Monday, November 10, 2014

Costco's Value Equation and Metrics

The December Consumer Reports has a one-page interview with W. Craig Jelinek, CEO of Costco. With 664+ warehouse stores worldwide, and annual revenues of $110 billion, Costco has earned high marks for providing good quality at great prices (not to mention paying its employees a living wage and providing benefits). The newest Costco will open near South Bend, Indiana, this week--just in time for the holiday shopping season.

The CEO interview confirmed details that Costco has released over the years. First, it limits its merchandise markups. The average is "in the 11% range," Jelinek told Consumer Reports. I've seen estimates of the markup as high as an average of 15% but that's still quite reasonable. Costco understands that members who pay for the privilege of shopping expect tangible value--meaning real cost savings reflected in the price tag. So one of the metrics it holds dear is markup, aiming for an average that fits with the target market's value equation.

Another part of the value equation is quality. Jelinek explained that its leading private label, Kirkland Signature, must have quality equal to or better than a comparable manufacturer's brand--at a price that's 20% or more below the competing item--more metrics. Today, roughly one-fifth of the products sold at Costco are Kirkland Signature. So while customers are happy to find top global brands like Sharp and Michelin, they're also pleased by the value equation of Kirkland Signature.

One more point Jelinek makes in his interview: New products get about 9 to 12 months to prove themselves. If they don't attract a solid following in the product adoption phase--if after introduction, weekly metrics show they don't meet sales projections set in the marketing plan--they're gone.

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