Costco by Hady

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COSTCO WHOLESALES

BY

HADY M
MBA SECTION B
What Is Costco?
Costco is a membership warehouse club, dedicated to bringing our members the best
possible prices on quality brand-name merchandise. With hundreds of locations worldwide,
Costco provides a wide selection of merchandise, plus the convenience of specialty
departments and exclusive member services, all designed to make your shopping
experience a pleasurable one.

History of Costco
The company's first location, opened in 1976 under the Price Club name, was in a converted
airplane hangar on Morena Boulevard in San Diego. Originally serving only small
businesses, the company found it could achieve far greater buying clout by also serving a
selected audience of non-business members. With that change, the growth of the
warehouse club industry was off and running. In 1983, the first Costco warehouse location
was opened in Seattle. Costco became the first company ever to grow from zero to $3 billion
in sales in less than six years. When Costco and Price Club merged in 1993, the combined
company, operating under the name PriceCostco, had 206 locations generating $16 billion
in annual sales.

Our operating philosophy has been simple. Keep costs down and pass the savings on to
our members. Our large membership base and tremendous buying power, combined with
our never-ending quest for efficiency, result in the best possible prices for our members.
Since resuming the Costco name in 1997, the company has grown worldwide with total sales
in recent fiscal years exceeding $64 billion. For additional information about Costco,
download the Costco Story in a PDF format to learn more.

Costco has transformed the retail world. When entrepreneur Sol Price introduced a
groundbreaking retail concept in San Diego, California. Price Club was the world's first
membership warehouse club, a place where efficient buying and operating practices gave
members access to unmatched savings.

At first, Price Club was limited exclusively to business members, who could purchase a wide
range of supplies and wholesale items. Jim Sinegal, the executive vice-president of
merchandising, distribution and marketing, was instrumental in fine-tuning the merchandise
and marketing strategies, helping to turn Price Club into a success story that changed the
face of retailing worldwide.

Global Position
As of August 2024, Costco operates 890 warehouses worldwide: 614 in the United States
and Puerto Rico, 108 in Canada, 40 in Mexico, 35 in Japan, 29 in the United Kingdom, 19
in Korea, 15 in Australia, 14 in Taiwan, 7 in China, 4 in Spain, 2 in France, 1 in Iceland, 1 in
New Zealand, and 1 in Sweden.
Costco’s SWOT Analysis1
Strengths
1. Strong retail market presence
2. Effective connections to an expansive supply chain
3. Strong brand (Kirkland Signature)

As the leading membership warehouse club chain in the United States, Costco is strong
because of its market presence. The company’s name is popular among
consumers. Costco’s marketing mix (4P) helps maintain this business strength. Also, the
retail company’s connections to an expansive supply chain are a strength. In the SWOT
analysis model, this strength relates to the company’s ability to achieve economies of scale
in its retail operations for competitive selling prices. Another one of the company’s strengths
is its Kirkland Signature brand, which consumers view as a label of quality. This brand is
one of the factors that attract shoppers and keep them coming back to the company’s stores.
Overall, the strengths in this part of the SWOT analysis of Costco highlight the benefits of
the company’s strong position in the retail market.

Weaknesses
1. Limited product mix
2. Exclusivity to members
3. Low profit margins on most goods

Costco has a limited product mix compared to the wider and more extensive
merchandise available from large competitors. In the SWOT analysis model, this weakness
prevents maximization of revenues from consumers who might not find what they are looking
for at the company’s warehouses or stores. Also, Costco’s business model creates
exclusivity to members and prevents other shoppers from easily purchasing at its
warehouses. Moreover, because of Costco’s generic competitive strategy and intensive
growth strategies, the business has the weakness of low profit margins that leave little room
for price adjustments. This weakness also limits the funds available for supporting the
company’s growth strategies in the retail industry. This SWOT analysis of Costco shows that
the company’s weaknesses are directly linked to its business model.

Opportunities
1. Business diversification outside retail operations
2. Expansion of product mix
3. Expansion of market reach through additional store locations

Costco has the opportunity to diversify its business, such as through the addition of new
services or an entirely new business in another industry. The company can also expand its
product mix, which is currently limited, in comparison to those of other big-box retailers. In

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https://panmore.com/tag/costco-wholesale
addition, the company has the opportunity to expand its business around the world by
opening new warehouses or stores in overseas locations, especially in high-growth
economies. This SWOT analysis of Costco points to opportunities for growth and expansion.

Threats
1. Competition with other retailers
2. Direct and indirect online competition
3. Instability in some areas of the supply chain

Costco Wholesale Corporation faces tough competition with brick-and-mortar, online retail,
and e-commerce firms, like Walmart and its subsidiary, Sam’s Club, as well as
Target, Aldi, Home Depot, Best Buy, Kroger, Lowe’s, eBay, Rakuten, and Amazon and its
subsidiary, Whole Foods. Convenience stores, such as 7-Eleven, and discount chains, like
Dollar General and Dollar Tree, add to the competitive pressure. Also, in the online market,
many small and medium-sized businesses from different countries sell goods at low prices
and attract buyers from around the world. In the SWOT analysis model, this situation creates
the strong force of competition described in the Five Forces analysis of Costco. On the other
hand, instability in some parts of the supply chain is a threat to the warehouse club company,
which heavily relies on the supply chain for its merchandise. This external strategic factor
relates to the effects of unfavourable climates, high cost of production, and geopolitical
tensions. This SWOT analysis of Costco shows the need for strategies and policies for
business stability and protection against threats in the external environment.
Costco’s PESTEL Analysis
Political Factors in Costco’s Business
1. Political stability of major retail markets (opportunity)
2. More complex environmental policies (opportunity)
3. Animal rights policies relating to consumer goods (opportunity)

Costco has the opportunity to grow with minimal political disturbance in major markets. In
addition, the company has the opportunity to improve its policies and strategies to exceed
expectations based on environmental and animal rights policies. Based on the external
factors in this PESTLE analysis, Costco has major opportunities to grow its business
alongside political influence.

Economic Factors
1. Increasing international trade agreements (opportunity)
2. Rapid growth of developing markets for retail business (opportunity)
3. Slow but stable growth of the American market (opportunity)

Increasing international trade agreements give greater support for Costco to expand its
supply chain and warehouses/stores. The company also has the opportunity to establish
new locations in developing markets to boost its financial performance. In addition, Costco
can improve its growth and stability in the U.S. even though economic growth remains
relatively low. In this PESTLE analysis dimension, Costco has opportunities for further
growth. It is worth noting that these economic trends align with the opportunities in
the SWOT analysis of Costco, which also identifies the business strengths that the company
can use to take these opportunities. The retailer develops its strategic approaches with
consideration for the economic factors in this PESTLE analysis. These same PESTLE
factors influence the formulation of Costco’s generic strategy for competitive advantage and
intensive strategies for growth.

Social/Sociocultural Factors in Costco’s Business


Environment
1. Increasing demand for retail business social responsibility (opportunity)
2. Animal rights trend (opportunity)
3. Environmentalism (opportunity)

Based on the external factor of the increasing demand for business social responsibility,
Costco has the opportunity to improve its corporate social responsibility programs to
strengthen its brand image and consumer perception. Also, Costco has the opportunity to
improve customer satisfaction by implementing policies and strategies for better animal
rights and environmental performance. In this PESTLE analysis dimension, the retailer has
major opportunities to satisfy customers and interest groups. The ability to address these
social trends is supported through Costco’s company culture (work culture), which
represents human resource awareness about the social context described in this PESTLE
analysis of the retail business.
Technological Factors
1. Worldwide growth of e-commerce (opportunity)
2. Increasing business automation (opportunity)
3. Rapid rate of technological innovation (opportunity)

Costco has the opportunity to capture a larger market share through enhanced e-commerce.
In addition, the company can implement new automation technologies to increase its retail
business efficiency, which should translate to savings and better financial performance.
Also, Costco can innovate in terms of other technological applications, such as in information
processing, knowledge management, and HR training. This PESTEL analysis shows
external factors that come with technological opportunities for Costco to improve its business
processes.

Ecological/Environmental Factors Affecting Costco


1. Climate change (threat)
2. Low-carbon lifestyles (opportunity)
3. Collapsing bee colonies (threat)

Climate change threatens Costco because part of the business sells fruits, vegetables, and
other food products that are dependent on optimal climate conditions. On the other hand,
the retail business can adapt its product mix to satisfy the changing lifestyles of consumers.
Adapting the product mix can improve the success of Costco’s marketing strategy and the
corresponding marketing mix (4Ps). Moreover, the issue of colony collapse disorder (CCD)
affects bees and, in turn, the supply of food products that Costco sells. In this PESTEL
analysis dimension, the retail company must consider adjusting its strategies to strengthen
its supply chain against environmental threats. These ecological trends are integrated
into Costco’s corporate social responsibility (CSR) and ESG strategy, which accounts for
the environmental impacts of the business, the interests of stakeholders, the objective of
sustainability, and the goal of corporate citizenship. These external factors define the
ecological situation examined in this PESTEL analysis of the warehouse club company.

Legal Factors
1. Changing employment laws (opportunity)
2. Tax reforms (opportunity & threat)
3. GMO regulations affecting consumer goods (opportunity)

Costco has the opportunity to improve its employment practices to exceed the requirements
of employment laws. Also, Costco can adjust its policies and strategies to optimize its
performance despite tax reform issues. In addition, the company can impose new policies
that require more accurate GMO labeling for its food products. The external factors in this
PESTEL analysis dimension show that Costco can change its business practices to exploit
legal or regulatory opportunities.
Costco’s Five Forces Analysis
Competitive Rivalry or Competition with Costco (Strong
Force)
• Large number of retail firms (strong force)
• High variety of firms (strong force)
• Consumers’ low switching costs (strong force)

The retail industry is saturated, and Costco aggressively competes with many firms, such
as Amazon and its subsidiary, Whole Foods, as well as Aldi, Walmart, and Home Depot.
Also, the high variety of firms makes competition tougher, as firms capitalize on their unique
competencies to compete against Costco. In addition, the low switching costs are an
external factor that makes it easy for consumers to transfer from Costco to other firms. Thus,
based on this element of the Five Forces analysis, competition is among Costco’s most
important strategic concerns.

Bargaining Power of Costco’s Customers/Buyers


(Strong Force)
• Buyers’ low switching costs (strong force)
• High availability of substitute goods (strong force)
• High quality of information (strong force)

Low switching costs mean that Costco’s customers can easily transfer to other retailers, like
Walmart’s Sam’s Club. Also, Costco consumers have many substitutes to choose from.
Moreover, through the Internet, the company’s customers can easily access information
about prices and offers among competing retailers. As a result, it becomes even easier for
customers to transfer to retailers that have better offers. These external factors indicate that
Costco Wholesale Corporation must consider the bargaining power of buyers as among the
top strategic issues in this Five Forces analysis.

The development of the retail business revolves around addressing buyer power. This is so
because Costco’s mission statement and vision statement focus on satisfying customers
through quality, accessibility, and affordability. These variables help mitigate the impact of
the bargaining power of customers described in this Five Forces analysis. In
addition, Costco’s marketing mix (4P) presents attractive shopping options that help reduce
the likelihood of customers shopping elsewhere. This approach to marketing also mitigates
the undesirable effects of the buyer power determined in this Five Forces analysis.

Bargaining Power of Costco’s Suppliers (Weak Force)


• Large population of merchandise suppliers (weak force)
• High overall supply (weak force)
• Low forward integration among suppliers (weak force)

Because of their large population, individual suppliers cannot easily impose their demands
on Costco. Suppliers’ bargaining power is further weakened because the overall supply is
high, which means that a single supplier’s action is unlikely to significantly impact the level
of total supply available to Costco. In addition, most of the company’s suppliers have low
forward integration, which means that they have minimal or limited control over the
distribution and sale of their products in Costco warehouses/stores. This element of the Five
Forces analysis shows that the external factors leading to the bargaining power of suppliers
are among the least of Costco’s concerns. Nonetheless, suppliers’ influence represents
trends significant to strategic decisions. For instance, the supplier power described in this
Five Forces analysis reflects the market changes that affect the supply chain, such as the
economic and ecological trends identified in the PESTLE/PESTEL analysis of Costco
Wholesale. Also, a consideration regarding the bargaining power of suppliers is
that Costco’s corporate citizenship goals for social responsibility help address the supply
chain situation examined in this Five Forces analysis.

Threat of Substitutes or Substitution (Strong Force)


• Customers’ low switching costs (strong force)
• High availability of substitute goods (strong force)
• High performance-to-price ratio of substitutes (strong force)

Substitutes for Costco Wholesale’s products are easily accessible with no added expense
in the process of transferring to the substitutes (low switching costs). In addition, there are
many substitutes for most of Costco’s goods, especially food products and related
commodities. Regarding the high performance-to-price ratio (or low price-performance
ratio), these substitutes can satisfy consumers’ expectations, thereby making the threat of
substitution a strong force against Costco. Based on this Five Forces analysis, external
factors leading to the strong threat of substitution should be among Costco Wholesale
Corporation’s most important competitive challenges.

Threat of New Entrants or New Entry (Moderate Force)


• Shoppers’ low switching costs (strong force)
• Moderate cost of doing retail business (moderate force)
• High economies of scale (weak force)

Low switching costs mean that it is easy for consumers to transfer from Costco to new retailers,
thereby giving these new entrants a strong chance of success. However, the moderate cost of
doing business is an entry barrier that offers some protection for Costco. Also, the external
factor of high economies of scale involving supply chains and inter-firm agreements makes it
difficult for new entrants to directly compete against incumbent giants. Thus, this Five Forces
analysis shows that the threat of new entrants is a considerable strategic issue for Costco
Wholesale Corporation.

References
https://www.costco.com/about.html

https://panmore.com/costco-wholesale

https://companiesmarketcap.com/inr/costco/marketcap/

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