Cost Co
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Key Issues of the Case
The Key Issues to be observed in this case include a look at why Costco has grown to be the discount retail warehousing sales leader and the strategic actions they have taken to achieve this market Position. First, the study will involve an analysis of the industry’s driving forces and the key success factors in the industry in order to obtain an understanding of the discount retail warehousing industry. The study will then perform a SWOT analysis of Costco and its environment with the objective of identifying the opportunities and threats faced by Costco and the strengths it has to help them seize and overcome them. This will allow for an analysis of the company’s strategy for continued growth in the future.
Driving Forces for Costco
Costco Wholesale Corporation is the number one warehouse club store in the world. Warehouse clubs compete with a wide range of other types of retailers which include Wal-Mart Dollar General, supermarkets, general merchandise chains, specialty chains, gasoline stations and internet retailers. Their competition varies because of the many different products they sell.
Costco’s industry conditions change because important forces drive industry participants to alter their actions. The driving forces in an industry are the major underlying causes changing industry and competitive conditions. They have the biggest influence on how the industry landscape will be altered. The main driving forces for Costco include, but are not limited to entering the internet market, changes in the industry’s long-term growth rate, changes in who buys the product and how they use it, product innovation, marketing innovation, and changes in cost.
Entering the Internet Market
Costco is beginning to have a growing acceptance of internet shopping. Costco created a website in the United States (www.costco.com), as well as one in Canada (www.costco.ca) to be more effective and competitive in the internet market. The websites are another shopping alternative for members and strive to provide members with a way to purchase products and services that may not be available at the warehouse and also provide convenience to the shopper. Examples of these services include digital photo processing, prescription fulfillment, travel information, and the ability to create other memberships. Costco’s online photo center allows customer to upload images and pick up at the local Costco. Costco’s e-commerce sales totaled $534 million in fiscal 2005 and $376 million in fiscal 2004.
Changes in the Industry’s Long Term Growth Rate
When Costco first entered the industry, the long term growth rate goal was to expand which they have achieved. Costco has 102 warehouses in the United States, 70 in Canada, 18 in the United Kingdom, 5 in Korea, 5 in Japan, 4 in Taiwan, and 30 in Mexico. Costco brings a competitive edge to the industry with its low costs, as well as quality products. They have launched their own brand which competes with all the name brands. Management believes there are opportunities to expand its private-label offerings from the present level of 400 items to as many as 600 items over the next five years. With the private brand, Costco is able to continuously offer a low and competitive price, regardless of what is going on in the economy.
Changes in the Customer Demographics
Costco continuously brings in different products in order to get a diverse customer base into their stores. For example, Costco wanted to reach out to electronics purchasers. In order to do this, they offered top of the line plasma screen TV’s, DVD players, cameras, computers and laptops, as well as many other sought after products. Costco also offers convenient services such as gasoline stations, car service and repairs, and other beneficial offerings. Costco is mixing itself with a diverse group of customer.
Product Innovation
Costco beats its rival Sam’s by offering quality products at a low price before Sam’s does. Costco’s selection of appliances, equipment and tools often include commercial and professional models because so many of its members were small businesses. Costco’s product range of 4,000 items that include food; (fresh produce, meats and fish, bakery and deli products, and fry and institutionally packaged foods) the net sales accounted 30% for 2006. Sundries (candy, snack food, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies) its net sales accounted 24% for 2006. Hard Lines (major appliances, electronics, health and beauty aid, hardware, office supplies, garden and patio, sporting goods, furniture cameras and automotive supplies) net sale for 2007 is 20%. Soft lines (apparel, domestics, jewelry, warehouses, media, home furnishings, and small appliances) the net sales accounted in 2006 was 12%. Ancillary and other (gasoline, pharmacy, food court, optical, one-hour photos, hearing aids and travel) net sales accounted for 14%. Also to encourage members to shop at Costco frequently, the company operated ancillary businesses within or next to most Costco warehouses.
Marketing Innovation
Costco’s low prices and its reputation for treasure-hunt shopping make it unnecessary for the company to engage in extensive advertising or sales promotions. Marketing and promotional activities are generally limited to direct mail programs promoting selected merchandise to existing members. Costco markets also through memberships. For example, Costco marketing teams personally contacted businesses in the area that were potential wholesale members. Costco has three different membership plans: Executive membership (upgrade from individual); a Gold Star memberships for individual member that are contacted through direct mail or by promotions at local employee associations and businesses with large number of employees; and the Business Membership which includes individuals with a business license or other evidence of business existence.
Changes in Cost and Efficiency
Widening or shrinking differences in the costs among key competitors tend to dramatically alter the date of competition. Competition among the warehouse clubs is based on such factors as price, merchandise quality and selection, location and member services. Costco is able to compete in such a market because they are able to recognize when their competitors are doing something innovative or lowering prices.
Key Success Factors for the Retail Industry