Costco Wholesale Corporation is a membership only warehouse club that operates on the concept of offering low prices on a limited selection of products with a wide range of merchandise. They are currently the largest membership warehouse club in the United States and operate in eight countries. Costco was founded in 1983 by Jim Sinegal. As the company evolves, the same core qualities of entrepreneurial spirit, commitment to quality and employee focus are still used in leading Costco today. Costco’s mission is “to continually provide our members with quality goods and services at the lowest possible prices.” Costco’s two main selling points are low prices and quality. An important strategy for the company is developing a supply chain that supports their low costs and high quality with brand-named merchandise. It is important for Costco to contain and improve its competitive strength and long-term market position through their members value. Their mission and vision go hand in hand with achieving their overall business strategy. Costco’s vision, “a place where efficient buying and operating practices give members access to unmatched savings,” shows the need for efficiency in operating with cost minimizations. Customers can expect some of the best discounts and savings through their different memberships. The high-quality products with low pricing strategy are what attracts customers to Costco.
The business model Costco uses entails high sales volumes with rapid inventory turnover. When rapid inventory turnover is combined with low operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling, and self-service warehouses it enables Costco to be profitable. Costco is able to operate with significantly lower gross margins than their competitors because they are able to minimize their merchandise costs.
Costco has two major competitors in the warehouse club industry, Walmart Sam’s Club and BJ’s Wholesale Club. There are also many other retail competitors that Costco deals with including Walmart, Target, Kroger, and Amazon.com. In this industry low cost operations, positive shopping experience, well-known and well-respected brand name, high labor productivity, strong e-commerce capabilities and convenient locations are all important areas of focus when competing. Membership loyalty and growth is essential for Costco. Costco is known for its well -respected brand name and positive shopping experience. With many competitors in this industry, if customers are not satisfied with their experience, service, or products it is very easy to find another store with similar merchandise. It is important to continually grow in memberships and sustain high renewal rates. Anything that can negatively impact sales or members can have a lasting effect on the brand’s image or reputation. Costco depends on running an organized operation to keep up with their demands and distributions due to the high inventory turnover that drives this company. Costco has many strengths over its competitors, but also has areas where it can improve. Costco is a well-known and respected company, and members know it to have high quality merchandise for a low price that comes with a good store experience. Some areas of weakness for Costco is its e-commerce capabilities. In 2018, Costco’s net sales for e-commerce were 4% of total net sales. Technology is becoming a driving force in the Wholesale industry and is constantly growing. Another area of potential weakness is being able to identify and respond correctly to consumer trends. Knowing trends in demographics and customer preference is important. Failure of this can lead to excess inventory and have a negative effect on company performance.
Costco’s financial performance is very strong and continually improving. An important driver in continued profitability is in sales growth. Generating the right merchandise at the right time, the health of the economies that Costco operates in, and constantly adding more members all influence Costco’s performance. The ability to control costs of the company also has a big influence on profitability. Costco’s operating margin has stayed relatively consistent the last four years in its United States, Canada, and international markets. Internationally they have seen an upward slope that likely implies there are less competitors in those markets making it easier to be more profitable. Costco is highly dependent on their financial performances in the United States and Canada markets as over 80% of their stores are located in those countries. The gross profit margin has stayed constant the last three years and total revenue has been increasing every year. To help keep revenues and profits increasing, Costco has continued to expand into new markets and opened 21 new warehouses in 2018.
Costco has great potential to continue their growth and profits. The industry and markets it competes in is very competitive and continues to grow in size. It is recommended that Costco continues to expand internationally. Costco already is established in international markets, but it has very few compared to the United States and Canada markets they are involved in. Less than 25% of revenue comes from their international markets. The international markets have a lower number of competitors compared to what the United States market holds. Costco should continue to develop in North America as well but growing internationally can help increase their size and strength in an industry they are already leading. E-commerce is an area that Costco lacks in with regards to its competitors. This is another area that is highly recommended to improve. Many of Costco’s major competitors in the retail industry are mastering online shopping. Costco has the funds, it just needs to market more to this area of sales. Technology and retailing are constantly evolving. Staying up to date with changing expectations and new developments can be challenging. The ability for customers to comparison shop only increases competition. Costco needs to make more technology investments in their website and mobile applications. The inability to adapt and respond to these changes and expectations of customers could negatively affect Costco’s financial performance long-term. Costco needs to make sure it is being innovative to keep members coming back to shop and renewing their membership statuses. Costco is increasing its revenue and store locations each year and by expanding to new geographic locations internationally, continue growth in North America, and staying innovative with retail e-commerce it can keep growing as a profitable company.
