Introduction
This paper offers a comprehensive analysis of Costco Wholesale, providing the main reasons for its success in the global and local markets, the principles of the strategy, as well as a SWOT framework with a financial analysis of key indicators. This information is then compared with direct competitors Sam’s Club and BJ’s Wholesale Club for opportunities and threats to organizations in the industry. Based on the case analysis results, conclusions, interpretations, and possible discussion of recommendations are given that can make Costco’s business even more successful and sustainable.
Costco Success
The company’s explosive growth began after the arrival of Jim Sinegal, who studied the industry since his student days and was always looking for an opportunity to make it more efficient. First, he constantly visited Costco stores in person, interacting directly with staff and customers. Second, Sinegal immediately set a clear direction for the company to follow for many years: quality products at a low cost (Thompson et al., 2022). Finally, the entrepreneur’s involvement in every business process, without the pursuit of personal gain, guaranteed Costco a unique proposition in the market and continued growth.
First of all, it is worth noting the strict control of the organization’s internal processes, the personal engine of which was Jim Sinegal. Efficiency was achieved by reducing the available range of products to a few thousand items versus hundreds of thousands from competitors (Thompson et al., 2022). Thus, the company reduced the need to integrate more complex control systems and dependency on suppliers. Savings on issues such as buying real estate in more profitable areas and building a route network became factors in reducing costs, guaranteeing a high percentage of net profit among retailers.
The pricing policy, unlike competitors, was not aimed at maximizing profits in every possible way. On the contrary, Costco was constantly looking for an opportunity to reduce the cost of goods for the end consumer, effectively dumping the markup, which often caused dissatisfaction among shareholders and other industry representatives (Thompson et al., 2022). At the same time, the quality of products remained a priority, which significantly reduced the range, but at the same time, left a high level of its renewal in the short term.
Thus, the organization achieved a rapid turnover of goods: many profitable offers became a phenomenon of “treasure hunting” among consumers who knew that tomorrow this product might no longer be in the store, as well as new supplies of it (Thompson et al., 2022). Against this backdrop of product turnover, Costco developed its line of products under the Kirkland brand, which constantly diversified.
Accordingly, the flow of customers was ensured, and due to this phenomenon, they often spent more than planned. The rapid turnover of inventories provided cash to the company, which had advantages in supplier contracts. The membership program, which, like any other business process at Costco, has been constantly optimized and expanded, created a comfortable and high-quality value proposition for the consumer, distinguishing it from competitors. At the same time, it cannot be said that the management was centralized, despite the severe personal control of Sinegal at every point. The managers of each warehouse were endowed with appropriate autonomous power and were free to make new proposals specific to their location.
Attention to employees is another significant value of Costco. The company’s social responsibility was primarily manifested in a dignified and respectful attitude towards the workforce, which clearly demonstrates the list of benefits available to every worker, from medical and dental insurance to the easy opportunity to purchase shares in the organization (Thompson et al., 2022). HR practices included career progression regardless of previous accomplishments on the applicant’s resume. The pay was fair, with Costco consistently closing the gap between employee and director compensation. Employee feedback on the brand was a significant marketing driver, reducing operating costs in this area. They tended to focus on supporting a membership program that grew significantly from year to year and brought in substantial revenue without incurring the costs of pure merchandise sales.
Finally, a focus on sustainability, innovative approaches to warehouse technology, and an online presence have also contributed to the success of Costco, which Sinegal pledged. Among the individual steps, one can single out cooperation with Visa and Mastercard to create cards with improved conditions for shopping in the company’s stores. Although Costco has often faced criticism for personal changes, the company’s current market position demonstrates the long-term benefits of these steps.
Costco Strategy
Accordingly, Costco’s strategy can be defined as complex but compact and effective in all directions. First, the company focuses exclusively on quality products at low cost, which almost wholly excludes the budget segment of mid-range and low-quality products. Thus, the organization does not go beyond the occupied niche and promotes the only true association with brands among many consumer segments.
Secondly, diversified horizontal development does not contradict the mission and vision: entering the car rental and hotel booking market is still distinguished by the quality of service and budget cost. The online presence facilitates expansion into an international space that already spans many continents, albeit on a smaller scale than, for example, Walmart. The emphasis on the value proposition at the expense of maximizing profit per unit sold, on the one hand, keeps the bar in net profit low, but the scale and differentiation of the offer contribute to its relative growth from year to year.
Today, every large company must meet the requirements of social and environmental responsibility, but Costco began to promote this philosophy long before that, as Sinegal saw in these changes not only a reputational profile of activity but also the optimization of operational activities. Satisfied employees create brand value and flow to open positions better than any advertising, and the same attitude is generated among consumers, a group that the employees themselves make up. Reliable and safe materials used in warehouses reduce depreciation costs and the quality of working conditions, for example, the transition to LED lighting.
The lack of savings not only on employee satisfaction and consumer comfort but also on environmental issues and own production, on the one hand, provides long-term asset stability and reduces dependence on suppliers. Timely entry into the online sales market contributes to the timing in the context of requests for the necessary functions of the retailer, especially against the backdrop of global challenges. Finally, the emphasis, including marketing costs, exclusively on the membership program increases the consumer’s involvement in the brand, giving more potential individual advantages and creating a feeling of the company’s keen attention to each customer.
Costco SWOT Analysis
By summarizing this case study, it is possible to gather the main strengths and weaknesses into a SWOT framework to identify further opportunities and threats for the company. The strengths are broadly listed above: here and the alignment of the mission and goals, the involvement of management and employees, respectful attention to the latter, fast turnover of goods, global representation and brand strength, emphasis on environmental development, low operating costs and rich experience in maintaining a loyalty program. Weaknesses, however, distinguish Costco from competitors in the following ways: low gross margins due to low markups, corresponding shareholder dissatisfaction with the approach, and a limited product range. While the organization has strongly promoted these aspects as a necessary part of its philosophy and practical approach, these traits provide an advantage to competitors who can use them to capture the right audience segment.
As a result, the threats primarily lie in serious competition with Sam’s and BJ’s Wholesale Clubs, which focus on slightly different niches and use different approaches to doing business. In addition, by providing quality products at a low cost, Costco can still lag behind other big players like Walmart in the fight for promising suppliers, as well as with local business in regions where not so much brand awareness is more critical, but an audience that is not ready to change habitual processes. However, Costco’s opportunities are laid here: firstly, horizontal development into new markets – at the moment, the company is represented in many countries; however, for example, in Australia, the number of its warehouses is still tiny.
Entering new countries where quality goods are valued at low cost can be complicated by the complex process of organizing the supply chain, but many of the competitors listed above have an even smaller presence worldwide. Second, the differentiation of a limited range of Costco services and products may continue to expand into areas of various kinds, both already associated with existing ones – for example, car maintenance – and into entirely new areas of implementation of delivery services, for example, ready-made meals from restaurants by using their route network or the delegation of this part of the business on the rights of OEM or ODM.
Costco Financial Analysis
Costco’s financial position reflects the success of the company’s chosen strategy over the selected period from 2016 to 2019. The company’s revenue is growing, and operating with net profit is also growing proportionately. While gross and operating margins fell in 2019, net margins rose steadily, ultimately keeping Costco upside. Regularly and quickly, current assets are increasing, a significant part of which is inventories. The key indicator for retail is the turnover of this type of asset, and here the company demonstrates stability over a long period, maintaining the indicator at the level of 11. Balance ratios act as a positive signal in dynamics: in 2018, the organization finally overcame the threshold of 1, which is a sign of liquidity and stability – the ability to cover short-term liabilities fully. Even excluding inventories, the quick ratio shows significant growth from year to year.
The indicators of leverage and solvency – debt-to-assets and debt-to-equity ratio experienced an unfavorable jump in 2017-2018 but returned in 2019 and even improved the indicators of 2016. These facts speak of the company’s long-term stability, which, together with the positive dynamics in liquidity, signals the competent conduct of business for development. At the same time, the average profit growth is seven percentage points higher than the average growth in debt obligations for this period.
In general, the financial position of Costco is not without potential risks, since in the event of a global crisis, the company may encounter problems in the high rate of accumulation of inventories and a decrease in turnover; however, at the moment, with the available introductory components, the organization is conducting an accurate and planned development with minor negative deviations only for some financial ratios. All calculations are presented in Table 1.
Table 1. Longitudinal Analysis Costco.
To complete the picture of assessing financial stability, conducting a cross-sectional analysis and comparing Costco with direct competitors in the regions is necessary. To do this, the indicators of 2019 were taken: this case contained limited information about Sam’s Club, and therefore many vital relationships for the company’s data were not calculated. The calculations are shown in Table 2.
Table 2. Cross-sectional Analysis Costco.
For BJ, the illustration of financial performance was almost complete, except for shareholder’s equity. Both competitors have a much smaller scale than Costco, as indicated by order of the numbers in terms of profits. While BJ has significant potential in gross profit margins over Costco, their processes could be better optimized as much less is poured into operating and net income. At the same time, BJ’s debt is growing quite quickly, and concerning assets, and it has an indicator of almost 0.5, which indicates the risks of the company’s solvency. As evidenced by sales and operating income data, Sam’s Club is more extensive than BJ.
The company has a similar operating profit margin to Costco, which indicates a reasonably streamlined business process structure. As a competitor, Sam’s Club poses a significant threat to Costco due to its similar markets, more extensive product range, and value proposition, including a membership program. Due to the lack of more detailed data on the financial activity of Sam’s Club, it is impossible to conclude by comparing the liquidity and solvency of the companies; however, the efficiency expressed in CAGR profits lies entirely with Costco.
Competitor Analysis
Costco’s competitors have a similar structure and approach to product diversification but differ significantly in the number of services. Sam’s Club and BJ’s Warehouse Club have comprehensive membership programs with little difference in cost per category. Sam’s Club has the most significant number of private brands sold through wide channels, including Walmart.
The product categorization is broadly in line with the classic large retailer categories, except that Costco has already entered the auto market, rental and hotel booking services, and more. Sam’s and BJ’s are represented by maximum pharmacology, but Sam’s has much more development opportunities: both due to a broader financial scale and human resources. BJ’s is taking a more classic marketing approach, activating channels such as social media and mailing lists. Control systems differ slightly among these retailers, so the main differences lie in the following.
Applying the SWOT framework to competitors through the lens of Costco’s achievements, it can be concluded that both competitors, according to financial analysis, do not pose a severe threat to the brand. Sam’s strengths lie in its patronage of a strong Walmart network, a multi-geographic presence, and solid growth in financial performance with a large number of human resources and a robust membership program. BJ’s differ only by having a broader established engagement base through marketing and a more diversified loyalty program, which nevertheless has a higher entry threshold cost (Thompson et al., 2022).
At the same time, both companies are targeting a niche of more budget products with a much larger number of items, giving consumers more freedom in choosing their favorite brands. Weaknesses relative to Costco highlight BJ’s weak financial performance, questioning the organization’s liquidity and long-term viability. Sam’s is more streamlined in operational business processes; however, their scale, global presence, and low diversification are also weaknesses of the company.
Accordingly, competitors’ capabilities lie in the plane of development potential in local markets and other continents. Costco has already realized part of this potential, although only partially. BJ’s can get the most out of the classic marketing approach due to the high costs of this category of expenses. Sam’s could expand its footprint by backing Walmart. Threats to Costco’s competitors are primarily a reflection of weaknesses. BJ’s has low liquidity and solvency: with a large assortment, the company has a significant dependence on suppliers, which, due to an emergency and a crisis, can even lead to losses. The more financially stable Sam’s, due to its careful policies, which, for example, led to the closure of some outlets, but optimized income in others, is more likely to survive a potential crisis.
On the one hand, Sam’s occupies a niche of a more budgetary offer for consumers, saving on the decor of the premises and, as a result, on customers’ comfort. However, Costco is not only chosen by wealthy people; most of the brand’s audience represents the middle and lower classes due to the availability of quality products in the first place. It is far more likely to lose out to a more prominent player than to lose Costco’s local markets: diversification, strict control, and a global presence with financial capabilities mean that neither Sam’s nor BJ’s can currently impose a severe fight on this brand.
Conclusions and Recommendations
Based on the above analysis, Costco’s position is stable and comfortable. It is mainly due to Jim Sinegal and his approach, but the overall performance of each member of the staff contributed to the success of the brand. Competitors do not pose a serious threat, at least in the short term. Accordingly, the company, relying on its achievements, including in the financial plane, can simultaneously direct retained earnings in several directions.
First, Costco can explore new geographies by optimizing the supply chain and locating production in more prosperous countries. Secondly, the innovative approach of the management creates room for diversification of the current pool of services into new ones that contribute to existing sales sectors: for example, maintenance of cars and equipment or deepening into the field of tourism services to expand the portfolio of activities and focus not only on hotels but also ready-made tours and excursions with air tickets. Finally, Costco must maintain current efficiency practices that have proven themselves over the long term and have been channeled into Sinegal’s policies, mission, and vision.
Reference
Thompson, A., Janes, A., Peteraf, M., Sutton, C., Gamble, J., & Strickland, A. (2022). Crafting and executing strategy: The quest for competitive advantage: Concepts and cases. McGraw hill.