costco's strategy

According to the company’s website (2019), Costco originated in 1976 by Sol Price and its basic business model was developed at that time, offering members the opportunity for efficient bulk buying at low prices. Jim Sinegal, who was an executive VP working for Price, took his knowledge and founded Costco in 1983 in Seattle. In 1993, Costco and Price Club merged, providing the fuel for an extended run of growth that the company is still experiencing today.
The warehouse business in the US is mainly competed by Costco and Sam’s Club, which is owned by Walmart. Costco is the larger of the two competitors. The industry is mature, with the major competitors having been around for a few decades each, and there being slow growth of 2.2% (IBIS, 2019) and relatively slow pace of innovation. The major innovations in this industry were more in the 80s and 90s.
The critical success factors in this industry are the ability to deliver goods to consumers at low prices. This means supply chain excellence is the most important factor, but also the ability to manage costs internally. Every percentage of margin is critical for a company that is competing as a cost leader, which is how these firms typically operate. A third competitor in the industry is BJ’ Wholesale Club, which sits a distant third and mostly operates on the East Coast, with 215 stores in 16 states (Isidore, 2018). Neither BJ’s nor Sam’s Club has enjoyed nearly the success that Costco has, and recently Walmart announced that it was closing 63 Sam’s Club stores as that company has lost sales to online shopping as well as other competitors (Howland, 2018).
There are few major political or legal forces that impact on the industry. The companies in this business basically engage in plain vanilla retail, with few legal impacts. Occasionally there are some business lines that might be more affected, such as pharmaceuticals. Local laws and zoning will impact the ability of stores to locate in the most desirable locations. And of course, the extent to which the political environment impacts the health of the overall economy will always be a factor, but for the most part government involvement in this business is relatively low.
Economic forces, however, can have a significant impact, as is the case with all retail. Because the companies in this industry compete as cost leaders, they are relatively recession-proof. While overall economic activity declines during a recession, many consumers look for ways to cut their spending, which leads them to stores that are successful cost leaders. In 2009, the industry saw a 2% increase in sales, versus 8% decrease across all retail (Martinez & Allison, 2010). As a result, Costco is viewed by many as a recession-proof stock (Samy, 2019). This shows that while warehouse clubs operates as an oligopoly, they still compete in the broader retail sector and serve as a substitute for other types of retail.
The social forces in the industry reflect the economic forces. People like to save money, and that is the main driver for success of a company like Costco. That Costco has a great reputation for treating its staff well, and its competitors do not, also has a certain social appeal, though it is unclear if that is a factor that influences the buying decision.
Technological factors affecting the industry are usually the factors that impact on the ability of companies in the industry to deliver low cost goods. However, Sam’s Club recently announced store closures and a shift to e-commerce, meaning that warehouse clubs, which were one of the last retail businesses to be impacted by the rise of e-commerce, might finally be seeing the effects of that technological change.
Costco has a fairly conservative approach to finances. The company is carrying very little debt (Samy, 2019), which means that it has little risk. As such it has a strong financial position where it is consistently profitable and low risk.
The major strengths of Costco include excellent supply chain management, strong brand and reputation, very low turnover rate for employees and remarkable consistency in its leadership and its operations. There are few weaknesses, and realistically this is a company that has excelled over a long run of time, which would imply that there are not a lot of weaknesses, at least none that competitors have been able to exploit. For Costco to continue to thrive, it really just needs to continue doing what it has been doing, and building on these existing competencies. It might want to explore e-commerce as an option, but there is no pressing need to do so, as that trend has not affected its business nearly as much as it has other retailing businesses.
In terms of opportunities, Costco’s stability really means slow, steady expansion. It may or may not be able to replicate its success in international markets (it is successful in Canada, but Mexico remains an untapped opportunity, for example). There are probably markets in the US where Costco can expand its presence as well. Geographic expansion appears to be the company’s biggest opportunity. There are still threats, however. A stable company can be at threat from sudden changes in its industry, such as technological threats. The company’s competitors are not particularly threatening right now, and even economic downturn has not hurt Costco much in the past.
The main strategic alternative is to explore geographic expansion. Costco’s current business is humming along just nicely, and making change for the sake of change is illogical. However, if there are opportunities to incorporate new technology, streamline operations further or expand geographically, the company should explore those. For the most part, however, the changes are more likely to be tactical in nature than strategic.
Obviously, staying the course has the pro of being proven and the con of exposing the company to risk from a changing environment. There are more risks from change at this point than from the status quo – geographic expansion can undermine a lot of companies because retail markets can be so dramatically different. Technological change is probably going to be approached in a measured way by Costco just as a means of reducing risk.
It is recommended that Costco should maintain the status quo. It’s boring, but this is one of those situations where a company’s strategic position is so strong that change brings more risk than might be worth it. Costco has few weaknesses and few threats, and instead should simply focus on building on its existing strengths in the same calculated, measured way that made it one of the world’s dominant retailers.



References

Costco (2019), website, various pages. Costco. Retrieved March 17, 2019 from https://www.costco.com/

Howland, D. (2018) Walmart shuttering 63 Sam’s Club stores in shift to e-commerce. Retail Dive. Retrieved March 17, 2019 from https://www.retaildive.com/news/walmart-shuttering-63-sams-clubs-in-shift-to-e-commerce/514676/

IBIS World (2019) Warehouse clubs and supercenters industry in the US. IBIS World. Retrieved March 17, 2019 from https://www.ibisworld.com/industry-trends/market-research-reports/retail-trade/general-merchandise-stores/warehouse-clubs-supercenters.html

Isidore, C. (2018) BJ’s Wholesale Club is going public again. CNN. Retrieved March 17, 2019 from https://money.cnn.com/2018/05/17/news/companies/bjs-wholesale-club-going-public/

Martinez, A. & Allison, M. (2010) Costco, other warehouse clubs holding their own during recession. Seattle Times. Retrieved March 17, 2019 from https://www.seattletimes.com/business/local-business/costco-other-warehouse-clubs-holding-their-own-during-recession/

Samy, S. (2019) Costco: Buy its resiliency and its dividends. Seeking Alpha. Retrieved March 17, 2019 from https://seekingalpha.com/article/4231853-costco-buy-resiliency-dividends