Business Case Studies Paper on Costco Wholesale Corporation

Costco Wholesale Corporation

Introduction

Costco is among the largest retailers in the US, taking the third position within the region, and the seventh position among the leading retailers globally. The company is popular for their wholesale club and discount warehouse segment, within the retailing industry of North America. By the year 2012, the company had 598warehouses within 40states. Costco’s stores were also operating in other markets including Puerto Rico, Canada, United Kingdom, Korea, Taiwan, Mexico, Australia and Japan. The company operates under the mission of continuously providing their members with high quality products and services, but with the lowest prices possible. Further, the mission includes offering exceptional customer services and observing their ethics code that incorporates caring for the needs of employees, suppliers, customers, shareholders and being responsible corporate citizens. This paper, therefore, will comprise of a case study of Costco Company, primary focusing on their business model, strategy, competitiveness and financial performance (Ricart & Casadesus-Masanell, 2009).

Costco’s Business Model

The focal point of Costco’s business model involves generating high volumes of sales plus rapid inventory turnover. The company does this through providing fee-paying members strikingly low prices under a limited choice of the selected private label and nationally branded products, in a broad range of merchandise groups or categories. Quick inventory turnover plus the low costs of operation allowed Costco to run their business profitably, but at considerably lower gross margins compared to traditional wholesales, supermarkets, supercenters and mass merchandisers. Low operating costs were achieved through efficient distribution, volume purchasing, reduced merchandise handling and the self-service warehouse facilities. Membership fee was a basic element of the company’s business model considering that the fee offered adequate supplemental revenues for boosting the firm’s overall profitability up to acceptable levels (Ricart & Casadesus-Masanell, 2009). Another element of Costco’s business model was the rapid inventory turnover and high volumes of sales. Through this element, the company would sell inventory and obtain cash prior to paying their merchandise vendors. This would be the case even when Costco made early payments to their vendors in efforts to leverage on possible discounts associated with early payments. For this reason, the company would manage to fund a large portion of their merchandise inventory via the terms of payments availed by vendors instead of maintaining a sizable working capital to enable the firm make timely payment to their suppliers.

Elements of Costco’s Strategy

Costco’s business strategy was characterized by ultra-low prices, a strong focus on low costs of operation, a treasure-hunting shopping environment, geographic expansion and a limited choice of the private label and nationally branded products. Costco’s pricing principle aimed at increasing customers’ loyalty to promote repeat business as customers are wooed through low prices (Ferreira & Rezende, 2007). For this reason, the company only stocked products that customers would bargain for to enable them generate some considerable cost savings. The low markups allowed Costco to place their prices just fractionally above the breakeven point to generate net sales revenues and cover all operational costs to earn a modest level of operating profits. On product selection, while other similar supermarkets placed huge stocks of approximately 40000products to allow consumers to have a wide selection, Costco offered their members/customers a selection of about 3600items. About 85% of the selected products comprised of quality brand name products while 15% comprised of the firm’s private label brands.

The company’s product range incorporated a wide range of products including different kinds of meat, cereals, canned foods, vegetables, dairy products, and electronics among many others. However, each category of product selection was based on colors, sizes and fast-selling models. Another element that characterized Costco’s strategy involved treasure-hunt merchandising. The company’s merchandise buyers constantly made one-time purchase of products that were appealing to consumers, which would sell-out speedily. This strategy aimed at enticing shoppers into making more purchases through providing irresistible deals to increase frequency into the company’s stores. Low-cost was also an essential element of Costco’s strategy that allowed the company to offer low prices to their consumers (Ferreira & Rezende, 2007).  In support of this element, the company eliminated all frills and costs related to conventional wholesalers or retailers. In other words, Costco devoted in ensuring tremendously low overheads to facilitate cost savings among their members. Additionally, Costco ensured their stores or business premises were located in strategic locations. Such locations would comprise of high traffic routes or adjacent to upscale suburbs to allow easy access by residents and small businesses that have above-average incomes.

The company strategy was highly effective because it perfectly suited the targeted audience. Ensuring low costs enabled Costco to reach their target market efficiently because they would offer products at low prices to suit the needs of the above-average income earners. The geographical locations of their stores allowed such market targets to access the company’s products easily. Under such circumstances, the company managed to capture their target market by effectively meeting their needs, hence ensuring total consumer satisfaction. Such a strategy enabled Costco to compete effectively in this market through their strategic positioning, which allowed the company to gain high customer loyalty and retention to facilitate big and consistent sales (Ferreira & Rezende, 2007).

Competition in North American Wholesale Club Industry

Wholesale Club was growing at 15% -20% faster in comparison to other retailers. The three major competitors in this market comprised of BJ’s Wholesale Club, Sam’s Club and Costco Wholesale.

Competition rivalry: This has been an extremely strong competitive force in this industry. All the three wholesale clubs provide products at low prices as a strategy for attracting customers while also enabling consumers to have cost savings. Competition among the three retailers, therefore, is fierce because all of them are seeking top-line revenue growth through establishing new stores, attracting new customers and seeking to grow their sales revenues. For this reason, the industry is becoming somehow mature and competition has continued intensifying. Every company has to strive in maintaining their consumer retention since it has become extremely easy to switch memberships/loyalty from a club to another. Moreover, there is substantial similarity in the provision of merchandise among the three companies and the level of differentiation based on product line has been weak, thereby increasing rivalry.

New entrants’ threats: This has been a weak competitive force in the wholesale club industry with North America. The industry has strong entry barriers, such that a new company that may wish to get into the industry may find it very difficult unless the company chooses to buy BJ’s Wholesale Club aiming to rapidly expanding business operations into new areas where the Club has never ventured. Sam’s Club and Costco are very strong competitors that enjoy substantial scale economies that new companies cannot access. Venturing into this industry by new comers also is limited by the huge capital requirements for a new company that wishes to compete at the same level as the major players. New comers may similarly face great difficulties entering into this industry because of the huge advertising and marketing costs incurred in promoting the businesses to secure a considerable level of sales. Furthermore, the three major players have already held strong positions within the industry in a manner that allows the firms to prevent new entries making the industry unattractive for new entrants.

Suppliers bargaining power: This is an average level competitive force within this industry in North America. Suppliers comprise of majorly the products’ manufacturers chosen by the warehouse clubs. A large percentage of such manufacturers are certainly huge businesses of popular brands and high reputation among consumers. However, the manufacturers do not necessarily hold strong positions for bargaining to enable them dictate conditions and terms of supply to the warehouse clubs. Particularly, Costco and Sam’s Club have substantial bargaining powers over their suppliers to acquire the desired stock of merchandise. None of the suppliers has enough supply to satisfy the stock needed by the wholesale clubs. Consequently, this limits their bargaining power in the supply process. The wholesale clubs are large volumes buyers, an element that grants them an advantage to have considerable bargaining authority with their suppliers. For example, if any of the suppliers may fail to supply the wholesale clubs with merchandise at an appealingly low price, the Clubs can simply switch and make purchases from alternative suppliers or manufacturers without disruptions on their business.  The ease with which they can switch suppliers minimizes the supplies bargaining powers. In other words, the suppliers cannot place much pressure on the wholesale clubs clients to negotiate for higher or better prices or any other favorable sale terms.

Buyers bargaining power: In this industry, this is also a weak force of competition. Members or customers to wholesale clubs are many and their purchases are in small quantities. No single client accounts for a substantial portion of the total sales made by the wholesale clubs. For this reason, individual clients or members have limited powers or advantages in bargaining for low prices with the wholesale clubs or for any other terms of sale. A member can opt not to buy a specific product from any of the wholesale clubs or opt not to renew membership with the clubs. Nonetheless, this has no consequence on the bargaining powers of buyers at all. Customers may have low costs of witching but they cannot negotiate for favorable prices or get any other benefit beyond the provisions of the membership card.

Threats from substitutes: This is a strong competition force in this industry since it is not a must for individuals, households and small businesses to shop at the warehouse clubs. They have various other alternative joints or channels from which they can shop such as the online retailers. Indeed, threats from substitutes can be considered the strongest competitive force facing the three wholesale clubs. This is because there are many other readily available and acceptable substitutes. Similarly, consumers switching costs are extremely low. Although the prices offered by alternative retailers may not necessarily be low like in wholesale clubs, the substitutes have a wider range of merchandise choices plus strategically positioned stores that facilitate easy accessibility. In addition, it is evident that most consumers are aware of the available substitute retailers, and are comfortable making their shopping in such destinations. Moreover, products availed by substitute retailers are equivalent to that offered by wholesale clubs because product differentiation has been extremely low.  

Generic Strategy Characterizing Costco’s Competitive Strategy

Generic strategies are usually employed by businesses in their efforts to gain and maintain a competitive advantage. For instance, a company can employ a strategy like differentiation, cost leadership or market segmentation (Bordean et al, 2010). Differentiation strategy involves where a company differentiates their products in a certain way to compete successfully. However, this strategy is only effective when the targeted consumers are not price sensitive, yet the market is saturated or competitive and customers have some specific needs that are unmet. Costco can be considered to be operating under the cost-leadership strategy in which the company has always been striving to secure a larger market share through appealing to the price-sensitive and cost conscious customers. The strategy is attained through ensuring the company offers products at the lowest prices within the targeted market niche.

Costco’s Financial Performance

Costco has been demonstrating an attractive financial performance over the years, with their sales rising from one year to another. For example, in the financial years 2000 to 2005, the sales increased from $31621 to $51862 and increased again to $70977 in 2008. Nevertheless, the sales dropped in 2009 to $69998 compared to 2008 at $70977. From 2009 to 2011, the sales showed an increasing trend from at $69889, $76255 and $87048 respectively. The trend was the same in regards to their net income, increasing from $631 to $1063 between 2000 and 2005. This level rose again between 2005 and 2008 from $1063 to $1283. However, just like in sales, the level of net income dropped between 2008 and 2009 from $1283 to $1086 and consequently increased to $1303 and $1462 from 2009, 2010, and 2011 respectively. The figures demonstrate that although the company has been experiencing a good financial performance, this level is not stable. It keeps fluctuating, with some years showing good performance and others poor performance. Nevertheless, Costco remains an outstanding performer from a financial perspective. In 2011, for example, their financial statements indicated that the company had generated total revenues of about $88.9billion plus a net income of approximately $1.46billion. According to their financial reports, every company store generates average annual sales of around $146million.

Costco’s Strategic Performance

Costco’s strategic performance has always been based on their business mission, which integrates various aspects of their business to ensure they deliver consumer value. The mission holds that the company should continuously provide their consumers with high quality products at the lowest possible prices. Costco’s strategy that facilitates their competitive advantage comprises of a blend of being a low cost provider as well as differentiating their products and services (Boyne et al, 2006). The company competes based on pricing while also delivering exceptional value in their excellent customer services and high-end offerings. Costco’s devotes in giving their customers more to meet the value of their money. Costco’s strategy has a number of basic elements inclusive of low prices, treasure-hunt shopping environment plus a limited selection of product lines. The company is popular for their exceptional customer services and unique treatment of their employees.

Costco’s operates on the belief that they have the best human capital within the warehouse-club industry. The company, therefore, devotes in providing their staffs with rewarding opportunities and challenges to facilitate career and personal growth. Employees enjoy competitive wages, safe/healthy working environment, great benefits, and promotions into administrative positions. Costco has competitive advantages over Sam’s Club and BJ’s Whole Club based on their unique ethic code, which they always strive to follow. The company further provides diverse things across the firm that ensures high level of consumer loyalty and retention plus repeat purchases. Costco also offers additional services to their clients including a food court, free samples in every store, plus a gas station/cat wash in some locations. For this reason, this strategy has always been their winning strategy and Costco will continue dominating the wholesale industry business by continuously remaining different among their competitors (Boyne et al, 2006).

Conclusion

The above discussion has provided an analysis of the wholesale club industry, with a specific focus on Costco’s strategy and competitiveness in the market. The issues discussed comprised of the company’s business model, strategy, competitiveness and financial performance. The company’s exceptional strategy has enabled them to remain ahead of competition.

References

Bordean, O., Borza, A., Nistor, R., & Mitra, C. (2010). The Use of Michael Porter’s Generic Strategies. International Journal of Trade, Economic and Finance, 1(2):173-178.

Boyne, G., Walker, R., & Andrews, R. (2006). Strategy Content and Organizational Performance. Journal of Management Studies, 34(2):241-258.

Ferreira, D., & Rezende, M. (2007). Corporate Strategy and Information Disclosure. RAND Journal of Economics, 38(1):164-184.

Ricart, J., & Casadesus-Masanell, R. (2009). From Strategy to Business Models and to Tactics. Working Paper, 1(1):1-43.