Discovering What Makes Costco Unique (2024)

Costco’s approach to retail is unique compared to traditional retail for at least three reasons. First, they require membership to shop at their store, like Sam’s Club. (Bryant, 2023) Most retail serves the public with no membership required, meaning anyone can purchase products and services from the retailer. Costco has annual memberships. The reason people are willing to sign up for membership is Costco’s valuable merchandise, many of which are under Costco’s brand name, Kirkland Signature (Kirkland).

Kirkland products are known to be of high quality and low cost in many cases, driving people to seek out and purchase memberships for the privilege to be able to purchase Kirkland from Costco. Bryant, 2023) The last main reason Costco is different from traditional retailers is their membership services portfolio. Costco members get access to insurance, travel options, and other services not traditionally associated with a retailer. Let's explore what makes them unique compared to traditional retailers.

Costco and Sam’s club are the only corporate stores in the United States with the capability to sell low-cost, bulk items in huge stores, setting them apart from other grocery, clothing, and department stores. Sam’s club is a division of Walmart, giving them the economies of scale for their products a priori to opening Sam’s club. Despite that advantage, Costco did more business in FY23 than Sam’s Club alone, yet less than Walmart. (Bryant, 2023)

Having so many products and services under one roof is a huge competitive advantage in and of itself, even without Kirkland Signature, as Sam’s Club has proven. An Economy of Scale is a situation where a firm has a competitive advantage because of the amount of business they do, usually reserved for large enterprises. (Parnell, 2014) Because of the economies of scale Costco has, they can offer lower costs on name brand items in bulk for its members.

Membership is a strange way to start a retail relationship, although many stores have started strong membership benefits and online shopping options following Covid-19 in 2020. (Murali, 2021) Costco had memberships for non-business public applicants in 1983, similar to how a traditional B2B firm might control accounts and only sell to business clients registered with the firm. That foresight helped them grow fast, becoming the first company to reach $3 Billion in sales in 3 years. (Costco, 2024) The concept of maintaining membership for retail customers is now commonplace, but Costco pioneered the effort and continues to enjoy the profits from its members.

Membership in the context of business strategy is like discovering a niche because the members represent a smaller subset of the public. They identify themselves by wanting to buy memberships, but not everyone is a member. That niche approach is a strategy of differentiation or identifying a smaller portion of a larger group for exploitation and exploration. In this case, the niche is cost-conscious buyers willing to pay for discounted high-quality products, like Kirkland Signature. (Parnell, 2014)

Developing a house brand, sometimes called a generic brand, is something retailers provide to their customers as a low-cost alternative to name brand products. (Chang, 2023) Many generic brands do not follow a high-quality differentiator strategy, but rather focus on a cost saving strategy to drive volume growth. Kirkland has been able to do both, and the brand is now worth more than Hershey, Campbell’s, or Kellog. (Chang, 2023) Because of the economies of scale, Kirkland Signature has grown to 350 products “known for high quality and affordable prices, helping you keep more cash in your savings account.” (Change, 2023) Again, attesting to their leadership, many retailers now have “premium” generic brands of high quality, but none drive business profits like Kirkland.

Finally, Costco customers can get car insurance, buy travel, and get other services with their membership. This bundling of products and services helps firms stay “sticky” with consumers, ensuring a relationship into the future. (Riserbato, 2023) Sam’s Club and Walmart also offer similar services, but traditional retail is not about insurance. Bundling services is all about offering fringe benefits or addons to an initial purchase (or membership in this case) that keep customers coming back for more and diversifying their purchases through your retailer. With all the benefits members enjoy, Costco members will have a tough time unwinding all the benefits they get from their Costco membership. This increases the “hassle factor,” or perceived switching costs in the mind of consumers, leading to longer relationship for business customers. (The Hassle Factor, 2024)

Integrating with this week’s study on Generic Strategies, Costco has figured out both a differentiation strategy and an overall cost strategy. They have found a niche in their members willing to pay for membership. They also have a differentiation strategy in that they have a unique brand in Kirkland Signature that is both high-quality and low-cost. Trying to build a brand catalogue like this today would be virtually impossible. Our reading indicated that trying to be both different and low-cost pull companies in opposite directions and really accomplishes neither. (Parnell, 2014). With their strong brand loyalty, purchased through annual memberships that offer a lot of benefits above and beyond great products and low prices, Costco should continue to be a profitable company well into the foreseeable future.

How Would Costco Fare Internationally?

Costco has stores outside the US and Canada, but my analysis indicates that they will not be as profitable in other markets across the globe for two main reasons: international regulation discrepancies and cultural differences. European Union member countries have vastly different regulations around food additives and preservatives making buying bulk impractical. (johnnylapasta, 2016) This would be a disadvantage for Costco because they wouldn’t be able to store and transfer the large amounts of product they sell, essentially diminishing their economies of scale. European countries focus their markets on fresh food, produce, and meats, whereby the American agrifood business has been more focused on making foods look more palatable for longer shelf lives. This serves Costco’s mission to sell large quantities but won’t help European markets where a longer shelf life doesn’t exist because of regulations protecting its citizens.

Another closely related set of reasons making it difficult for Costco’s global spread are cultural differences. Costco’s $60 USD membership might be an annual salary for citizens of a poorer country, meaning the adoption of members would be more difficult. Membership fees could be adjusted, but the membership portion of Costco’s revenue constitutes a large enough segment to give pause.

Some countries don’t even use insurance like US consumers do, so the fringe benefits of cheaper insurance and travel benefits would not be in as high of demand in countries without insurance needs, where less cars are driven, citizens aren’t as litigious, there isn’t a legal system incentivized towards lawsuits, and people travel by affordable train rides.

These cultural differences suggest to me that Costco is somewhat of an American institution, helping American citizens navigate uniquely American challenges. These challenges might not be present in other cultures with better public transportation, less lawsuits and a lower cost of living. Because of those cultural differences, Costco’s global strategy would have to drastically change to adapt to unique cultural challenges in new markets. Adapting to international cultural differences would be a difficult problem on top of Costco’s core competencies of selling high-quality, low-cost products to its members.

Considering the cultural and regulatory challenges, Costco should continue to grow in markets in the US that support our unique challenges and demand solutions that Costco’s membership provides.

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