The Analysis of Costco’s Business Model

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Costco’s business model and overall strategy is very interesting, they only keep a selection of approximately 3,700 items in their store that could be provided at a lower cost. However, supermarkets like Walmart keep around 125,000 items stocked for shoppers, this is a large difference that I don’t think Costco can maintain and continue to be competitive with Walmart. Costco’s mission statement is “to continually provide our members with quality goods and services at the lowers possible prices”. They achieve their mission by following four rules throughout the organization, theses rules are to obey the law, take care of their members, take care of their employees, and to respect their suppliers. Costco has many strategic choices that makes it a well-known and competitive store. It tries to maintain the lowest prices possible and it has a membership warehouse club business model to separate them from competitors. I believe its strategic choices are aligned with their mission statement because they are providing their members with quality goods at a lower price.

A complete chain analysis starts with operational activities and ends with services. An operational activity that Costco encounters is, when material arrives to Costco, it needs to be launched it into the market, these activities include packing, assembling, and testing. After operational activities is distribution. Costco has distribution centers to help reduce delivery costs, they have also added packaging changes to help put more products on the trucks and send less trucks out. The next stage is marketing and sales. In this stage Costco can promote its quality value at a low price to its customers. Marketing examples include advertising, promotion actives, and building relationships. The last stage in the value chain is services. Costco needs to offer high-level services to develop a good customer loyalty and keep them renewing their membership. Some services offered by Costco are listening to buyers’ inquiries and complaints on items and customer service.

Costco has many strengths, one strength is the high volume of inventory turnover contributing to higher revenues, they have also been able to increase sales in the last several years by 6%-10% which are all higher than their goal of increasing 5% annually. Another strength is the number of website sales in the US, Canada, Mexico, the UK and Korea, this also brings in large amounts of income for Costco.

I think a big weakness for Costco is its membership-only warehouse style, this limits the number of customers that will freely shop there. Another weakness is they do not keep their store stocked with as many items as the supermarkets they are competing with, this could lessen their chances of members purchasing items. In my opinion one of Costco’s competitive advantages is its customer loyalty, however I am not sure if it is sustainable. Members pay a yearly fee to shop at Costco, they keep shopping with Costco either because they need to get their money’s worth of savings from buying the membership fee or because they know if they get the membership maybe they will do better next year on their savings.

The threats of new entrants is weak because it seems pretty much impossible for a North American warehouse club store to be able to compete with the existing, and very much thriving industry members that already exist. The three wholesale stores are not only flushing in the United States, but also internationally. New entrants would also have to market themselves and spend high on advertisements to take customers away from the already existing industry members. The Bargaining power of suppliers is weak because items being supplied are commodities that are available from many suppliers, therefore, if a particular manufacturer does not sell to wholesale clubs at a low price they can choose to purchase from another price competitive source. For example, all of Costco stock did not come from a single manufacturer. Threats of substitutes are strong because there are similar products at supermarkets that have comparable prices to wholesale stores. The range of selection at substitutes retailers is also greater and more convenient than wholesale stores. Customers may also think that the yearly price of a membership is not worth shopping at the wholesale stores and choose to shop elsewhere, losing potential customers to these stores. Bargaining power of buyers is weak because not one single member accounts for a large fraction of the wholesale’s store total sales. They also do not have any bargaining power over sale prices. Members may choose to drop their membership; however this will not affect the company and the bargaining power members have. The three competitors, Costco, Sam’s Club, and BJs are all trying to attract more members with their merchandise and customer service than each other, hence their competitive rivalry being strong. They are all know for their low-price products that keep members renewing membership every year. There is not much differentiation in the products sold from store to store, so members loyalty to one club may not be strong.

Opportunities for Costco is to focus on attracting younger customers to their stores. They could do this by having a pickup site for online grocery shopping, as well as younger clothes and items that are found at supermarkets. Costco is already internationally stable; however, they could continue to expand into new counties and continue to grow. Threats for Costco are the competition from their rivals, Sam’s Club and BJs. Large retailers like Walmart, are also a threat for Costco because they have low prices with the convenience and comfort for customers without having to pay for a membership fee.

Net sales has continued to increase from 2000 to 2015, from $31,621,000 to $113,666,000, with a growth rate of 3.36%. Total revenue has also increased from 32,164,000 to 116,199,000 in 2000 to 2015. Total return on assets in 2015 is 7.11%, net profit margin is 3.19%, and gross profit margin is 11.09%. These ratios all show that Costco is continuing to grow, however do seem to be slowing down from 2000. I think if Costco can continue to grow into other countries and manage their capital expenditure well they can continue to improve their financial performance.

As mentioned in the case study, Costco achieves its mission by following 4 codes of ethics; obey the law, take care of members, take care of employees, and respect suppliers and shareholders. Our text says that many companies have set four to eight core values on how they expect their mission to be displayed (The Costco Story, n.d.). In January 2019, Costco reported net sales of $10.71 billion, which was an 8% increase from the $9.92 billion in the previous year. “Costco currently operated 768 warehouses, including 533 in the United States and Puerto Rico, 100 in Canada, 30 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, 2 in Spain and once in Iceland and France”. Since the case date Costco has opened 70 mores stores worldwide, this is proof of how rapidly they are expanding (Costco Wholesale, 2019). Costco’s strategy includes: attracting customers, competing against rivals, responding to economic changes and more. Costco attracts customers by having low quality prices, it also competes with its customers by stocking on average 3,800 national brands and private label products. Costco responds to economic changes by keeping its brand strong no matter what country it is in (Meyersohn, 2018). Costco has a great marketing strategy by not only advertising themselves, but also their customers post on social media about the great deals they got and the free samples they get to try (Clifford, 2019).

My personal experience with Costco has always been good, I enjoy looking through all unusual items, sampling food, and buying things in bulk at a cheap price. I am not the only customer that enjoys this store however, one customer told Costco she made it her mission to visit a Costco store every time she goes out of town to see if they are the same everywhere, which they have proven themselves to be.

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