Costco Wholesale Case Analysis

John Molinar and Talia Myres (PMBA 5433)

Executive Summary
The summary objective is to address the generic strategy, the macro environment and its impact on
the industry, forces of industry competition and outlook of profitability and the drivers of change,
value chain advantages and disadvantages, and the identification of key factors to support strategic
recommendations. Costco’s present strategies are working well against immediate rivals, Sam’s Club
and BJ’s Wholesale Club. Costco’s low-cost strategy is driven on rapid inventory turnover and
highly efficient operations that allows them to be profitable at very low margins while providing
customers with great value. Costco uses a limited selection of high-quality merchandise throughout
broad categories to differentiate itself from competitors in the low-cost market. Global expansion has
helped stabilize revenues in a slow-growth market allowing Costco to maintain a dominant position
in the membership-warehouse market segment.

The macro environment presents opportunities and considerations with general economic conditions,
technology, trends in consumer demographics and lifestyle in addition to regulatory changes. Costco
has opportunities to expand membership warehouses domestically and globally. Technology
advancements have made online retail competition very strong. Costco must utilize its reputation and
capital to expand further into the online business. Buying trends of consumers and perceived values
are shifting to ultra-convenience and smaller quantities beyond the needs of the affluent. Costco’s
mission of ethical and responsible sustainable business practices will guide them through regulatory
changes.

The forces of change follow the opportunities in the macro environment and the industry. Market
growth is about 4 percent per year. Without continually moving into new markets, growth will
diminish to a single category or online competition. Lifestyles and shopping behaviors are changing.
The current customer base of Costco is aging, and the affluent target demographic market is utilizing
online technology innovations to expand their quest for value, differentiation, and convenience.

Costco’s value chain analysis shows strong resources and capabilities in supply chain management,
operations, and distributions. The implementation of these activities is the reason for the significant
market share today. However, online competition threatens the Costco market share based on limited
SKUs and high turnover of quality inventory and super-efficient operation turning distinct
competencies to brick and mortar handcuffs.

Talia’s recommendations
Based on the analysis, I recommend Costco pursue two strategies to increase club membership and
revenue. The first recommendation is to broaden its e-commerce capabilities by offering more
products online and making online purchasing available to all Costco customers worldwide. SWOT,
macro-, and Five Forces analysis all show that Costco is behind its competitors – specifically
Amazon – in the e-commerce field. Currently, the ability to purchase items on Costco.com is
available to members in the USA and Canada. Because of this, Costco is losing massive revenue
opportunities to its competitors.

By making online sales available to Costco members throughout the world, the company would most
likely see an increase in revenue. This is because of several factors revealed by the analysis including
the generational shift of younger customers that seek to purchase from the convenience of their home
or phone and have their products delivered to them rather than purchase in store and the rise of online
retailers and local retailers that offer online shopping for local pickup and/or delivery. Costco has to
combat this by stepping up their online presence. Costco has the competitive capabilities to make this
happen.

The second recommendation is to shift its marketing strategy from affluent suburban members and
begin targeting middle to lower class consumers to attract new membership and increase revenue. By
only focusing on upper-income consumers, Costco is limiting market area and ignoring potential
revenue markets. Middle-class consumers tend to be bargain shoppers and coupon clippers so that
bulk buying would be appealing to them along with the treasure hunt format. By focusing on middle
to lower class consumers, Costco could expand into previously untapped geographic locations, too.
The influx of new middle-class consumers would have a positive impact on Costco’s membership
revenue and help secure its market share in the competitive industry.

John’s Recommendation
To begin addressing the needs of the new consumer, Costco must significantly expand online sales
opportunities by moving to a format that allows consumers who are not members to see the value
Costco can provide. This change would include the ability for non-members to purchase goods and
service online. Additional value for members would help to entice new members. Amazon Business
Prime is an example of a format that provides consumers with an expanded marketplace and
analytical tools for shopping compared to the standard Amazon prime membership. It would require
Costco to utilize the power of its strategic partnerships with suppliers adding additional SKU’s for
online-only purchases and partner with other search engines like Amazon to offer access to items
supported within their buying platform with limitation to vendors of the same standard to
maintaining control of the quality of products offered.

Allowing business to establish lines of credit in addition to member credit card lines with the ability
to use purchase orders will result in additional loyalty and convenience for individuals and small to
large businesses. Many of the items sold online are very competitive in price, and the Costco
reputation supports the value to the consumer. Broadening the online market will help Costco’s
position to meet the convenience needs of the new consumer and will drive revenue to support the
already strong distinct competencies in place.

Costco has the resources to develop this model of business and they can help address the lagging
position they have in online sales. Costco should continue to expand brick and mortar globally but
must address the online failure immediately. Amazon is working backward to brick and mortar while
Costco has the opportunity to make substantial advancements in both arenas.

Case Analysis

Generic Strategy
Costco Wholesale Club’s focus is on a strong value proposition of low prices on nationally
recognized brands and private label items, providing high quality, everyday items and unique
purchases to create a money-saving shopping experience of ever-changing inventory for the
consumer. The Costco idea is to provide quality goods and services at the lowest price while
adhering to a strict code of ethics while taking care of employees, respecting suppliers and rewarding
shareholders. The mission of sustainability is to execute a profitable business while doing the right
thing by lessening the environmental impact by sourcing products responsibly through the
preservation of natural resources.
Costco uses two strategies, blending Porter’s models of low-cost strategy with a broad differentiation
strategy and value chain bundling of resources and capabilities. The overall focus of driving sales
based on limited items with a no-frills business model has differentiated them from other cost-based
retailers. The differentiation strategy is not the only factor separating Costco from low-cost strategy
rivals like BJ’s Wholesale Club and Sam’s Club. Costco has continued an aggressive global
expansion and approach to business, by driving sales with a well-paid labor force and providing
exceptional value to its customers, while using a limited line of products, specialty limited time
products without spending profits away on marketing.

Low-Cost Strategy
The value proposition of ultra-low pricing of limited selections of nationally recognized branded
items is a result of Costco’s work with suppliers to drive down costs. Working with manufacturers to
produce ready-to-stock items of limited packaging options generates bargaining power vis-a-vis
suppliers and manufactures power to create supply chain efficiency to control key cost drivers. This
idea of limited SKU’s also helps rapidly turn over products and control the capacity key cost driver
with the amount of shelf space and overall warehouse footprint required to maximize the operation to
full capacity by periodically revolving new products into the rotation on limited floor space.

Costco pays employees higher than average wages to create a stable labor force. The key cost driver
of learning and experience helps to address new site selections, store layouts, and product selection
while promoting excellent customer service from its employees. It also helps drive returning
customers to its warehouses. The reputation of excellent service and value has allowed Costco to pay
higher wages instead of paying for robust advertising expenses to sell products and services.

Broad Differentiation Strategy

The second strategy used is offering high-quality products with upscale attributes to satisfy the
unique needs of affluent buyers looking for quality products with a strong perceived value. Costco
has differentiated themselves from direct competitors by offering items that stand apart from
competitors in quality and price. The Kirkland Signatures product lines cover many item categories.
Costco also utilizes a “while they last” revolving inventory of items offering high-end specialty items
purchased from manufactures closeout and discontinued items that wow customers with incredible
values. The successful differentiation of private label items has created brand loyalty for customers
who enjoy the features of the products and connect them with the company for return visits.

Costco has separated itself from other retailers addressing many value drivers as the keys to
differentiation. The utilization of broad differentiation helps Costco enhance profitability by
generating more substantial unit sales on items customers believe have brand uniqueness and more
value. Value drivers like product features and performance add value for those customers looking for
more than the basic models not offered by rivals in the same market. Product quality and reliability
help differentiate a perceived value to the customer in the form of fewer repairs, better taste, less
maintenance and better design leading to extended product life help lower the overall buyer's cost of
using Costco products. Costco’s focus on the value drivers of customer service and employee skills
and training help deliver high-level customer satisfaction and profitability. Great products and
service translate into an excellent reputation for Costco.

Costco has combined several factors into a successful business. These include providing quality
goods and services at low prices, adhering to a strict code of ethics, and reducing environmental
impact through responsible sourcing of products. Additionally, taking care of their employees,
respecting suppliers, and rewarding shareholders all contribute to their sustainability and execution of
a profitable business and are part of what makes Costco’s strategies successful.

Macro Environment Analysis

Because every company operates in a broad macro environment influenced by national and global
economic conditions, it is essential that each firm considers these external factors when creating their
corporate strategy. In the wholesale retail industry, it is vital for the major three players to
continuously scan the external environment for significant macro developments, and assess their
impact and influence. Failure to do so could lead to the loss of customers and ultimately lead to the
loss of market share and revenue.

Economic factors
Economic factors concern the general economic climate and specifics such as inflation rate,
unemployment rate, consumer confidence, and conditions in the stock market to name a few.
Discount retailers like Costco and its competitors benefit when general economic conditions weaken
because consumers become more price conscious and focus on what they spend. Economic factors to
consider while conducting macro environment analysis include things like inflation rates, interest
rates, and exchange rates, as well as if the local economy is currently in a recession, growth, or
recovery period.

Companies should consider the education level of their potential workforce and associated labor
costs. They should also analyze the unemployment rate and determine if there is a willing labor force
in the market they want to expand in. Review competitors’ existing infrastructure to see if similar or
better infrastructure can be installed at comparable or lower costs. An organization should review
what type of economic system is in place and determine what the economic growth rate is, and if it is
conducive to profits. The economic portion of the macro analysis shows Costco has an opportunity to
expand its warehouses within the United States and abroad.

Political factors
Several political, legal, and regulatory factors can impact the industry’s long-term
viability/profitability as they look to operate in a market. Before investing in a new market, Costco
and its competitors should analyze the political environment of the area where it wants to operate and
consider the various risk factors associated with that country’s political environment. Those factors
could include reviewing the market’s political stability. Are there tax incentives for doing business
there? Are government officials open to new business opportunities or resistant to them? In the same
vein, if there is a high level of government corruption, will the company have to pay unrealistic fees,
or will politicians intervene and impose laws and regulations that might not be conducive to
business?

In some instances, intellectual property laws must be considered. This is important for product
innovation and especially crucial in countries like China where patents are copied, and products are
duplicated. Equally important are trade regulations, import tariffs, and border adjustment taxes.
Many countries have health and safety laws along with minimum wage legislation and worker
protection laws. The economic portion of the macro analysis shows Costco it is important to partner
with the local government to ensure it can operate legally and profitability before expanding into that
market.

Technological Factors
Technological factors change so quickly, but the focus of those changes must be on the innovations
and breakthroughs that can potentially revolutionize society through such things as new industries
while disrupting others like mobile payments, cloud computing, and big data solutions which are all
technologies that the wholesale industry currently uses. As the three big chain looks to move into
new environments, they need to consider how current tech and future advances will affect their
strategy.

A thorough analysis will include considering the impact of how quickly current technology becomes
obsolete and the rate of technology adoption by the consumer. Along those lines, Costco must adapt
and integrate it into their strategy faster than their competition or they will possibly lose customers
(think Walmart to Amazon). Another factor to consider is technology automation in the warehouse
and supply chain environment, and how it can potentially reduce costs by introducing more
automation, reducing the human footprint, and lowering labor costs. The technology portion of the
macro analysis shows Costco it is has an opportunity to expand its e-commerce business in the
United States and internationally. Currently, the website only operates in the United States and
Canada.

Sociocultural factors
Society’s shared beliefs, values, and attitudes impact the success of the wholesale industry in a
particular market. Consider other demographic factors including population size, growth rate, and
age distribution, as well. Organizations should consider society’s shift toward healthier lifestyles that
incorporate organics and exercise equipment when assessing the macro environment. Marketers must
understand their customers’ growing demand to health care, recreation, travel, and entertainment and
structure their marketing messaging around that.

When analyzing sociocultural factors, they should consider the demographics of the market they are
entering as well as the culture of the market including specific gender role, or caste/class system for
individual countries. Prevailing social attitudes of the market concerning health and environmental
factors should be considered, as well. The sociocultural portion of the macro analysis shows Costco it
has an opportunity to expand its business beyond the urban affluent membership it currently targets
and increase its membership numbers by targeting middle class shoppers.

Environmental factors
Environmental factors are essential in macro analysis because some industries contribute more
significantly to pollution to others. Different countries have different laws, and laws vary from state
to state. Fines for breaking environmental laws can be hefty, but conversely, many states and
countries offer tax breaks for companies that implement renewable energy measures.

Companies in the wholesale market should carefully review the required environmental factors and
regulations in the state or country they want to operate in before opening a store. Factors to consider
include analyzing weather patterns for the region. This is important because if the location Costco
wants to build a warehouse is prone to flooding or a tornado path, this would be problematic. Costco
should consider federal, state, and municipal attitudes toward recycling and green programs and see
if there are tax breaks for companies that engage in green policies.

Costco should also consider how climate change might affect its supply chain distribution and
vertical integration measures. Lastly, when assessing environmental factors, Costco needs to consider
recycling and pollution regulations and see what policies are in place, what costs could be incurred
from those policies, and how it will affect their overall costs. The environmental portion of the macro
analysis shows Costco it is has an opportunity to earn goodwill and positive PR by embracing green
policies when building new warehouses and distribution centers.
Five Forces Analysis

Industry Analysis
As of 2019, the wholesale industry is relatively profitable. Of the three major warehouse chains –
Costco Wholesale, Sam’s Club, and BJ’s Wholesale Club – average annual growth has increased
between .5 to 4 percent in the last ten years, and the warehouse club channel is expected to grow 4
percent annually through 2022. In 2017, the combined total sales for the three clubs in the United
States and Canada was $198 billion, and in 2018, the three rivals had approximately 1,460 locations
in the same geographic region. The industry typically employs a cost-based strategy that results in
low-profit margins, the battle for market share, and is prone to low switching costs that makes it
imperative stores find a way to build brand loyalty among their customer base. Generally, revenue is
earned through a membership fee which allows a customer shop in-store or online.

Although competitive threats exist within the industry from substitute products and retail rivals,
domestic and international expansion opportunities exist. Competition is fierce because there are only
three significant players in the wholesale space, and BJ’s Wholesale is only in 16 of the 50 states, but
the threat from new entrants is weak because of high-cost barriers to entry. Website sales have
become common in the industry for all three wholesale stores along with ancillary offerings at their
box stores. Cross-docking depots serve as distribution points for each of the big three’s stores,
minimizing receiving and handling costs.

In 2019, Costco faces competition from external factors in varying degrees of intensity that could
potentially change over time. Presently, there are five competitive factors, or Five Forces, that Costco
faces in its industry. By analyzing these forces, we can gain a better understanding of the challenges
Costco faces and learn how to manage the five forces to better shape strategy, minimize risk, and
maximize profitability.

Rivalry among Competing Sellers – strong

The first force, Rivalry among Competing Sellers, is considered a strong force, and the case study
states this is usually the strongest of the five forces. This instance is undoubtedly true with Costco.
With only two major competitors – Sam’s Club and BJ’s Wholesale Club – rivalry is intense among
the three wholesale membership clubs. With over 90 million Costco cardholders in January 2018,
Costco generated over $2.85 billion in revenues and averaged 3 million members per day, while
Sam’s Club membership numbers are unknown, it generated $59.2 billion in revenue and averaged
20.4 million unique visitors per month. BJ’s Wholesale Club had more than 5 million members and
generated $259 million annually. Overall, the three rivals are roughly equal in size and competitive
capability making rivalry a strong force.

Costco’s growth strategy is to increase sales at existing warehouse stores by 5 percent or more every
year and to open new warehouses domestically and internationally. Within the last ten years, average
annual growth has been at least 4 percent for stores open at least a year or more. Comparatively,
Sam’s Club has seen a .5 percent to 2.8 percent growth in its stores open at least a year or more and
BJ’s Wholesale Club has seen a -.5 percent -4.2 percent decline in growth in stores open during the
same time. Overall, the wholesale industry slow growth trend reflects that buyer demand is growing
slowly, making rivalry a strong force.
The high number of firms is a weak force. There are only three significant players in the wholesale
market and all three tend to share similar costs and similar industry outlooks (weak force). No one
wants to disrupt the status quo, and because of this, if anyone did, any strategy or move by the three
companies to grow sales and market share could be seen as a hostile move to steal customers. Costco
would benefit from reasonable efforts and instead slowly draw sales and market share away from its
competitors instead of engaging in price wars, deep price discounts, or costly marketing campaigns.

Variety among firms/Differentiation is a weak force because the products the three clubs offer within
the industry are very different. Costco differentiates itself from its competitors by offering high-
quality merchandise along with “treasure hunt” shopping where customers can score high-end luxury
items not found at its competitors. Costco also offers its customers its private Kirkland brand label in
multiple merchandise categories, but this could be compared to Sam’s Club’s Member’s Mark label.

Low switching costs to buyers is a strong force. Each store offers products at similar prices, and their
membership fees cost around the same amount. Given these factors, customers can switch their
memberships and shop between all three stores with relative ease. This switching strengthens the
rivalry between the stores and makes the competition a chief concern for Costco. Because of this,
Costco must take care with its pricing, merchandise offering, and marketing efforts to retain its core
customer base while enticing new customers.

All three wholesalers do not generally carry excess inventory, making their rivalry weak, but their
product is costly to hold in inventory, is perishable, and is seasonal which makes the rivalry between
all three strong. Costco would do well to purchase smaller amounts of bulk inventory, reduce the
number of perishable items it carries, and carefully assess how much seasonal inventory it brings in
each year to reduce costs while meeting customer needs and remaining competitive. Overall, Costco
Wholesale must take care to maintain its place within the retail space. It can do this by continuing to
expand its warehouses in new markets while differentiating its products so that it can focus on
earning new customers in existing markets rather than winning customers away from its competitors.

Threat of New Entrants – low

As discussed earlier, the annual growth rate in the last ten years has been between 3-4 percent for
Costco and Sam’s Club with BJ’s Wholesale Club seeing a decline. However, in 2017, Costco saw
net sales of $1.26 billion, Sam’s Club saw net sales of $57.3 billion, and BJ’s Wholesale Club saw a
net sales of $12.09 billion. For new entrants, these numbers might seem enticing. Coupled with the
strong force of low switching costs, the threat of new entrants might appear strong. However, several
other factors give the threat of new entrants little success in the wholesale market.

Cost advantages enjoyed by industry incumbents is a strong force. Costco’s economy of scale is hard
to duplicate. Between its low fixed costs, 750+ locations throughout the world, supply chain
partnerships, and 36 years worth of best business practices, Costco has set a high bar for industry cost
advantages. It will be extremely risky for a new entrant to attempt to enter the market. Strong brand
preferences and high degrees of customer loyalty to existing brands such as the private Kirkland
label make it difficult for new entrants to compete in the industry because Costco has a strong
foothold in the arena with their established Kirkland brand and treasure hunt shopping strategy.

High capital requirements make breaking into the industry difficult. This requirement is a high
barrier because most companies will find it difficult to secure the capital needed to finance the start-
up monies needed for all the resources needed to compete with a company such as Costco.
Restrictive and costly regulatory policies for establishing a new business also make it difficult for
new entrants to enter the market. New entrants must secure permits for utilities, ensure they follow
safety and environmental regulations, abide by banking regulations and comply with local and
federal policies. Because of the complexity of these policies, it can be very prohibitive for a start-up
to get off the ground and all of these factors make new entrants a weak force.

Building a network of distributors or retailers and securing space on retailers’ shelves can be a
challenge for a potential entrant. New entrants do not have the name recognition that Costco has.
This lack of recognition works in Costco’s favor, as their competitor will most likely have to buy
their way into the distribution channel by cutting prices or taking a hit on their profit. All of this
makes new entrants a weak force.

Overall, the threat of new entrants is low, but Costco must continue to differentiate its products. If a
new entrant does enter the market, Costco can spend additional money on marketing to beef up its
brand identification to reinforce that with existing customers to retain them. Costco should pay close
attention to its membership prices and ensure it maintains competitive pricing in that arena along
with its online shipping costs since a new entrant might try to come in an offer ultra-low membership
pricing and free shipping to attract new customers or lure away existing Costco customers.

Threat of Substitute Products – strong

The threat of substitution is perhaps one of the most substantial threats that Costco faces in the
wholesale industry because the main commodities are relatively similar and several substitute options
exist within each category. Substitutes are readily available at both Sam’s Club and BJ’s Wholesale
Club. Because Costco primarily deals with foods and similar commodities, there are many options
from which buyers can choose when they go shopping.

Substitutes from competitors are attractively priced. This threat is a strong force. Because substitutes
are similarly priced to Costco’s products, the company has to balance pricing with selection and
quality. If they do not, their competition could undercut them and they could lose their customers to
lower prices. Also, substitutes have comparable or better performance features. This is a weak force
because Costco’s quality does tend to be higher than that of its competitors. Also, one of the main
selling points of Costco is its customer service which, while not necessarily a performance feature, is
one of the reasons people shop at Costco.

Buyers have low switching costs, and as previously stated, buyers can switch between Costco and its
competitors with relative ease. This ease makes this a strong force and one that Costco must be aware
of when crafting its strategy. Buyers are more comfortable with using substitutes, and this is a
moderate force because consumers are quite comfortable in switching between brands. Costco has
done an excellent job in building brand loyalty, so its consumers are generally loyal to the Kirkland
label. As long as Costco can maintain this loyalty, the threat of substitutes can be kept at bay. Costco
should continue to strengthen the loyalty to the Kirkland label through competitive pricing,
expansion of items available through the private label and brand awareness through marketing.

To remain competitive against the threat of substitution, Costco should continue to focus on the
quality of its products. By increasing the quality of its offerings, customers will continue to shop at
Costco and purchase quality products. Also, Costco must focus on customer service, realizing that its
attention to service-oriented sales is a large part of its success. As mentioned above, Costco should
focus its efforts on expanding and strengthening the Kirkland private label, to discouraging
customers from exploring substitute options. As always, product differentiation will help customers
perceive Costco products as unique, encouraging them to shop at Costco for all their needs,
disregarding substitute products as inferior or unsatisfactory for their needs.

Supplier Bargaining Power – low

Supplier bargaining power is the weakest external force in the wholesale industry because there are
more suppliers in the industry when compared to buyers. Because of this ratio, suppliers have far less
control over pricing which makes their bargaining power weak and gives power to the buyers.
Another reason their power is weak is that the products suppliers provide to buyers are relatively
standardized with very little differentiation. Buyers can shop between suppliers with low switching
costs which gives the buyers power over the suppliers and forces them to keep their prices low and
hinders their bargaining power.

Costco’s suppliers have low bargaining power (weak) because the wholesaler is a large retail brand
that makes bulk purchases from multiple suppliers which gives it immense bargaining power. This is
an instance where switching costs are low for Costco but not for its suppliers. Because there are a
large number of suppliers, this makes their bargaining power weak. Any single action by a supplier
is unlikely to significantly impact the level of supply that is available to Costco.

Because there are many suppliers, there are many substitute options available which makes supplier
bargaining power weak. Also, the suppliers need the business from Costco and the other wholesale
companies for their financial success. This dependency hinders their ability to negotiate pricing and
set terms more beneficial to them, effectively weakening their position.

While Costco continues to pursue vertical integration and can integrate backward, most of its
vendors have low forward integration – they have little control over the distribution/sale of their
products once they reach a Costco shelf. This lack of control reduces the supplier bargaining power
while increasing Costco’s bargaining power. Because of this power play, supplier bargaining is the
weakest of all the five external forces.

There are several ways Costco can effectively manage its suppliers within the wholesale industry.
Costco can purchase from one supplier but switch to a different supplier if it becomes dissatisfied
because of low switching costs. Because of the large number of available suppliers, it can carry
multiple suppliers in its supply chain; however, it would do well to cultivate close relationships with
a few strategic suppliers that could benefit Costco’s Kirkland brand. Costco could develop a
relationship with a firm that would only supply specific items to Costco. By doing so, Costco would
hold a significant portion of the bargaining power in the relationship. Conversely, Costco could
develop a mutually beneficial relationship with a few strategic suppliers and slowly draw those
suppliers’ business away from its competitors.

Buyer Bargaining Power – strong

Buyers exert intense pressure on the industry when they can collectively influence the price industry
members charge. While not all buyers have the same degree of bargaining power or leverage, if they
can obtain price concessions or favorable terms of sale, they have some degree of influence.

In the wholesale industry, buyers have low switching costs (strong), which puts industry members at
an immense disadvantage. It forces them to keep their pricing relatively low. This ties directly into
the fact that buyers are also highly price sensitive (strong). If they do not like a price at Costco, they
will purchase a membership at another store and transfer their business there. In the same vein, if
they are repeatedly dissatisfied with Costco’s deals (strong), they will eventually stop shopping there
and move their business elsewhere.

With the advent of internet technology, buyers are well informed about Costco’s product selection
and the product offerings of its competitors (strong). Because of this, consumers can easily shop
around and decide where to make their purchases or postpone their purchase until a better offer is
located. Unless brand loyalty is in place, or strong customer service ties exist, or Costco offers a
quality product to offset substitute products, Costco will struggle to retain its customer base in these
situations (seller position is weak). However, buyer bargaining power is weakened because there are
so many of them that one’s failure to purchase an item does not significantly affect Costco’s bottom
line.

As mentioned above, the availability of substitute products makes the bargaining power of buyers a
strong force in the wholesale industry, and it should cause concern for Costco. Although Costco
offers consumers the private Kirkland label, Sam’s Club can counter that with its Member’s Mark
label. Costco should continue innovating new products items that cannot be found at competitors
while staying competitively priced. Since customers usually seek discounts on established items, this
will limit customers’ power. As Costco continues to increase its customer base through product
innovation, it will slowly reduce the bargaining power of customers because there will be so many
buyers that one buyer’s sale will only account for a small fraction of total sales. Also as product
innovation increases, so will product differentiation, and both of these factors will weaken buyer
bargaining power and increase Costco’s seller strength.

Driving Forces Analysis

The most significant driving forces for the warehouse clubs are the industry’s long-term growth rate,
changes in societal concerns, attitudes and lifestyles, marketing innovation, emerging new internet
capabilities, and applications. The long-term growth rates are projected around 4 percent annually.
Moderate growth rates reflect the difficulty of entry into the market and the limitations to compete in
this arena. Costco is significantly the largest company in the warehouse club market segment, using
very selective placement for new operations by limiting the number of warehouses in an area to
service affluent households and businesses. Costco uses “brick and mortar” expansion through
globalization opportunities to continue to drive market share, and much of North America has been
saturated with their preferred clientele.

The second greatest direct competitor, Sam’s Club, is culling out brick and mortar to focus on the
most profitable markets. Both businesses continue to increase net sales and net income through
efficiency, refinement and careful expansion. Competition from smaller scale regional rivals and
general merchandising chains pose threats to steal market share. Low-cost model retailers like
Walmart and Target and online giants like Amazon are competing directly in specific merchandise
categories. Many companies like Lowes and Trader Joes are operating in low-cost single category
merchandise and significantly affect the market share of multi-category warehouses.

Changes in lifestyle and attitudes are driving the way consumers shop. Demographic changes are
moving to buy little and buying more often. More customers are looking for the convenience of
buying close to home or even buying from home. Many people are choosing to allow companies to
pick out the items for them for a convenient pickup or delivery. Affluent society has become
accustomed to service that supports the idea of differentiation and convenience. CVS and Walgreens
allow for convenient shopping on the way home providing a limited selection of groceries, pharmacy
and health, and beauty aids.
Marketing innovations like Amazon threaten warehouse stores like Costco by providing great
pricing, fast delivery and even more differentiation of products while allowing purchasing access to
those without a membership. Walmart, Target and Whole Foods also have shopping apps for store
pickup. Slow movers to online shopping and recognition of the changing lifestyles of consumers will
continue to fall behind in the battle for market share. The driving forces in the industry environment
are continually reshaping competitive strategy. The outer ring of the macro environment will
continue to be an essential component of the driving forces, especially the sociocultural forces like
lifestyle and shifting population demographic needs that are moving toward convenience and
differentiation.

The drivers as a whole are making the industry more competitive with specializing in certain
segments. The traditional membership warehouse market is less attractive for competitors to enter
due to the changing lifestyle needs of the consumer and the emergence of new marketing
innovations. Also, internet capabilities are now driving the way people shop. It is clear that
profitability will be affected for the organizations who are focused on the key driving forces and
adjust their strategy ahead of or who can respond to the shift in consumer behavior.

Value Chain Analysis

A company’s prices and costs must be competitive with rivals, and it must have an appealing value
proposition to customers. By reviewing internal activities, a company collectively creates value to
the customer. The effort to reduce or eliminate activities that do not provide value to the customer is
accomplished by streamlining or eliminating processes, and, in turn, deliver revenue to the company.
The higher the value a company can deliver to its customers relative to its rivals, the higher the
advantage it has in the market. Costco bundles its resources and capabilities throughout the value
chain to deliver profits and capture a substantial market share with a differentiation-based
competitive advantage.

The strategy of low prices and limited selection membership base drives the value chain for Costco.
Value chain primary activities and costs consist of supply chain management, operations,
distribution, sales and marketing, and service. Secondary activities and costs consist of R&D,
technology, and systems development, human resources management, and general administration.
All of the components together drive profit margin because the company’s value chain delivers the
best value to the customer at the lowest cost of close competitors.

Supply chain management – Buying and merchandise selection – operating efficiencies of a limited
number of items help create buying power directly with manufacturers with the elimination of
middlemen to minimize cost. Large bulk order purchases and relationships with suppliers on 3,800
active items prices and bargain levels drive the rapid inventory turn.

The model of limited items, bargain prices, and a quick turn is a sustainable strategy. It provides
excellent value to the customer and has significant competitive value. It is better than the competition
because inventory turns so quickly that it often exceeds payment terms, essentially allowing the
manufacturer to finance the purchase of the inventory. It would be hard to copy this system because
the models of other warehouse membership companies have chosen a broader base of items creating
a distinctive competence that rivals do not have. The weakness in this capability is that is possible for
smaller rivals to mirror this model because of their smaller footprint, but again, for larger-scale
competitors, it would be difficult to duplicate.
Operations – The warehouse membership model uses a limited footprint and vertical display space
to maximize the flow of traffic, and product display of products support services in a self-service in
low overhead facilities positioned in target markets of affluent shoppers. Products arrive at each
warehouse in full pallet units and are displayed directly on the sales floor or overhead bin for quick
rotation. The refined relationship with manufacturers and purchasing power of limited items allows
limited touches of individual items, eliminating inefficient partial loads, sorting and reloading split
containers of slower movers and further sorting at the retail location. All received products are ready
for immediate stocking on the floor from the manufacturer creating a value chain that eliminates
individual items handling from the manufacturer until the consumer selects the item. Membership
and controlled point of access in and out of the facility minimize shrinkage.

Warehouse setup and footprint coupled with the efficiency in supply chain facilitates integrates and
bundles capabilities within the operations to drive Costco’s customer value proposition. Most
membership warehouses have a similar setup but do not have the scale to ship full pallets requiring
more touches and cost. Rivals do not easily attain this level. Website operations are a weakness and
point opportunity for Costco. Members-Only access and limitation of product selection trail
competitors and can easily be trumped by competitors.

Distribution – Costco employs a network of direct shipments from manufacturers and cross-dock
depots to sort and distribution full pallets to maximize shipping of goods to warehouses within 24
hours. Shipments arrive at the warehouse and are forklifted directly to the sales floor reducing
(touches) shipping and handling costs. The volume and quick turn of merchandise are difficult to
match by rivals, making it a core competency derived from bundling resources and capabilities.
Structural changes would be required by rivals to copy and would be challenging to trump with
substitute resources. However, in the future with time and resources, the distribution model could be
imitated by rivals, so this is a resource weakness.

Sales and Marketing – Costco uses a reputation of low prices and the treasure hunt for a great value
to drive sales. Limited marketing focused on mailers to members and occasional prospecting for
members, in-store sampling and new warehouse membership drives target businesses and gold star
members. A strong value reputation is the driver of sales and limits the need for marketing. Kirkland
Signature products, treasure hunting and a one-stop shop for items for services like pharmacy and
gasoline perpetuate word of mouth results. An excellent reputation has a competitive value that most
rivals do not have. Walmart and Sam’s Club have the reputation of being inexpensive and providing
value to many that make it a sustainable capability.

Resource/capability weakness is that Costco relies primarily on word-of-mouth and reputation for
advertising and marketing whereas its competitors market themselves more. But as the older
membership group dies out and in an age where social media is becoming more prevalent and
younger generations are doing less of face to face communication, Costco might consider investing
in a social media presence to garner younger membership and drive advertising.

Service – Costco is focused on providing a multitude of added services beyond warehouse items and
a strong labor force to provide value to customers. Feedback from all areas provides the basis for
warehouse leadership and buyers to monitor the pulse of the consumer. Most competitors do not
have the same labor structure but do have the ability to replicate this area. This is a weakness for
Costco because with a little added labor, its competitors can easily duplicate this service level.
Costco should work on finding ways to differentiating its customer service in ways that cannot be
duplicated by its competitors to continue adding value to its customers’ experiences.
Technology and system development and general administration – These areas of the support
activities are refined and minimized to lower costs throughout the supply chain, operations,
distribution and sales, emphasizing the lowering cost of operations to a bare minimum. Human
Resource Management is a strength of Costco. Superior wages and training provide a stable
workforce and allow for long-term development and promotion from within that many rivals do not
possess. This is a competitive strength and derives value. Structural changes would be required for
most competitors to copy due to the cost structure. Substitution can be provided by outsourcing.

E-commerce technology is an area of weakness and an opportunity for Costco to expand. As internet
giants like Amazon dominate the online shopping market, Costco has an opportunity to gain new
members by offering expanded online shopping with in-store pickup similar to what local grocery
stores are doing now. Also, Costco could introduce self-checkout kiosks to reduce the long lines
often seen in stores.

SWOT Analysis
 Strength – low prices, brand loyalty, strong culture, operating efficiency, strong private label
 Opportunities – attract younger customers, expand more internationally, expand e-commerce
 Weakness – e-commerce, older customer base, no self-checkout, limited operating area
 Threat – price competition from retailers and industry rivals, internet retail (Amazon)

KEY SUCCESS FACTORS

 Costco has a very large network of 750+ retail warehouse locations serving 3 million
members a day
 No Frills warehouses keep the focus on low overhead, controlled shrinkage quick turning
inventory
 Efficient supply chain, operations and distributions value chain activities translate into
customer value and solid profit margins
 The model of limited SKU’s drives quick turn inventory of treasure hunt merchandise and
private label items creating brand loyalty and frequent customer visits
 Great product reputation makes “word of mouth advertising” the best and most cost effective
form of advertising for Costco