BUSINESS MODEL INNOVATION

&
DIGITAL TRANSFORMATION

Group - 9

KARUNYA B: 2210120024
PANUGANTI V MANOJ KUMAR GUPTA: 2210120043
SHOURYA DIXIT: 2210120081
VADAPALLI SAI VENKATESH: 2210120063
VANSHIKA SHARMA: 2210120064
VENKATA BALA MURALI NAVULURI: 2210120034

By
Dr Shilpi Jain
Professor in Business Strategy & Information Technology
School of Management & Entrepreneurship
Shiv Nadar University Delhi NCR
Table of Contents
1.Introduction to Business Model and its Components: ......................................................................... 4
1.1 Introduction to Digital Transformation: ............................................................................................ 4
1.2 Steps for Successful Digital Transformation: ................................................................................... 4
1.3 Project: Comparison of Business Model and Digital Transformation Strategies of Walmart &
Costco Wholesale: .................................................................................................................................. 5
1.3.1 Analysis of Walmart’s Business Model Strategy: ..................................................................... 5
1.3.2 Key Components of Walmart’s Business Model Strategy:........................................................ 5
1.4 Walmart’s Business Model Canvas: ................................................................................................. 6
1.4.1 Breakdown of Walmart’s Business Model: ............................................................................... 6
1.5 Digital Transformation Initiative from Walmart: ............................................................................. 7
1.5.1 Digital Transformation through Cloud Technology .................................................................. 8
1.5.2 E-Commerce: ............................................................................................................................. 8
1.5.3 Use of AI and ML ...................................................................................................................... 9
1.5.4 Market Share and Revenue Model: ............................................................................................ 9
1.6 Organization Structure .................................................................................................................... 10
1.6.1 Leadership Competencies ........................................................................................................ 11
1.6.2 Employee experience: .............................................................................................................. 11
2. Analysis of Costco-Wholesale’s Business Model Strategy: ............................................................. 12
2.1 Key Components of Costco’s Business Model Strategy: ............................................................... 12
2.2 Breakdown of Costco Wholesale’s Business Model Canvas: ......................................................... 14
2.3 Digital Transformation Initiatives:.................................................................................................. 16
2.3.1 Digital Transformation Journey of Costco............................................................................... 17
2.4 Market Share and Revenue Model: ................................................................................................. 18
2.5 Organization Structure .................................................................................................................... 19
2.5.1 Function-based Departments: .................................................................................................. 19
2.5.2 Costco Wholesale’s Corporate Structure Advantages & Disadvantages: ................................ 20
2.5.3 Employee experience ............................................................................................................... 20
3. Risks and Mitigation: ........................................................................................................................ 21
4. Conclusion: ....................................................................................................................................... 22
References ............................................................................................................................................ 23
CONTRIBUTORS STATEMENT:

VADAPALLI SAI Data curation for Business models, Writing Original Draft, Reviewing
VENKATESH and correcting final draft.

PANUGANTI V MANOJ
Organisation structures, employee experiences, leadership competencies.
KUMAR GUPTA

SHOURYA DIXIT Digital Transformation Strategy and Revenue and Finances models

VENKATA BALA
Risk Mitigation, Conclusion & Overall project guidance.
MURALI NAVULURI

KARUNYA B &
Final Draft Writing, editing and collating information
VANSHIKA SHARMA
1.Introduction to Business Model and its Components:

A business model is a plan for a business to explain how a business operates and how a company can
create, deliver and capture value for its customers, stakeholders and market. It includes planning,
description and structure of the products or services that are provided by the business, the target market
and the financial efficacy of the business to gain trust from both customers and shareholders. The key
components of a business model are:

i. Customer Segment and Market: The model should reflect the target customers and the
market they are planning to enter.
ii. Resources for Design and Production/delivery process of a product or a service: A business
model must include all the components of the design and production process of the product that
a business plans to produce and this must include raw materials, manufacturing, or technology
required or the labour, etc.
iii. Value proposition & Revenue Stream: A good business model contains the key indicators of
value that are provided by the business to its customers and must also represent the various
revenue sources.
iv. Business Structure: The structure of the business can be made up of the cost structure,
partnerships, distribution channels, Metrics, measures etc.

1.1 Introduction to Digital Transformation:

“Digital transformation is the ability to adapt and apply technologies properly to continuously evolve
and reinvent the enterprise for growth or competitive strategy”
-Tim Smith
Principal | Deloitte Consulting LLP
Digital transformation is the implementation of digital technologies to re-engineer existing processes
or develop new services that better engage customers, support employees, and improve business
operations, fundamentally changing how you operate and deliver value to customers. It became a key
strategic initiative in the mid-2010s, as mobile communications, cloud, data analytics, and other
advanced information technologies took off, enabling businesses and consumers to easily engage via
digital channels.

1.2 Steps for Successful Digital Transformation:

Successful transformation starts with a vision that articulates how to harness computer-based digital
technologies to achieve strategic objectives based on the organization's digital business model. Digital
transformation involves the following steps:

● The alignment of objectives & business goals by using digitization.

● Collaboration of IT with business functions to create cross-functional teams.
● Redesign businesses, products and services around customer preferences with the help of digital
initiatives.
● Create a Digital Roadmap to develop a vision for the organization's future by incorporating
innovative technologies.
● Educate customers and stakeholders on digitization and train business partners and employees
to adapt to the new business functionalities.
1.3 Project: Comparison of Business Model and Digital Transformation Strategies of
Walmart & Costco Wholesale:

1.3.1 Analysis of Walmart’s Business Model Strategy:

With 11,000 plus stores and clubs in 24 countries, Walmart, the American multinational retail
corporation, is a global retail giant with a B2C business, and a staggering revenue of over $600
billion and 2.3 million employees around the globe.
Developing and sustaining such a global market presence is not easy in any business, let alone
in the most competitive Retail market. Our group have attempted to analyse and explain the
international supermarket's business model and digital transformation strategy to gain insights
into what it means to lead a product-based global organization towards a digitized future.

1.3.2 Key Components of Walmart’s Business Model Strategy:

i. Lead on Price

Perhaps the main characteristic of Walmart’s business model is the commitment to keep its prices as
low as possible so that they are accessible to practically the entire population. To achieve this, Walmart
has the largest network of suppliers in the world, from which they make purchases in large volumes, to
guarantee a bargaining power that allows them to reach the lowest possible price.

ii. Differentiate on Access

When we think of Walmart, the image of big centers and supermarkets always comes to mind, but one
of the corporation’s strategies is to diversify access to the population. For this reason, Walmart is
investing in Small-format stores, with fresh food, Digital marketing and retail, by enhancing its e-
commerce experience and also connecting physical and digital (the customer can buy online and get in
the store), and services that are difficult to access, being the only American retailer to have its pharmacy
stores and clinics, where it offers preventive health care check-ups and wellness products. Walmart also
invests heavily in a variety of products and brands, from local products to international names, both in
its brick-and-mortar and online.

iii. Be Competitive in Assortment

Walmart's business model promotes the assortment of products and large varieties of these commodities
across the physical and digital portals. It ranges from local tastes to international preferences. This helps
to include as many people as possible to be a part of their customer base.

iv. Deliver a Great Experience

The final goal of any business is to ensure the fact that the customers have a pleasant experience at the
store and come back in the future. The business model of Walmart also has similar aims. They employ
2.2 billion individuals who strive towards an excellent customer shopping endeavour.
 1.4 Walmart’s Business Model Canvas:

1.4.1 Breakdown of Walmart’s Business Model:

Walmart’s Key Partners
The Key partners include suppliers, as they are the ones that allow the company’s value proposition to
be delivered, by guaranteeing low-cost products and services, as well as access to different parts of the
world, delivery and logistics, as they are essential to transport the products and technological
partnerships who make it possible for Walmart to have a sustainable e-commerce business.

Walmart’s Key Activities

The key activity of the retail corporation is buying and delivering goods while controlling the costs
involved. In addition, the company invests in customer service, inventory control, distribution
management, marketing and advertising.

Walmart’s Key Resources

Walmart’s biggest key resources are its brick-and-mortar stores, its distribution, and storage system, its
technological infrastructure with the e-commerce store and the mobile app, and, of course, its human
resources.

Walmart’s Value Propositions

Walmart's value proposition reflects its business policy: It provides its customers with a wide variety
of products, at the lowest price and in the most convenient way possible.

Walmart’s Customer Relationships

Walmart’s customer relationship is also entirely based on its value proposition, cheap, good and varied
merchandise, easily accessible, and with the best service. For this, the processes are as automated and
simplified as possible. Walmart also has memberships such as Walmart Plus, Sam's Club where
customers can make purchases with the points collected from previous shopping or have exclusive
access to Walmart warehouse etc.
Walmart’s Channels
Walmart is widely known to be an omnichannel retail store with brick-and-mortar stores, its website,
its mobile app, and direct delivery to customers.

Walmart’s Customer Segments

Walmart’s customer segmentation is mainly accomplished due to its primary low-price strategy.
Therefore, its customers tend to be people who are looking for low-cost but good-quality products,
whether they are low-income people or small businesses who would buy in bulk. Online shoppers are
also considered a major part of Walmart's customer segment as the e-commerce side of the business is
also a major market player.

Walmart’s Cost Structure

Walmart’s cost structure is certainly not “lean”, as it has more than 11,000 stores (including
supercenters) worldwide. However, its operations involve a financial discipline that allows reducing
such costs to the maximum, so that these savings can be passed on to the final customer. Walmart
heavily invests in new technologies to make the shopping experience for both online and physical store
customers as seamless as possible.

Walmart’s Revenue Streams

The revenue streams for the retail giant are surprisingly limited to their retail sales, services and
membership fees. This indicates that the business only focuses on one main aspect: providing the best
retail services for customers.

1.5 Digital Transformation Initiative from Walmart:

Walmart as a part of the industry 5.0 Digitalization initiatives taken, started using robots for Inventory
management. The inventory scanning robot streamlines brick-and-mortar inventory management
processes and brings new efficiencies to physical retailer stores. For this purpose, Walmart has
partnered with robotics firm Bossa Nova for their cutting-edge Inventory scanning Robots which
provided inventory data to Floor managers in real time. Walmart is currently using Symbiotics Robots
in their warehouses after they partnered with US-based Symbiotic Technologies for providing their
new-age bots.

Bossa Nova Inventory Scanning Robot at Walmart Store.

1.5.1 Digital Transformation through Cloud Technology

Cloud technology is also driving rapid transformation across the retail landscape. Retailers turn to cloud
technologies to grow their efficiency and transform the large pool of data they generate daily into
actionable insights.

In 2018, when Walmart was already using a large set of Microsoft services for critical workloads, the
company announced a strategic five-year partnership with the cloud leader to make its digital
transformation possible. This partnership with Microsoft allowed Walmart to leverage machine
learning, artificial intelligence, and data platform solutions for a wide range of external customer-facing
services and internal business applications (Walmart, 2018).

Walmart aimed to transform digitally, bring innovations that saved its customers time and money, and
change how work was carried out inside the organization for increased productivity. To achieve its
target, the company selected a full range of Microsoft cloud solutions that included Microsoft Azure
and Microsoft 365. The main advantages of using cloud technology for Walmart were going to be as
follows:
▪ Leverage the capacity of Microsoft’s enormous computing capacity.
▪ Ability to manage workloads seamlessly in an elastic environment.
▪ Bring innovations faster through the new toolsets
▪ Drive costs lower through a cloud-native environment.

From reducing energy consumption in Walmart stores to managing logistics, the company uses cloud
technology to make its work processes more efficient and save time and money. The company uses
machine learning to route thousands of trucks in its supply chain. Apart from that, Walmart gained
access to various tools that allow its associates to improve their productivity and collaborate on projects.
Tools like Microsoft workplace analytics, Microsoft Stream, and Microsoft One Drive allow associates
to collaborate, save time, and work better.

1.5.2 E-Commerce:

Walmart is well known for being one of the largest retail conglomerates, selling anything and everything
you could need – from bed sheets and groceries to shoes and makeup, it has it all. Now, it has even
more with a growing e-commerce marketplace established in 2020. Partnering with Shopify, Walmart
released the Walmart Marketplace, an online e-commerce platform with a focus on U.S.-based small
and medium-sized businesses. There, they could sell an assortment of goods and products right from
their door, while also keeping track of important sales metrics and analytics.

Walmart’s online revenue increased to $39.7 billion in 2020 and further to $64.9 billion the following
year. In its 2022 fiscal year, Walmart’s online sales grew to $73.2 billion. In 2023, its most recent fiscal
year, the company’s online sales surpassed the $80 billion mark, to $82.1 billion.

However, Walmart lagged behind Amazon in the e-commerce boom in the early years of the Twenty-
First Century as has a lot of catching up to do. In a 2019 interview with Fortune Magazine, Walmart
CEO Doug Macmillan has been quoted as saying that Walmart has orchestrated a Digital Strategy to
stay at the forefront of the e-commerce Industry.
However, the e-commerce delivery business shall be done to facilitate the existing Brick and mortar
Warehouses. Walmart aspires to make online deliveries within 20 miles radius of their existing stores
and not beyond.

In carrying forward its e-commerce business Walmart seems to following the principles underlying the
Theory of “Transaction Cost Economics” wherein instead of launching a new Business Division they
have focused on making partnerships.

Walmart's approach towards Digital Transformation in the e-commerce industry has been oriented
towards Fostering a Partnership based ecosystem. As a part of this strategy, they have partnered with
“jet.com” which is an American e-commerce company with which Walmart partnered with initially.
They finally acquired “jet dot com” in 2016. A similar partnership was fostered with Flipkart in India
in 2017 as a part of their maiden venture into the Indian e-commerce markets.

1.5.3 Use of AI and ML

In recent years, Walmart has inducted the usage of AI and ML in their operations. In 2021, they created
a smart tool that uses past and current shopping info to guess which items might be missing. It then
suggests up to five alternative options for customers to pick from, keeping track of their choices for
later. This boosted Walmart's online sales during the pandemic.

They even use AI/ML to decide when to lower prices and where to open new stores. It helps them do
things faster and make customers happier.

1.5.4 Market Share and Revenue Model:

Walmart continues to offer products at a discount to its customers and has also pioneered in decoding
customer behavioural psychology prompting them to resort to impulsive buying using techniques like
selective shelf placement of products, offering discounts in odd numbers etc.
The organization utilized the Ansoff Matrix Model to their advantage to gain and subsequently Maintain
Market Leadership by constantly i) Penetrating Deeper into the existing Markets. (ii) Diversifying their
product portfolio by offering New Product ranges in diverse markets.
Walmart has been able to achieve Market Penetration by constantly evolving its product base in recent
times for eg. Their in-house brands like George (Shoes), Terra & Sky (women's apparel brand) etc. are
perceived to be at par or slightly better in quality with any other utility brand.
As per Walmart’s website, they have a registered customer base of over 350 million and offer 150
million products across more than 80 categories. Walmart is the pioneer and sole Retail Company which
offers a vast range of products across so many locations. With its current employee base of 210,000 and
an Annual Revenue of $ 611,289 Million/ $ 611.289 Billion, it is the world’s largest company by
Revenue.
In effect, it can be seen from the data that in United States alone Walmart continues to enjoy a
substantial market share as enumerated below.
In June of 2022, Walmart claimed a 6.3% market share in the US, which amounts to $572 billion in
sales alone.

▪ In 2022, Walmart’s brand value amounts to $111.9 billion.

▪ Walmart’s current revenue worldwide in sales is $573 billion.
▪ In 2021, the company generated global net sales of over $555 billion, showing an increase of
6.8% from the previous year.
▪ Walmart’s gross profit margin has remained consistent at about 25% over the last several years.
▪ Last year, Walmart operated more than 11,000 stores worldwide.
▪ In 2021, the US segment of Walmart generated about $370 billion, which amounted to 67% of
total sales.
▪ Another large market for Walmart is Mexico, with 2,634 locations.
▪ In 2021, about 240 million customers visited Walmart per week.
▪ So far this year, 230 million have shopped in Walmart per week.
▪ In 2022, American Walmart had net sales of $393.3 billion.
▪ This year, grocery sales accounted for 55.7% of Walmart’s net sales in the US.
▪ There are 4,743 Walmart stores in the United States.
▪ Walmart.com boasts 14.3 billion in net sales in 2022.
▪ Market share of Walmart.com in the US is 6.3%.
▪ Online sales of Walmart International amount to $18.5 billion.
▪ The global operating income of Walmart amounted to $25.9 billion as of the year 2022.
▪ By serving millions of consumers, Walmart makes more than $1.5 billion daily as of 2023.
Besides, every second consumer all over the world tends to spend $15,288 in Walmart.

1.6 Organization structure

Walmart’s operations are vast. With almost 11,000 stores, operations in 24 countries, and a workforce
of 2 million people, Walmart needs a strong organizational structure supporting it. Walmart has what
is known as a matrix structure. It is a hybrid between the company’s various functional hierarchies and
divisional structures, and many large multinational corporations use this or a similar structure to manage
their operations. Under the company’s hierarchical structure, each Walmart store operates under a
traditional hierarchy where different levels of supervision report up the chain until it eventually gets to
the CEO. Under the company’s functional structure, however, employees are grouped based on their
skills, capabilities, and functional departments.

1.6.1 Leadership Competencies

The following is a list of key leadership competencies. Sam Walton believed each manager's mastery
of these personal skill areas was critical to Walmart's success around the world here they are:

● Communication: The role of managers is to give employees the help, information, and
motivation needed to serve the customers.
● Developing Others: The ability to develop the talents and potential of every employee must be
the goal of every manager.
● Motivating Others: A manager’s true success is measured by his or her ability to help others be
more successful.
● Customer Focus: Associates at every level must be empowered to respond to the needs of
customers.
● Listening: Leaders at all levels are expected to spend time with employees listening to and
responding to their concerns.
● Continuous Improvement: Any process, policy, or practice can potentially be improved and
everyone is encouraged to take a critical look at ways to improve the business.
● Sense of Urgency: “Do it now” accurately describes the company’s bias for action.
● Team Development: A manager’s primary responsibility is to serve the employees he or she
leads. Walmart believes in the spirit of teamwork and the synergy it creates.
● Organization/Planning: At Walmart being organized and having a good plan in place can be the
difference between being completely overwhelmed versus thriving in an often-chaotic
environment.
● Expectations/Accountability: High expectations are the key to everything and operational
excellence is the standard everyone tries to achieve.
● Resolving Problems: The retail work environment presents an endless number of problem-
resolution opportunities. People who succeed at Walmart enjoy addressing a wide array of
problems.

1.6.2 Employee experience:

● Employee happiness at Walmart is listed in the Bottom 40% of similar size companies on
Comparably. Compensation is an important aspect of employee happiness and at Walmart, 53%
of employees feel they are paid fairly, 58% are satisfied with their benefits, and 55% are
satisfied with their stock/equity. 62% of Walmart employees feel their work environment is
positive meaning Walmart is a happy place to work.
● In general, employees in the Business Development and Admin departments are considered to
be the happiest at Walmart, while the Customer Success and Legal departments are considered
to be the least happy. Also, employees with Entry Level of Experience are more satisfied at
Walmart, while employees with Over 10 Years of Experience are the least satisfied.
● Walmart's Happiness score ranks in 4th place when compared to competitors Costco, Amazon,
Target, Rakuten, and Sears Holdings Corporation. Walmart ranks in the Bottom 40% of other
companies on Comparably.
2. Analysis of Costco-Wholesale’s Business Model Strategy:
Costco, an American multinational wholesale corporation, is a membership-only warehouse club or
big-box retail store. Being the fifth largest retailer on the planet and ranked #11 in the Fortune 500
rankings of the largest United States corporations by total revenue, Costco is dedicated to bringing the
best possible prices on quality brand-name merchandise to its members. With more than 800 locations
worldwide, Costco provides a wide selection of merchandise, plus the convenience of speciality
departments and exclusive member services. Like every other customer-centric brand, Costco’s
business model is heavily reliant on its consumers. This is because the more customers are given a better
spending platform, the more revenue is likely to be generated. Costco is a customer marketer (B2C) and
a business marketer (B2B). Their customer target market is the wealthy and upscale large family market
segment and their business target market is the small business segment.

2.1 Key Components of Costco’s Business Model Strategy:

i. Membership Model:

The primary component of Costco's business model is the membership-based shopping experience. It
simply means that to shop at a Costco store; one needs to be a member; else, they shall have to purchase
Costco cash cards to shop and get prices that Costco offers. Each member can also get a complimentary
membership card issue for a family member. Since Costco charges a specific membership fee for each
membership type, this ensures upfront payment from a massive base of users. Because customers pay
membership fees upfront, they are motivated to shop at Costco stores; this helps Costco ensure a
permanent revenue stream and customer retention.

The membership fee also means customer loyalty and repeat business transactions. Membership
renewals play a crucial role in Costco's business model. By offering attractive benefits and value to
members, they aim to encourage renewals and retain customers over the long term. To that end, there
are two categories of membership offered by this brand. These are:

Gold Star Membership: This membership category is designed to cater to the needs of individual
customers who specifically want to benefit from the high discount prices offered by the company;

Business Membership: This type of membership is designed for small and medium-sized businesses
(SMBs). It’s set up to help optimize the resale of Costco goods by these outlets. Outside SMBs,
individuals who have a business license or evidence of business ownership are also eligible for this
membership type. In addition to this, the company also offers Executive Memberships. This allows
customers to collect points and earn rewards as they perform certain activities or transactions with
Costco.

Costco’s Revenue from Sales vs Membership Fee.

(The above snapshot from Costco’s 2022 Annual Report shows that the Membership Fee has a direct
bearing on its Overall Revenue)

ii. High Inventory turnover:

One of the critical components of Costco's business model is the inventory turnover ratio. Costco has
an inventory turnover of fewer than ten days. The low inventory turnover allows Costco to source large
product volumes from manufacturers at better credit rates than competitors. It also means that Costco
can pay the manufacturers even before the credit period expires. One of the primary reasons behind
high inventory turnover is that Costco sells products in bulk bundles to its customers. It helps drive
sales volumes, and the manufacturers are happy to supply Costco at better rates and credit. By selling
in bulk, they can negotiate lower prices from suppliers and pass on the savings to their members.

Inventory Value Walmart Inc.

Inventory Costco Wholesale

As illustrated in the data above Costco holds much less inventory as compared to Walmart. The
Inventory Turnover Ratio (Rate at which Shelf Inventory is replaced after it gets sold) of Costco
Wholesale at 12.41 is much better than 8.20 of Walmart. It shows that the shelf products of Costco get
sold at a much faster rate as compared to Walmart.

iii. Cost Leadership

Another important strategy that Costco's business model works upon is giving more discounts and better
selling rates on products than its competitors. This is possible due to two reasons. First, Costco sources
products directly from the manufacturers, getting rid of the middlemen in the process. Also, Costco
consciously takes lesser profits out of the sales to offer the lowest prices to the consumers. Second,
Costco has contractual partnerships with the manufacturers. Costco commits massive sales volumes to
manufacturers, and consequently, the manufacturers offer extra margins on products to Costco. This
helps Costco procure and sell products at lower rates than its competitors.
By maintaining low operating costs, efficient supply chain management, and negotiating with suppliers,
they can offer discounted prices to their members.

iv. Space utilization

Costco operates large warehouse-style stores that are designed to maximize efficiency and provide a
no-frills shopping experience. The layout of the store is carefully planned to utilize every square foot
of the warehouse space. As a result of this, Costco makes more profit per square footage than any of its
competitors with products displayed on pallets or stacked high on shelves. This setup helps them save
on store design and labour costs.

2.2 Breakdown of Costco Wholesale’s Business Model Canvas:

Costco’s Key Resources

Costco has a vast network of physical warehouses and many other key resources. These include its
online store and high-tech IT infrastructure, its optimized freight logistics and distribution network, its
efficient supply chain and a large group of supply partners & of course its professional personnel.

Costco’s Value Propositions:

Costco has especially strong value propositions. The value-added goods and services that it offers its
members hinge on four elements. These are:
i. Low Prices: As Costco operates a unique business model that focuses on offering wholesale
prices for merchandise, members will almost always get lower prices when shopping at its
warehouses. This makes Costco more attractive than conventional grocery stores and
supermarkets;
 ii. Zero-Risk Membership: Another strong aspect of its value proposition is its risk-free
membership offering. The fact that consumers are given the option of claiming a refund if
unsatisfied with Costco’s service is a major selling point. In addition to this, members can also
turn in several goods in-store and request a refund, further contributing to higher customer
confidence in the brand;
iii. Membership Reward Program: Costco’s Executive Memberships reward scheme which allows
customers to claim up to $750 annually in reward points has also been proven to have a strong
positive effect on the brand’s exposure;
iv. International Exposure: Costco’s global reach and growing online sales channel means that
members can always readily access the goods and services offered by the merchant.

Costco’s Channels

The company operates three main channels. These are:

i. Its International Chain of Wholesale Warehouses: As of 2021, Costco had 825 membership
warehouses worldwide. This chain of warehouses accounts for the majority of the sales and
revenue generated by the company;
ii. The Costco Website: This provider uses its official website, www.costco.com. Through this
platform, customers can find information on elements like running reward schemes, the location
of warehouses, and membership options;
iii. Online Sales Channel: This platform offers various products and services, a few of which
mightn’t even be available in the company’s brick-and-mortar stores. However, the reach of
this online platform is still quite limited, as it’s currently only available in locations like the
U.S., Mexico, Canada, and the United Kingdom.

Costco’s Key Partners

This company has several key partners. Some of these include its suppliers, Non-profit programs,
Advertisement, branding, and publicity companies, Payment solution providers, Credit partnerships
(Formerly with American Express, now with Visa) & other technology companies for providing online
services.

Costco’s Key Activities

The most noteworthy activity of Costco is maintaining an efficient supply chain to assure that the
products are never out of stock and also managing the warehouse. Costco’s marketing is also a key
activity to attract new members and Costco’s customer services provide the best service possible for all
of its customers, whether they are e-commerce customers or wholesale store customers.

Costco’s Customer Relationships

Costco maintains its customer engagements through Social media, In-person sales support service,
Email relations & Membership warehouse club.
Costco’s Revenue Streams

Costco’s revenue stream can be broadly divided into two categories. These are:
i. Product Sales: This refers to the income accrued from the direct sale of products and services
through Costco’s brick-and-mortar stores and online platforms. In 2022, revenue from this
outlet totalled more than $220 billion;
ii. Membership Fees: This refers to the revenue generated from the various types of membership
packages offered by the company. In 2022, membership revenue for the company rose to $4.2
billion.

Costco’s Cost Structure

As a multinational business franchise, Costco incurs various types of costs. Some of these are:
▪ Operational costs for managing its multinational network of membership outlets
▪ IT infrastructure maintenance costs
▪ Logistics and storage expenses
▪ Retention of personnel costs
▪ Acquisition of merchandise expenses
▪ Administrative costs
▪ Expenses for startup operations

2.3 Digital Transformation Initiatives:

Costco’s business model which is based on Providing Members only shopping experience to buyers is
based on the foundation of its customers’ loyalty and providing the privilege/joy of shopping. As a part
of its Digital Transformation initiative, Costco hired Torsen Lubach as vice president of the e-commerce
division in 2020 to improve e-commerce, including both mobile sites and applications. However, their
e-commerce sales have decreased in 2023 a bigger leap into the e-commerce industry is on the cards.
Costco has also leveraged other platforms, particularly social media to connect with buyers, creating
viral moments and generating online buzz, particularly through Social Media Reviews. A few
takeaways from the social media strategy followed by Costco to maintain virality are:

Through Social Media Influencers:

By partnering with social media influencers who review products and promote Costco to its vast
following, the company has managed to increase its brand visibility. Working with influencers increases
Costco’s chances of going viral since the reach is wider. This also helps to keep them relevant on social
media.

By Responding to Feedback:
Costco has a dedicated team for responding to feedback both good and bad. They also respond quickly,
ensuring unsatisfied customers feel appreciated and heard. As a result, buyers feel empowered and also
tend to feel that their opinions matter and that the company is genuinely interested in keeping their
business. Ultimately, it’s a proactive approach and increases brand loyalty.
It also encourages buyers to continue giving feedback, keeping Costco’s brand relevant in discussions
that are happening on social media.
Using Reviews:
To generate buzz on its platforms, Costco encourages buyers to leave reviews about products,
experiences, and overall satisfaction. In-store signage, receipts, reminders at the register – Costco used
every means to make customers aware of the chance to voice their opinions. By doing so, the
corporation has created a culture of active feedback where buyers feel heard and respected.

By asking customers to give feedback, Costco keeps its brand relevant during conversations on social
media.

2.3.1 Digital Transformation Journey of Costco

Although Costco's primary business is inhouse purchase experience with ongoing changes Costco
realized as there is a need for digitization in its business model to expand its reach through the e-
commerce channel.

● In 2012 Costco recognized the trend of an increase in Smartphone users and the growth of E-
Commerce.
● Created a Mobile App with the objective of
o Dynamic Shopping experience
o Easy tracking shopping list
o View Purchase history
o Membership cards and benefits
● Enables Data Analytics to collect customer behaviour to fine-tune offerings
● By 2021 mobile app downloads reached to 10 million
● Revenues increased from 4.5 billion in 2019 to 10 billion in 2022.
Costco continues to increase its investment in IT infrastructure as part of its Digital transformation
journey by focusing on:
● IT Infrastructure and Data Storage
o Reduction in time spent searching and retrieving data
o Improved logistics
o Increase Efficiency and Productivity
o Cost Savings
o Greater flexibility and better communication
● Established collaboration with Retail exchange partners for better data management to
o Track Performance
o Identify Trends
o Inventory and Supply Chain Management

2.4 Market Share and Revenue Model:

Costco, established in 1983 has been able to do Market Development using its subscription-based
Business Model. Costco which is believed to offer the “Privilege of Shopping” to its members has the
second largest chunk in the Retail Space in the US after Walmart. Costco which boasts of being a
“Member Only” Retail brand has been able to offer products at cheaper rates as Memberships Fee forms
a substantial portion of their revenue.
Costco has managed to usher and thrive in a market that was already dominated by Walmart in the 80s
and 90s due to the vision of its promoters to follow a “Blue-Ocean” strategy wherein they did not blindly
follow Walmart on Price Point but created a niche for themselves. Costco differentiated itself from its
competitors (majorly Walmart) by becoming a “Member Only” brand. By offering the subscription-
based shopping option to its members Costco has been able to Disrupt the market to an extent that with
an Annual Revenue figure of $226,954, it is currently the 27th largest company in terms of revenue
around the globe.
Costco’s Management is not vocal on their Business Strategy but it is to be seen that New Products are
frequently replaced from the shelf and replaced by new ones. This prompts regular shoppers to buy
them before they get replaced.
It is also believed that only selected products get to the shelves of the “Costco Stores”. Value in the
form of Quality and price is delivered to the buyers as is also quite evident from their Mission Statement
“to continually provide our members with quality goods and services at the lowest possible prices.”
Costco has a Transformative Business Model and transitioned the Business Space of Retail by adopting
LEAN and JIT inventory Management techniques. Costco’s Inventory Base is much lower as compared
to Walmart as also shown below.

Costco's revenue for the quarter ending May 31, 2023, was $53.648B, a 2% increase year-over-
year.
▪ Costco's revenue for the twelve months ending May 31, 2023, was $235.442B, an
8.23% increase year-over-year.
▪ Costco's annual revenue for 2022 was $226.954B, a 15.83% increase from 2021.
▪ Costco's annual revenue for 2021 was $195.929B, a 17.49% increase from 2020.
▪ Costco's gross profit for the quarter ending May 31, 2023, was $6.473B, a 3.72%
increase year-over-year.
 ▪ Costco's gross profit for the twelve months ending May 31, 2023, was $28.517B, a
5.69% increase year-over-year.
▪ Costco's operating income for the quarter ending May 31, 2023, was $1.679B, a 6.25%
decline year-over-year.
▪ Costco's operating income for the twelve months ending May 31, 2023, was $7.830B,
a 3.42% increase year-over-year.
▪ Costco has 584 locations in the United States and 848 warehouses total worldwide.
▪ Costco has 123 million members as of February 2023.
▪ Costco has 304,000 employees, with 203,000 of those working in the U.S.
▪ Costco generates $222.7 billion of revenue annually.
▪ Costco is the sixth-largest retailer in the world and the third-biggest in the US, behind
Walmart and Amazon.
▪ Costco offers the highest pay in retailing, with workers averaging $20 an hour.
▪ Its most popular item is Kirkland Signature Bath Tissue, of which Costo sells over a
billion rolls per year, bringing in $400 million from this product alone.

2.5 Organization structure

Costco has a matrix organizational structure, which can simply be defined as any structure that
combines two or more different types. In this case, a predominant functional structure exists with a
more secondary divisional structure. Costco’s geographic divisions reflect its strong presence in the
United States combined with its expanding global presence. There are six divisions in the country alone
to reflect its standing as the source of most company revenue. Compared to competitor Walmart, Costco
takes more a decentralized approach to management, decision-making, and autonomy. This allows the
company’s stores and divisions to respond to local market conditions more flexibly.

2.5.1 Function-based Departments:

The functional characteristic of Costco’s organizational structure presents the basic functions to
maintain the retail business. These functions are carried out starting at the corporate level and affect the
entire organization. The main functional groups at Costco are as follows:
▪ Human Resources and Risk Management
▪ Operations
▪ Costco Wholesale Industries & Business Development
▪ Finance
▪ Foods & Sundries Merchandising
▪ Merchandising – Fresh Foods
▪ Construction
▪ Information Systems
▪ Legal
▪ Accounting
▪ E-Commerce and Publishing
▪ Depot Operations
The functional characteristic of Costco Wholesale Corporation’s organizational structure applies to all
the geographic divisions. For example, the Finance group affects all the geographic divisions of Costco
worldwide. Also, there are more geographic divisions in the U.S. than in other markets because the
company derives most of its revenues from the American market.

2.5.2 Costco Wholesale’s Corporate Structure Advantages & Disadvantages:

The main advantage of Costco Wholesale Corporation’s organizational structure is that the functional
grouping characteristic supports organization-wide control. The company can easily implement new
policies and strategies to take effect in all geographic divisions. Also, the geographic divisions are a
characteristic of Costco’s organizational structure that presents the advantage of flexibility to adjust to
regional market conditions.
However, a disadvantage of this organizational structure is that it offers limited flexibility, considering
the corporate and organization-wide effects of the functional groups at Costco’s headquarters.

2.5.3 Employee experience

Three best things that say Costco has its best employee-friendly environment which shows their passion
to make their employees feel comfortable.

i. Communicate an Inspiring Vision:

Costco’s values are summed up in the phrase: “Always do the right thing, even when it hurts.” Costco
lives this out in the way it faithfully serves its members, the way it treats employees like family and the
positive things it does for communities. Because Costco deliberately lives out these aspirations, its
reputation is stellar. As a result, Costco’s members trust the company will provide quality goods and
services at an attractive price and will be safe for its members and the people they love. The level of
customer loyalty Costco has developed with its members is the envy of every retailer.

ii. Value People

Costco values people. Compared to competitors, it provides generous compensation and benefits to its
employees. Costco provides career opportunities for its employees. The fact that Costco’s senior
executives started out working on the front lines in warehouses is a testament to upward career mobility.
The job security Costco has provided also shows that it values employees as human beings. The time
Wall Street criticized Costco for its generous compensation and benefits, but Costco’s leaders didn’t
cave in. Instead, it continued to do what was best for the long term by giving raises to its people. During
difficult economic seasons, Costco tightened its belt, rolled up its sleeves, and worked harder and
smarter so that its employees would continue getting raises. No jobs were cut when Costco merged with
Price Club. At the warehouses, the local leaders hold programs to help employees increase their
responsibility and teach managers to “greet before delegating.” A word you will hear frequently at
Costco is “family”.

iii. Giving People a Voice

Giving people a voice to express their ideas and opinions and then considering them is a third way
Costco strengthens its Connection Culture. Sinegal told me a story about the time in Costco’s early days
when it was opening a warehouse in downtown Seattle and the local liquor license inspector questioned
everything. As the inspector’s inquiry stretched out, Sinegal blew up at him, in frustration. A colleague
of Sinegal’s had to be sent to convince the inspector that he had gone temporarily insane.
3. Risks and Mitigation:

With recent global pandemic situation and geo-political situation there are potential risks facing by both
giants to list some are:

1) Change in customer purchase behaviour

2) Interruption in Supply chain
3) Labour Shortage
4) Wage Demands
5) Stock movement and logistics

Mitigation impact Opportunities:

1) Continue to leverage digital technologies to improve e-Commerce

2) analyse the consumer expectations and purchase behaviour and adjust business models
3) increase warehouse storage capacity
4) Establish effective relationships with small and medium business partners to keep the brand
value intact.
5) Leverage part time labour for redundant tasks (Ex:- College students and home makers)
4. Conclusion:

There are many similarities as well as several differences in the business models of Walmart and Costco.
Both are successful retail brands enjoying heavy popularity and enormous financial success. Walmart
has its EDLP (everyday low pricing) at the core of its value proposition. It is also the main factor
differentiating it from Costco and other retailers in the US. The US retail industry is marked by heavy
competition and other retailers also strive to sell to their customers at lower prices. However, that also
means sacrificing profit margins. This is what Costco also does. It keeps its profit margins low to sell
to its customers at lower prices. However, compared to Walmart, the product range available at Costco
is smaller. Walmart comparatively offers a very large assortment of products in its stores and online.
Both Walmart and Costco procure in bulk to save costs.

Walmart employs an open to all approach whereas Costco is only a membership-based warehouse
chain. Apart from Gold Star and Business memberships, Costco also offers household cards. The
business and Gold Star members can upgrade to an executive membership for an additional annual fee
of only $60. The executive members of Costco that represented 39% of its around 53.9 million paid
memberships, generally purchase more frequently from Costco and also spend more than the other
members at an average.

When it comes to human resource management, Walmart has taken a few strategic steps to improve its
reputation in this area. Until some years before now, the cost-cutting strategy of the company also
included paying staff less. However, the company has improved the hourly wages it pays its associates.
On the other hand, Costco has managed a strong reputation in the area of HR where it has excelled since
its foundation. Apart from an organizational culture that values employees’ contribution, it has always
paid its staff well and offered them a work environment that maximizes work satisfaction.

Although both companies are taking strategic steps and digital initiatives to compete in the market,
Walmart is leveraging the digital technologies to scale up the business to increase customer reach, where
in Costco still relying on in-store purchase model and limiting its capability in digital transformation
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Costco Business Model Explained: The Things That Led to Its Success - Business Chronicler

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