COSTO CASE ANALYSIS

COSTO CASE ANALYSIS

Introduction

Costo is a retail brand that is leading in the U.S. Costo wholesale is a warehouse that offers massive discounts to the buyers. It has membership-based houses both in Canada and in the U.S. and several other markets (Thompson et al., 2020, Pg. C18). Its operational business model is different from the one for Walmart. In recent years, the number of members for Costo merchandise has increased as well as the revenue. The company has also been able to achieve increased brand equity and popularity due to its regularly low prices for the members together with improved customer service. The company was established in 1983 by Jeff Brotman and Jin Sinegal, guided by the vision to provide their consumers with discounted merchandise. Costo’s success in the warehouse club industry is associated with its business model. The model involves generating rapid turnover on inventories and high volumes of sales by offering the purchasers low prices, which are attractive for a limited selection of selected private-label and nationally “branded products in a broad range of merchandise categories” (Thompson et al., 2017, Pg. C23). As compared to every other merchandise retail shop, Costco prices are lower. However, the retail industry is associated with increased competition levels. It faces competition from Walmart and other numerous competitors who are competing to have a recommendable market share. The success of Costco wholesale merchandise is directly linked with its ability to initiate a favorable balance in addressing both internal and external factors guided by the SWOT analysis. In the paper, the SWOT analysis for Costco is discussed, and further implications for the areas that need improvement are proposed for the management..

Costco SWOT Analysis

The SWOT analysis evaluates the internal and external factors which are strategic to the company. The internal factors encompass the strengths and weaknesses of Costco wholesale. The external strategic factors comprise the opportunities and the threats which are relevant to the management. Costco’s SWOT analysis provides insights on the most pertinent business issues which the management must include in its strategic formulation. Addressing these issues effectively in the SWOT analysis can promote the steady progress of Costco’s position in the international markets. The SWOT analysis hence identifies the issues affecting the company to understand the potential of the company in the global retail market.

Strengths

Brand equity

The major strength of Costco is brand equity. The company has created substantial brand equity through improved customer service, providing quality products, and lower prices (Thompson et al., 2017, Pg. C18). The brand has been able to offer its promises to the members hence strengthening the trust of customers on Costco’s products. Building the trust of the customers is an added advantage during this era of competition. Costco has also created stable brand equity by offering better customer services.

Low Prices

Costco provides consistent low prices to its members. The members are charged low for all the purchases that they perform with Costco. The philosophy of the company is to offer quality products at competitive prices hence do not focus on increasing costs in the short term (Thompson et al., 2017, Pg. C22). The customers can return to the warehouse since they are convinced that they are getting the best prices for a wide variety of products.

Membership and customer base

Costco is a famous brand internationally, and this has kept a good customer base over the years. The total number of members in 2017 was 90.3 million, and the number grew to 94.3 million in 2018 (Thompson et al., 2017, Pg. C29). The loyal customers are issued with special privileges and increased discounts on their products. The membership deals offered by Costco enables them to establish a long term and loyal customers (Thompson et al., 2017, Pg. C29). The idea of issuing deals based on the membership is the principal strength it has used to retain customers in the market.

Extended supply chain and technology

The Costco brand has frequently expanded its supply chain and also encouraging the application of advanced technology to support its global operations. The primary aim is to increase the initially unforeseen markets and establish a large international supply chain (Thompson et al., 2017, Pg. C28). Costco wholesale also has a straightforward supply chain, and they are capable of providing competitive prices for their products.

Indomitable Market Presence

Costco has a stable operation for its brand that has promoted a strong customer base. The customers worldwide are sufficiently informed about the Costco brand presence. Costco has been a long-term provider of quality wholesale products, which has enabled the brand to survive in a stiff competition (Thompson et al., 2017, Pg. C26). Through labeling its products on their own and selling them in their chains, its market presence is strengthened. Finally, Costco is a famous wholesale brand in the entire United States and Canada.

Weaknesses

Dependency on the U.S. and Canada markets

The company largely depends on the Canada and U.S. markets for a larger share of its sales. U.S. accounted for 72% of the overall sales in 2018, while Canada accounted for almost 15% (Thompson et al., 2017, Pg. C29). The sales in other global markets are less than 15%. In case of any economic slowdown or breakdown in the two countries, the business is heavily affected. If the brand can expand into other global markets, then it is less likely to be affected by economic upheavals.

Reduced focus on marketing

In the past, Costco has not spent enough on marketing. The company majorly uses publicity and word of mouth for marketing purposes. It only sends coupons and emails to the existing members. Competitors such as Wallmart, on the other side, use a lot of money to advertise its products (Thompson et al., 2017, Pg. C25). Other global competitors also use a lot in product promotions and advertising. Costco’s reduced expenditure for marketing and promotions results in increased pressure due to competition and other growth-related pressures.

Limited Products

As compared with the competitors, Walmart, Costco offers a smaller product range (Thompson et al., 2017, Pg. C19). The members are hence facing the challenges of acquiring a variety of products at their outlets. A limited range of products acts as a competitive disadvantage.

Product Recalls

Costco product recalls severely affects its reputation. There are particular instances that the company is forced to remove a specific brand from its outlets. Recalls are associated with quality issues or temporary problems such as diseases. For example, in 2015, Costco recalled a particular food product from its outlets due to toxin present in the primary ingredients (Thompson et al., 2017, Pg. C30). Such cases adversely affect brand reputation and interfere with the customer base.

Opportunities 

Global expansion

The brand increased its presence outside the United States, and Canada Costco has plans to continue expanding both domestically and internationally. The present number of stores is roughly 670, and the management expects to establish more than 1200 warehouse in the future (Thompson et al., 2017, Pg. C24). For example, recently, Costco has expanded into Spain, and in due time it plans to expand to France.

E-Commerce presence

Costco has recently invested in digital marketing through the E-commerce market and has made their products available online. In the modern world, e-commerce stores are productive since most people can access the internet for online presence. Due to the increased online presence of the younger generation, Costco has expanded its market segment to a larger share for the digital generation (Thompson et al., 2017, Pg. C26). The e-commerce website is functional in various geographical markets such as Mexico, Canada, the U.K., Taiwan, and Korea. In 2018, e-commerce sales were 4% of the overall sales.

Private Labels

In the modern world, the trends in consumption have shifted into purchasing private label brands (Thompson et al., 2017, Pg. C25). Costco is known for providing private labels for its wholesale products. It is likely to attract more customers by issuing even more private stamps.

Threats 

Labor Cost

The present increase in the labor costs is likely to affect Costco’s profit margins due to the pricing strategy it uses on its products (Thompson et al., 2017, Pg. C27). In the United States, labor costs are rising steadily, and this does not support the revenue model for the company. A similar scenario is also observed in Canada Markets. To avoid such a problem, Costco should prioritize opening more outlets in other nations where the labor cost are still low enough to support their profit margins.

Stiff Competitive

The pressures on the retail industry have grown due to high competition. Apart from Walmart, which is the largest retailer, Amazon also creates stiff competition due to its growing presence (Thompson et al., 2017, Pg. C22). Other retail brands are creating pressure in competition for Costco.

Regulatory Barriers

The Government has also placed restrictions on the chains of supply for large retail brands. These restrictions have resulted in the increased cost of running these supply chains, and in the future, the regulations are expected to be more (Thompson et al., 2017, Pg. C24). The profit margins for Costco will be adversely affected, and they are likely to increase their prices. Such an action will result in a reduced customer loyalty base.

Strategic Implications and Conclusion

Costco is a leading warehouse retail brand in the U.S., and it has also expanded its operations in Canada. Other markets where Costco enjoys a limited presence encompass Korea, Mexico, Taiwan, and the U.K. To achieve increased growth, the brand has invested in digital marketing through e-commerce. While it has enjoyed increased revenue and higher profit margins in recent years, the future is holding a lot of challenges. The challenges comprise of strict regulatory measures, high competition, and the increasing cost of operation. Costco has never been that serious about investing in advertising, and the management must ensure that in the future, they increase the use of digital advertising to enhance promotions and grow its customer base and market share. Costco’s marketing department should also consider using technologies such as A.I. to provide better customer service. The management should also ensure that the brand has expanded into emerging markets and extend its merchandise operation to achieve faster growth.

Reference

Thompson, Peteraf, Strickland & Gamble, 2020. Crafting & Executing Strategy: The Quest for Competitive Advantage 22^nd Edition, McGraw Hill)