Analytical Essay on Costco: Competitive Analysis, SWOT Analysis, Porter’s Five Forces and Analysis of Strategies

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Executive Summary:

Retailing industry becomes more globally however it has to compete with the domestic market as well (Minahan, et al., 2012). In this report, Costco wholesale corporation is chosen and to discuss its strategic approach in the retail industry. Porter’s five forces also labeled along with Costco. The contemporary strategic issue made by Costco also particularized in this article alongside alternate strategies of that organization elucidate. Costco Wholesale Corporation is an international chain of warehouses, began its operation in 1983 in Seattle, Washington (Costco Company Profile, 2019). Gradually Costco merged with The Price Company, which had pioneered the membership warehouse concept. Costco Wholesale Corporation provides a wide range of merchandise, it is mainly membership-only warehouse club. Costco Wholesale Corporation has a major market share in the retail industry and their rivalries are Target, Wal-Mart, and Sears (Corona, 2012). Wal-Mart and Target are the foremost players in retail industries. Wal-Mart is the largest retailing company according to 2008 sales and Costco is progressively growing for the last twenty-six years with business in seven countries (Corona, 2012).

Introduction:

In the modern era of a competitive domain of business sustain in market because of the finest strategic plan of an individual organization. Effectiveness of organization in sense of performance is determined by an optimum strategic proposal of top management (Baroto, Abdullah, & Wan, 2012). Retailing industry becomes more globally however it has to compete with the domestic market as well (Minahan, et al., 2012). In this report, Costco wholesale corporation is chosen and to discuss its strategic approach in the retail industry. Followed with Costco background also expounded with competitive analysis. Costco external factor and internal factor also considered as in SWOT analysis to have insight about power and softness. Porter’s five forces also labeled along with Costco. The contemporary strategic issue made by Costco also particularized in this article alongside alternate strategies of that organization elucidate. Finally suggesting our commended strategic for Costco wholesale corporation to the instrument.

Company Background:

Costco Wholesale Corporation is an international chain of warehouses, began its operation in 1983 in Seattle, Washington (Costco Company Profile, 2019). Gradually Costco merged with The Price Company, which had pioneered the membership warehouse concept. Costco Wholesale Corporation provides a wide range of merchandise, it is mainly membership-only warehouse club. It is the second-largest retailer in the United States and the seventh-largest retailer in the world. It offers exclusive product categories such as supplies, confectionaries, appliances, television and media, automotive supplies, tires, toys, hardware, sporting goods, jewellery, watches, cameras, books, housewares, apparel, health and beauty aids, furniture, office supplies and office equipment (Costco Company Profile, 2019). Under the symbol of “COST”, Costco Wholesale Corporation trades on NASDAQ global select market Hill, C., Schilling, Melissa A., author, & Jones, Gareth R., 2015). According to CNBC.com Costco has a huge profit in 2019.

Costco’s strategy is to provide a variety of high quality of products at the consistently lower prices than any of its competitors offer (Hill et al., 2015). Costco offers low prices on nationally branded and privately labeled products which in return produce high sales volume and massive turnover. Operating efficiency, efficient distribution and warehouse facilities collectively generate profit over a lower gross margin than any other traditional wholesalers or supermarkets. Costco limits specific items in each product line for fast selling (Hill et al., 2015).

Costco has direct manufactures thru which Costco purchases it’s all merchandise directly and reallocate goods from the respective depot. Costco’s product selection criteria are value, sales potential and product expansion categories and price (Hill et al., 2015). To face competition with Wal-Mart, Kmart and Target’s privately labeled products Costco offers its own privately labeled brand “Kirkland Signature” (Cascio, 2006). Kirkland signature products similar to or better quality than national brands which includes juice, cookies, coffee, nuts, housewares, luggage, appliances, clothing, and detergent. Costco offers individual, business add-on and executive membership (Hill et al., 2015). Costco does marketing and promotional activities to new warehouse openings, occasional mail to the new customer and direct mail to existing customers to promote particular products (Baroto, Abdullah, & Wan, 2012). Costco started its online operations in 1998 as Costco.com and ranks 17th amongst the online retailers.

Costco shares healthy employee relations and provides health benefit such as Costco pays 92% of employee’s health insurance premium (Hill et al., 2015). Even Costco’s wages have raised net income per employee. Costco follows employee-first philosophy and provides high wages, benefits, promotions, bonus, incentives, and opportunity for growth (Corona, 2012). Costco gives a lesson to think about long term action, reduce employee turnover and let the employees know that they matter (Hill et al., 2015).

Costco has major competition in the retail and supermarket industry. Kmart and Target also provide a variety of products, membership and other benefits (Lee, Atkins, Kim, & Park, 2006). The retail industry is rapidly growing. Looking forward to this, Costco has a major challenge of high performance. Moreover, Costco has a major challenge of an online retailer such as Amazon. Will Costco be needed new capabilities to sustain in changing and challenging environment?

Competitive Analysis:

Costco Wholesale Corporation has a major market share in the retail industry and their rivalries are Target, Wal-Mart, and Sears (Corona, 2012). At present most of the companies keen on invest in shape their brand among consumers, which help patrons to identify their product (Hu & Chuang, 2009). Among Wal-Mart, Target, and Costco they crucially play in pricing their product, choose a superlative position to place their product amongst the brand and implement their innovative ideas towards the retailing industry to hold their market share (Hu & Chuang, 2009). Wal-Mart and Target are the foremost players in retail industries. Wal-Mart is the largest retailing company according to 2008 sales and Costco is progressively growing for the last twenty-six years with business in seven countries (Corona, 2012). Target is another rivalry which competes with Costco in retailing and Target has a business model of bulky departmental store which aid customer to feel like a mall (Corona, 2012). Target focus on everyday low price on fashionables and necessity product. It recognized by their patrons’ as low price with the best quality product. Their brand acknowledged by best marketing approach with wide and gigantic store size. In Wal-Mart as well they recognized by their customer as save money and live a better life (Corona, 2012). Wal-Mart was also is known for their bad appearance like not treating employees well, awarding low pay, lack of equality and gender-biased, putting stress on supplier and product cheap in price associated with their quality as well (Cascio, 2006). Costco has a good public image like treating their employees well and their pay at best. They also treat employees as their owners and awarding them actual leave required without any gender bias. Civic approach about Costco is sharing equal responsibility and playing fare level of business compared with their rivalry.

SWOT Analysis:

SWOT analysis is commonly used for the strategic planning thru which organization gains insight for internal and external environment, which enables the organization to make strategic plans and decisions by analyzing and positioning organization’s internal and external factors (Phadermrod et. al, 2019). In below table Costco’s strength, weakness, opportunity and threat have been identified.

Internal factors

Strength

Privately labled “Kirkland brand” offers high profit margin
Low cost operations resulting in low price of goods and services
Low employee turnover, approximate 6%
Customer loyalty Weakness
High geographical concentration depending on USA and Canada market
Limited to membership only wholesale club
No self-checkouts available
Poor advertisement fails to reach range of customers

External factors

Opportunity

E-commerce provides new digital platform
Plans for significant expansion internationally
Operations are mainly in countries where GDP is high
Increase in membership
Rapid growth in brand awareness Threat
Intense competition as Sam’s club expanding aggressively
Due to membership fees and bulk purchase, people below poverty line cannot afford Costco
Currency fluctuation
Poor geographical diversification, mainly depending on USA, Canadian market (Costco Wholesale Corporation SWOT Analysis, 2019)

Recommendations from SWOT analysis

Costco can expand its operations in e-commerce. E-commerce platform may provide customer loyalty and it could reach to the customers who are not in high GDP region. E-commerce will allow Costco to expand its operations outside USA and Canada and get its competitor’s customers. Costco can improve on marketing and advertisement. Even it can provide self-checkout options to its customers. Costco can reduce its membership fees and can attract people from below poverty line.

Porter’s Five Forces:

Michael Porter’s five forces framework is an in-depth assessment and analysis of competition and profitability for the industry (Dobbs, 2012). These five forces are competition in the industry, the potential of a new entrant in the industry, power of supplier, power of buyers and threat of substitute (Dobbs, 2012).

Competition in the industry

Wholesale club industry attracts its consumers by providing discounted prices on various products. Power of rivalry is very high due to competitive price and less profit margin. Consumers are price elastic and this creates pricing competition amongst the industry (Dobbs, 2012). Due to similar products and pricing rivalry differentiation is low which can be resulted in weak switching cost and due to which consumers can switch from one competitor to another.

Potential of new entrant into the industry

Due to large economies of scale and competitive but profitable prices, entry barriers are high in the industry. Costco is a well-known brand and has high sales volume which can be difficult for a new entrant to replicate. Even, Costco is established worldwide and to compete with it, a new entrant would require huge capital expenditure to create an image.

Power of suppliers

Suppliers are the manufacturer of the products which is sold by the wholesale club (Dobbs, 2012). Wholesale clubs sell products at a competitively lower price and they buy bulk products from their suppliers which increases price competition within the industry and resulting in price sensitivity. In this industry, while evaluating bargaining power, the wholesale club has higher bargaining power than the supplier.

Power of buyers

In the wholesale club industry, buyers are consumers or club members. Bargaining power and price sensitivity influence buyer’s power. The wholesale club sells bulk products at low prices. Customers are price sensitive. The wholesale industry has numerous buyers and all purchase in small quantities but there are many wholesale clubs’ options available and buyers are not well informed about industry cost. Due to which buyers have low bargaining power.

Threat of substitute

Wholesale club industry serves as a global wholesale retailer. Costco has several substitutes available such as Target, Walmart, and Amazon. None of the substitutes is wholesale club or membership only club. Even, Walmart has many locations and open for 24 hours as compared to Costco. Target offers discounts on purchase. Apart from this, Amazon provides special rewards to its prime members and two-day shipping and free streaming videos. This makes a threat of substitute high.

According to porter five forces, wholesale club industry has high competition, less threat of new entry, high in supplier and buyer power and the threat of substitute is also high.

Strategic Issue:

Strategy can be defined as formulation, implementation, and evaluation of cross-functional decisions which makes the organization to achieve its objective (David, 2016). Costco has strategic issues such as low-profit margin, price penetration, membership loyalty, online wholesale competition such as companies like Alibaba, Amazon, etc., customers are becoming more demanding due to which Costco has to offer diversified products. It is membership-only wholesale club thus it is challenging for the Costco to keep up lower membership costs. Costco’s strategy strives for the low-cost provider of products or services it offers to the customers.

Alternative Strategies:

Costco has a large number of customers due to its low-price strategy but it has some strategical issues as well. To improve strategically, Costco can focus on international expansion. Costco must expand its regional stores and put forward the customer-first strategy. Another financial strategy Costco can apply is to preserve cash to account for the maintenance of expenditure. Costco can focus on the new market. Costco has to set market segmentation it has to provide products for all generation and all age group people. Moreover, Costco can provide student membership as well. Further to market expansion, Costco can expand its business online by offering more products and providing online order, pick-up, and delivery near the store.

Costco can further apply five P’s strategy: Plan, Ploy, and Pattern, positioning and perspective. Costco is the low-cost leader in the wholesale market. Such extremely low price enables the company to pass on savings to its members. Marketing strategy of Costco is poor, it is only based on word of mouth. Costco can further develop a public relationship, advertisement, branding for its products and services. Costco can apply the 7-S strategic framework.

Strategy: Costco provides low prices, provides a limited selection of nationally branded and privately products and emphasizes international and online expansion.
Structure: Costco can apply for functional grouping characteristic support in the organization. And thus, Costco can implement new policies and strategies for all geographical regions.
System: Costco’s wholesale strategy can involve quality control by providing training and development, and by providing “Kirkland” signature brand to indicate high quality.
Shared Value: Costco has successfully rich culture developed by its values. Moreover, it can maintain its culture by enhancing values such as taking care of customers, follow the legal compliance, take care of employee welfare and practice the sale and make a profit out of it.
Skills: To become competent and sustainable in the market, Costco must have employees with updated skills and this can only happen by providing training and development promptly. Thus, employees can be motivated and give superior performance.
Style: Beneficial packages and training retain the hi-potential employees and it helps to minimize the turnover.

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