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Wednesday, April 13, 2011

Costco case study and strategic analysis


Costco Wholesale Corporation (Costco), one among the few largest wholesaler giant differentiates itself applying unique strategies relating to production and operations, and marketing which make it stand out from the rest of the retailers who are also said to be competitive in the retailing and wholesaling business globally. Costco is one of the innovative wholesalers teamed by very dynamic management team and dedicated, motivated and satisfied workforce with the mission “to continually provide its members the best quality products at the lowest possible prices” (Costco Annual Report 2006). Some of the fundamental principle of the Costco is that they obey the law, they take care of their members, they take care of their employees, they respect their suppliers, and finally they reward their shareholders.
Some of the reasons how Costco can serve those highest quality goods of national brands for the lowest possible prices is that they eliminate different cost associated with delivery expenditures, account receivable, inventory, sales people, and fancy buildings. And they successfully operate themselves in the competitive environment serving not only an individual customers but also a legal customers (a company), and small business customers.
Costco believe that society and the community is one of the key factors of their success. Therefore, they are willing to give back to their community and the society in terms of quality goods in lowest possible prices. Not only this but also, Costco encouraged its employees to actively participate in the social welfare program by volunteering in every possible occasions in the locality wherever they are located.





SWOT Analysis
Strength
Weakness
·         Low product and services
·         Internal (Home grown) top management team in majority
·         Employee’s turnover within a year of recruitment is just six percent
·         Unique ability to keep overhead cost low resulting in low prices of goods and services
·         Loyal and affluent customer base
·         High inventory turnover comparing to its competitors
·         Consistent return on sales and return on assets
·         Incredible return policy
·         Comparatively less attractive store layout for luxury items
·         Weak advertisement base leading to the inability of reaching full range of membership base.
·         Declining or inconsistent profit margins 
·         Not widely scattered around the world than its competitors
·         Location is not attractive in terms of real-estate
·         No self-checkout
·         Primary focus on business customers rather than individual customers

Opportunities
Threat
·         Costco’s operations is mainly targeted in countries where there is high GDP and high disposable income of the consumers (Canada, U.S.A and Japan) with low inflation rate in the countries
·         Serves the democratic countries with political and governmental stability
·         Rapid growth in membership
·         Possibility of international expansion
·         Advantage of economic downturn
·         Increasing brand awareness
·         Positive image in terms of employees pay and social responsibility

·         Costco cannot attract people who are below poverty line due to its membership fees and bulk purchase
·         Not well diversified in terms of geography (presence)
·         High competition from Sam’s Club and BJ
·         Highly dependent on United States and Canadian market.
·         Largely dependent on vendors for  timely supply of  quality merchandise at reasonable price
·         High market expectation in terms of price, quality and financial performance


In the core of their strategy, Costco sells limited numbers of products in fewer varieties to keep the cost down and they rely on high volume sales. But unlike their competitors they pay well to their employees. One of the key uniqueness and strength is that they sell membership to their customers that not only generate the fixed revenue every year but also increase the brand loyalty and awareness of the customers towards Costco.  They advertise very less thereby reducing the cost by two percent each year.
One of the crucial factors of Costco is their pricing strategy. They have unique way or mechanism that helps them keep the price lower than that of competitors and they can still afford to pay 48 percent higher salaries to their employees than their major competitors mainly Wal-Mart. Their membership base is growing and they are able to retain their customers. Virtually, they do everything to retain their customers. Most importantly they have very incredible return policies in hand to attract and retain customers. Furthermore, they try to find the best value pack for almost every product they sell in their location (store). For example, they have thousand packet box of Splenda (sugar free sweetener). They generally engage in bigger packages because they believe that bigger package provides better value and cost savings to their customers.
Costco applies several other strategies to achieve corporate wide price leadership strategies. For example, to achieve the price leadership they reduce handling and storage cost,  they maintain in-stock positions without being overstocked and transition seasonal merchandise,  they utilize just-in-time principles when ordering merchandise to minimize the cost of inventory, keep best value pack product to assure low prices through volume buying, expense reduction and low gross margins etc. in addition to this, Costco  doesn’t spent a lot in advertising and use word of mouth advertising for marketing which is not only one of the cheapest way to advertise but it is one of the most effective ways of advertisement.
Costco’s mission statement is to focus on bringing high quality goods and services to the market at the lowest possible prices every day, but to do it with integrity at every level of the company while valuing the interests of the stakeholders (Annual Report 2006). The mission statement of the Costco is well understood throughout the organization by the management and employees. Costco offers their customers with low prices on selected private and a limited selection of nationally branded products in a wide range of merchandise categories. Businesses and families can rely on Costco to offer high quality goods and services at everyday low prices. Rapid inventory turnover, high sales volume per warehouse, leveraging an efficient operating structure, reduced handling of merchandise, and making themselves the low cost operator in retail are all key elements that make the company so successful (Annual Report 2006)

Fig: Showing strategic group map of the Costco along with its rivals.
In this strategic group map, there are four whole sales companies; Costco, Wal-Mart, BJ’s and Target that are chosen to be evaluated based on their sales revenue and market capitalizations. The circle represents the sales revenue.
This group map shows that Costco Wholesale Corporation has strong competition in the market. Based on market capitalizations and revenue, Wal-Mart is the leader of the discount variety store industry in the US. However, Costco has second highest position based on sales revenue in wholesale store industry of the US market. The market capitalization of Costco Wholesale Corporation is 26.06 billion (Market watch, 2010).Costco’s sales revenue in 2009 was 71.42 billion, which is a decrease of 1.46% in comparison to 2008 sales (market watch, 2010). The trend of the market share price is increasing in the last few months because of the slow economic recovery. As per April 28, 2010 at 1:06 am, Costco Wholesale Corporation (COST) market price is $59.45. In the competitive discount variety store industry, Wal-Mart is the top Wholesale Company based on the revenue as well as Market capitalization. It has $202.71 billion of market capitalization and sales revenue of $408.21 billion in 2009 (market watch, 2010). In 2009 Sales was increased by 1.7%. The stock share price was $54 per share as of April 28, 2010. At the same time, Target Corporation is the second highest company in the industry based on market capitalization. Target Corporation has $41.90 billion of market capitalization and $65.36 billion of sales revenue in 2009. The sales revenue of Target was increased by 0.6% compared to previous year (market watch, 2010). The share price was $56.25 per share as of April 28, 2010. BJs Wholesale club Corporation has the last position in the industry compared to its competitors as per its sales revenue and market capitalization. The market capitalization of BJs Wholesale Club Corporation is 2.05 billion and sales revenue of $10.19 billion (market watch, 2010). The sales revenue of the BJs wholesale corporation was increased by 2.1%. The share price was $38.26 per share as per April 28, 2010.
The discount variety store industry one of the mature industry of the US market; some of the company in the industry has international expansion of their business also. Analysis of the completion using strategic group map shows that Costco has numerous well know competitors in the market. Most of them have wider presence of their business with better brand image.
Costco’s Business Model, strategies and core competencies:
Costco is trying to generate huge sales volume and quick inventory turnover by applying a business model that offers limited selections of nationally branded product in a wide range of merchandise categories. Costco apply number of operating excellence or mechanism such as efficient way of managing inventory and Just in time inventory, efficient distribution, minimum merchandise handling, and volume purchasing to reduce the price of its product. One of the major benefits of high sales volume and rapid inventory turnover is that they can sell their inventory and receive cash which can be used to pay its vendors and take the advantage of early-payment discounts. And because Costco is able to sell its product before they have to pay their suppliers or manufacturer for its merchandise, it enables them to finance their inventory from their working capital. Furthermore, among those 4000 merchandise that Costco keeps in its location, it has distinctive segment which they called “treasure-hunt merchandise” where they keep 1000 products which keeps changing quickly. The main idea behind this is that it helps lure customers by offering irresistible deals on those 1000 products which will quickly vanish from the store. Another key strategic competency of Costco is that they do not obtain its luxury offerings from the high end manufacturers rather they look for the opportunities to find such luxury products legally on the gray markets from the retailers who want to get rid of their inventory. 
Generally speaking Costco strategy to increase sales and profits largely depends on some of the key strategic components such as increase the number of new warehouse, build larger and loyal customers base and finally implement such a merchandising technique to motivate and attract members to shop at Costco more often and induce volume purchase per shopping trip. To achieve these strategic objectives, Costco frequently used business and household merchandise at money-saving prices. Beside this, Costco provides opportunities to purchase ever changing array of big merchandise at lowest possible prices. And finally they try to encourage their members to regularly visit Costco so as to not miss out on the those special best value  products offering selections that would otherwise will sold out in a matter of days.
To achieve the operational excellence, Costco uniquely handles its Merchandise by storing on racks above the sales floor and displayed a portable platform for storing or moving goods containing large quantity of each category of merchandise. By doing so, Costco reduces its labor requirement for merchandise handling and stocking. Another crucial way of Costco’s merchandise handling that helps in reducing the cost associated with the merchandise handling is when merchandise arrives at the warehouse; it goes directly to the sales floor of the store. By doing so Costco eliminates merchandise receiving cost by eliminating multiple steps handling of merchandise. Beside this, another benefit of Costco merchandising is that not a single manufacturer supplies a huge percentage of the merchandise that Costco stocked. Therefore, Costco is not experiencing any kind of problems in obtaining necessary quantities of merchandise from its vendors. If one of the supplier or manufacturer is unable to supply the sufficient merchandise then Costco could switch its purchase to alternative manufacturer without disruption in the day to day business. Not only this but also to achieve the excellent store operations, considerable level of authority is delegated to the warehouse managers who are responsible for bringing the new ideas about the items or product that would possibly be sell in their stores. Furthermore, store managers at Costco is responsible for experimenting with what products or merchandise to stock and what in-store merchandising techniques to employee.  These are the actions within the Costco that helps organization to successfully execute its strategy in each location.
Strategic Weakness in Comparison with Competitors:
One of the major strategic draw backs of the Costco is that they just have 4,000 selections of merchandise. Generally, other supermarkets such as Wal-Mart stocked about 40,000 to 150,000 items for shoppers to choose from and BJ’s have 7,300 items. Another major problem of Costco strategy is they spend very less in the advertisement and solely rely on the reputation and word of mouth advertisement. But the major competitors of the Costco that is Sam’s Club spent about dollar 50 million annually on advertising and direct mail promotions. It may affect Costco’s future performance and competitors such as Sam’s Club may take away its market share due to the lack of promotional activities.  Beside this, Costco gives more priority to the business consumer but on the other hand Sam’s club is adding new lines of merchandise with additional emphasis on products such TVs, furniture and other electronics products. Beside this, while comparing with that of Sam’s Club and BJ’s membership fee of the Costco is relatively expensive. Not only this but also, Sam’s Club is announcing different promotional program to increase its membership base such as announcing and offering the college student membership of dollar 40 and receive a dollar 15 worth of gift card to offset the cost of their first purchase.
In comparison with BJ,s Costco doesn’t have self-checkout lanes, but BJ’ s have well managed self checkout lanes and BJ’s also have low cost video based sales aids to make shopping more efficient for members. There is the tough competition especially in between Costco and Sam’s Club. In some areas Sam’s Club is outperforming the Costco because it added some additional department with the store such as pharmacies and optical shops. Beside this, Sam's Club has the advantage of opening many other stores in areas where it already exist in the market.
In conclusion, Costco is applying different cost related strategy such as penetration pricing, and below the line promotion and they have also employed diversion buying strategy which they themselves termed as treasure hunt shopping experience. Mainly, Costco targets independent small business with annual income of $100,000 or more. Some major features of the Costco are that they sell high end quality product in relatively low prices, and it is convenience and reliable. One of the key to their ability to lower the price is that their product or goods is usually bulk-packaged and Costco does not carry multiple brands or varieties that helps in resulting high volume of sales from single vender, that gives the edge to decrease the price and reduce the price. If we analyses the Costco from the five forces model of competitive analysis it seems like there is high barriers to entry therefore we can say that there is low threats of entrants. Furthermore, there is low power of supplier and because Costco is dealing with several suppliers and if one or some of the suppliers are unable to provide timely merchandise then Costco can get same merchandise from the any other venders that’s minimize the vendors dependency in the business affair but, there is high bargaining power of the buyers because of the intense competition among number of similar business mainly BJ’s and Sam’s Club. Beside this, there is high competition because all the rivals including Costco are trying to reduce the price that ultimately lowering the overall profitability of the businesses.
Some of the major problems of the Costco is that they have very few product choice (4000) comparing to the competitors that can be a future challenges for the Costco because customer wants choice. Beside this, there are not lots of category or variety of the one particular kind of product and Costco just keeps what they called best value packet which may not be appropriate for individual or house hold customers. In addition to this, now a day’s economy is doing poorly, and customers are looking for relatively less expensive products, Costco will do even better if it considers those low ends customers and individual households’ customers. Because those customers who are said to be well off last year may not be same this year and they may need help in terms of saving money whenever they go for shopping.
Costco has some other operational level problems that in some extent hinder the overall companywide effectiveness and goals achievement. For example, they don’t accept all kinds of credit cards from the customers, though it is done to minimize the cost of overall operation. But the key fact is that, customers are rather willing to pay few more cents but they want convenience when they go for shopping. Beside this, Costco is unable to stand their employees to make the shopping process easier to its customers. There are so many employees around the counter or check out area but not a whole lot in shopping floor that makes the customers feel awkward, helpless and uncomfortable. Costco should also focus on the advertisement because number of its rivals is already doing intense advertisement. Today, global business players of the world are investing heavily on the marketing. It is true that company like Costco are doing good in economic downturn but competitors like Sam’s Club is outperforming Costco in pricing which could be biggest threats to the Costco though Costco keeps relatively branded and qualitative product than that of Sam’s Club. Furthermore, Costco now is widely depends upon the U.S. and Canadian market therefore, it will be better if Costco further diversified itself into international market that gives competitive edge and financial security to the company minimizing the risk of partial economic downturn.
Finally, this is the time of structural change. If we see and analyze the economic situation then we can say that entire global economy is looking for the structural change in terms of how it does business. Therefore, just opening door for only members means closing doors for all those who even cannot afford to pay or not willing to pay the one time membership fee per year. But they are still the prospective customers of the Costco. Today, only those businesses will do better which serves all no matter what corner of the Pyramid the customer occupies.











Reference:
Thompson, A.A., Strickland, A.J. & J.E. Gamble (2010) Crafting and Executing Strategy: The Quest for Competitive Advantage 17th edition. New York, McGraw-Hill Irwin
Bick, J (2007, January 28). 24 Rolls of Toilet Paper, a Tub of Salsa and a Plasma TV.  
 The New York Times, p. 5. 
Costco Wholesale. (2006). Annual Report 2006. Retrieved March 21, 2010, from the Costco
 Wholesale Web site: http://media.corporateir.net/media_files/irol/83/8383  
 0/reports/70072002.pdf 
Harris, Craig. (2007, March 9). Costco Hourly Workers to Get a Raise; Lowest Wage  
Will Be $10.50 an Hour; Top Scale To Hit $20. Seattle Post – Intelligencer, p. 
E1.Retrieved March 22, 2010, from ProQuest database 
Market Watch. (2010a). BJs Wholesales Club Incorporation: Profile. Retrieved April 28, 2010
from http://www.marketwatch.com/investing/stock/BJ/profile 
Market Watch. (2010b). Costco Wholesale Corporation: Profile. Retrieved April 28, 2010 from
 http://www.marketwatch.com/investing/stock/COST/profile 
Market Watch. (2010c). Target Corporation: Profile Retrieved April 28, 2010 from
 http://www.marketwatch.com/investing/stock/TGT/profile 
Market Watch. (2010d). Wal-Mart Stores Corporation: Profile Retrieved April 28, 2010 from http://www.marketwatch.com/investing/stock/WMT/profile 











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