Question: COSTCO PUSHES ITS SUPPLY CHAIN TO SATISFY CUSTOMERS

The merchandise sold at Costco may be similar to that of its two main competitors-Sam's Club and BJ's-but Costco aims to be a cut above by offering many unique and unusual items. Its stores also look slightly more upscale than other club stores, the brands it carries have more cachet, and the products are often a bit more expensive, but they still offer extremely good value. And unlike some other discounters, Costco does not have everything under the sun. The stores carry only about 4,000 products each, which is a small fraction of the more than 100,000 items stocked by other warehouse clubs and conventional discounters such as Target and Walmart. About 3,000 of Costco's products are a consistent array of carefully chosen basics, from canned tuna to laundry detergent to printer cartridges. The other 1,000 items are a fast-moving assortment of goods such as designer-label clothing, watches, and premium wines. These items change from week to week, reinforcing the idea of buying something when you see it because it'll probably be gone next week.

Costco prefers to offer name-brand products and has successfully introduced some branded luxury items such as Kate Spade and Coach purses. However, high-end suppliers such as Cartier and Cannondale flinch at the idea of their goods being sold in a warehouse setting, so carrying those brands isn't always possible. Some suppliers, hoping to protect their higherend retail customers, have been known to spurn Costco's offers "officially," only to call back later to quietly cut a deal. In other cases, Costco goes on its own treasure hunts, using third-party distributors to track down hot products, even though these "gray market" channels can be unpredictable. And if that doesn't work, Costco can commission another manufacturer to create a lookalike product-leather handbags are one example-with its own Kirkland Signature label. To give its millions of members the best prices on everything, Costco negotiates directly-and fiercely-with suppliers.

Aiming to be known as the toughest negotiators in the business, Costco's buyers won't let up until they get their target price on the merchandise. Often, the "right" price is determined by how much less expensively Costco can make a product itself. Using this approach, the company has managed to drive down price points in several categories, such as over-the-counter drugs. Costco then passes on the savings to customers, who never pay more than 15 percent above the company's cost. Cofounder and recently retired CEO Jim Sinegal was determined not to let the wheel of retailing take Costco for a spin, either. "When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them. We don't want to be one of the casualties. We don't want to turn around and say, ‘We got so fancy we've raised our prices,' and all of a sudden a new competitor comes in and beats our prices." Inventory turnover rate is also a key to Costco's financial success. By focusing on fast-selling items, the company moves its merchandise significantly faster than competitors-so quickly, in fact, that it often sells products to shoppers before it has to pay its suppliers.

Costco is rolling through its third decade with strong financial health, a dominant market position, and millions of consumers and business customers that rely on Costco bargains. Annual sales will break the $80 billion barrier soon, and $100 billion doesn't look too far out of reach. Online sales remain a fairly small fraction of total revenue, but the company expects those sales to pick up as the economy improves and consumers are more confident to spend on the more expensive items that are typically offered on the website. International expansion is another item on Costco's strategic menu, with sales recently growing at a faster clip outside the United States. Per-store sales are up in other countries, but the number of new store openings has tapered off over the past few years, thanks in part to the economy and in part to a cautious approach to finding the right locations. For instance, the company thinks Taiwan could support 20 Costco stores and Japan could support 50, but finding enough land for the giant footprint of a warehouse store-typically 15 acres-that is near population centers but not in areas with zoning regulations that prohibit bigbox retailers is a particular challenge in some countries.37

1. If customers repeatedly ask Costco to carry certain items that the company thinks are outside its price/quality "comfort zone" (because they're too expensive or not of high enough quality), should it give in and carry the items? Why or why not?

2. Most of the items on Costco's website are available only through Costco; should it expand its online product selection to include more commonly available products, since an online store doesn't have the physical constraints of a brick-and-mortar location? Why or why not?

3. If Costco can't find enough land in, say, Japan, to build its usual store format, should it leverage the Costco brand name anyway and build something such as conventional department stores or grocery stores in these areas? Why or why not?