Case Analysis of Costco

Costco Wholesale is a discount retailer situated in the United States. It was established in 1976 by the discount merchandising sage sole price. Second to Walmart, the company has risen to become one of the largest retailers in the world despite the challenges faced by them. The management skills of Costco Wholesale CEO and cofounder, Jim sinegal have led to the company’s expansion from 1983 to being one of the best in retailers in the world (Thompson, Jr., 2016). Jim possessed a good experience and skills in retail management after he worked as a matrass loader at Fed-Mart while studying at the San diego Community College at the age of 18. Through his leadership, the company grew from strength to strength. He borrowed from Sol Price’s attention to detail and management skills – minimizing costs, constantly improving operations, stocking fast-moving products, and offering low prices.

One of the key issues affecting Costco is low margins due to the ultra-low pricing strategy of the company. To maintain the low pricing strategy, the company faces the pressure of keeping operating costs low. Another issue affecting the company is competition from big discount retailers such as Sam’s Club and BJ’s Wholesale Club (Thompson, Jr., 2016). The two companies operate similar business model with Costco and competed in terms of price, quality, location, and customer service. Lastly, the company’s growth strategy offers a new challenge of managing large-scale operations efficiently to provide quality products and services while offering low prices to achieve competitive advantage; but still continue making profits.

Company Mission

Costco’s mission is to offer quality products and services at the lowest possible prices accompanied with effective customer service; while observing strict ethical codes (Thompson, Jr., 2016). This mission is implemented through an effective business model involving membership price club whereby members are offered discount on products after paying membership fees.

The company sells a small range of retail merchandise – approximately 3,700 items compared to traditional merchandisers such as Walmart which stock from 40,000 to 150,000 items (Thompson, Jr., 2016). The products ranged from chicken, seafoods, cereals, coffee, dairy products, paper products, groceries, vacuum cleaners, musical products, DVDs, cookware, toiletries, washers and driers, and other retail products. The company sells products in five major merchandise categories: food, sundries, hardlines, softlines and ancillaries (Thompson, Jr., 2016). Majority of these products target low-end consumers who would like to save through discounts and low pricing. For instance, many customers prefer to buy pharmaceutical products from the company because they are cheap. Approximately 20-25% of the items were constantly changing, including high-end HDTVs, jewellery, diamond rings, watches, espresso machines, etc. Affluent or high-income consumers and members rush to buy these items in large quantities because they know they might not get them the next time they return for shopping.

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Internal/External Analysis

Strengths

• Strong Financial performance: the company recorded a high revenue of $113,666 million in 2015 and a favorable current ratio of 1.045 which means that the company can meet its financial obligations as they fall due (Thompson, Jr., 2016).
• Brand loyalty and market share: the company has a large market share, becoming the second largest retailer in the world.
• Huge customer base: the price club membership model, and high product and service quality has attracted a large number of customers, leading to increased sales.
• Leadership and management capabilities: The leadership of its two CEOs has been exceptional – they simply mastered the art of managing merchandise, leading to high inventory turnover and efficient operations.

Weaknesses

• Low pricing: the company offers low prices, which is reflected in small profit margins as shown in appendix 1.
• Small product range: unlike traditional retailers, Costco offers a few products on the shelf, so customers might choose other firms where they can get everything they need.
• High compensation levels: Employees are paid high salaries and wages, with a lot of benefits which raise the company’s labor costs and reduce profits.

Opportunities

• Health-conscious consumers: The Company sells food products to a market that is increasingly becoming conscious about their health, so they demand health food and stick to reputable companies like Costco which they trust.
• Technological Advancement: New technologies such as social media marketing and online stores can be used to increase customers and sales.
• Increasing demand for consumer goods: Consumer goods are becoming highly demanded in emerging markets, where middle class societies are emerging.

Threats

• Competitive Rivalry: companies such as Sam’s Club and BJ’s Wholesale club have come up with strategies to compete against Costco. The company also faces competition from traditional retailers such as Walmart.
• Poor economic conditions: macro and micro economic situations may affect the company’s sustainable growth, especially because it pays a lot of money to employees and charge low prices.

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Strategic Implications

The above international and external issues affecting Costco have specific strategic implication on the company. First, the strong financial performance of the company is an important for organic and global growth strategies in the company. Costco is engaging in global growth by establishing new stores in foreign markets such as Canada, Mexico and South Korea (Thompson, Jr., 2016). With the increasing revenue and net income, the company may establish new stores in developing markets of Asia and Africa to take advantage of new market opportunities. Furrer (2016) suggests that internationalization opens up new frontier for the access of new customers; thus promoting market development and increased market share.

The major problem with the strategic approach of the company is how to deal with competition in a weakening market economy. Although the U.S. market is still strong, sustainable growth in the long term may be affected by economic swings and increased competitive rivalry. The company’s low-pricing strategy may cause challenges in hard economic times. The margins are already low, and further economic strains and increased competition may plunge the company into losses. Therefore, the new challenge for the company is to establish an effective business level strategy that will enhance effective operations and competitive advantage. The integrated low-cost/differentiation strategy can help the company deal with the increasing competition and changing market conditions. According to Porter (1983), integrating low-cost and differentiation strategies helps a company to adapt to environmental changes. The company also needs to develop new skills and utilize its key competences to innovate and differentiate its products and services at a low cost in order to achieve competitive advantage.

Goals and Long-Term Objectives

One of the goals of Costco should be to increase profit margins. The company is currently earning a lot of revenue, but due to the low-pricing strategy, the margins are low. This goal should be accompanied with specific objectives such as: lowering costs and targeting the high-end segment of the market where profit margins are high. Another long term objective of the company is to increase customer base and market share through the existing and new markets. Higher number of customers will increase revenue; hence raising the margins.

The company should also focus on increasing its competitive advantage to remain profitable even during hard economic times. This goal can be achieved by targeting to increase customer satisfaction, customer loyalty and retention in the long term (Finlay, 2000). Another long term objective that will guarantee competitive advantage is to improve innovation and operational efficiency in the workplace.

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Strategy Selection

The corporate level strategies are the types of businesses that the firm needs to implement to improve its competitiveness. Such strategies include: diversification, stability and growth strategies (Porter, 1983). Costco currently pursues a growth strategy involving opening up new warehouses, especially in the domestic market. However, to remain competitive the company should pursue a global growth or internationalization growth strategy to take advantage of new emerging markets of Africa, Asia and the Middle East. Competing in the international markets offers an organization the opportunity to gain cost advantages (Furrer, 2016). The company may gain economies of scale by entering new international markets; hence lowering production costs and increasing the margins which are currently at a low. This is also a market development approach which involves taking existing products to a new market (Hannagan, 2002); preferably by entering a new retail chain to meet the needs of the local market.
The appropriate business level strategy is integrated low-cost and differentiated strategy which ensures that the company can adapt to changes in the business environment (Furrer, 2016). The company may should use innovative ways to differentiate its products and create value for customers through product features and price. The company must be careful to consistently minimize costs while adding differentiated products to the existing and new domestic and global markets.

The company should also implement an effective functional strategy to back up the corporate and business level strategies. Costco has to implement two functional strategies: organizational and marketing strategies. There is need to streamline the organizational structure and compensation system with the integrated low-cost/differentiation approach by restructuring the compensation system and choosing an appropriate structure that will promote low costs and differentiation requirements. For example, the company may develop a functional organizational structure in which each department runs specific operation towards the achievement of the organization’s goals. This approach is helpful because it enables managers to concentrate in key competences within their functional area to enhance operational efficiency; hence achieving low cost while at the same time improving product quality (Hannagan, 2002). The problem of communication may be solved using interdepartmental teams that work on common objectives. The compensation structure should also be restructured by increasing motivation through non-monetary benefits and lowering salaries and wages to cut costs for the company without lowering the employees’ morale.

Recommendations/Implementations

Costco now faces a new challenge of expanding to a new market using an integrated low/cost differentiation and organizational structure. The best option of entering international market is to establish company-owned stores in the host markets and establish new retail chain that will meet the needs of the domestic market. Self-entry strategy is important for Costco because the company has the financial resources to enter the market through this costly strategy. Furthermore, self-entry strategy enables the business to maintain its culture of discount retailing and low-cost pricing. However, the company should hire local employees who understand the culture and language of the host market; hence offering differentiated and effective customer service to win and retain customers (Werbach, 2009).

The company should also buy products from local suppliers to meet the needs of the local market, and ensure that the local suppliers offer quality products at the lowest cost so that the pricing continues to be competitive; but the level of differentiation increases (Werbach, 2009). The company may choose Kenya as its destination and entry point to Africa, and China and Malaysia as the preferred destinations in Asia because these markets have a big potential for growth. The different functional departments must also work together across different markets to enhance operational efficiency and improve product differentiation.

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References

Thompson, Jr., A.A. (2016). Costco Wholesale in 2016: Mission, Business Model, and Strategy. Alabama: University of Alabama.
Finlay, P.N. (2000). Strategic management: An introduction to business and corporate level strategy. Facilitator’s guide. Harlow: Financial Times/Prentice Hall.
Furrer, O. (2016). Corporate level strategy: Theory and applications. London: Routledge.
Hannagan, T. (2002). Mastering strategic management. New York, NY: New York.
Porter, M.E. (1983). Cases in competitive strategy. New York: Free Press.
Werbach, A. (2009). Strategy for sustainability: A business manifesto. Boston, Mass: Harvard Business Press.

Appendices

Appendix 1: Financial Performance of Costco