Category: Costco

For a corporation to succeed, the management needs to have sufficient knowledge on financial concepts. Companies that apply these concepts manage to outdo their competitors as illustrated by Costco Corporation. Costco Wholesale Corporation runs 592 warehouses across the globe (Brigham & Houston, 2009).

They sell various product brands together with the companys own Kirkland Signature brand, which they sell at a discount to some individuals and businesses. It is the biggest and the most financially successful corporation in the industry.

It success is attributable to proper management since it carries its operations in large economic scales. Costco possesses a reasonable market share among its competitors because it implements the right accounting concepts, which include appropriate financial ratios, proper management of cash flows, and effective capital budgeting techniques.

Costco uses all the accounting ratios that help in evaluating the performance of the company for a specific period and those that compare its performance against their competitors. Efficiency ratios are used to determine the effectiveness in using company assets and management of liabilities. Currently, Costco efficiency ratio is at 1. 05 which is positive rate for meeting current liabilities.

Liquidity ratios determine the ability of a company to meet the obligations within set deadline. Costcos liquidity ratio as given by Acid test ratio stands at 0.47. Although this ratio indicates the ability to convert asset into cash, it needs improvement to be proportionate to real estate possessed. Leverage ratios relate to debts of the company that is reflected in the balance sheet.

Profitability ratios measure on the effectiveness of business operations by determining how the company is running ascertaining whether it is improving or declining as compared to other forms in the industry. These ratios are given by comparing the sales and anticipated profits calculated using margin and mark-up. The companys mark-up is at 15%, which facilitates low cost of the products thus increased sales and profitability.

Costco management controls the movement of fund in and out of the business accordingly. To achieve this, they ensure that there are more funds moving in the business through sales and debtors than the funding moving out of the business through purchases and creditors. They develop means of speeding up receipts from receivable and suggest ways to access payment through banks at customers authorization.

They also tighten credit requirement to discourage credit sale, and advertise aggressively to increase sales. The management analyzes and manages cash flows at reasonable intervals. This analysis facilitates the company to have enough cash in the current period to cover financial obligations for the next period (Brigham & Houston, 2009).

They utilize accounting software packages and other websites offering free templates that help in producing cash flow statement. This is essential for the company to understand the amounts flowing in and out of the business and make necessary provisions to cover for deficits.

Capital budgeting is a process that helps the management choose between alternative investment opportunities and allocate available resources to the most viable projects. Businesses have alternatives for investing the scare resources. The managers have the responsibility to choose the most viable investment that will increase the shareholders wealth.

They should invest in projects that will have higher returns on capital in future. To make decision on the most appropriate investment, the management must evaluate the future value of investment and spend on the project with potential to increase shareholders funds (Ross & Westerfield, 2010). The IRR method analyzes the return on the investment by comparing expected return of the investor from different projects.

Costco uses various method to analyze and determine future value of a project. Net present value (NPV), payback period, and internal rate of return (IRR) are the main options available. The net present value estimates the current value of the future expected cash flows. The management chooses the investment with the highest NPV.

The IRR method calculates the return on the investment and compares to what the investors get in future (Ross & Westerfield, 2010). The payback period calculates future returns by determining the amount of time taken before the company recovers the amount spent on investment in the project (Ross & Westerfield, 2010).

The company restricts debts and equity, but the management ensures that these variables are maintained at the most economic level. Restrictions are in terms of creditors instituted by the tight debt requirement and adoption of appropriate capital budgeting technique that limits the management to invest in projects that will give hire returns.

References

Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason, OH: South-Western Cengage Learning.

Ross, S. A., & Westerfield, R. W. (2010).Fundamentals of corporate finance (9. ed.). New York, N.Y.: McGraw-Hill/Irwin.

Introduction

Costco is a club with enrolled members with different specialized units that offer different but well-known products to its members in one convenient locality. The aim of Costco is to offer its members the lowest prices possible on quality goods. All the goods offered by Costco are guaranteed and of the best quality possible (Costco.com.au, 2013).

History of Costco

The exclusive membership club, Costco, came into existence in 1976 when Sol and Robert Price solicited for funds from well-wishers and raised 2.5 million US dollars. In the same year, they put up Price Club, which was the first establishment (Costco.com.au, 2013).

Price Club accommodated the commercial clientele only and initially operated in a refurbished airplane garage along Morena Boulevard in California (Costco.com.au, 2013). The business did not do so well in the first year of operation but picked in 1979 by acquiring two locations and realizing over one million US dollars in profits (Costco.com.au, 2013).

The Price establishment offered its stock to the public on 12 July 1980 and two years later, a meeting brought together Jeff Brotman and Jim Sinegal that saw the drawing up of plans to set up a fresh wholesale establishment (Costco.com.au, 2013).

In 1983, Costco establishment came into being in Seattle, Washington and saw an increase of two more locations in Portland and Spokane in the same year (Costco.com.au, 2013). In 1984, the fourth Costco establishment opened in Salt Lake City in Utah with the establishment hitting the one billion dollar mark in sales the same year. By this time, the company operated in five states of America (Costco.com.au, 2013).

In 1985, Costco offered its shares to the public. As the Price establishment celebrated a decade in operation, Forbes Magazine declared it the Best Managed Company in 1986 (Costco.com.au, 2013). In the same year, the first pharmacy opened in Portland, Oregon as the Tukwila, WA establishment housed the first fresh meat unit (Costco.com.au, 2013).

A year later, Costco set up its first produce and bakery units as both establishments opened their initial optical laboratories. The year 1988 witnessed the winding up of Mid West Division with shift of focus to East and West Coast sales (Costco.com.au, 2013).

By 1989, Costco had over 46 establishments, as Price Club became the third most lucrative firm in the United States of America. During the same year, the first one-hour photo studio opened in Chula Vista house. In 1992, Costco opened its 100^th establishment, located in Miami Lakes in Florida State (Costco.com.au, 2013).

The year 1993 marked a decade since Costco opened and as the celebrations went on, the shareholders of Price and Costco companies approved a merger of the two companies to form PriceCostco Company (Costco.com.au, 2013). The name changed to Costco in 1999 and initiated the two percent reward program, which saw the increase in Executive membership the following year as it started its travel enterprise and opened up two units in Texas (Costco.com.au, 2013).

The company marked its 25^th anniversary in 2001 with the shifting of its Canadian business to a regional office in Ottawa. In 2002, Costco set shop in Kansas and Indiana and marked the 36^th state of its service in the United States of America. As at 2011, Costco had 592 warehouses all over the world (Costco.com.au, 2013).

Costco Today and Its Location

The company has set up warehouses outside the United States of America namely in Mexico, United Kingdom, Taiwan, Korea, Japan and Australia. The company serves a membership of 131 million people in its various locations with over 155, 000 staff members distributed in its various warehouses. (Costco.com.au, 2013)

References

Costco.com.au (2013) Costco History. Web.

Costco Wholesale is one of the leading American corporations, operating a chain of warehouse clubs for its members. Founded in 1976, this company has experienced massive growth, and currently, it operates in various countries in North America, Europe, and parts of Asia. The management of this company has been keen on understanding customers needs and meeting them in the best way possible as a way of managing competition. Currently, Costco is the worlds second-largest retailer (Boone & Kurtz, 2015). It was voted the most preferred retailer for organic foods, prime beef, wine, and rotisserie chicken. The companys revenue, net income, total assets, total equity, and the number of employees have been on the rise over the past five years, which is a clear demonstration that it has been registering impressive growth. The positive indexes show that this company has managed to understand external forces in the market and has aligned internal factors accordingly to ensure that it achieves the desired level of success. In this paper, the researcher seeks to discuss external and internal environmental factors at Costco to develop strategies that can enable the company to achieve a competitive edge over its rivals.

External Analysis

The retail industry is one of the most competitive sectors of the economy not only in the United States but also in other parts of the world. According to Rothaermel (2016), the ability of a firm to achieve success in such a market depends on its understanding of external forces and the capacity to adjust its internal operations appropriately. In most cases, a firm may not have the capacity to influence these external forces in the market. It only needs to redefine its internal structures to ensure that it achieves the intended goals.

Industry Structure

One of the factors that the management of Costco Wholesale needs to consider within the external environment is the industry structure. It focuses on the size and number of rivals that a firm has to compete against in a given market. The wholesaling and retailing industry is one of the most competitive ones in North America, Europe, and parts of Asia. Wal-Mart is the largest and most powerful rival that this company has to deal with in the global market. As Turban et al. (2018) observe, Wal-Mart is the largest retailer in the world and the most popular in the United States. It means that Costco has to find a way of overcoming the stiff competition that this firm poses. In the European market, the company has to deal with market rivalry from some of the dominant brands such as Tesco, Aldi Edeka Group, and Schwarz Group. Other major players in the industry include Ahold Delhaize, Centers Destributeurs, IKEA Group, Mercadona SA, Coop Group, and H&M Hennes (Boone & Kurtz, 2015). These retailers have strong brands in Europe and have a large base of loyal customers. In parts of Asia where this firm operates, especially in China and Japan, other strong market rivals exist. The company must find ways of ensuring that they overcome the stiff market competition by delivering high value to its clients at the most competitive cost possible.

Competitive Forces

The management of Costco would need to understand the competitive forces that the firm has to deal with to achieve success in the market. According to Rothaermel (2016), Porters five forces framework helps in identifying these factors in a way that makes it possible to develop effective management strategies. These forces include the intensity of industry rivalry, the threat of potential entrants, and the threat of substitute products, the bargaining power of suppliers, and the bargaining power of buyers as shown in figure 1 below. It is important to discuss each of these factors to understand how Costco can deal with them.

One of the first factors that the management of this company should evaluate is the level of market rivalry among existing competitors. In this industry, the challenge is relatively high. The analysis conducted above has identified Wal-Mart as the main competitor for this company. Other major rivals include Tesco, Aldi Edeka Group, and Schwarz Group. Besides these large corporations, Costco also faces stiff competition from small and mid-sized companies offering the same products in the same market. This firm needs a unique strategy to overcome this challenge. The threat of new entrants is another major challenge. Morden (2016) explains that the ease with which other companies can access this market also affects the capacity of this firm to achieve success. In the United States and most of the foreign markets where this company operates, it is easy for new companies to emerge as long as they follow laws and regulations set by respective governments. As such, the level of competition can get stiffer than it is currently.

The bargaining power of suppliers is an issue that the management should consider. In this industry, wholesalers and retailers have a wide range of options whenever they want to stock different products. As such, Costco may not worry much about the power of suppliers. However, the company should ensure that there is a fruitful relationship with these suppliers. The power of customers is another issue. Rothaermel (2016) explains that when customers have a wide variety of options when they plan to purchase something, then they will become more demanding. Costco has to deal with this problem because of the numerous options that its customers have. The fifth factor is the threat of substitute products. When products that a firm offers can easily be substituted, then it loses its bargaining power. Fortunately, for Costco, this threat is low based on the industry within which it operates.

Strategic Groups

A strategic group is a useful model that helps in classifying companies based on the similarity of specific business strategies and models that they use to achieve a competitive edge over their rivals in the market. As Lasserre (2017) observes, it is often common to find cases where a firm settles on one or two strategies that they believe can offer them the greatest advantage in the market to attract more customers. Figure one below identifies the position of Costco in terms of the strategy that it takes to achieve competitiveness in the highly competitive market. Figure 2 below shows the position of the firm in comparison to other firms

Internal Analysis

When the management has conducted a detailed analysis of the external market, the next step is to analyze the internal environment. The internal analysis helps to understand the core competencies of the firm, resources that it has to achieve specific goals, and capabilities as it seeks to achieve specific goals in the market. According to Turban, Whiteside, King, and Outland (2017), when conducting internal analysis, it is important to take into consideration a firms strengths and weaknesses which directly define its capacity to take advantage of opportunities in the market while at the same time dealing with threats that may emerge.

Resources

Resources that a company has defined its capacity to undertake different activities in the market. According to Rothaermel (2016), one of the most important resources for a firm is its financial capacity. It needs the resource to fund research and development activities, expand to new markets, and in an effective remuneration of its workforce. Costco is a financially empowered firm, especially because of its impressive performance within the past five years. Its financial power has enabled it to expand to new markets through mergers and acquisitions. The firm also has a team of highly skilled employees who understand how to meet the diversified needs of customers in the global market. According to Turban et al. (2018), the success of a firm depends on the skills and capabilities of its employees. Firms are currently investing heavily in their human resources because they directly influence the capacity of a firm to succeed based on their performance. Costco has been hiring talented workers and giving them attractive remunerations to limit the rate of employee turnover. The team of dedicated and skilled management units is considered another important resource that can help a firm to achieve success in the market. This company has managed to create a team of highly experienced, committed top-level managers who understand how to manage various market forces.

Capabilities

The capabilities of a firm define its capacity to undertake a given activity in an efficient manner that creates a competitive edge over its rivals in the market. It focuses on the major strengths of a firm within a given industry (Turban et al., 2017). One of the main areas that Costco has proven to be efficient in the provision of fresh organic food materials. In the United States, the company has become popular among customers keen on purchasing organic vegetables, fruits, and cereals. In a market where many people are keen on consuming organic food products, this factor makes Costco one of the preferred destinations for the majority of Americans. The company has also proven to be effective in providing quality beef to its customers. It has been working closely with farmers around the world to ensure that they have access to quality products that is fresh from the farm. The management should use these unique capabilities to position the company as one that uniquely meets customers needs and keen on protecting their health.

Core Competencies

The core competencies of a firm also focus on its strengths in the market. According to Rothaermel (2016), core competency refers to a combination of skills and resources that enable a firm to stand out in the market and achieve competitiveness, especially in an industry with a high rate of rivalry. Superior customer service is one of the main core competencies of this firm. A detailed review of the firms performance shows that it has focused on meeting the emerging needs of its customers. Its decision to hire a diversified workforce was deliberately meant to ensure that it understands customers needs in the market. The company has also been keen on understanding market trends, especially the emerging tastes and preferences of its customers. These core competencies will enable this company to overcome the still competition that it faces both locally within the United States and in the foreign market, especially in Europe and parts of Asia.

Competitive Advantage

When a firm realizes that it is operating in a highly competitive business environment, it is often advisable to define a path that can enable it to outsmart its rivals in the market. Lasserre (2017) advises that it is important for a firm to focus more on what it can deliver best to its customers in a way that its rivals cannot. In this section, the focus is to identify ways in which this company can deliver unique value to its customers.

Firm Performance

The management should start by looking at the performance of the firm against that of its main rivals. According to Turban et al. (2018), Costco is the second-largest retailer in the world, after Wal-Mart. It means that this companys performance is impressive despite the stiff market competition. It understands customers needs and it is doing everything to meet them in the best way possible. The financial performance of this firm is also impressive. Its total assets, net income, and operating avenues are on the rise. These indices show that the firm is making positive progress in the market towards achieving the level of success that it deserves. The records of the company also show that its number of employees worldwide is increasing, which reaffirms the impressive performance.

Business Models

Selecting an appropriate business model is critical in enabling a firm to achieve success in the market. Porters Generic Strategies identifies four potential strategies that a firm can use to achieve a competitive edge over its rivals in the market, as shown in figure 3 below. The possible strategies include cost leadership, cost focus, differentiation leadership, and differentiation focus. A firm can decide to choose one or two of the suggested strategies based on its core competencies and business interests.

Costco should consider embracing differentiation leadership as the most appropriate strategy to achieve a competitive edge. The strategy is appropriate because its main market rival, Wal-Mart, has embraced cost leadership. Using differentiation will require this firm to embrace the unique approach of delivering its products to customers. Given the fact that it cannot change the nature of products it offers, it can adjust its packaging strategies, and customer service approaches to achieve uniqueness in the market.

Conclusion

Costco is one of the leading retailers in the world with branches in North America, Europe, and parts of Asia. The management of the company has been keen on ensuring that the company achieves consistent and sustainable growth in the market despite the stiff competition. The firm has invested a lot in employee empowerment as a way of achieving a competitive edge over its rivals. It has embraced differentiation as a way of offering unique quality products to the market. The study emphasizes the need for this firm to use its strengths in the market to take full advantage of the opportunities available in the local and international markets while at the same time overcoming its weaknesses and threats within this industry. It should also embrace innovation in its operations.

References

Boone, L. E., & Kurtz, D. L. (2015). Contemporary marketing, update 2015. New York, NY: Cengage Learning.

Lasserre, P. (2017). Global strategic management. London, United Kingdom: Palgrave.

Morden, T. (2016). Principles of strategic management (3rd ed). New York, NY: Routledge.

Rothaermel, F. (2016). Strategic management (3rd ed). London, United Kingdom: McGraw-Hill Education.

Turban, E., Outland, J., King, D. R., Lee, J. K., Liang, T. P., & Turban, D. C. (2018). Electronic commerce 2018: A managerial and social networks perspective. Cham, Switzerland: Springer.

Turban, E., Whiteside, J., King, D., & Outland, J. (2017). Introduction to electronic commerce and social commerce. Cham, Switzerland: Springer International Publishing.

What is Costco’s business model? Is the company’s business model appealing? Why or why not?

Businesses uses a Business Model to demonstrate the specific methods and approaches that are employed to realize revenue as per the business plan (Teece, 2010). Costco, like any other business has its model, which helps it achieve commendable success. The company’s model focuses on generating a high volume of sales and prompt inventory turnover (Gamble et al., 2014). Costco business achieves this by giving much lower prices on the selection of privately labelled and nationally branded products in a scope of stock categories. These products are offered to both gold star and two types’ members.

Costco’s business model is appealing since it provides a standard measure for testing its management to keep inventing new approaches and techniques that allow them catch new members while retaining the old ones. The two-way approach also minimizes the risk of losing discontented members, who may fail to renew their subscription. Thus the business model focuses the company towards quality management.

What are the chief elements of Costco’s strategy? How good is the strategy?

Strategy can be defined as a company’s pre-selected approach for attaining the set objectives while attentively focusing on the future and current outside conditions. Costco Company’s strategy has the following chief elements; Low prices, has less product selection and lines and treasures hunt shopping atmosphere. First, Costco follows cost-leadership, which is excellent since the company can favorably compete with its competitors by maintaining low prices.

Second, limited product lines and selection allows the company to offer 4000 items, while its competitors offer unlimited products. The strategy allows Costco capture new markets for its existing products. Third, the treasure hunt shopping setting provides lesser prices for the products to the members believed to be absent in the subsequent visit. The strategy seduces the maximally utilize the opportunity, which leads the company to make volume sales. Finally, the company does not sell all sizes of products as this could decrease their efficacy.

Do you think Jim Sinegal was an effective CEO? What grades would you give him in leading the process of crafting and executing Costco’s strategy? What support can you offer for these grades? How well is Craig Jelinek performing as Sinegal’s successor? Refer to Figure 2.1 in Chapter 2 in developing your answers.

Jim Sinegal was an effective CEO. In his attempt to craft and execute Costco’s strategy, Sinegal led the company from its simple single store to world’s fourth largest retailer company. He established a tactical vision of delivering to Costco’s members’ high quality products and services at lower prices. Sinegal aimed at quick inventory turnover since he believed that such a turnover would enable Costco to make profits at low gross margins compared to its competitors.

Additionally, Sinegal crafted various strategies, which included lowering the prices, limiting the product selection, ensuring a hunt shopping setting. By implementing the strategies, he focused on large purchases, effective distribution, and minimized stock handling at the warehouses. Consequently, Costco’s products sail through low prices and attract more members. Finally, his crafted strategy of maintaining a hunt shopping atmosphere could allow mailing the members of the company, while at the same time targeting new unseen members, which would be projected into volume sales. Therefore, based on the above facts, Sinegal was an effective CEO for the company and I would rate him a good manager.

On the other hand, his successor Craig Jelinek if following the foot prints of Sinegal. The strategies developed by the former CEO of Costco are much esteemed and followed, no wonder the company progressively succeeds in its operations. Today, Costco still holds a top position in the world’s retail businesses ranking.

What core values or business principles did Jim Sinegal stress at Costco?

Jim Sinegal had a deep meaning for Costco values and lived by them. Today, his grooming mostly includes apparels sold at the company, for instance his socks and shirts. In everything he does, Sinegal takes pride in it and doesn’t hesitate to crown Costco at any point. His heartfelt commitment has immensely contributed to the success achieved by this company. Sinegal has credibly impacted Costco’s business ethics, for instance, he insists that the company must know its customers and understand why they choose to engage in business. He is also convicted each team player must remain focused on business. According to Small Bizz Bee, 2009, Sinegal states that for a business model to succeed, it should not be “be too much to too many”.

Additionally, Jim Sinegal holds unto values that have tremendously influenced Costco Company. Obviously, his values have not impacted the organization without first reaching his employees and influencing them positively. Thus, Sinegal has been a source of motivation to the employees, one of the things that has kept Costco scaling up. Additionally, he not only shaped the employees for his company but also made them efficient for hire by other companies. However, the Costco’s stockholders feel jealous and see it’s a threat since they often think that Sinegal usually treat his employees too good.

Through paying the workers relatively high wages compared to the other companies, the stockholders often think of lack of transparency concerning the profits realized. Additionally, the stockholders believe that the huge amounts of money used to pay employees devalue their stock. The issue has created conflicts severally and criticisms by the stockholders, but all the same, Sinegal remained adamant of the complaints and promises to treat his employees nice.

Based on the data in case Exhibits 1 and 4, is Costco’s financial performance superior to that at Sam’s Club and BJ’s wholesale?

BJ’s wholesale and Sam’s club are efficient stores but Costco Company rides the competition, considering the number of warehouses in its member countries. Costco’s wholesale financial performance can be assessed using the analysis of financial ratio. The financial ratio analysis strategy allows an opportunity to calculate and compare ratios obtained from a company’s financial statements. According to the data provided on current financial statements, Costco’s has a wholesale ratio of 1.07 which indicate its ability to meet t current liabilities. The profitability ratios indicate sales returns, and according to the data, it stands at 1.8% showing a low sales profit margin. The low profit margin explains its strategies for offering commodities at low prices.

Additionally, the Return on Assets is 6% signaling that Costco utilizes its assets in wise manner. Significantly, the Asset turnover ratio stands at 3% indicating company’s efficiency in assets utilization. All these financial ratios explain the financial position of Costco, which is generally good. The company has more than half, 53% share of wholesale club sales throughout Canada and the USA while its competitors Sam’s has about 37% while BJ’s wholesale has about 10% shares (Gamble et al., 2014). Even though Costco’s profit margin is low compared to Sam’s Club and BJ’s wholesale, its sales volume is higher than that of the competitors and also has a strong membership base. Therefore, Costco is performing better than its competitors.

Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially successful? Why or why not?

Costco has spread out of USA, which has amounted to much success. According to the data in case exhibit 2, Costco’s expansion is financially successful, since there has been a steady growth over years. The total sales and warehouse operation income of the branches outside the USA have amounted to the steady growth. Additionally, there has been significant and constant share warehouses operation income of warehouses outside the USA. Finally, the ratio of revenue to number of warehouses is significantly increasing over time.

How well is Costco performing from a strategic perspective? Does Costco enjoy a competitive advantage over Sam’s Club? Over BJ’s Wholesale? If so, what is the nature of its competitive advantage? Does Costco have a winning strategy? Why or why not?

The company has been successful and effective in the wholesale industry as seen from business strategies. Primarily, Costco’s members enjoy a limited choice of nationally branded products while selecting privately labeled products from a wide scope of stock categories. The company combines its steady inventory turnover with other warehouse operating efficiencies to conduct business operations at a profit and with lower gross profit margins (Gamble et al., 2014). Consequently, Costco uses the sales volume advantages and quick inventory turnover, hence enjoying early payment discount from stock suppliers. The increased volume of sales and quick inventory turnover allows the company to create enough cash.

For instance, Costco has progressively slowed its cardholder’s growth rate towards end of the year and opening of warehouses in the recent years. The company has a significant competitive advantage over its competitors, BJ’s Wholesale and Sam’s Club in a few stores owned. Currently, the winning and reliable strategy for this company is declining, as seen from the examples mentioned above. Even though Costco has 59% market share, and its strategy well suited for the company’s condition, the declining strategy in growth indicates a loss in competitive power in the industry.

Risk 1: Increase in production cost

Costco has a supplier diversification strategy for its supply chain management area of operations management. However, the company’s supply chain management is focused on quality and low prices which is in line with the Company’s mission. If the production cost increases, Costco may have to supply items at a lower quantity to be able to sell the products at a given price.

Risk Event: Trade War

The Trade War has affected many states in the US mainly because it has become more expensive to import goods from China which results in some economic factors such as increase unemployment and interest rate in the US and decrease in consumer confidence index.

The Trade War is expected to affect Costco’s production cost significantly since Costco imports manufactured goods from China. Based on Costco’s analysis, if the 25% tariffs go into effect this year on two segments, travel goods and furniture, consumers would have to pay $6 billion more nationwide. Moreover, the plan to levy tariff of 300 billion worth of goods like footwear, apparel and electronics can cause Costco higher production cost since that’s mostly where the majority of consumer spending is.

Although Costco’s main source of revenue is its membership, the members will then buy Costco’s goods in bulk at the best price. This will in turn affect Costco’s production cost as they will rely on their suppliers.

However, Costco still sees strength in patio furniture even with certain tariff price increases. Trade war could also result in an increase of Producer Price Index [PPI].

Key Risk Indicators: Producer Price Index [PPI] and Consumer Price Index [CPI]

The Producer Price Index measures the average changes in prices received by domestic producers for their output. Its importance is being undermined by the steady decline in manufactured goods as a share of spending.

In this case, the Producer Price Index triggers the Consumer Price Index to go up. This causes product prices to increase, demand to decrease which in turn decline the profit. s.

If selling price is not increased, demand will be the same, profit margin decrease s.

Risk Response:

Before deciding if Costco should continue to import goods made from China, Costco can use the key risk indicators that would determine if rise in production costs would affect its profit margin.

If production cost continues to increase to the extent that it affects Costco’s budget, if any; since Costco focuses on lower cost but high quality, Costco can choose to import similar manufactured goods of different brands from diverse range of countries that have lower or no tariffs or the ones that are cost-efficient for the company.

Risk 2: Decreased profit due to exchange rate loss

Risk Event: Strengthening of US Dollar

As a multinational corporation, the strength of the USD, domestic currency of Costco, could adverse the profitability of the company.

Although Costco is a major wholesaler, the strength of the USD may not affect the cost of their product as more than a third of their product sales come from their private label, Kirkland Signatures as well as most of the others being major US retail brands. Their private labels may be sourced from places outside of the US, but Costco could leverage on the volume of import to negotiate lower prices as well as choosing to import from markets with weaker currencies.

Despite Costco being able to circumvent high product costs, as it is a variable cost, Costco is not able to control their profit loss due to exchange rates easily, as it is a fixed income from their overseas operations. With Canada alone attributing to 35% of operating income and having more than 30% of its store overseas as well as their plan for rapid expansion in their international operations to achieve a 50/50 split of domestic and international sales, Costco has to make sure they can predict future market volatility to be well prepared to overcome profit loss.

As the 2019-nCOV hit the Asia-Pacific Market which makes up 8.54% and Brexit which will affect the UK Market which makes up 3.7%, these currencies could weaken against the US dollar. With the stronger than expected US economy in 2019 and optimistic economic growth in the US which is in addition to the phase one US trade deal and the Fed appearing to be likely to stay hold, the USD could further appreciate against all the other currencies.

Key Risk Indicator: Simple Cross-Section Regression Crisis Index

The main key risk indicator Costco can use to analyse future market volatility is using the Simple Cross-Section Regression Analysis.

The indicator is most constructive to serve as an early indicator for a currency crisis when the timing of the currency crisis is largely unpredictable. During a predictable currency fluctuation such as the US-China trade war, it is most straight-forward for companies to predict future currency trends, however, what is unfavourable is when the company is being caught off guard. Therefore, this indicator would serve an effective purpose.

As Costco serves mainly in the US-Canada-Mexico and the East Asian & Pacific Market. An examination of cross-section data of markets which includes US, Canada, Mexico, China, EU, Japan – key economies of the US-Canada-Mexico market and Indonesia, South Korea, Taiwan, Vietnam, Hong Kong, India, Thailand, Singapore and Malaysia – key economies in the East Asian & Pacfic Market could indicate the future volatility of the market’s that Costco operates in.

Comparing the past 5 years of data to the preceding 5 years of the weighted average of these 3 factors:

Growth in credit in credit to the private sector

Percentage of real appreciation in exchange rate of the past five years compared to the preceding 5 years

Level of international reserves relative to the M2

This shows the overvaluation of real exchange rate, weak banking system and low reserves, which is the perfect formula for a disaster.

With at least 21% variance of the data of both sets, it could indicate a currency crisis of the currencies that will affect Costco’s profitability. (Sachs et al., 1996)

Risk Response:

Upon maturity or expiration of previous hedging tools, Costco should use their Key Risk Indicators to estimate the future exchange rate fluctuation as well as the current position of exchange rates. Early in 2015, as the company rose it’s membership fees by 2.2% amid a 1% fall in sales, Costco’s share price has dipped by nearly 12%. Costco has attributed its performance decline to it’s the weakened profits from overseas operations amid the rising dollar. Therefore, for possible future foreign exchange translation losses, Costco should devise a more comprehensive hedging strategy by using tools such as forwards and options. A forward could be used when the US market is doing well and the USD is strong against other currencies, or when other markets, especially Canada, Europe and the expanding Asian market are weak. However, if the US market is currently gloomy, or when there is sign of a currency crisis, as indicated by the KRI, Costco can use options as a hedging tool against a declining USD or/and a potentially appreciating USD as well as in times of uncertainty.

• https://www.seattletimes.com/business/retail/costco-blames-disappointing-earnings-on-strong-dollar-other-one-time-issues/
• https://www.businessinsider.com/costco-has-a-massive-overseas-expansion-plan-2015-7?IR=T
• https://www.quora.com/Is-Costcos-Kirkland-Signature-brand-really-just-repackaged-brand-name-products
• https://www.wsj.com/articles/how-kirkland-signature-became-one-of-costcos-biggest-success-stories-1505041202

Risk 3: Decline in Costco’s members

Risk Event: Recession

Membership loyalty and growth are essential to Costco’s business. The extent to which they achieve growth in their membership base and sustain high renewal rates significantly impacts their profitability.

A recession arises when there is a marked decrease in consumer and business spending and this includes less demand for Costco’s membership and goods, leading to a drop in membership renewals and gross margin. Costco’s income from membership comprised 17% of their overall revenue in 2019.

When a recession occurs, general economic factors such as levels of unemployment, GDP growth, and reduced consumer confidence would have an adverse impact on the demand for their goods and services. Consumers and businesses alike could lose their membership in order to cut cost, going for other cheap alternatives such as Amazon where memberships are not required.

Due to Costco’s business model, which requires customers to pay for a membership card to shop at their warehouses, a decline in membership would similarly result in a decline in their sales revenue.

With the possibility of an oncoming recession, Costco’s could lose their increasing trend of memberships, and see a decline in their overall sales as well.

Key risk indicator:

The main key risk indicator the company should observe is the USA treasury yield curves. The company should be aware of when the Us yield curves become inverted as they are a closely monitored indicator for an oncoming recession. When the yield curves are inverted, it means that shorter-dated yields have become higher than longer-dated ones, implying a weaker growth in the future. It is a classic signal of a looming recession and has accurately predicted past recessions.

Risk response:

Before the onset of a recession, Costco should use Key risk indicators to estimate its arrival to restructure and cut costs before its impact. Early in the 2008 financial crisis, Costco had a forward-looking strategy of cutting costs in various areas. Costco had shifted from hard goods to more consumer staples and non-perishable goods to reduce inventory costs, limited the number of variations of goods in each category, especially branded products, in order to get bigger wholesale discounts, reducing its average Storage-keeping unit to 3,700. (A storage-keeping unit is a distinct type of item for sale)

For possible future recessions, the company should continue to effectively cut costs and be forward-looking in cutting costs through the investment in newer technologies such as digitizing its in-store experience. One effective way the company can reduce cost is to adopt Kroger’s digital price tags which digitally displays pricing and nutritional information, allowing the store to instantly and remotely update it. This tech runs on renewable energy, allowing Costco to effectively cut energy costs while improving customer in-store experience. Additionally, its environmentally-friendly nature could prove an added benefit to attract more customers.

Costco was established in 15 1983, Seattle Washington United states by James Sinegal and Jeffery H. Brotman. Costco is mainly vender company it comes into second position subsequently the Walmart. It is mainly co-operational with American intercontinental warehouse clubs. Unfluctuating, popular decline period, Value Bat and Costco Across-the-board retained on developing and develop, and in 1993, the two super retailers consolidated, making a skilled administration group that earlier long made Costco the world’s best stockroom club. The current CEO of Costco is W. Craig Jelinek. In present, Costco has 756 storerooms over the world. In the United States and Puerto Rico 540, 105 in Canada, 28 in Mexico, 28 in the United Kingdom, 24 in Japan, 13 in South Korea, 15 in Taiwan, 14 in Australia, two in Spain, one in Iceland, one in France, and one in China. Moreover, Costco has a 243400 workforce as part time and complete time world widely .

. (Canadian Grocer, 2020) They sale the products popular huge quantities on a smaller amount as compared to other stores. The foremost backbone of the Costco company lead by CEO and CO- founder is James singel’s. he is primarily believing in using the Commercial strategies besides processes management. After the long decade, Cost co maintains good financial position of sale the products on low prices. The main motive of the Cost co to compete the other stores. Because of recession time, he did not lay off their employees. Even he earned good profit and kept reduce price level of products, so the customer can attract towards. Costco provides good hours to their employees and health package. So, the workers can happy and loyal linked to their work. Employees are supplementary emotionally attached to CEO and the obligation of employees growth the administration’s profitability. Sinegal supposes pricing the belongings higher might lead to customers losing the trust on Costco. Hence, he never allows the items in the storeroom to be wholesaled more than 14-15% from the cost. He might take increase the price a little higher to improve profits. Costco should develop an improved advertisement strategy so that people would know about the discounts and other advantages given to customers. (Dagher, 2010) Every organization have organization structure. Organization structure refers to determine the structure of the group of association. The main perspective of the Organization to share the structure and follow the all Strategies. An organization chart is a diagram showing how employees and tasks are grouped and how the lines of authority and statement move in an organization. These graphs can look moderately different liable on uncommon factors. For example, is it a Mechanistic or an Organic type of organization; the nature and size of the business, the way it is departmentalized, pattern of delegation etc. there are dissimilar kinds of place to engage the workforces. All hire abilities depend on performance, assistance, and familiarity. Cost Co’s mainly following both communication structure Horizontal and vertical. They plays some specified tasks through Hierarchy.

Board of director: (cain, 2019), In Costco W. Craig Jelinek he is new president and board of director in 2020.Board of executive shows crucial indispensable and unbelievable character in this group. It focuses on taking the decision, to fulfill some responsibility and plans. The main motive of the CEO and manager of the company to give the vision, direction, mission statement and overall strategy. In Costco W. Craig Jelinek he is new chief, CEO, and board of director.

Chief financial officer: The main work of economics member of staff to analyze the fiscal position of the business. Annual report of the year, cash flow such that what comes in and what comes out. On that basis process will be start and done. He is responsible to maintain the accounting section.

Chief information: (varun, 2020) The main objective of the Costco’ s CEO to evaluating the valuable resources related to technology. It also helps to increase the customer service and to get the profit in the business. It also examines the Performance and turn over ratio of the industry.

Merchandising: It is also known as Supply chain of the Costco’s Organization. They maintain the all record of all products from Raw material to finished goods. For example, Kirkland. It also managing the Critical path, marketing production and handle supply control.

Chief operating officers and Distributors: The main goal of Costco’s organization design the business strategy. All operations should be implemented on time. Follows all policies. Distributing the stock on time. They do not follow any window dressing. The second command of the business is efficiency. It defines the relationship between Coordination and co-operates. They have communication between departments and coordination. Distributors refers to provide the stock to the retailers or final sales. It promotes the distribution of goods on time. They already connecting with manufacturers and customers. They also fulfill the needs and customer satisfaction.

Administration operations and Risk management: It refers to maintaining working on Environment, also handling communication, organizing, and attending the whole meetings of the Costco’s organization. There are variety of work including book-keeping, data entry and putting every data through systematic order. Risk management also a part of threats, consumer severity reputation and workers compensation. Costco have good technological workers who have deals to control the crime.

Human resources and reginal vice president: HR are a functional structure of the Organization. The main objective is HR to maintain the payroll, Planning and executive the work. He is a specialist for recruiting, selecting and interviewing with workers. The main Objective of Costco’s Manager to give the opportunities and hiring the people. Reginal vice president plays important role in Costco’s warehouse. He performed good attained work to maintain good communication with customers and sell quality of good stock. He is also known as a supervision of the company. Main motive of vice president to link between sales managers and sales teams to increasing the profit.

Manager and supervision: He are responsible for productivity and actions of taking by the organization. There is mainly accomplishment of several tasks like roles, authority and team-leading. The focus of Supervision to complete the work instead of performing directly. There are different types of position available for supervisors such as Counsellors, directors, and educators. The main thing is that he is always giving training to another person doing awesome work.

Warehouse floor work: the associates in the warehouse Costco wholesales take the process of receiving and loading of the products seriously, they stack their material into the store systematically as they do not want to face any type of problem in their process during shipment of the goods. One more noticeable thing at their warehouse is that, they store the material into a well-organized and neat way. It is the policy of the warehouse of Costco, they receive and ship the material onto the blue palates as it ensures more durance and provides more strength to hold the material. The employees store the products on floors as well as on the shelves to cover each corner of their space. In this way the warehouse floor works in Costco.

Ancillary department workers: in Costco, the organization take the health of their workers in their topmost priority. The primary work of the ancillary department is to provide health care to all the people working in the organization. The basic duties of the department are to assist with ambulance services and a disease-free environment, overall, all the things which come under health and relates to humankind.

• Goal: The main goal of Costco’s to provide good quality of inventory on a low price. They are mainly taking care of customer services.
• Mission: The main aim of Costco’s continuously invented stock and pay attention on our member . It is mainly set up for achieving the goals.
• Vision: It uses for analyzing the case study and maintain the good strategic objective of the business.

Conclusion

In the nutshell, Costco is an inventory store warehouse. They provide excellent good services to their clients. They are using horizontal and vertical vision to making connections with their employees. It is coming on the second position retailer store in Canada.

Introduction to Costco’s Business Model and Vision

Costco was established by American Businessman Jim Sinegal in 1983 in Seattle Washington, with a vision and mission “to continually provide members with quality goods and services at the lowest possible price point possible.” Their businesses key to success involved establishing a direct buying relationship with their suppliers which encourages and enables effective supply chain management, and allows them to buy high quantities of items at an incredibly discounted price. The hard work put in by its owners to establish numerous strong relationships with multiple suppliers allowed Costco to control all aspects of their supply chain from order placement to the acquisition of goods within their warehouses all put in one place in front of a large variety of customers to ensure they can afford to continually support Costco’s company vision.

Costco’s Competitive Edge and Membership Structure

Costco is officially the largest warehouse club in the world based on their volume of sales. Their business structure offers customers three levels of memberships and provides members access to a wide variety of products throughout store locations spread across 761 locations worldwide with their headquarters based in The United States, Washington. Because of their wide variety of products sold Costco also has to compete with a wide variety of brands. But their main competitors would be stores like Amazon and Walmart whomst also sell a wide variety of products at as cheap a price as possible. Their founder Jim Sinegal once defined his companies’ visions as “giving the best to the customer at the best value possible”. And this is Costco’s main driving force to customers offering large wholesale portions of all their products at a low price for the amount of product received. Because of this driving force it is vital that Costco manage the costs of their supply chain perfectly to ensure they can sell their products as cheap as possible to compete with their thousands of competitors. Costco also ensures its members remain satisfied with some of the most lenient return policies found in wholesale stores (an average of 90 days) and by offering cheap fast food options in store to increase customers perceived value for the money. Their business model emphases their low prices and volume purchases in order to accomplish profit at a low margin with their stores offering seasonal discounts on rotating products, these discounts are referred to as “treasure hunts” as they are not available for purchase throughout the year.

Their mass volume purchasing from their suppliers allows them to save millions a year in shipping and marketing. Quality products from low prices in limited selection ordered based on forecasting tends to result in a quick turnover of their inventory. This business modal of mass volume purchasing with annual membership fees is designed to help small and medium sized businesses lessen their bulk purchasing costs as well as support large families with goods packaged in bulk ranging in from typical fresh food produce, the latest electronics, office supplies, car tires, and alcoholic beverages. They even go as far to sell services such as real estate, home insurance and travel services to those with higher tier memberships. Costco’s target customer base are generally found to be overwhelming affluent, being able to afford to buy in bulk, but their age range and background can vary drastically amongst customers, this is likely due to the fact the Costco has grown to be one of the world’s largest companies with more and more members flocking in every year. And despite this Costco continues to grow seeing an almost 7% increase in net worth over the past year alone.

Supply Chain Management: Costco’s Strategic Approach

The focus of this assignment is to analyse the supply chain operations of Costco. I will be relating them to the business focus whilst also assessing its strategy on its ability to maintain a competitive edge, after that I will be evaluating Costco’s supply chains sustainability and providing techniques Costco could employ to further improve their sustainability. Since Costco’s goods are transported directly to the store grounds upon arrival and Costco does not manage their inventory but it is instead managed by vendors, the price of inventory and labour costs of handling products are largely nullified.

Costco’s Inventory and Vendor Management Techniques

For example in their fresh produce and meat sections they focus on low-price and high volume strategies, and because all of their products are sold by second-party vendors Costco itself has very limited storage for perishable products. This inventory management strategy means that all vendors must Forecast their product orders, having to estimate based on previous sales and environmental factors how much product they should order to meet customer needs perfectly. Costco’s inventory management structure gives them a huge advantage over their competitors such as Walmart who have been known to struggle with the issues of perishables. Costco has incredibly well documented buying relationships with many internationally famous brands and are able to be supplied to directly from suppliers through their numerous shipping distribution points throughout the US and in other established countries. Their partnerships with big brands have also resulted in numerous multi company projects. For example in 1999 they created a partnership with American Express working together to create a custom credit card called Costco-AMEX with specific in store discounts for Costco, helping both brands acquire more customers with promises of huge discounts. Costco has also made great strides throughout their supply chain by maximising their transportation efficiency.

One strategy that they implemented was the redesign of their product packages to maximise the amount of packages that can fit into an individual truck. They also practice the cross-docking of products by delivering some directly to Costco’s selling stores whilst the remaining products are kept in distribution centres saving both time and money through their supply chain. They also relay information between trucks and delivery points with an intricate setup of buzzers to indicate when trucks arrive, where their products need to be unloaded and their drivers remaining. Costco’s warehouses are intentionally established remotely to lower property costs. Costco’s department of information technology embellishes itself with its advanced connection of all warehouses to their central headquarters in Washington. They do this by using their EFIM system which can provide real-time information updates and gives them easy access to control the inventory of all warehouses at once. Costco employs the use of a partial vertical integration with a cross-dock distribution system. By establishing more control over its inputs and outputs by sourcing directly from suppliers they have much greater control over the delivery time and variations of products they receive. This elimination of middle men results in decreased costs which are ultimately transferred to the customers.

Evaluating and Enhancing Costco’s Supply Chain Sustainability

The measurement of supply chain performance can be measured in numerous ways. Businesses tend to measure success through their level of profits or market share, but whilst individualized experiences such as customer service and satisfaction can be hard to measure they are still absolutely vital part of Costco’s success. Costco aims to reduce unnecessary costs plastic shopping bags, excessive shop floor staff and expansion into areas with less selling power. And with the money they’ve saved from these things Costco has been able to focus on improving their buying power to allow for greater output. Because their inventory is turned over quickly, Costco can afford to offer suppliers fast tracked payment, this fast tracked payment is generally rewarded, as early and continuous payments can be heavily discounted. Their main costs are related to storage distribution, shipment, transportation and the sourcing of products from multiple geographically distant suppliers. However experts have noted that efforts can be made to improve Costco’s supply chain management, specifically by implementing a better supply chain integration program that takes into account to notion of avoidable costs such as packaging and storage locations.

Costco could partner with more service providers and suppliers for better operations flow as well as well as studying their competitions practices and applying some of their techniques (specifically in their marketing campaigns), which would likely lead to more long term success. More travel business services could be implemented throughout Costco stores, like money orders and currency transfers to attract customers with a different set of needs and potentially expand further into the travel industry than they already have. Greater awareness to customers through marketing campaigns would also be efficient as currently email messages seem to be the only way Costco advertises promotions and new products. All of these suggestions would likely result in a more established and effective means to lure customers into stores and expand their business to new revenue streams. Growth opportunities involving businesses entering the Asian and European markets have not been exploited by Costco. From current operation methods their high staff salary, and low margins maintenance need to be looked into and altered if they are to continue thriving in the future.

Future Prospects and Challenges for Costco

With their CEO coming to the end of his working days and with competition growing at record rates it is vital Costco keeps an eye on rising political threats especially involving the new sustainability laws rolling out in years to come. To best deal with these issues, it is vital that Costco takes time to assess issues such as their lead time management, products handling, quality, inventory management and transportation. Whenever available, Costco should have sales promotions to enhance their desired image of maximum value from products sold in bulk, this may temporarily reduce Costco’s short term profit margins but if managed properly the publicity created for the company should more than make up for all of the marketing expenses. Expansion into overseas markets is still a relatively untapped forced for Costco and with the rigid store structure and financial backing Costco can provide it would be likely to result in a tremendous increase in profit. The innovation of more private brands for a wider range of products, and an increased focus on customer loyalty programs would all be worth implementing as well, especially put in place of a business plan that needs to be established before the retirement of the CEO.

To further demonstrate the importance of good supply chain management in defining business performance and holding onto Costco’s competitive advantage, undertakings such as maximised volume purchasing, their package handing, product distribution, supplier implementation and customer marketing communication have each contributed to highlighting Costco’s numerous capabilities and level of performance with each section of their operations resulting in the unique advantages and disadvantages Costco is required to deal with. A continual review of their supply chain practices will continually ensure that management at Costco can continue to compete with competitors with supply chain requirements like lean management and forecasting. Just in Time resources planning distribution, replenishment procedures, and their optimization of transportation have all played had major positive impacts, but should be subject to continued review to ensure Costco retains their industry wide competitive edge.

Introduction

The research report is prepared on the title ‘Supply chain analytics’. It is a network including organization, individuals, resources, activities, technology and information in the creation and sale of product (Christopher, 2016). The key focus of the repot is on Woolworths and COSTCO. The report initiates by providing a brief introduction about the two recognized companies named as. The next section emphasizes on the supply chain implementation and comparison of both the companies. Lastly, to provide an effective understanding, it also focuses on the literature review of supply chain models. The key purpose of the report is to pour light on the managerial concepts and models. Additionally, it provides an opportunity to upgrades the knowledge with respect to both the organization.

Company overview

Woolworths

It is an Australian supermarket chain store founded in the year 1924 by Woolworths Group. It offers multiple products to its customers like furniture, jewelry and electronics. It follows ‘Franchisee business model’ (Maritz , 2019). It is studied that Woolworths has altered its business model. Its new operating model aims to change customer shopping experience and habits (Hall , 2019). It serves around 3 million customers per day (King , 2019). Its top supplier are Teys Australia and Red meat (Insidefmcg, 2019). Others include Perfection Fresh, Driscoll’s Australia and Kailis Brother as award winner suppliers (AFN, 2019). In order to make its supply chain effective, it has adopted better practices. This is because it aims at achieving competitive lead and sustainability through its supply chain implementation (Woolworths Group , 2019).

COSTCO

It is an American company founded in the year 1983. It is also a supermarket brand engaged in selling variety of products like groceries, vegetables and cosmetics. As per the research, it is examined that COSTCO relies on ‘Subscription business model’. It states that customers who want to shop at the COSTCO store must buy a membership to purchase. Globally, it has 98.3 million customers with Costco membership (Conway, 2019). It has high number of suppliers and they are called vendors. It is examined that it follows ‘high volume, low margin’ strategy in its supply chain. Its supply chain implementation is fine as it is called as one of the reason for its success (COSTCO , 2019).

Figure1: COSTCO total customers

Source: (Conway, 2019)

Comparative analysis

In order to gain knowledge, Woolworths and COSTCO are compared with respect to each stage in the Supply chain process. Following are the main components of its process:

Attaining resources: It is the first step that initiates the supply chain process. Woolworths obtains raw material from suppliers like Teys Australia and RED Meat. It emphasizes on specific indicators while obtaining raw material. It has developed ‘Woolworths Quality Assurance to check the standard of its raw material (Wowlink , 2019). COSTCO obtain its raw supplies from the farmers that follows sustainable activities in the farming practice. It lays prior attention on implementing organic farming to offer healthy products to its customers (COSTCO WHOLESALE , 2019).

Manufacturing commodities: In the manufacturing process, it lays prior attention on its manufacturers and producers to ensure that product met the quality standard (Woolworths Group, 2019). COCTCO only obtains its products from forests that has the certification of FSC and SFI. This is because, it aims at protecting the forest for upcoming period. To pack the manufactured products, it uses Fiber Based Packaging (COSTCO WHOLESALE , 2019).

Inventory control: To reduce wastage in the packaging, Woolworths uses FIFO method (First in, First out) (Farmsoft, 2019). It also has an inventory manager to control the process (Payscale , 2019). To avoid wastage and attain control over inventory, COSTCO has inventory control specialist (Indeed, 2019).

Conveyance and Control: This the last component in the process. Woolworths uses ‘Primary Freight’ as a ‘Transport management system’ to provide convenient transportation service facility (Wowlink , 2019). COSTCO relies on using conveyance method that uses low possible energy and emit low Harmful gases like carbon. It has adopted the use of electric vehicles and electric plugin shore power in its transporting vehicles (COSTCO, 2019).

As per the research and on the basis of above discussion, following points are analyzed:

• Similarity: Woolworths and COSTCO, both attains similarity as they both have appointed specialized individual for inventory control (Indeed, 2019).
• Logistic goal: In general, both attains a goal to minimize the inventory wastage in the supply chain process.
• Issue: Woolworths is facing issues of poor relation with suppliers and exploitation in its supply chain (Sit, 2018). Similarly, COSTCO has faced a lawsuit that can affect its supply chain transparency (Moote, 2017).

Literature review

Joseph Sarkis, Qinghua Zhu and Kee-hung Lai (2011), focuses on the significance of Green Supply Chain Management. According to the review, it is adoption of environmentally friendly practices in the business. It involves taking decisions that will assists in safeguarding the environment and sustaining the natural resources of the global world. According to them, these should be added to the daily practices of business operations. They state that it has gained an adequate attention in the industry as well as among the customer. They have emphasized on the benefits of green marketing. They suggest that it is practiced by certain organization. However, its implementation has not taken seriously by the business organizations. Thus, they emphasizes on the adoption of Green and Sustainable practices in the supply chain process as it is valuable for meeting the future demand (Sarkis, 2011).

Conclusion

From the above discussion, it is analyzed that Woolworths and COSTCO both operates in the form of supermarket stores. They are involved in similar business practices and offers alike products. However, they both differ in its supply chain implementation. It is assessed that among both, COSTCO is highly adopting the sustainable practices in its Supply chain process. Additionally, as per the literature review, it is analyzed that COSTCO is aligning with the sustainable practices that the review is focused on.

Hence, on the basis of Supply chain implementation and Literature review, COSTCO is consider to be healthier and better submarket brand.

Bibliography

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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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What are Costco’s competitive advantages and how can they leverage them to expand successfully?

Costco is one of the worlds leading global retailer with its presence in eight countries offering a diversified range of products and services. The company’s unique business model and global expansion strategies have led to its success. In spite of heavy competition in the retail industry, Costco has built a strong brand image by offering high-quality products at low prices with excellent customer service, along with other key factors.

Customer retention and loyalty: Costco’s membership warehouse model gave access to high-quality products at low prices to its customers. Customers paid a fixed amount yearly to gain memberships which allowed them to shop at Costco. Unlike other competitors in the market, Costco allowed its customers to cancel their membership any time of the year and also reimbursed the unused portion of the membership. While competitors set a cap on cashback, Costco’s no-cap cashback attracted more customers to be a part of a hassle-free shopping membership. This kind of flexible membership business model gave Costco an advantage to enjoy high customer retention and loyalty rate.

Leveraging in-house brand: Costco launched a wide range of premium quality products under the name of “Kirkland Signature”, as its home brand. These products were superior in quality, had higher margins and were 10-20% less expensive than other brands that the company offered. Products under the home brand give a quality parity with national brands and also cost fairly less to manufacture and distribute to customers (Private labels taking over supermarket shelves). Kirkland products were made available to a larget set of audience by utilizing third-party e-commerce platforms such as Google cart which contributed to an increase of market share. In global markets, these products attracted customers to try out “American products” and also helped to capitalize Costco’s image as a foreign retailer. With constant innovation and diversification of products under the company’s private label, Costco can continue to increase sales and grow as an international retailer in foreign markets.

Efficient operations and store layout: Costco’s unique business operations model focused on limiting the range of products and its SKUs and promoted sales of these products. This strategy benefited the company in many ways. Firstly, it allowed the company to dedicate larger areas to individual employees’ which increased productivity and overall profitability. By focusing on a limited range of products, Costco benefited by dealing with lesser suppliers with lower negotiation and enforcement costs which resulted in reduced transactional costs. These factors helped Costco in achieving higher inventory turnovers than its competitors. Just like its products Costco has a diversified range of suppliers. However, they majorly eliminated operational costs by procuring products directly from manufacturers and eliminating middlemen. The warehouse-style store layout with basic design contributed to the higher efficiency of operations by allowing ease of storing, handling products, maintaining inventory and reducing electricity costs.

Understanding local markets, customer service and marketing:

Costco strategically has entered into foreign markets by carefully understanding local market situations, requirements, risk factors and potential growth. In most countries, Costco has partnered up with local retail giants. This has helped in gaining an initial foothold of local markets. Tying up with local partners helps in overcoming government regulations, setting up local infrastructure and managing different types of risks in foreign markets. Costco has gained an advantage amongst its competitors’ by the process of localisation. The company has succeeded in most foreign markets by meeting local customer demands.

Complementing high-quality products at lower costs with excellent customer service is one of Costco’s key competitive advantage. Customer service included “no questions asked” return policy, anytime membership cancellation, no-cap cashback and multiple payment options. Features like these made customers happy and made Costco stand out amongst competitors. Happy and satisfied customers led to free and effective word-of-mouth advertising. Other than coupon promotions and direct email marketing, Costco kept its marketing costs very minimal.

Healthy employee relations: While Costco’s major competitors have had a poor reputation for employee management, Costco has been named one of America’s best employer. Costco’s great work culture, wages, collaborations and human resource policies have contributed to increased employee loyalty, job performance, productivity and better customer service.

What would be the best method for entry, based on existing barriers and culture and operational constraints in France, Iceland, China and India?

Costco’s has strategically expanded into countries with different entry modes depending on numerous factors that have an impact on the local market. Based on barriers and culture Costco will have to make important decisions with regard to the market size and scope for growth, government regulations, local infrastructure and cultural differences to choose the best entry mode.

France:

Challenges: The economy in France has been highly developed over the years with a free-market orientation. France is closely located to another strong economy, the United Kingdom allowing easy trade between both the countries. However, a critical political issue known as the ‘Brexit” has affected business relations and interests between the countries. With Costco already operating in 27 locations in the UK should consider this political barrier as it may be a potential risk of distribution channels, trade networks and movement of people between both countries. Opportunities: As mentioned above France is an economically developed nation with sophisticated customers. Manufacturing has declined over the years in the country, resulting in a requirement of imported products. As the French market is mature and sophisticated, there has been an increasing interest in American culture, consumer and food products giving Costco a great opportunity to dominate the French market. In addition, as there lies a huge potential of E-commerce in France, Costco can increase sales and revenue by creating a strong omnichannel for customers.

Mode of entry: As no players exist in the warehouse concept stores in France, Costco can gain the advantage of being a first-mover. Warehouse concept stores are to see a 113% growth rate in the current year. (Exhibit 1) By considering the above factors, the best mode of entry for Costco to enter France would be a wholly-owned subsidiary, as the company can have maximum control on operations and a high resource commitment in the French market.

Iceland:

Challenges: Firstly, Iceland is an island with a very low population. Secondly, due to poor climatic and geographical conditions, there lies a necessity for agricultural and fresh food products to be imported. However, high tariffs are applied and import restrictions are implied, respectively. This results in Costco having to depend on other suppliers in European markets. Lastly, due to the implementation of new economic policies, establishing a Joint Venture with a local company is challenging.

Opportunities: Iceland economy is stable with most of its consumers being innovators and early adopters, giving Costco an opportunity to introduce new Kirkland products suitable for the local market. As mentioned earlier, due to poor climatic conditions Iceland is highly dependent on imported products such as organic food and fresh food products.

Mode of entry: With the above-mentioned barriers and opportunities, it is ideal for Costco to enter the Iceland market as a wholly-owned subsidiary to access maximum control on operations and to procure fresh food products from EU suppliers.

China:

Challenges: Reports show that American companies in China face numerous problems with regard to government regulations, rising operations costs, increase competition, regulatory risks and an increase in non-tariff barriers. Foreign companies in China face day to day business problems due to delayed and opaque legalisation procedures with respect to registrations and permits. Rigid import restrictions and industry policies limit the access of foreign products and services, resulting in less control of operations for the foreign company in the Chinese market. This inversely promotes local products and domestic companies backed up by local governments. As the majority of Costco’s revenue comes from its private-label Kirkland Signature, importing and selling them in the Chinese market would be a big challenge. Costco’s competitors, Metro and Walmart along with local partners (JVs) share the market with 65.2% and 34.8% respectively, who have increased competition by providing value-added services such as “next-hour delivery”. (Exhibit 2)

Opportunities: With the worlds largest population, vast size, changing demographics, and increase in the middle-class population create a major opportunity for Costco to expand to China and achieve great economies of scale. With the Chinese manufacturing industry becoming more advanced with technology, Kirkland products can be manufactured in China helping to overcome import restrictions. Warehouse concept stores are a niche in China and continue to see extensive growth over the coming years. As fresh food is the drive engine of supermarkets in China, Costco can offer American fresh food along with localised products to build an American brand image that attracts young and affluent customers.

Mode of entry: To grow in the long term in the Chinese market Costco should partner up with a local company to carry on business activities as a joint venture. A local partner would be beneficial by providing knowledge on the vast Chinese market, its target audience and their requirements, government regulations, industry policies and performing marketing activities and other business operations as per local cultures are crucial aspects for Costco to succeed in a complex market. Such a collaborative partnership would allow a medium level of control on operations, resource commitment and dissemination of risk between both the entities.

India:

Challenges: One of India’s biggest barrier for international companies to enter is lack of local infrastructure. Many investors and MNCs face non-transparent and unpredictable regulatory regimes. As the government controls what and how things can be sold on e-commerce platforms, this discourages foreign companies to enter India. Due to policies on data localisation and local content requirement, and other rigid government norms, carrying on day to day business operations for Costco in India would be a challenge. One of Costco’s key product is fresh food items, importing such items are made mandatory to be approved by a government department. As India is multi-cultural and diversified amongst different regions, Costco would have to implement different business and marketing strategies regionally resulting in increased operations costs. Overall, due to rigid government regulations and political differences between the central and state governments, India appears to be an unstable market for foreign companies.

Opportunities: The warehouse concept of supermarket stores has been an untapped industry in the Indian market. With rapid urbanisation, an increase in the population of millennials and the middle class there has been a demand for international products.

Mode of entry: To gain a strong foothold in India, Costco should enter into a Joint venture with a local company in the initial phase to establish themselves in such a complex market. As mentioned earlier, India’s diversified market and audience size are complex to understand and deliver for a foreign company. A strong local partner would help in strategically expanding into regions with suitable infrastructure and resources. A Joint venture would primarily benefit Costco by overcoming government regulations and rigid import norms.

Based upon Costco’s business model and the potential for a large consumer base, should Costco enter densely populated Asian countries, such as China and India? Justify your decision.

With economic, demographic and technological factors rapidly increasing the rate of change in these Asian countries gives Costco an opportunity to expand innovatively. As countries like China and India have a vast potential of growth in terms of population and economic growth are set to become the backbone of the world’s economy (Michelle Grant, Megatrends Reshaping The Global Retailing Industry). As per Euromonitor International, these Asian frontiers will account for 50% of the world’s production and global consumer expenditure by 2025. Within the next five years, forecast says China will account for 25% of the overall industry’s sales growth.

Another key factor is the increasing growth of digital consumers in Asian countries. With consumers becoming more tech-savvy by utilising multiple devices to interact with company services and products. As mobile internet retailing is rapidly on the high, it will also account for more than 58% of total e-commerce sales. Particularly with increased access to smartphones access in emerging markets like India and China will allow Costco to expand with omnichannel business strategies.

Unlike developed economies, these frontier markets have been seeing a gradual increase in the proportion of middle-class people of the population. As the middle-class focus on acquiring most of their money and optimising