Costco Wholesale Corporation
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Costco Wholesale Corporation is a warehouse club chain found in the United States of America. As of July 2011, the organization was the largest membership warehouse club in America. In 2007, Costco was the largest wine retailer in the world. The headquarters of the organization is Issaquah, Washington. The first warehouse of the organization was in Seattle. Costco has decentralized to the United Kingdom, Canada, Taiwan, South Korea, Japan and Mexico. James Sinegal and Jeffrey Brotman founded the organization in 1983. Today, Costco has approximately 142,000 employees, both full time and part-time. In September 2009, the company had 55 million members (Costco Wholesale n.p.). The company’s main strategy is the provision of lowest prices in high quality merchandise. This strategy aims at selling large quantities of goods at low prices. Costco’s main competitor is Sam’s Club. Other competitors are BJ’s Wholesale Club, 1-800 Contacts, ALDI Group, and Amazon.com.
Costco deals in a wide variety of products that include candy, snacks, health as well as beauty aids. Others include tobacco, alcoholic beverages, cleaning and institutional supplies, and dry and fresh food. The company also has institutionally packaged food and tobacco. In addition, Costco Wholesale Corporation deals in pharmacy, optical, one-hour photo, food court, and hearing aids among other products. Currently, the company has 600 warehouses, which include a lot of warehouses in the U.S and Puerto Rico, 32 in Mexico, eight in Taiwan, three in Australia, and 22 in Britain.
Porter’s five forces analysis is a framework for analyzing industries and business strategies. Michael E. Porter developed the approach in 1979. The approach uses industrial organization economics to come up with five forces of competitive intensity and, as a result, determine the attractiveness of the market. Three of Porter’s forces are about competition from external sources, (the macro environment) and the two others refer to internal threats (micro environment). The five projections consist of the forces that are close to the company and, as a result, can affect the service delivery of the company. Let us use Porter’s five forces analysis to understand Costco’s competitive environment.
There is the threat to new competition. This is the suggestion that markets that post high returns tend to attract new firms. This will lead to a big number of new entrants, a fact that will decrease the profitability of all companies in the industry. Thus, incumbents need to block the entry of new companies so that they maintain realizing high profits. For instance, Costco has established customer loyalty to its brands (Roads 599). The company does not use multiple brands, where the item is the same (except under circumstances, when it is selling a house brand). Besides, the products have low prices as the company buys them in high volumes from vendors. As a result, customers remain loyal to the same brand (which costs relatively less). In addition, Costco has many warehouses. Thus, new entrants in the market require a lot of capital so as to compete. There is a wide distribution of the warehouses, a fact that fosters customer loyalty.
Let us move on to the threat of substitute products. This is the suggestion that the availability of products other than the common products increases the likelihood of customers to try alternatives. Costco’s competitors have used this approach to introduce different products to the market. For instance, Sam’s Club has established more warehouses than Costco. However, Costco still maintains a higher volume of sales than Sam's club. This is because Costco has countered the move of Sam’s club by maintaining a low cost (Costco Wholesale n.p.).
The other force is the bargaining power of customers. This refers to the ability of the buyers or customers to pressurize the firm. This factor affects the buyer’s sensitivity to changes in price. Costco ensures that its buyers have a high bargaining power. The company has little to no switching costs. This means that becoming a member is easy. Besides, Costco has a high concentration of buyers (Roads 600). Moreover, the company sales products that are either similar or the same. This practice ensures that there is a guarantee of customer satisfaction.
The other force is the bargaining power of suppliers. This means that suppliers of products to the firm can become a source of power over the firm. This is especially when product substitutes are few. In the case of Costco, suppliers have a low power (McGregor 5). There exists a strong relationship between Costco and the suppliers. The practice of buying large quantities at low costs serves as a win–win situation to both parties.
The other force is the intensity of competitive rivalry. This is the main determinant of an industry’s competitiveness. Costco has high competitive rivalry. The company can easily replicate its economies of scale or supply chain management (Roads 598). In addition, the battle for low costs results into low profit margins. These factors make the organization remain relevant in the market.
Costco Wholesale Corporation has managed to maintain a lead in the warehouse industry. However, there are other players that are worthy notice. As already noted, the most significant competitor of Costco is Wal-Mart and Sam's Club. In fact, Sam's Club has more warehouses than Costco. The other significant players are BJ’s Wholesale Club, 1-800 Contacts, ALDI Group, and Amazon.com. Some of these competitors (for instance, Amazon.com and 1-800 Contacts) specialize in online marketing of their products. However, apart from Sam's club, the most significant player is BJ's Wholesale Club. The three companies (Costco, Sam's and BJ’s Club) share a similar business model. This involves selling large volumes of merchandise, using low prices in membership-only warehouse clubs.
Competition in the warehouse industry aims at retaining members and maximizing profits. Garretson, Fisher and Burton, give the following levels of competition (95).
This level involves the needs or desires of consumers. The warehouse company should establish the potential desires and needs and seek to satisfy them. For instance, customers may need easily accessible warehouses. Costco takes into account this factor by ensuring that there are many retail locations that customers can easily access. On a similar note, Sam's Club has followed suit by establishing more retail locations than Costco. Another example is the use of cash, checks and/or credit cards for payments. This is an attempt to satisfy the needs of workers.
This refers to the demands that the buyer wants. For instance, some customers may prefer online ordering of goods, rather than walking to warehouses. Companies like, Amazon.com, decided that online marketing was the best. Besides, Costco and the other leading warehouse companies also allow online ordering of goods (Garretson, Fisher and Burton 96).
This refers to the competition based on brands. In this level, questions concern the brand name that the consumers prefer. Costco does not use multiple brands, where the item is the same (except under circumstances, when it is selling a house brand). This ensures that customers remain loyal to a brand and, as a result, remain in the same firm. Customers are likely to buy a brand that they already know (McGregor 5).
This one involves the consumer demand (type). This entails analyzing the products that consumers prefer. For instance, Costco offers high quality products at low prices.
There is a significant reduction in consumer durable spending because people have deferred purchases like furniture and large appliances. In fact, purchases of apparel have reduced by 6 percent for women and 10 percent for men. There have been marginal increases for the apparel of children. This is crucial as the product categories for the two types of products make up to 29 percent of Costco's business. Although Costco has only a three percent decline (Costco Wholesale n.p.), this is a worrying trend. Costco has decided to concentrate on other products that are recession proof, for instance, wines, snack foods, tobacco and health related products in order to make up ground to avoid the decline. If the economy continues to decline, there is the fear that the Costco Wholesale Corporation will lose its unrivaled economic stability. This means that the company should come up with other measures of guarding against the threat of economic meltdown.
Demographics are another key issue that is facing Costco Wholesale Company. Demographics cause trouble for the company's business model of "a single size packaging" of large volumes of goods. The company pursues this practice in order to reduce handling and restocking of the goods (Costco Wholesale n.p.). This has the advantage of cutting down the expenditure of the organization. However, the world has an increase in the number of the aging population, single and divorced people as well as smaller families. This means that there will be few people who need the large sizes of goods that Costco offers. This might serve societies that have large families, for instance, in Africa. However, in the countries that Costco has warehouses, the prevalent trend is that of small families. McGregor established that the average American family consists of five members (6). This means that there is the fear that people might start to shop elsewhere as they no longer need the large volumes of goods that Costco Wholesale Company offers. As a result, the company should explore the possibility of packaging goods in small packages.
Pairing the problem of packaging with the concerns of reliable supplies of merchandise brings another significant issue. As it is seen in Porter’s five forces analysis, there are aggressive competitors that threaten the market share of Costco. Though the company has controlled much of this competition, there are signs that competitors and suppliers are gaining ground over Costco. For instance, Proctor and Gamble cited Sam's club as their preferred merchandiser (McGregor 5). This is because Sam's Club has more efficient logistics and inventory management systems than Costco Wholesale Corporation. Besides, Sam's club purchases ongoing supplies of Proctor and Gamble products in many sizes. Moreover, Sam's Club stocks a full inventory of P &G products. This means that when there is a limited production of merchandise, Sam’s Club will become the preferred customer and the other corporations (in this case Costco) will have to wait or go without. Costco purchases stock of merchandise on the grey market whenever it is possible. The company also handles only a single size of Proctor and Gamble products in sizes, which are not lucrative for Proctor and Gamble. Besides, Costco has few ongoing commitments for its products. This example shows that there are problems with merchandise policy of Costco. The company should move to seal this gap in order to prevent the competitors from having a cleavage.
This is a chain of retail warehouse clubs, belonging to Wal-Mart Stores, Inc. In 2008, estimates showed that Sam's Club served approximately 47 million members from the United States of America. Sam's Club holds the second position in sales volume of warehouse clubs. As already noted, the first one is Costco Wholesale Corporation. However, Sam’s has more retail locations (602) than Costco (600). Most of the time, Sam's Club sells its merchandise in bulk. It also sells the merchandise directly off pallets. The products that the club sells include jewelry, designer goods, crystal and collectibles, electronics, apparel, food and meats. In addition, most locations have pharmacy, photo, bakery, optical department, among others. A notable feature in most locations of Sam's Club is the availability of stands, at which employees prepare food products for customers to sample and purchase. The club has approximately 47 million members from the United States of America. It operates about 580 clubs nationwide (Roads 599). There are approximately 100 locations in other countries like Brazil, China, and Mexico.
Sam's Club earned revenue of $ 46.9 billion in the year of 2009. There are various options that can be used for payment in Sam's Club retail locations. These are Wal-Mart Credit Cards, MasterCard, debit cards, Wal-Mart's gift cards, Discover Card, cash or checks. Sam's club offers an aggressive competition to Costco's Warehouse Corporation because of the wide range of products it provides. In addition, the number of retail locations challenges the position of Costco as the largest warehouse club in America. Sam's Club had $44.4 billion in revenue in the year 2007. This was from 591of its warehouses.
BJ Wholesale Club, Inc. is a warehouse club chain that operates on the East Coast of the U.S. and in the state of Ohio. The company began in 1984. In January 2010, there were 190 BJ's locations in the United States of America. The company has about 23, 500 employees. Its main competitors are Costco Wholesale Corporation and Sam's Club. BJ's has many benefits to its members. These involve "member pricing", which is a variety of "name-products" goods at discount wholesale prices, among other benefits.
BJ's accepts various payment options, such as cash, check, debit cards, and EBT SNAP benefits. Among the main warehouse clubs, BJ's is the only one that regularly accepts Visa for payment. One should be a member at BJ's to enjoy the various benefits available to consumers and businesses. According to Roads (600), BJ's is the third company with the largest market share in the United States of America. However, its influence is not comparable to Costco or Sam's Club. In 2007, BJ's got $9.0 billion in revenue from 177 warehouses.
Costco has a high membership fee, when compared to the other companies. However, Costco's membership fee includes other services such as car and home insurance. This gives Costco leverage of the other corporations.
All the Costco stores allow cash, checks and credit cards. However, Costco only takes American Express credit cards. On the contrary, Sam's Club and BJ's accept MasterCard and Discover.
Costco's packaging ensures that goods have a low unit price. The cheap prices, indicated by the other warehouses, are misleading as they do not consider the packaging.
Costco has undertaken an extensive expansion program. The domestic overexpansion risks cannibalizing the market share of pre-existing stores. BJ's Wholesale Club and Sam's Club have more controlled expansion programs than Costco. In Costco, the average pay of a worker is remarkably high, when compared to the competitors. For instance, Costco pays $17 an hour, which is 42 percent higher than that of Sam's Club.
Most of Costco's products are practical and frequently used goods that people need. Costco allows buying of these products in bulk at cheap prices. Besides, Costco's expansion enables accessibility of their warehouses by many customers. The corporation has racks of gift cards that can be obtained at discounted rates. These include Ruby's Diner, Disneyland, Wild Rivers, and so on. Costco's has a favorable return policy. The member can always return products that are unsatisfactory. However, for electronics, the deadline for returning is 90 days.
Costco has an advantage over the rest of the companies given its low prices, high employee motivation (because of the good remuneration) and a comprehensive membership policy. However, the corporation needs to re-examine its weak areas.
The differentiated branding, in addition to private label products, enables Costco to provide an upscale club experience to members. This allows Costco to gain market share and, at the same time, increase sales per square foot (Costco Wholesale n.p.). Costco enters a market by selling membership to employed persons in leading companies. The company also sells membership to owners of small businesses. These practices help to capture the highest income population in discount retailing. Costco can increase its present base of 600 clubs in the world.
From 2000 to 2008, the operating income of the company increased from $1.037 to $1.969. The company reduced its shares from 475.7 million to 444.3 million as stakeholder equity rose from 4,240 to 9,192. In the same period, membership rose from 17.1 to 56 million. Costco is the first company in the world to move from zero to $3.5 billion in a span of less than six years. In the fiscal year that ended on August 31, 2009, Costco’s sales totaled $71.42 billion. This included $1.09 billion net profit.
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