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Case Analysis: Costco Wholesale Case Study

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Updated: Jul 22nd, 2021

Introduction

Costco Wholesale Corporation is a membership club founded in 1983 and headquartered in Issaquah, US. The company deals in a variety of merchandise including televisions, computers, camcorders and phones.

In addition, the firm provides services such as website and online solutions, mortgage purchase and financing, business prescription insurance as well as payroll services. The corporation was formed with a mission of offering quality products as well as services to its members at achievable economical prices.

Current situation

The company’s competitive advantages are the business strategies, customer approach and the diversified trade model.

Strategy elements

Low pricing as well as limited selection of products are the foundation of the corporation’s strategy. Further, Costco’s treasure-hunt merchandising is also an invaluable tactic applied by the firm in operations. Through treasure-hunt merchandising, the company is capable of purchasing high-end products and services on the gray economy from the vendors with the motive of eliminating surplus stocks.

Competitive approach

The company’s price leadership tactic attained through reduced handling and warehouse expenses, the utilization of just-in-time stocking principle and maintenance of in stock has proven invaluable in the reduction of prices and increased purchases.

The corporation also maintains preeminent value packs that contribute hugely in attracting large numbers of customers. The company undertakes minimal promotional activities resulting in minimal number of expenses incurred.

The business model

The firm currently utilizes business model that focuses on the provision of restricted categories of trademarked national stock while anticipating high proceeds from vending as well as prompt stock returns.

In fact, the company’s just-in-time stock, minimal handling of stock, volume purchases as well as efficient delivery channels has enabled the firm to generate higher revenues from its operations. Further, the corporation’s treasure-hunt merchandise has created a process that attracts large number of clients.

Analysis

The macro-environment

Costco Corporation uses PEST analysis in the examination of the macro-environment in which it operates.

Political aspects

The corporation recognizes the significant roles played by both the political and the legal sectors in ensuring excellent status, success and trust in its operations. As such, the firm adheres to business morals as well as the legal provisions provided by the international business organizations. The company offers goods and services that meet the standards as well as gratifies the customers’ needs across the globe.

Economic aspects

The company’s repute appeals to large number of clients leading to increased sales. Additionally, the firm continues to offer superior goods and services to its clients. Further, the firm has spread remarkably across different states in the globe by opening various businesses causing an increase in its economic power and competitive position over similar firms in the industry.

Socio-cultural aspects

Culture influences the performance and productivity of Costco Corporation in a number of ways. First, the corporation recognizes the worth of its personnel’s ideas and beliefs without prejudice. The company also satisfies its client social assurance by the provision of high quality goods and services.

Technological aspects

The utilization of contemporary technology in businesses ensures efficiency and competitiveness. Costco is at the forefront of utilizing the current progression in expertise to come up with innovative products that suit the needs of the customers. Further, the company’s website enables the clients to familiarize with the firm’s products and services.

Key success factors

The company’s business model is instrumental in defining its achievements. The firm recognizes cultural perspective by seizing opportunities in different locations. In addition, the firm’s circular vision is instrumental in the reinvention of innovations leading to efficient delivery of products.

The corporation’s passion has been imperative in the designing of a collaboration-propelled paradigm enabling innovations of current value models. Moreover, entrepreneurial spirit and working for a purpose is invaluable in sharing ideas that deliver greater achievements.

Strategic group map

Corporation Business
Model
Revenue
(billions)
Comparable store sales(decline) Number of store locations Current strategy
Costco Low costs and high volumes $70 6% 513 International economy
Sam’s Club Low cost and high volume $45 4.5% 490 20 club locations nationwide
BJ Club Low cost and high volume $10 3.5% 170 Retail shoppers and provision of more grocery

The company relates with other two competitors including the Sam’s Club and BJ’s wholesale club. The map exhibits the stiff competition that Costco faces in the market from rivals. Based on the business model, all the firms apply low cost and high volumes model. In terms of revenue, Costco leads with $70 billion followed by Sam’s Club $45 billion and BJ”s Club at $10 billion.

Costco’s sales have declined by 6%, Sam’s by 4.5% and BJ by 3.5%. The firms have diversified their stores all over the globe with the Sam’s Club leading with the number of stores at 590 followed by Costco’s 513. BJ Club has 170 stores.

The firms are employing a number of current strategies to gain competitive advantage. For instance, Costco has diversified operations in the global economy while the Sam’s has opened up 20 new locations nationwide. The BJ’s Club focuses on retail shoppers as well as presenting volume groceries.

Porter’s five forces

Porter’s five forces

New market entrants

The corporation has a competitive advantage over rivals due to high barriers of entry into the market, low threats from new firms and diversified products at low-costs.

Competitive rivalry

The company faces stiff competition from other firms such as the Sam’s Club. The firm’s delivery series is effortlessly duplicated leading to enjoyment of economies of scale. Low-cost strategies by many firms have resulted into meager proceeds to the firm.

Supplier power

The firm enjoys good working relations with its vendors who supply large quantities of products at low prices

Purchasing power

The firm enjoys high purchase bargaining power, high concentration and mobility of buyers

Substitutes

There is insignificant pressure of substitute and the customers get towering worth from the economical purchases as well as elevated membership maintenance.

Internal environment

SWOT analysis

Strengths Weaknesses
Opportunities Threats

Strengths

The firm maintains devoted and rich clients, towering stock proceeds and consistent return on sales as well as resources together with incredible remunerations policy. All the aspects have enabled increased revenues.

Weakness

The company diminishing profit levels, weak promotion activities, lack of self-checkouts and the primary focus on the club’s members opposed to the general customers make Costco less attractive to many potential customers.

Opportunities

Higher growth prospects are presented to the firm due to operations in high GDP states, expansion in membership, good repute regarding employee remuneration and societal responsibility as well as the augmenting trademark among the masses.

Threats

The firm faces stiff competition from competitors such as the Sam’s Club and BJ Club. Additionally, the firm’s geographical diversification is insignificant compared to the Sam’s Club.

Financial ratios

Liquidity ratios

The current ratio showed a decreasing trend from 116% in 2010 to 110% in 2012. The quick ratio and cash ratio were 60% and 47% respectively in 2010 and declined to 52% and 40% respectively in 2012.

Profitability ratios

Costco’s profitability ratios have remained constant over the years. For example, gross margin has been at 13%, operating margin at 3% and profit margin at 2%. Return on investments after tax has been increasing from 12% in 2010 to 14% in 2012.

Value chain

The Costco’s CRX program enables clients to obtain inventory requests in time. In addition, the program enables the firm to measure performance and productivity against competitors thereby increases priceless insights in the viable economy.

The system has also provided efficient delivery series solution to the clients through updating stock information, forecasting and demand planning leading to enhanced business operations and reduction in costs.

Key strategic issues

The critical tactical aspects of Costco encompass low prices, limited product lines and selection as well as treasure-hunt shopping experience. In fact, the firm strives to offer quality goods and services to its members at economical costs achievable. The company operates a limited number of products approximated to be 4,000 through volume buying, effective delivery procedures and abridged inventory managing.

Recommendations

The firm should modify its strategies to address the shortcomings in its operations. For instance, the corporation should diversify selections of merchandise instead of limiting choices to only 4000 to expand the customer base.

Secondly, the firm should build many warehouses across the globe to counter the rising number of competitors like the Sam’s Club that may attract a large share of the market. Thirdly, the company should also diversify applied cost and pricing strategies since competitors are utilizing the low-cost tactics.

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IvyPanda. "Case Analysis: Costco Wholesale." July 22, 2021. https://ivypanda.com/essays/case-analysis-costco-wholesale/.

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IvyPanda. 2021. "Case Analysis: Costco Wholesale." July 22, 2021. https://ivypanda.com/essays/case-analysis-costco-wholesale/.

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IvyPanda. (2021) 'Case Analysis: Costco Wholesale'. 22 July.

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