Student Name: Amit Bharam  

BA 460 03: Senior Seminar in Business

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Prof.: Allan B. Bernard

Wartburg College

 

 

 

Costco Wholesale in 2016: Mission, Business Model, and Strategy

 

 

 

 

 

 

 

 

 

 

 

 

Executive Summary

Costco Wholesale Corporation is a chain of an American membership warehouse that offers a wide selection of items in large amounts. Costco Wholesale is a multi-billion-dollar international retailer company with warehouse club operations in many different countries. They are the recognized industry leader and well-positioned in the market. Costco is dedicated to quality and low price in every area of their business. They have strong commitment to their business ethics. Despite Costco’s large size and explosive international expansion, they have continued to provide a family atmosphere in which their customers and employees are satisfied. There are three different types of membership to get access to the store and become a member. They are called Business, Gold star, and Executive. All Costco membership customers have complete access to the store and all the discounts it has to offer.

Jim Sinegal, the president and CEO of Costco Wholesale Corporation and Jeff Brotman, Chairman of the Board of directors founded Costco Wholesale Corporation in 1983. The company name was changed from Price/Costco Inc. to Costco Wholesale Corporation. The company was moved to Washington. The membership warehouse idea was from the Price club and now Costco has taken that and now they are one of the largest retail stores in the industry. Costco was the first company ever to grow from zero to $3 billion in sales in less than six years.

Costco is the second largest retailer store in the United States as well as in the world. Currently, they are second leading discount retail industry after Walmart in the world. According to the case analysis, the Costco company has been run profitably and has maintained its competitive advantage of offering lowest prices on their product offerings in the industry. The CEO Jim Sinegal has been the mastermind behind the Costco’s success. He has led company activities from the beginning and has been the main decision maker. Based on the Costco’s history, CEO Jim sinegal is an extremely intelligent individual within the industry. He is well respected in the market and liked leader. The company faced the issue of replacing him when he was 70 years old and likely reaching the end of his career. In addition, the company also faces the issue of gaining more members.

The case is significantly about growth and who is going to take the market share in the future. Also, which companies marketing strategy is going to work better in the long term because they all have their own marketing strategies such as going after the different income demographics, Product differentiation, quality of products, and many other. Costco could face significant loss in the market if they don’t change their current marketing strategy to meet the competition in future. Although Costco have a significant lead in the market share but they should be aware of their competitors.

Looking at Costco’s current position in retail industry I have provided some recommendation such as using internet retailing and global expansion which could help Costco top management to sustain the company’s growth and improve its financial performance as well as increase the number global customers.

Business Model

Costco company’s mission statement is, “To continually provide our members with quality goods and services at the lowest possible price” This mission statement is directly linked to Costco’s business model and strategy. Their mission statement is presenting business scope and purpose. Costco’s mission underlines quality and low price, which are factors consumer usually look for in the retail market. The mission is clear to understand and their business model implementation purpose is to generate revenue and make a profit from operations. Therefore, the mission statement of Costco contributes to the company’s competitive advantage.   

Costco uses a membership club business model and the model is very appealing based on Costco’s incredible history. In this model, consumers pay a membership fee to access the low-cost products available at Costco stores. Non-member may go together with members, but only members can purchase in these stores. However, non-members can use Costco Cash Cards to shop at the company’s stores. Research shows that competitors Sam’s club and BJ’s Wholesale Club also use the same business model. A unique aspect of Costco’s business model is that it limits marketing, advertising, and promotional activities to new warehouse openings. 

Strategy

Costco’s basic strategy is providing quality products and services at low and discount price to their customers. They target upper-middle class people through offering high quality products at discount price to increase the membership base. They provide discounts on their products and services which means Costco is using cost leadership strategy. This strategy maintains the lowest pries possible for their customers. Costco’s biggest competition Walmart also use the same strategy. The chief element of Costco’s strategy is that they combine the membership warehouse club business model to differentiate it from other retail stores. This business model is a core factor that enables Costco to follow its mission and it aligns with the company’s mission. The analysis shows that the cost leadership strategy is needed to sustain Costco’s business model. By providing good quality products at low price Costco keeps their customers going to the shop. The company offers great values to its customers through their customer service. They open new Warehouses with additional offerings and services.

Additionally, Costco keeps their employees and suppliers happy through providing appropriate assistances and compensation.

As I mentioned before the CEO of Costco, Jim sinegal is an extremely intelligent individual within the industry. He is well respected in the market and liked leader. His core values for Costco are as following: take care of members, take care of employees, respect for their suppliers, and rewarding shareholders. Jim Sinegal was an effective CEO for Costco Wholesale company based on his overall performance. According to the case study, Jim has followed a strict code of ethics by taking care of his employees and members. They have brought the highest quality goods and services to market at the lowest price. Throughout his career Costco has delivered excellent customer services. Overall, CEO Jim Sinegal is vital part of Costco company. Through company’s mission, business model, and strategy Jim Sinegal has managed to make Costco’s financial performance superior than Sam’s Club and BJ’s Wholesale. Costco is performing well from its strategic perspective. They do enjoy the competitive advantage over Sam’s club and BJ’s Wholesale. The company offers very low price for their products and services. They have rapid inventory turnover with high sales volume. This contributes to company’s higher revenues. All this shows that CEO Jim Sinegal was an effective CEO.

Analysis of the Five Competitive Forces

A five forces analysis is a strategic model that identifies and analyzes the five forces that shape every industry. To better understand the competitive forces affecting Costco Wholesale, it is important to analyze the five competitive forces and determine their strength. These five-industry shaping competitive forces are as follows: “(1) Rivalry/competition in the industry, (2) Potential of new entrants into the industry, (3) Power of Suppliers, (4) Power of Customers, and (5) Threat of substitutes.” The characteristics associated with each of these will provide a better understanding of the strengths of these forces.

The rivalry among competing retail sellers appears to be strong in the case of Costco. The company attracts their consumers through discounted price on a wide variety of retail products at large warehouse locations. However, for consumers to gain access to these discounted warehouse locations, consumers are charged yearly membership fee. The competition in the industry is extremely high because the Costco business model is based on discounted warehouse pricing. According to the sources the top three major players in the American wholesale club industry are (1) Costco, (2) Sam’s Club, and (3) BJ’s Wholesale Club/Walmart. Costco offers the lowest prices than its competitors to attract consumers and provide great values to their customers through their competitive advantage.

The threat of new entrants is minimal in the industry. Competitor unions and achievements could play an effective role for rivalry to expand and steal market share from Costco. In addition, Sam’s Club, Costco, and BJ’s Wholesale are already consumer known brands. They all command high sales volumes so that would be difficult and expensive to replicate to new unknown and unexperienced entrants. Costco has built a suitable membership base that supports sustained large volume sales.

According to the research, suppliers affect Costco’s business and the retail industry environment. There are some factors that create the weak bargaining power of suppliers in the Costco’s case. Because of the large population of suppliers, no single supplier can impose its demands on firms like Costco. The overall high supply has weakened the suppliers’ bargaining power, which means that a single supplier’s action is unlikely to impact the level of total supply available to Costco. In addition, they have minimal control on the distribution and sale of their products in Costco warehouse.  

This element of the Five Forces analysis considers the influence of customers on companies’ effectiveness in the retail industry environment. If a company desires to remain in business they must meet the market demands. Individual customers have no bargaining power compared to the average sales volume. They control no bargaining power other than switching to competitors. Costco must ensure that it satisfies consumer’s needs and adds the values to its customers. Following are some factors that lead to the strong bargaining power of customers. The low switching costs. which means that Costco’s customers can easily transfer to other retailers like Walmart and Sam’s Club. In relation, Costco’s customers have many substitutes to choose from. Furthermore, because of the internet, Costco consumers can easily access information about prices and offers. These factors indicate that Costco Wholesale Corporation must consider the bargaining power of buyers as among the top issues in this five forces analysis.

There are not many substitutes for the Customers of Costco that can offer similar convenience or low prices. Apart from Walmart and Target there is hardly a brand that can offer competing price or convenience. Customer can switch to the other brands but then the same customer service, product quality, and matching prices will not be available. The threat of substitutes gets eased by the excellent customer serviced that Costco provides.

Recommendations

Looking at Costco’s current position in the market as well as in the retail industry here are some recommendation that could help Costco top management to sustain the company’s growth and improve its financial performance. The top management should focus on developing internet retailing and apply multi-channel strategies. For example, companies like Alibaba, Facebook, amazon and many others are making good use of internet for their marketing strategy and increase the number of customers. Costco should capitalize on its strong financial position to invest in creating new retailing channels. Based on the case analysis, online presence will enable Costco to reach a wider customer base. Additionally, Costco should increase their global expansion into available markets such as Asia and Africa. Expansion of Costco in Asia would be the great idea because of the huge population and their everyday needs. This will help to reduce Costco’s dependency on North America market. In addition, rather than opening new store every time, Costco can do partnership with other internet retailers which will allow Costco to enter in the available market without physical presence.

Conclusion

In the end, Costco has achieved customers trust, respected brand name in the industry through providing quality products and services at lowest possible price to their customers. Costco’s business model is appealing because of their mission, strategy, and overall performance since they started working in retail industry. In these process, former Costco CEO, Jim Sinegal has played dynamic role in sharpening the company. He provided important core values and business principles to Costco company which made Costco’s financial performance superior to that Sam’s club and BJ’s Wholesale. The company has enjoyed the competitive advantage over its competitors. And lastly, to sustain the company’s growth and improve its financial performance we recommended that the top management should focus on developing internet retailing, apply multi-channel strategies, and they should increase their global expansion into available markets such as Asia and Africa.

 

References

Welcome to Costco Wholesale. (n. d.). retrieved January 28,2018, from https://www.costco.com/

Page, V. (2015, July 07). Costco’s Business Model Is Smarter than you think. Retrieved January 29,2018, from  https://www.investopedia.com/articles/investing/070715/costcos-business-model-smarter-you-think.asp  

Costco Wholesale. (n. d.). Retrieved January 29, 2018, from http://phx.corporate-ir.net/phoenix.zhtml?c=83830=irol-homeprofile