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The warehouse concept was not new, but what Jim Sinegal found was that if you constantly improve the store operations, keep operating and overhead cost low, keep popular items stocked, and charge low prices, it keeps the customers coming back. Costco opened its first store in Seattle in 1983 with these concepts in mind, by the next year the company was in five states and had over 200,000 members (Gamble, Thompson, & Peteraf, 2019).
As the years passed, the company grew and became the first U.S company to reach $1 billion in sales in less than six years. Costco is a down-to-earth company that follows five simple principles:
- obey the law,
- take care of the members,
- take care of employees,
- respect the suppliers, and
- reward the shareholders (Gamble, Thompson, & Peteraf, 2019).
These principles come from the understanding that if you put forth the effort, to make everyone important and a part of the success, then the company will thrive and be successful.
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Five Generic Competitive Strategy
The five generic competitive strategies are
- A low-cost provider strategy- lower overall cost over competitors;
- A broad differentiation strategy- unique product that consumer wants and will pay maybe higher prices;
- A focused low-cost strategy- concentration on market niche and having lower cost;
- A focused differentiation strategy- concentration on market niche with a better product than competitors;
- A best-cost provider strategy- give consumer more value for money at a better price (Gamble, Thompson, & Peteraf, 2019).
Companies can create a mix of these strategies, but the goal is to successfully gain a competitive advantage over the competition (Gamble, Thompson, & Peteraf, 2019). Costco Wholesale strategy is based on best-cost provider strategy that focuses on offering their members low prices, a limited selection of nationally branded and private-labeled products with the occasional “treasure hunt” big-ticket items, and low operating cost (Gamble, Thompson, & Peteraf, 2019).
The low pricing, membership strategy combination is a great success for Costco with membership fees creating the large percentage of the revenue for Costco, the company can pay low prices for items and have a low mark up on brand-name merchandise of about 14% and private-name goods at 15% (Gamble, Thompson, & Peteraf, 2019). The low prices keep the customers coming along with the variety of products, which totals about 3,700. Costco’s product line, Kirkland, has a growing percent of the products carried, about 20%, which includes dress shirts, laundry detergent, and even beer.
Costco carries products that cover all the needs and wants of their members; from a rotisserie chicken, televisions, washers, and dryers, to most recently caskets, that will be received within three days of placing orders, creating a one-stop-shop. There have been axillary services such as pharmacies, gas stations, food courts, optical centers, photo centers, and hearing aid centers opened by Costco and highly regarded by the members for the low prices offered (Gamble, Thompson, & Peteraf, 2019).
Costco also found the winning combination of having dozens of featured items at incredibly low prices. The idea was to have members spend more by offering big-ticket items. The store has been known to have great deals on Movado watches, Coach bags, diamond rings, and cashmere sport jackets (Gamble, Thompson, & Peteraf, 2019). Members learned to buy these items when found because the next time they would come into Costco that item would no longer be available. Costco eliminated all the frills that are commonly associated with retailers, including salespeople, fancy buildings and décor.
Warehouses are located on high traffic routes in or near upscale suburbs. Most of the Costco locations are a metal pre-engineered design, concrete floors, with minimal interior décor. These warehouses are designed with floor plans that are efficient and economically maximize selling space, the handling of merchandise, and controls inventory (Gamble, Thompson, & Peteraf, 2019). I believe that Costco’s strategy is being successful and is executed excellently. By saving cost in all areas, Costco has been able to pass on the savings to its members, building a loyal customer basis. As Costco continues to grow and expand its strategy has been successful at holding about 59% of the warehouse club sales in the United States and Canada (Gamble, Thompson, & Peteraf, 2019).
Five Forces Analysis
For a company to be successful, it must evaluate the external environment and be able to make necessary changes and adapt. Some of these external factors include the general economic conditions, social and cultural values, political factors, legal and government regulations, ecological considerations, and finally, technological. If you look at the external environment as a whole, there have been so many changes in the 33 years since the store opened. Technology has evolved to the point that everyone has access 24/7, is a critic and can post reviews online, new laws and government regulations have been enforced to change the way businesses do things because it has be environmentally friendly, to the expectation that people want items now and for a low price.
To understand the external environment, the company needs to analyze the five forces:
- the competitive rivalry or competition,
- the bargaining power of buyers or customers,
- the bargaining power of suppliers,
- the threat of substitutes or substation, and
- the threat of new entrants or entry (Gamble, Thompson, & Peteraf, 2019).
Competitive Rivalry
This is one of the strongest of the five forces, because of the fact, that Costco is competition with most every other retailer that offers similar products. It is described as many firms, low switching costs (Gamble, Thompson, & Peteraf, 2019). Those that are in the same concept market, Costco is competing with Sam’s Club and BJ’s Wholesale Club. All three companies have developed their private label to be sold at their clubs; Costco has Kirkland Signature, Sam’s Club has Members Mark brand, and BJ’s Wholesale Club has Berkley Jenson brand that is of great quality at low prices.
The fact that members are loyal is the determining factor of where they will shop and if at any time they are not satisfied, Costco will refund membership fees in full (Costco.com, 2020). Out of these three, in San Antonio for example, the choices are Costco or Sam’s. The competition between these is fierce, for the most part, these two are close in geographical proximity, and the membership fees difference in prices with Costco being $20 more than both Sam’s Club and BJ’s Wholesale Club.
When it comes to where customers shop, I have known some shoppers that started with Sam’s Club membership and then when Costco came around go a membership too, but at the end chose to keep the Costco membership. They felt Costco offered better prices and more of the products that this customer was needing. Sam’s Club:
- Opened in 1984
- Concept was to sell merchandise at a very low-profit margin
- Sam’s mission “to make savings simple for members by providing them with exciting, quality merchandise and a superior experience, all at great value” • 660 stores in the United States and Canada, 100 stores in Mexico, Brazil, and China
- 2017- Revenue of $59 billion
- 8th largest retailer in the US
- Warehouse- concrete floors, spare décor, goods displayed on pallets, simple wood shelves, or racks
- Offers 4,000 items
- In 2017, employees 100,000 people (Gamble, Thompson, & Peteraf, 2019). BJ’s Wholesale Club
- Opened in the mid-1980s
- 213 warehouses in eastern states
- Offers 7,000 items
- 70% of BJ’s product line is found in grocery stores
- Strategy to differentiate itself for others: by having later store hours, offering smaller package sizes of many items, accepting manufacture’s coupons (Gamble, Thompson, & Peteraf, 2019).
Competition is a strong competitive force since there are several firms in this market. Low switching cost makes it easy for customers to shop from different companies.
Bargaining Power of Buyers
The target consumer for Costco is both induvial and small business owner, that are price conscience and looking for deals. Costco must satisfy the customer’s needs and wants to keep them coming in. With other options, such as Sam’s or Amazon, and the switching cost low, Costco must build a relationship of loyalty with the members to keep them coming. The appeal of these wholesale clubs is the low prices and the variety of products offered (Pratap, 2019).
I would classify this force as being moderate because once a membership term is over, customers have the option to switch to another club with lower membership fees than the other. Bargaining Power of Suppliers I would categorize this force as weak because of the fact there are a huge number of suppliers. Costco typically sells products at a small marginal markup, enough to cover their cost but pass on the saving to the customers (Pratap, 2019).
Costco’s demand could be so large, and one supplier may not be enough to meet it, so the large population of suppliers helps meet those demands. There is a huge inventory turnaround in these clubs that orders are in large quantities and the philosophy of Costco is for all the parties involved to at the end make money or save money. Threat of Substitutes The threat of substitutes is categorized as a strong force. Substitution is a concern for Costco because if customers are dissatisfied with price or product, the consumer can easily find it somewhere else (Pratap, 2019). Amazon is known to have everything from A to Z and even the switching cost to shop at Sam’s is not high enough to prevent them from going elsewhere. There are many other companies that the consumer can consider meeting their needs and wants at similar prices as Costco.
Threat of New Entrants
New entrants to the market are categorized as a weak force for Costco. There are so many barriers, such as the moderate cost of doing business, a large percentage of the marker is already captured by those already established, the brand recognition and reputation has been built with the customers and supplier, and all of these barriers then offer some protection to Costco (Pratap, 2019). Costco has reported a growing enrollment of loyal customers over the years and developed a business strategy to promote its label and brands, capturing a large percentage of the market.
The competition in the North America wholesale club industry has three top competitors: Costco, Sam’s Club, and BJ’s Wholesale Club (Gamble, Thompson, & Peteraf, 2019). These three companies use marketing campaigns to retain their members and gain new ones. The ability for customers to go back and forth between clubs hurts a business model where profit relies heavily on membership fees to keep prices so low. Costco has built and established relationships with suppliers by treating them with respect, honoring all commitments, protecting their property, and doing what is right (Gamble, Thompson, & Peteraf, 2019).
I think that in following the philosophy that Jim Sinegal set forth, in doing the right thing and making sure that all parties benefit from the business model, it is a major reason for them being leaders in this market. In my opinion, to the industry participants, the industry is favorable. There are few threats to those companies that are already established the brand recognition and loyalty for the fact that in 2016, Costco has 56% of warehouse sales, Sam’s had 34% of warehouse sales, and BJ’s Wholesale Club along with a few smaller shares 7% of the sales.
Financial Performance Evaluation
Costco’s financial strength is excellent. Revenue from 2013-2016 has steadily been increasing and is currently at $118.75 billion. Even though, revenue is increasing the Revenue 1 Year growth rate is going down from previous years and is at a 2.17%. Gross Profit Margin is increasing by a small percentage each year since 2013. Operating margin is fluctuating in the years 2013-2016 going up and down but it is not a huge amount. It stays with in the same range. Costco has managed to lower long-term debt all 4 years as has their fixed asset turnover. Inventory turnover is steady and not changing much in the last 4 years.
When the financials are analyzed, we can conclude that all of the steady growth and be contributed to solid supplier relations, which include getting great bargains, members are being loyal to the company and continue to renew membership, and Costco is always finding was to lower operational cost and continue to pass on the savings to the customer.
Strategic Issues
I think that the three major strategic issues that Costco faces are:
- the financial success is heavily relying on membership dues to remain profitable,
- competition, and finally
- their growth strategy.
Costco’s whole strategy to offer the lowest prices to its members relies heavily on the customers getting and retaining their membership year after year. Membership prices need to maintain steadily for the fact that if it becomes too costly, those customers are going to shop somewhere else. The convenience of becoming a member is now available online, you can purchase it online and then process it at a Costco to receive cards (Costco.com, 2020). Once the payment goes through, the new member will receive an email with their number, and they can start shopping online (Costco.com, 2020).
Currently, there are two types of memberships, regular members and business members, the basic one for each is $60 and includes one card and the ability to use the membership at all Costco locations worldwide (Costco.com, 2020). The next level up is $120 and includes everything from the first, plus rewards on travel purchases, extra benefits, and the member can add others for $60 each (Costco.com, 2020). For businesses, there are also two levels, the $60 level includes the one card, being able to use the card at all Costco locations worldwide, the member can add others at $60 and the benefit of purchase for resale (Costco.com, 2020). For the $120 business plan, the member gets all the perks, a free card, their membership is valid at all locations worldwide, reward on travel purchases, extra benefits, the ability to add members at $60, and purchase for resale (Costco.com, 2020).
Costco must find a way to continue to raise profits without losing customers to be able to compete with others like Walmart, Sam’s Club and BJ’s Wholesale Club. Sam’s Club offers memberships at two levels, the basic membership is $40 and the premier which includes some benefits as free shipping and free selected prescriptions is $100 (samsclub.com, 2020). Another competitor, BJ’s Wholesale Club, offers memberships at $55 and $110 with similar perks. BJ’s also offers an online access pass for $10 a year (bjs.com, 2020).
As time changes and the shopping patterns of the customers evolve, the competition grows and there are more choices for the customer at low price ranges. Amazon is a great example of this, it is a site where you can find anything and everything at great prices and the customer doesn’t have to be a member to buy. Costco needs to expand its online presence and options for its members to be true competition in the online sector and are beginning to do this by allowing non-members to shop on Costco’s website but may have a 5 percent surcharge added on some orders. Costco’s growth strategy needs to continue to increase by expanding to underserved markets both domestically and internationally (Gamble, Thompson, & Peteraf, 2019). Kirkland
Signature brand has dramatically expanded its product line to now include organic products such as organic coffee, organic soy beverages, and organic salsa (Costco.com, 2020). The variety of products are well priced, quality products and great deals on treasure hunt items would get the members to visit and purchase these items at the store.
Getting them in the door and keep them coming while meeting the changes in shopping habits is hard, but Costco is evolving and continues to increase membership from year to year.
