentivizes membership renewals with exclusive benefits, shoppers. This combination of physical and digital platforms
such as discounted products and access to special savings and strengthens Costco’s customer connections and enhances sales.
travel offers, thereby reinforcing customer loyalty and further
distinguishing Costco from its competitors. Promotion in Costco’s 4Ps Marketing mix
Costco’s promotions emphasize value and trustworthiness.
4Ps Market mix Bulk purchase discounts appeal to businesses, while seasonal
Product in Costco’s 4Ps Marketing mix discounts and member-exclusive deals incentivize consumer
The 4 Ps marketing mix, introduced by E. Jerome McCarthy, spending. Another key component of Costco’s promotion
is essential to any effective marketing strategy and comprises strategy is public relations, which reinforces its brand
Product, Price, Place, and Promotion. Costco’s product line, reputation. Initiatives such as the zero-waste program and
though narrower than some competitors, covers a wide array of sustainability efforts, including using 75% recycled plastic
goods and services, giving it a competitive edge as a “one-stop for its popular $4.99 rotisserie chicken, align with Costco’s
shop.” This array includes: values. Publicizing its mission statement has also helped build
1. Appliances consumer trust and bolster Costco’s brand image.
2. Auto & Tires
3. Baby, Kids & Toys CONCLUSION
4. Clothing & Handbags In conclusion, Costco’s remarkable success in recent years
5. Computers & Printers is a direct result of its effective business model and the
6. Electronics strategic implementation of growth initiatives. Despite facing
7. Furniture high competitive pressures, strong buyer power, and threats
8. Grocery, Floral & Pets of substitution (Porter’s Five Forces), Costco’s strategic
9. Holiday, Gifts & Tickets emphasis on cost leadership (Porter’s Generic Strategies)
10. Home Improvement allows it to maintain low costs and high sales volumes through
11. Health & Beauty bulk purchasing and large warehouse operations, ultimately
12. Home, Kitchen, Bed & Bath offering customers the best possible prices in line with its
13. Jewelry & Watches mission statement. Costco also demonstrates an element
14. Office Products of differentiation with its membership-based warehouse
15. Patio & Outdoor model, which generates the bulk of the company’s profits
16. Sports & Fitness (73% of 2024’s profits) while keeping customers satisfied
17. Travel & Luggage with competitively low membership fees and an increasingly
18. Photo Center services diversified in-store selection (supported by Costco’s high-low

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pricing and market-oriented pricing strategies, as outlined in

the 4 Ps Marketing Mix).

Costco’s business model is robust and flexible, allowing

for multiple avenues of growth, with primary focus areas on
market penetration and market development. Additionally,
Costco’s dedication to public relations through sustainability
initiatives and action programs that align with its mission
statement has contributed to its continued profitability, high
customer retention (as demonstrated by a strong renewal rate),
and steady market expansion, even in challenging economic
periods, including recessions and stagflation.

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