Costco Corporation Analysis
Costco Corporation was established in 1983 in Seattle, Washington. The company operates as a warehouse shopping club in 12 markets with 782 location (Statista Research Department, 2020). The company’s operations are based in Canada, Iceland, Spain, China, Australia, Japan, United Kingdom (U.K.), France, Mexico, Korea, United States (U.S.), Puerto Rico, and a majority-owned subsidiary in Taiwan. The company’s growth has been gradual, where between 2017 and 2019, the company increased with 41 stores across their countries of operation(Costco Wholesale, 2019).
The company operates membership warehoused based on the idea of offering low prices to its clients on a limited selection of private and national labeled products (Costco, 2020). Their profit is achieved by providing a wide range of products that produce high sales volumes at a rapid inventory turnover. The company’s operation is seven days,70-hour a week (Costco Wholesale, 2019). The company’s merchandise falls under the following categories;
- Food and Sundries -dry and packaged foods, snacks, groceries, candy, cleaning supplies(Costco Wholesale, 2019), alcoholic and nonalcoholic beverages.
- Hardlines – major appliances, health, electronics, hardware, garden, patio and beauty aids
- Fresh Foods – bakery, meat, produce, and deli.
- Softlines – apparel and small appliances
- Ancillary – pharmacy and gasoline businesses.
Ancillary businesses offer expanded products and services to encourage members to shop more frequently. The business includes; pharmacies, gas stations, food courts, optical dispensing centers, and hearing-aid centers. The gasoline business has extended working hours than other merchandise. The number of gas station vary in various countries. Currently, the gasoline business does not operate in France, Korea, and China. There were 593 gas stations by the end of 2019, which contributed 11% of the total net sales.
Stakeholder Affecting the Company’s Product Prices
Supplier Bargaining Power
Costco has acknowledged the power that the suppliers have over the company’s product price. The company also buys from manufacture private-label merchandise that meets their quality. Porter’s five forces claim that suppliers determine the product’s production cost since a shift in suppliers’ preference or buyer can lead to hiking of prices (Öneren, Arar, and Yurdakul, 2017). To avoid such a situation, the company has established a direct buying relationship with many national brand name producers. The business does not buy a significant portion from one supplier. The strategy helps them reduce difficulties in obtaining sufficient merchandise quantities (Costco Wholesale, 2019). Furthermore, Costco believes that if diversifying the supplier source gives them the market power because if the current source became unavailable or changed the operating conditions, the company can move to the next supplier. Therefore, alternative sources help them to avoid supply in convinces.
The company uses its transport to avoid the supplier dependency level. According to Charro and Schaefer (2018). companies should strive to use their transport when acquiring bulk products from the manufactures. The policy reduces the cost associated with transport since the company can choose the most reliable and affordable means of transportation. Costco has purchased directly from their suppliers; they route to their warehouses or cross-docking points (depots) (Costco Wholesale, 2019). Their depots receive large shipments from the suppliers and quickly dispatch it to the warehouses. The process’s objective is to create freight volume, handling efficiencies, and lowering the cost associated with dealing with multi-step distribution channels. Additionally, it reduces the supplier bargaining power, which might affect the production cost.
Consumer Bargaining Power.
The company has strategically placed itself where it has created a perception that they offer products at the lowest price at high quality. According to Öneren, Arar, and Yurdakul (2017), consumers have the power of setting the market price through a shift in preference or quality. Costco has developed a policy to limit their sales to fast-selling items, colors, and sizes. The company maintains an average of approximately 37,000 active stock-keeping units per warehouse in its core for warehouses business (Costco Wholesale, 2019). The policy helps them maintain less stock than other broader lines retailers most of the company’s consumables for sale in case, multiple-pack quantities and carton. The approach of bulk selling helps them maintain the low-pricing strategy, which increases consumers’ loyalty.
Additionally, to increase the consumer’s satisfaction and eliminate the chances of consumers changing their preference from Costco to its competitors, the company has a 90-day return policy. Consumers are not charged to access these services. They also offer extended warranty and technical support services. Additionally, for electronic items, a third-warranty is used. The company has maximized bulk buying and after-sale benefits to reduce the chances of a consumer preference shift. The objective minimizes the company’s need to change the product price according to the consumers’ demand.
The company has Cost co-branded cards, cash, checks, debit cards, and proprietary stored-value card (shop card) (Costco, 2020). The strategy’s purpose is to maintain customer loyalty while establishing a basis for market research. Costco sells its product at the lowest price; therefore, understanding the market demand is crucial. The company applies information from the loyal costumers to know fast moving developments in the market to understand this. Accepting cards increases the consumer’s loyalty and helps understand the market, thus reducing the chances of dead stocks and shifting in consumers’ preferences due to outdated products.
The company has utilized consumer loyalty by offering various types of membership. Gold-star membership is available to individuals (Costco, 2020). On the contrary, business membership is limited to businesses where it includes retail sales with licenses or similar documents and individuals with a business license. Business members have the power to have additional cardholders/ affiliates to which the same annual fee might apply. However, the affiliates cannot access the Gold star services. In the U.S and Canada, the yearly fee for these memberships is $60(Costco Wholesale, 2019). However, the cost varies in other countries. The company also has household cards.
The policy has maintained a high customer relationship with a 91% renewal rate in Canada and the U.S and 88% in other countries by the end of 2019(Costco Wholesale, 2019). Costco renewal rates calculations reported capture seven to eight months before the reporting day. Market segmentation has improved the company’s revenue, with Gold Star producing the highest number of cardholders. According to the 2019 Costco Wholesale, report the policy helps increase the company’s customer loyalty since comparing between 2017 and 2019, the total cardholders were 90,300 and 98,500 respectively across all sections.
The company understands the power of having loyal customers since, through the consumers, the market can be easily understood, and prices set according to the consumers’ needs. For these purposes, Costco has a program that allows paid cardholders expect the affiliates to become eligible to upgrade to Executive Membership at an extra cost of $60. The opportunity is also available in the U.K., Korea, and Mexico, where the additional fees vary according to the country. Executive members earn a 2% reward on the selected purchases with a maximum bonus of $1000 annually in the U.S(Costco Wholesale, 2019). and Canada. The percentage reward is different in other countries.
The reward systems are redeemable only at Costco warehouses. The program allows the members to access additional savings and benefits on various consumer and business services such as auto and home insurance. However, these extra-services are not available in Mexico and Korea. The executive membership services are an effective marketing strategy since, in 2019, 39% of paid members’ sales were from the executive members (Costco Wholesale, 2019). Costco has understood the importance of having a strong customer loyalty base since their preference cannot be easily shifted or compromised. Therefore, giving the company a strong power to control the price over the stakeholders.
Employees
Employees are vital stakeholders that determine the company’s production cost. Employees play an essential role in determining the company’s value and consumer loyalty. Costco employees’ professional employees help provide quality services that directly help maintain high customer loyalty. Additionally, the company eliminates the possibility of having under-utilized employees, therefore having part-time and full-time jobs (Costco Wholesale, 2019). With a clear job description and utilization, employee satisfaction is increased, which reduces turnover. Hiring and selection processes are expensive processes that must be avoided to maintain the Costco low pricing strategy.
External Factors Affecting Costco Operation.
Social Factors
Costco’s operation is based in developed countries where eating healthy is becoming a trend (Pandey and Chawla,2016). Consumers are looking for goods and services that will promote their well-being. The company is being forced to look for alternatives that will fit into the market demand. Furthermore, consumers prefer online purchases; therefore, the company needs to shift to eCommerce before their customer shifts to companies that have adopted the system. The company’s operation is dependent on consumer membership; therefore, a change in consumer membership might destabilize the company’s process.
Technological
Costco operation is in the 12 most developed countries across the world. According to Al-Henzab, Tarhini, and Obeidat (2018), changes in these countries’ occurrences are rapidly increasing, and the company needs to adopt it. For Costco, its operation is based on its depots; the company needs to understand the role of artificial Intelligence in inventory management. Japanese and Korean companies have adopted the changes, which pushes Costco to embrace the changes.
Costco’s Market Opportunities.
Costco has ventured into the e-commerce market, which is a current business trend in the market. The company has well-established websites that help consumers to access their products online. The company’s operation is in developed countries; therefore, there exists infrastructure to support internet-based services. Nevertheless, the company has not fully utilized the opportunity. The underutilization might cost them a shift in consumers’ preferences. The company’s competitors, such as Walmart, have gone a step further in developing applications that might help them venture into the market.
On the contrary, Costco is focusing on expanding physical warehouses, which is becoming outdated. The company needs to adopt measures that will help them balance between physical and online warehouses. It also requires a better inventory management system than the current one of having one exit and entrance. Companies are moving to online tracking systems where consumer track their products from production point to delivery.
Future Research Works
Future research will be essential to research how Costco inventory and marketing strategies will move to the current market demands. Despite its gradual growth, they need to understand the importance of balancing between physical and online stores.
References
Al-Henzab, J., Tarhini, A., & Obeidat, B. Y. (2018). The associations among market orientation, technology orientation, entrepreneurial orientation, and organizational performance. Benchmarking: An International Journal
Charro, A., & Schaefer, D. (2018). Cloud Manufacturing as a new type of Product-Service System. International Journal of Computer Integrated Manufacturing, 31(10), 1018-1033.
Costco Wholesale. (, 2019). FISCAL YEAR ENDED SEPTEMBER 1, 2019 ANNUAL REPORT (2). Costco. https://investor.costco.com/static-files/05c62fe6-6c09-4e16-8d8b-5e456e5a0f7e
Costco. (, 2020). Investor relations overview. Costco Wholesale Corporation. https://investor.costco.com/
Costco. (, 2020). The Costco Way. Costco Membership. https://www.costco.com/membership-information.html
Öneren, M., Arar, T., & Yurdakul, G. (2017). Developing competitive strategies based on SWOT analysis in Porter’s five forces model by DANP. Journal Of Business Research-Turk, 9(2), 511-528.
Statista Research Department. (2020, January 7). Number of Costco warehouses worldwide 2019. Statista. https://www.statista.com/statistics/284431/number-of-costco-warehouses-2013-by-country/
Pandey, S., & Chawla, D. (2016). Impact of changing consumer lifestyles and website quality on online satisfaction and loyalty-an an emerging market framework. International Journal of Indian Culture and Business Management, 12(1), 50-71.