#7: Costco has small, but efficient assortment
Source: Wikimedia
Despite the huge size of the Costco stores, the assortment Costco sells is very small. An average Costco warehouse stores about 4 000 different products (SKUs or Stock Keeping Units) at a time. This is miniature compared to the main rivals.
Assortment sizes of selected retailers
Small assortment makes things more efficient: store operations
Just like the rapidly growing German grocery discounters, Aldi and Lidl, the tough choice of limiting the assortment provides a lot of benefits. Despite limiting the customers’ breadth of choice, it might also make it easier for the customer to decide which product to choose. There is research done about the influence of more choice on the customers choice anxiety. The famous Jam Experiment is one example.
Besides making customers’ choices easier, smaller assortment also makes the store operations and logistics much more efficient. It is easier to handle big amounts of the same products than multiple varieties of different products. This relates back to the point from the previous post that Costco is all about making things more efficient and thus saving money for the costumer. Small assortment is one case in point for that.
Small assortment makes things more efficient: high inventory turnover
The small assortment size is a strategic choice that Costco makes in order to be able to be more efficient … and sell cheaper. The small inventory combined with the high revenue, makes Costco one of the most efficient retailers in turning over its inventory.
Inventory turnover is one of the most traditional efficiency metrics used in the retail industry. It tells how many times in a year a company sells its inventory (in other words turns its inventory over). With 12,1, Costco turns its inventory around approximately once a month, whereas Target does it every second month.
Because of the high turnover of the inventory, Costco gets money from the customers before their invoice are due to the suppliers. Therefore one could say that the suppliers fund the Costco inventory.
“Higher inventory turnover enables Costco to rely on its suppliers’ capital to finance its inventory, rather than the capital of its shareholders or creditors.”