Costco is a public national wholesale corporation with a membership warehouse club that offers the best low prices with quality brand-name merchandise. The organization’s first location opened under the Price Club name, was in San Diego. In 1983, the first Costco distribution center area was opened in Seattle. Costco turned into the main organization ever to reach $1 billion in sales within a period of fewer than 6 years.
Whenever Costco and Price Club converged in 1993, the joined organization, working under the name PriceCostco, had 206 areas creating $16 billion in yearly deals. Costco operated its 732 warehouse memberships in many locations, US and Puerto Rico which is the biggest, Canada, Mexico, UK, Japan, South Korea, Taiwan, Australia, Spain, and Iceland. They also sold their items at websites in most of the cities they operate. They locate their warehouses on high-traffic areas or an upscale residential area with people who have above-average income and are accessible to small businesses. Their products range food, electronics, wine, jewelry, furniture, vitamins, consumable products such as detergents and office supplies.
They also opened an ancillary department next to or within most warehouses to encourage the visits. They also offer treasure-hunt merchandising, with the strategy that they would allure the shopper to spend more than they usually will by offering them appealing deals that change frequently, as well as, gasoline stations.
Costco’s mission and purpose is to bring to the market the highest quality of goods and services at the lowest price possible, to provide good customer service relying on their coded of ethics, to take care of their employees and members using that code, to give rewards to their shareholders, to be eco-friendly while being a responsible corporate national citizen. They are a national company that offers a wide range of multipurpose low priced products and services to average-income people and small businesses to satisfy their needs in the highest quality possible. This corporation’s business model was to offer fee-paying members irresistible low prices on a limited range of nationally branded and selected private-label products in a wide range of product categories, which made them generated high sales volumes and rapid turnover of inventories, which made the company profitable.
Another element that helped was that the turnover allowed it took advantage of the early payment discounts from the vendors to make timely payment of suppliers possible. Creating a strategy is important to push on the company towards the goal set and achieve its performance objectives. The generic strategy used in Costco is a broad low-cost provider strategy, where they offer a broad range of products and services at high quality at the lowest price possible over its competitors. This strategy can create a long-lasting competitive advantage if the other competitors find it hard to compete with the low-cost approach.
From 2014 to 2016 there has been an increase in the growth rate by 3.10% and 2.10% which shows that the growth rate is slowing. However, between 2016 and 2017, they have been growing by 8.68%. This proves that the strategy Costco had a slow growth rate in the beginning years, but in 2017, the growth rate is increasing and this means that their broad low-cost strategy is their winning strategy. From 2014 to 2015 (Operating Income/ Sales Revenue) A winning strategy is a strategy that fits the external and internal situation of the company, improves the company’s performance, and leads to competitive advantage.
Costco’s strategy is on track and well-matched to the company’s situation as it is the market leader with 59% off market share and they have double the sales of Sam’s club. Costco is producing a good financial performance in terms of profit and revenues. Costco has a high revenue, but their profitability is at 3.16% in 2016 which is slightly below Sam’s club that is at 3.20%. According to the three tests of winning strategy, Costco’s strategy is producing good company performance and that means that they are a profitable leading company with competitive strength in the market with high market share and position. The pricing, product selection, treasure-hunt merchandising, low-cost emphases and growth strategy are successful in helping the company achieve sustainable competitive advantage.
Between the period 2015 and 2016, Costco increased by 2.10% while Sam’s club’s lost -2.10% market share even though they are in the same industry which shows that Costco is doing well. The challenge facing them is maintaining that growth and focusing on how they can make it grow more. So the question is, what can Costco do to increase their growth rate and how can they maintain and increase their growth rate in the face of an industry that is slowing down?
Company situation (Intro to the external environment): Regarding the company’s situation, that Costco is in a period of growth where their revenue sales are increasing but the revenue growth is at a decreasing rate from 2013 to 2016, but it increased by 8.68% in 2017. Also, Sam’s club is at a growth phase between 2016 and 2017, where their revenue sales and growth rate also increased from -2.10% to 0.90%.
Between 2010 and 2011, BJ’s an increase in sales and growth rate from 1.55% to 6.82%, which means they are in the growth stage of the life cycle. The industry is in a decline phase of the life cycle as the growth rate of the combined sales of the 3 companies is decreasing from 7.83% to 7.19% from 2016 to 2017.
Porter’s 5 forces model
This section provides an overview of the external environment, the porter’s 5 forces analysis, and the key success factors. The 5 forces model is used to assess the strength of the industry’s competitive forces that affect the industry’s attractiveness. The strength of each force would be evaluated. The stronger the forces, the harder it becomes for the industry members to earn a profit.
The 5 forces are the competitive pressure that comes from the buyer’s bargaining power, substitute products, supplier bargaining power, new entrants to the market, and the rivalry between competing sellers, which is the strongest force. First, the buyer’s bargaining power. Buyer demand in the industry is growing. Buyer switching cost is moderate because when switching from Sam’s club to Costco, there will be membership dues and you will need to pay for another membership. Costco’s consumers are offered a very low price for the products, different payment methods, and treasure-hunt merchandising which may include selling high-end products at a lower price.
Consumers purchase the products from Costco in bulks for a cheaper price than other wholesale markets. This creates strong buyer bargaining power.
Secondly, Competitive rivalry is a strong force. 3 top competitors control the market which are Costco, Sam’s Club and BJ’s. Competition is from a wide range of other types of retailers. Competing cells are active in making fresh moves. For example, Costco and Sam’s club have limited items of national brands and BJ’s are offering double the products, but, this strategy is not working for Sam’s Club and BJ’s because their revenue isn’t increasing like Costco’s. Low cost and low selling prices keep profitability down, which makes competitive rivalry stronger. The industry is in a growth phase but the growth rate is slow. This creates strong competitive rivalry and pressure on profit margin. Third, substitute products. The substitutes are available in other wholesales like Sam’s Club, BJ’s, Walmart, and target. They also have a low-cost strategy which makes it more attractive for the customer.
However, because of the high cost of membership switching when switching to another substitute, including the inconvenience cost, equipment cost, and psychological cost of serving supplier relationships, create a moderate competitive force of substitute products. Fourth, supplier bargaining power. This depends on the level to which the supplier has enough bargaining power to control the rules and details of supply in their favor. Costco has a large number of suppliers, but they carry the top-selling brands.
Because Costco doesn’t provide specialized equipment, this gives the suppliers low power. As stated in the case, one of the element’s in the business model is that Costco takes advantage of early payment discounts, which helps finance a huge percentage of the merchandise inventory through the settlement’s conditions given by the vendors to make the payments given to the suppliers easy, which creates a satisfied supplier. The products supplied at the wholesale can be found from many suppliers at market price. This creates a low bargaining power of the suppliers. Fifth, the competitive force of buyer bargaining power. This depends on if the buyer has enough leverage to secure price concessions and other good terms and how sensitive are the buyers to the price.
The cost from switching memberships between Costco, Sam’s Club, and BJ’s is high. Because of the high demand in the industry, this creates a “seller’s market”. Costco has an ultra-low-cost strategy that attracts buyers and weakens the price sensitivity factor. Since the number of buyers in Costco is huge and they are the leading brand, the loss of a customer it is less likely to affect the company unlike other brands in the industry. Also, because most of the consumers are individuals and small businesses, this creates a mix of strong and weak bargaining power. This creates a moderately weak bargaining power of the buyer.
Finally, the potential of new entrants. When new companies enter the industry, this creates pressure on existing firms who are already competing for the market share. This is important because when a company enters the market, it creates a credible threat of entry causes the existing companies to lower their prices to scare off the new entrants. This depends on the expected reaction of the existent firm and the barriers to entry. Having a membership in a company establishes customer loyalty, and the stronger the brand preferences and customer loyalty, the harder it is for the new entrants to break into the market space.
Because Costco’s strategy is considering an ongoing expansion of its geographic network of store locations, this creates a threat for other companies. In the US, there are some unfavorable government policies like taxes, which creates a weak effect. Based on figure 1, Sam’s club and BK’s sales are growing but not at the same rate as Costco in 2017, which shows that something is holding them back from having high sales. All those factors create a moderately weak possibility of new entrants.
Key success factors
Key success actors are the things that the company must do well to be successful in the market. The key success factors in the wholesale industry are, promotion, having a strong network of retail stores within easy-reach locations, and distribution capabilities. Promotion is an important key success factor in the wholesale industry. Promotion can be done by giving samples out, developing an inviting store design, have better customer service. Companies that promote their brand effectively to reach a broader target market and differentiate their products in the mind of consumers will be successful. Consumers are always looking for opportunities to lower their costs. Promotion includes advertising and marketing.
Costco offers treasure-hunt merchandising which features active items and high-end or name-brand products at a low price. Therefore, companies should administer a strategy to advertise their promotions through different channels to reach a broad range of customers. An important KSF in the wholesale industry is a strong network of retail stores in convenient locations so that customers have easy access to the store. This means positioning the stores in high traffic locations and making the stores accessible in a wide number of neighborhoods, which is exactly what Costco did to make it accessible to small businesses and residents of the suburbs. People prefer shopping close to home.
Many consumers work and after having a long day, they do not prefer to drive long distances to shop. Convenient locations will lead to an increase in revenues and market share. So, companies should execute a market development strategy by regulating market research to identify growing neighborhood communities to open new stores that attract a wide range of customer groups. Also, the distribution capabilities of the industry is another common KSF among industries. This factor includes having a strong network of wholesale distributors and having sales that are directly strong through the internet. Having an appealing and easy to use website could lead to customer satisfaction which is the goal firms seek.
Small businesses that look for low-cost products are often run by young entrepreneurs who are technically smart and high knowledge of how to access the internet. Costco’s sales that are obtained from their website increased in 2016 from 3% to 4%. Having a website that you can order from is fitting in well with the customer’s need. To be more successful, wholesale companies should be able to react to the consumer’s needs fast to increase their sales and not lose the customer to other companies who will satisfy their needs. By using the internet, the company exposes itself to a wider group of customers, therefore, drawing them more into their market.
Industry profile and attractiveness
The outlook of this industry is positive because revenue and demand are growing according to the industry’s life cycle. Companies that can implement those key success factors and the 5 forces will be successful. Companies are getting more competitive in the industry. Because Costco is the leading company in the wholesale industry, it has a better chance of earning a good profit margin in the future. The challenge the industry faces is the moderate ease of entry and buyer bargaining power. According to Costco, the industry is attractive, and because they are a strong leading competitor, they should invest in it and take advantage of the opportunities while overcoming the challenge of maintaining and growing their company in the slowly growing industry.