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Costco’s warehouse-style stores and bulk products mean that their supply chain operates a little differently than the average big-box retailer.
The company, from its supply chain to the retail space, is a no-frills operation. You can see it throughout their business model and in the simple warehouse-style racks, palletized merchandise, and overall décor in stores.
Let’s take a look at how Costco manages to think outside of the typical big-box supply chain model.
Simplicity
The company uses a “No Touch” policy. This means that most products stay on pallets from the supplier for their entire trip through Costco’s supply chain, even being presented to customers on those very same pallets. The company works with suppliers to make sure pallets are stacked and wrapped to accommodate this efficiency. This strategy creates savings across the company, reducing labor in logistics and in stores.
Costco’s approach to warehousing and logistics is to use a simple cross-docking system to move freight directly from one of their depots to a truck headed to the warehouse that ordered it. The warehouses act as both retail point of sale and, well, warehouse. They essentially combine retail sales floors with warehouses to minimize square footage occupied and simplify their supply chain so that distribution centers are unnecessary.
Take a look at Costco’s seasonal offerings if you’re searching for another example of their simple model. Rather than keeping seasonal stocks up, seasonal freight is not replenished after pallets are exhausted.
Limited SKUs
One of the hallmarks of Costco’s lean approach is carrying limited SKUs. Where you could expect to find more than 10,000 unique products at your average big-time retailer, Costco only averages about 3,700 SKUs.
Fewer SKUs are easier and cheaper to manage. They require less time, effort, and money to manage stock, and fewer people can handle stock to a more effective degree. They don’t have as many suppliers to deal with which means simpler, leaner procurement operations that shoulder a smaller burden than most multi-national companies.
Homegrown Brand
Costco’s Kirkland brand is a favorite with customers. Store brands are often perceived as cheap knock-offs, but Kirkland is positioned towards the high-end side of the quality meter. Buying high-end products in bulk saves customers money.
Despite the high quality, Costco offers Kirkland signature cheaper than national brands in most instances. The brand itself has gained the company quite the loyal following, and since margins tend to be higher on store brands, Kirkland is truly a win-win for Costco.
What’s in Store for Costco?
Sustainability
Sustainability efforts have, in the past, centered around responsible sourcing and charitable contributions from Costco’s Kirkland brand. We can expect for Kirkland R&D to continue to seek out more ethical and sustainable ways to create Costco brand products.
International Expansion
Costco has seen success in its international operations and is, therefore, looking to continue international expansion. Though they’ve moved slowly into international markets, the last five years have seen overseas CAGR growth of approximately 7% in the company. International revenue accounts for about 28% of the company’s total revenue.
Currently, the company has a physical presence in 11 countries outside the U.S. Costco recently opened its first warehouse in Shanghai and was forced to close its doors on its first day of operations due to an overwhelming response from customers.
Vertical Integration
Costco’s plans for the future include bringing segments of their supply chain in-house to better control costs. For instance, Costco recently acquired Innovel Solutions for $1 billion to handle big and bulky deliveries, most of which take place online for the warehouse retailer. Innovel Solutions is a middle and last-mile delivery and installation carrier.
The company is planning to add warehouses and logistics centers both here and abroad in the coming years. As of 2019, Costco had 782 warehouses and over 20 depots.
E-Commerce Improvements
Costco is looking to upgrade its e-commerce presence in both U.S. and international markets. While the company was a little late to the e-commerce party, they’ve been stepping up their game over the past two years and are continuing to do so today.
In 2017, the company partnered with grocery delivery service Instacart so that Costco customers could shop from the store’s inventory and have their order delivered right to their door in as little as a few hours, and they recently added prescriptions to their Instacart offerings.
The 2020 COVID-19 Pandemic has led to an online grocery sales spike for Costco, with a 65.3% growth in Q3 earnings.
Image Credit: Open Grid Scheduler / Grid Engine / Flickr
