Costco Wholesale Report

Executive Summary

Costco is making steady financial progress year by year. The firm is in a good position socially and financially. Their stock value and net profit have been increasing. These financial accomplishments have been achieved through their membership programs.

Costco offer a large variety of high quality products at a low cost. They don’t sell various sizes and this keeps the business model simple and structured. They keep their costs of productions low by having a strict set of rules and regulations. In addition, their employees are treated very fairly and this motivates them to stay loyal and perform at their best for the company.

Costco should increase their presence globally especially in countries that have resources and capabilities that can be of benefit to the company. Costco is not doing well on advertising and promoting. They should engage more in promoting their company and the benefits of shopping there. One of the ways that they could advertise to a larger scale market would be to increase their social media presence. This would help to promote their company and attract people to become members.

Costco are a member only wholesaler. This means that only paying members have authorization to shop in their stores. Through the use of their membership programs they are able to offer many wholesale discounts to their members. They are particularly appealing to customers who prefer to buy in bulk as this is what they specialize in.

Background

Costco is a membership warehouse and wholesale merchandiser. It is one of the world’s largest and most successful consumer goods merchandisers. It is the third largest in the United States and seventh globally. It has been growing rapidly; from 2012 to 2015 it gained $27 in revenue and 88 membership warehouses. At the beginning of 2016, Costco was ranked as the second largest retailer in the world.

The membership warehouse concept was started in 1976 by Sol Price with a store called Price Club. Jim Sinegal gained experience by working for Sol Price and Price Club, and after leaving, he decided to start his own business by using the concepts and techniques he had learned. He started Costco with Jeffrey H. Brotman in Seattle, Washington in 1983 (this was the same year Walmart started Sam’s Club). Costco had a good start, opening 9 stores in 5 different states with 200,000 members within the first year of its existence. In January, 2016 they had 488 membership warehouses in the United States and Puerto Rico, 90 in Canada, 36 in Mexico, 27 in the United Kingdom, 24 in Japan, 12 in South Korea, 11 in Taiwan, 8 in Australia, and 2 in Spain.

The Environment – PESTEL Analysis

Political Analysis

The political environment a company is in can have a big impact on it. Costco is an American owned company headquartered in Issaquah, Washington. Though they operate globally, they have government stability in their home market which allows them to focus solely on executing their business strategies. However, political issues in the countries they are located in affect the way the company operates and if it will be successful.

Economic Analysis

Since Costco is based in the United States, the main economic environment they face is mostly stable. The world has recently been through a recession which created difficult times for companies that operate globally. However, the world economy has improved and the recession is over. This has given consumers more confidence, and they are now ready to spend more. This change in the economy has been beneficial for larger businesses. In 2015, the world economy generated more than $20 trillion and by 2020 it is projected to grow past $28 trillion. The labor market is also improving, with wages increasing.

Social Analysis

Costco is driven by increasing globalization and how it connects with different cultures, changing lifestyles of customers, and changes in customer preferences of costs and quality. They must be able to adapt the types of products that they are merchandising based on changes within society. Socio-cultural factors have a major impact on Costco’s business and their profitability as a whole.

Technological Analysis

The increase in the quality of today’s technology has enabled members of Costco to shop for many in-store products online and to provide members with a means of obtaining a much wider variety of value-priced products and services that were not practical to stock at the company’s warehouses. In 2015 online sales made up $3.4 billion in total sales, and from 2012 to 2015, online sales made up around 3 percent of total merchandise sales.

Environmental Analysis

With the increase in environment awareness, sustainability and environmental factors have become a focus in 21st century business. Costco’s management team have undertaken objectives to invest in environmental and energy saving systems. Their stated goal is to make sure the company’s carbon footprint grows at a slower rate than the company’s sales growth.

Legal Analysis

Tariff and importing/exporting laws affect Costco because the company operates globally. Labor laws and laws affecting consumers have increased so this has affected all businesses. Ethical standards and compliance laws have become more important in today’s society. Costco has maintained a positive image (especially compared to its biggest competitor – Walmart) and needs to make sure it maintains that image.

The Industry – Porter’s Five Force Analysis

Bargaining Power of Suppliers

The bargaining power of Costco’s suppliers is weak. There are many suppliers available, and no manufacturers supply a large amount of the merchandise that Costco stocks. Furthermore, Costco does not face difficulty in obtaining enough quantities of merchandise. If there was difficulty obtaining merchandise, Costco believes that it can switch to alternative suppliers since there are many to choose from. Costco’s suppliers do not have much control on the distribution and sale of their products to Costco because they have low forward integration.

Threat of New Entrant

The threat of new entrants is low. There is a moderate cost of entry when entering the industry. Furthermore, considering Costco is one of the largest and most successful merchandising companies in the world, it would be difficult for a new entrant to compete against the established brand. Costco already has brand recognition and a good customer base. This leads to strong network effects.

Rivalry Among Existing Competitors

The rivalry among existing competitors that Costco faces is high. There are only three, but very significant competitors that are in the wholesale industry. They are Costco Wholesale, Sam’s Club, and BJ’s Wholesale. Walmart is the largest merchandiser in the world, and since Sam’s Club is a part of that brand, it is Costco’s biggest competitor. There are around 652 Sam’s Clubs locations in the United States, and there are an estimated 150 locations in other countries. BJ’s Wholesale Club has an estimated 210 locations in 15 states, 85 percent of which are located within 10 miles or less of at least one Costco or Sam’s Club warehouse. In addition, buyers face a low switching cost between the competitors in the wholesale industry.

Bargaining Power of Buyers

The bargaining power of buyers is strong. This is because their switching costs are low; they are also well-informed about the product’s quality and cost due to technology and communication. Buyers also have the ability to postpone purchases. If individual buyers need a certain product, they do not have to buy in bulk, they can shop at a store such as Walmart or Kroger to obtain it.

Threat of Substitutes

The threat of substitutes is strong. Some substitutes available include: Walmart, Kroger, Target, Dollar General, supermarkets, general merchandise chains, specialty chains, gasoline stations, and Internet retailers such as Amazon. These substitute products can satisfy customer expectations. Also, some of these substitutes offer quality equal to or above Costco’s product quality. Other substitutes offer cheaper products than Costco.

The Firm

Mission and Vision

Costco’s vision is to bring the “highest quality goods and services to the market at the lowest possible prices while providing excellent customer service and adhering to a strict code of ethics that includes taking care of [their] employees and members, respecting [their] suppliers, rewarding [their] shareholders, and seeking to be responsible corporate citizens and environmental stewards in [their] operations around the world.”

Costco is in the warehouse merchandising industry. They satisfy needs of those who need to buy in bulk such as other businesses, vending machine owners, and people wanting more for their money. They satisfy those needs by providing a high quality and large amount at a low cost.

Financial Condition

Overall, Costco is in a strong financial position. Over the past 5 years, Costco’s stock price has been on the rise, increasing from $77.67 in November of 2012 to $145.88 in November of 2017. It reached of $166.44 in February of 2017. Net sales increased from over $31 billion in 2000 to over $113 billion. However, since 2013, sales have been increasing at a decreasing rate. Net income has also increased since 2000 – from $631 million to over $2 billion.

Management Philosophy

Managers function as business owners running their own operations. They have many responsibilities including: coming up with new ideas, merchandising techniques, in-store product locations and displays. This is so that they can make sure sales are at their maximum and that there is a quick turnover. The most successful managers at Costco thrived on high pressure and crisis solving.

How Decisions are Made

In individual stores, managers are given the responsibility of making strategic decisions. At the corporate level, company officers make the decisions that affect the smaller branches of the corporation.

The Product

The Goods and Services Costco Offers

Costco offers 3,700 active items and 85 percent are quality, name-brand products. They offer a wide variety of grocery goods sold in bulk. They also sell home goods, clothing, sporting goods, technology products, entertainment products, pharmaceuticals, outdoor products, gasoline, automobiles, etc.They also offer automobile services.

What Consumer Needs Do Costco’s Products Solve?

Costco is able to satisfy the needs of customers who are looking for a higher quality product at a reasonable price, they are able to satisfy the needs of buyers looking for products in bulk, and they are able to satisfy the needs of customers looking for a very large variety of products offered from a wholesaler.

Costco’s Promotional Mix, Channels of Distribution, and Pricing Strategies

Costco uses wholesale discounts as a form of promotions to bring in customers to its stores. Members are guaranteed low prices for products. Costco also emails members, as well as sending out “The Costco Connection.” This is a monthly publication that promotes different products available at Costco stores.

Costco has strong public relations. For example, the company has sustainability programs for its supply chain, and gives donations to support programs for children, education, and health and human services. Costco does not advertise like its competitors do and brings is able to bring in customers without using that method.

Distribution is on-site. Most customers come to the store to purchase their products. Some items can be purchased online and on the mobile app and distributed by shipping companies to the customers door.

Costco’s operating costs are kept at a bare minimum in order to keep their low prices on their products. The company is able to eliminate all the extra expenses that are not a necessity by running a very tight operation with extremely low overhead. Costco avoids prime real estate sites for its warehouses so that it can keep land costs low, floor plans are designed for efficiency for selling space, products are stacked on pallets which reduce labor required for handling and stocking, in-store signs are made on laser printers, no shopping bags are bought because purchased products are put directly into shopping carts, and there are short operating hours. All of these strategies reduce costs for both the company and the customers.

Competitive Advantage of Costco’s Marketing Strategy

Costco has a competitive advantage that includes two memberships (Business and Gold Star—Individual). The memberships have different prices paid on a yearly basis. These memberships enable customers to gain value from the benefits they receive. This also keeps their customers loyal. Furthermore, the low-cost production strategy that Costco implements enables them to offer better quality products than their competitors.

SWOT Analysis

Strengths

Costco implements a best-cost provider strategy. This provides customers with high quality goods and very competitive prices. These prices are lower than competitors prices. This is an offensive strategy option. This strategy, in turn, creates customer loyalty. Keeping the costs as low as possible means that Costco has to operate in a very structured.

Costco offers its own generic brand called Kirkland. This increases its brand awareness. In fact, its best-selling product was its own Kirkland Signature Toilet Paper. Costco sold over $400 million worth of this product in 2015. This is a strength of Costcos.

Furthermore, Costco has a wide variety of products and services offered. This means that some products might attract the customers, but when the customers arrive, they see all of the other purchasing options Costco has in store. An example of this is their gas stations. When a customer comes for gas, he or she might be attracted to the warehouse as well. The fact that they offer various products and services at a low cost increases their economies of scope.

Weaknesses

One weakness of Costco is that they have a low profit margin. In 2015 the company has a profit margin of only 20.6%; an ideal profit margin would be above 25%. This is partly because of their low costs, but this low profit margin can also make it harder for Costco to change the prices of products for customers.

Another potential weakness is there first business model. This model is that Costco is membership only store. The membership fee could be considered expensive by some people. People who are not able to afford this membership cannot shop at the store even if they want to. This can make some feel excluded. Furthermore, people who are already paying memberships at other merchandisers probably would not pay extra to shop at Costco as well.

The fact that Costco offers bulk might put people off of shopping there because some people do not need a lot of their products at once. This could cause potential customers to shop at other stores such as Walmart where there is no membership fee.

Since the people already shopping there are willing to pay for the membership, they are aware of the benefits of the types of memberships and what discounts they offer. They are also aware of the high quality and low priced products offered at the warehouses.

Opportunities

A big opportunity for Costco is to expand their operations into more populated nations. Expanding more into Asia could greatly increase their sales because China and India have the first and second largest populations. Combined they make up over 2.6 billion of the world’s population. This is almost of the global population. Since they are already operating abroad, it would be beneficial for Costco to increase these operations to more countries.

Another opportunity for Costco is the increase in social media use. This means it could be beneficial to start advertising on social media. The company could use social media because it is a cheaper way to advertise and it reaches a larger scale. This could attract younger people as well because many of Costco’s customers are older. Furthermore, it could increase brand awareness.

Threats

One threat to Costco is that it is more successful in its home-continent (North America) than it is in the rest of the world. This makes its success in this part of the world more important and a main focus of the company. Even in the United States there are certain areas that are more significant than in the rest of the country. For example, California makes up 32% of Costco’s sales in the United States in the last 12 months. This means that if the demand decreases in California than it will greatly affect the company.

Another threat is that online competition is high. Since Costco is behind other major companies in this area (such as Amazon) it might be harder for them to catch up. Also, the number of online competitors is increasing.

Compared to other retailers, Costco has a small margin of active items available for sale. Some supermarkets stock almost 40,000 items, and Walmart or Target might offer 125,000 to 150,000 items. Costco only offers 3,700 active items. This could make Costco less attractive to some potential consumers and prevent them from having the ability to purchase items that they might want or need.

Costco might want to think about increasing the variety of options available. Since competition is so high online and since they do not make much profit from it, Costco should consider using the money they invest into online stores and investing it into opening more warehouses worldwide and focusing on their stores that are not doing as well as the stores in the state of California.

Problem Statement

Primary Problem

One of the biggest problems with Costco’s business model is their dependence on memberships. This strategy works well as long as its members keep coming back and continue purchasing items in bulk, but there are things that could affect this. Customers could choose to move their memberships to a competitor of Costco. An example of a competitor that a customer might switch to is Sam’s Club. The costs are very similar and the discount/bulk options are the same. The biggest difference is the selection offered. If the range of products is the preference, Costco could lose out. If the quality of product is the preference, Costco wins.

Secondary Problem

The secondary problem with Costco’s business model is the difficulty involved with delivering products in bulk. They fail to compete with major online players such as Amazon when it comes to this aspect. Amazon and other companies are able to transport bulk goods at a discount rate in comparison to Costco. A major consequence of this problem is that customers may look elsewhere when they need to have products delivered to their home.

Long Run Problems

A long run problem that Costco could face is the threat of a company completely beating them out in a certain industry (such as Amazon completely controlling the online segment. In addition, another long run problem could be the continuous loss of profits due to the membership program that Costco enforces.

Short Run Problems

Several short run problems that potentially exist for Costco include: the temporary loss of a customer searching for a simple product and loss of profits. However, Costco has stated that they aren’t concerned with losing customers who are only interested in purchasing certain sizes of products as they view this as an intelligent loss of sales because if they had multiple sizes of products it would make their business model more difficult to manage.

Strategic Plan

Vision, Mission Statement and Core Values

We think that Costco’s vision should be to increase global awareness and recognition of the brand by integrating into more countries and advertising more.

Costco should increase their global presence in the most populated markets in the world over the next five years. Right now these countries are India and China. In addition, they should focus on improving their advertising and marketing strategies. An improvement in these areas would increase brand awareness and recognition, and it would inform potential customers about the benefits of paying for a membership at Costco. This would help erase the negative connotation that is associated with paying to shop at a store.

In five years, Costco is still going to be in the wholesale merchandising business. They are still going to be serving businesses and individuals searching for products to buy in bulk. In the future, this will include people in China and India. The needs of those who need to buy a lot of one type of product at once will be served. In order to satisfy those needs, they will implement more globalization and advertising.

Costco should stick to their Theory Y and William Ouchi’s Theory Z strategy and treat their employees with positivity and as family members. This would make employees more loyal to the company. Furthermore, they should keep their strict production and organizational strategies in order to keep costs low.

SMART Objectives

Costco should increase the number of stores that they have worldwide within the next five years. This would increase the number of customers as well. This objective is specific, measurable, achievable, realistic, and timely.

Implementation Plan

Costco can rent land in China and India to build their stores on. They can advertise in these countries because they are new and the citizens should be informed about the organization. Their advertising should increase on social media because many people use this. Their product offering should differ based on the cultures and what is popular in these countries.

Key Performance Indicators

The key performance indicators Costco should monitor are increase/decrease in sales, number of memberships, and stock value.

Summary

Overall, Costco is making steady financial progress year by year. The firm is in an overall good position socially and financially. Their stock value and net profit have been increasing. These financial accomplishments have been achieved through their membership programs and the discount benefits that come with purchasing them.

Furthermore, Costco offer a large variety of high quality products at a low cost. They don’t sell various sizes and this keeps the business model simple and structured. They keep their costs of productions low by having a strict set of rules and regulations. In addition, their employees are treated very fairly and this motivates them to stay loyal and perform at their best for the company.

As a group, we think that Costco should increase their presence globally especially in countries that have resources and capabilities that can be of benefit to the company. We disagree with Costco’s stance on advertising. We think that they should engage more in promoting their company and the benefits of shopping there. For right now though, Costco is doing very well.

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