Strategic alliance between Select Comfort and Costco: implications and analysis

Marketing Strategic Alliance: Select Comfort Company and Costco

Select Comfort Company and Costco are both successful companies, so that a marketing strategic alliance between the two companies could provide significant benefits for both of them.

"Select Comfort Corporation is leading the industry in setting a new standard in sleep by offering consumers high-quality, innovative and individualized sleep solutions, which includes a complete line of SLEEP NUMBER® beds and bedding. The company is the exclusive manufacturer, seller and servicer of the revolutionary Sleep Number bed, which allows individuals to adjust the firmness and support of each side at the touch of a button. The company offers further personalization through its solutions-focused line of Sleep Number pillows, sheets and other bedding products" (Select Comfort, 2011). "Costco Wholesale is one of the largest retailer stores in the market" (Adam, 2010). It has differentiated itself from its other big-box competitors through its exemplary customer service and through its true commitment to treating its staff well; Costco employees earn far more and have better benefits than employees at its rivals (Chan, 2009). In addition, Costco, though it is a wholesale warehouse, is known for its marketing of upscale items, from luxury furniture to makeup to gourmet food. The combination of these two leading companies would seem to provide an excellent opportunity for both companies; Costco would be able to market one of the premier mattresses in the industry and Select Comfort would have the opportunity to expand to a much greater audience through Costco.

SWOT

The primary strength of this alliance would be that Costco provides a huge market for Select Comfort products. Moreover, it provides walk-in business. Consumers can be introduced to Select Comfort products without seeking out a specialized Select Comfort store. This means that they might purchase Select Comfort without having previously planned to do so. Moreover, understanding Costco's return policy and knowing that Costco has staked its reputation on the quality of the product, they might be more likely to make a large purchase without really knowing the company or the product. For Costco, an alliance with Select Comfort allows them to bring in another luxury mattress brand for their customers. Costco already markets several different major brands of mattress, but does not have a product that compares to the Sleep Number bed that is Select Comfort's primary product.

The primary weakness in this alliance is that Costco does not have the same potential benefits as Select Comfort. The products are only marketed directly through Select Comfort and its stores. This means that the overhead is manageable by the company, and it can cut prices without having to consider down-market expenditures. Costco will not be able to offer its customers the type of big box store savings that they are accustomed to receiving on name brand items. A secondary weakness is that Select Comfort appears to have a surplus of inventory, which could make Costco vulnerable to a price decrease in the Select Comfort stores. However, "A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it 'positive inventory divergence'" (Seth, 2011). Therefore, this perceived weakness may actually be a strength.

owever

One of the opportunities that presents itself is a creation of a Kirkland brand Select Comfort product. Rather than marketing the Sleep Number bed through Costco, Select Comfort and Costco could offer a "generic" product with similar features, but a smaller price. That would allow Select Comfort to retain the exclusivity of its direct marketing through its factory and stores, while also allowing Costco to market a similar, strong product.

The biggest threat to the alliance is that Costco already has a huge market. It might reach a sufficient audience to make Select Comfort's more traditional marketing venues obsolete. This could threaten the brand's perceived integrity. The other threat is that Costco, while a successful big box retailer, is not experiencing the same market growth as other big box stores. Target has seen 70% growth in the same time period that Costco has experienced 30% growth (Sun, 2011). Therefore, Select Comfort might be better-served by a partnership with Target.

BCG

The Boston Consulting Group tends to take a holistic approach to marketing strategies, which looks at the impact that a strategy would have, not just on the marketing of a single product, but also on the perception of an entire brand. Both Select Comfort and Costco already have strong reputations for the quality of their products. There does not seem to be a risk to either of their reputations that would result from an alliance between the two companies. Both companies already employ best practices for customer service. Therefore, even if a customer found problems with customer service with either company, it seems likely that they would reach a satisfactory overall result, increasing customer satisfaction with both companies.

Porter's Five Forces

For Porter's Five Forces, there are five forces that impact business decisions. First, there is the threat of new competition, second there is the threat of substitute products or services, third is the bargaining power of customers, fourth is the bargaining power of suppliers, and fifth is the intensity of competitive rivalry. One must look at all of these factors to see if a proposed business venture is a good idea.

The first thing to look at is the threat of new competition. In order to examine that threat, one must look at barriers to entry into the market. Both companies have relatively high barriers for entry. Big box stores, to be successful, have to be able to offer prices lower than small-store competitors. In order to do this, they must be able to buy in bulk. Therefore, the barrier to competition is very high. The barrier for a mattress company is smaller, and it is possible for a new mattress company to offer quality mattresses in a smaller area, but there would be a significant delay before that company could become competitive on a national level.

The second thing to examine is the threat of substitute products or services. Costco already markets mattresses, usually traditional innerspring mattresses. Therefore, there is a risk of someone coming to Costco in order to purchase a Sleep Number bed and purchasing a traditional mattress instead. As a result, Select Comfort does risk losing some business, but its increased exposure to a wider market should offset any of those losses.