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Costco case study and strategic analysis 2 (50%)

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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

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dynamic management team and dedicated, motivated and satisfied workforce

with the mission “to continually provide its members the best quality products at 46,552
the lowest possible prices” (Costco Annual Report 2006). Some of the
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people, and fancy buildings. And they successfully operate themselves in the

competitive environment serving not only an individual customers but also a legal CONTRIBUTORS BLOG ARCHIVE

customers (a company), and small business customers. dinesh ▼

▼ 2011 (183)
abeata ►
► August (14)
Costco believe that society and the community is one of the key factors
sabita ►
► June (22)
of their success. Therefore, they are willing to give back to their community and
►
► May (126)
the society in terms of quality goods in lowest possible prices. Not only this but
▼
▼ April (21)
also, Costco encouraged its employees to actively participate in the social welfare ►
► Apr 29 (4)
program by volunteering in every possible occasions in the locality wherever they ►
► Apr 15 (1)

are located. ►
► Apr 14 (6)

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5/26/12 Student help center: Costco case study and strategic analysis

▼
▼ Apr 13 (9)
Four criteria
test CVS
Corporati
on
Internal
SWOT Analysis
environm
Strength Weakness ental
analysis
· Low product and services · Comparatively less attractive store layout for luxury CVS
· Internal (Home grown) top management team in items Adidas
majority · Weak advertisement base leading to the inability of corporate
strategy
· Employee’s turnover within a year of recruitment is reaching full range of membership base.
and case
just six percent · Declining or inconsistent profit margins studies
· Unique ability to keep overhead cost low resulting in· Not widely scattered around the world than its The
low prices of goods and services competitors Paradoxic
al Twins:
· Loyal and affluent customer base · Location is not attractive in terms of real-estate
Acme
· High inventory turnover comparing to its competitors· No self-checkout and
· Consistent return on sales and return on assets · Primary focus on business customers rather than Omega
Electronic
· Incredible return policy individual customers s
Competition
Opportunities Threat in video
game
· Costco’s operations is mainly targeted in countries · Costco cannot attract people who are below poverty
console
where there is high GDP and high disposable income line due to its membership fees and bulk purchase industry
of the consumers (Canada, U.S.A and Japan) with · Not well diversified in terms of geography (presence) Nora Sakari
low inflation rate in the countries · High competition from Sam’s Club and BJ case
analysis
· Serves the democratic countries with political and · Highly dependent on United States and Canadian
governmental stability market. Western
Union
· Rapid growth in membership · Largely dependent on vendors for timely supply of Re-
· Possibility of international expansion quality merchandise at reasonable price structurin
g decision
· Advantage of economic downturn · High market expectation in terms of price, quality and
Hewlett
· Increasing brand awareness financial performance
Packard
· Positive image in terms of employees pay and social merger
responsibility case
studies
Costco case
study and
In the core of their strategy, Costco sells limited numbers of products in strategic
analysis
fewer varieties to keep the cost down and they rely on high volume sales. But
►
► Apr 06 (1)
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
FOLLOWERS
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

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5/26/12 Student help center: Costco case study and strategic analysis

unique way or mechanism that helps them keep the price lower than that of Join this site
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competitors and they can still afford to pay 48 percent higher salaries to their Friend
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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.

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5/26/12 Student help center: Costco case study and strategic analysis

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:

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5/26/12 Student help center: Costco case study and strategic analysis

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

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5/26/12 Student help center: Costco case study and strategic analysis

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

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5/26/12 Student help center: Costco case study and strategic analysis

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

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5/26/12 Student help center: Costco case study and strategic analysis

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

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5/26/12 Student help center: Costco case study and strategic analysis

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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http://www.scribd.com/doc/7051046/SWOT-Analysis

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recession-super-infla.aspx
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-
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presentation

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