Strategic Actions for Costco, Research Paper Example

Costco has a lot of strengths.  According to Wikipedia.org “As the largest membership warehouse club chain in the United States, the third largest retailer in the U.S. (as of July 2009), and the ninth largest [retailer] in the world, Costco is a formidable force in the retailing warehouse club industry (2010).”

Costco was the first company to grow from zero to $3 billion in sales in less than six years.  For the fiscal year ending on August 31, 2009, the sales totaled $71.42 billion with $1.09 billion net profit.  They are the 25^th on the 2010 Fortune 500.

Sam’s Club and BJ’s Wholesale are its only competitors.  Sam’s Club has more warehouses/locations (602). Costco has 572 warehouses.  However, Costco has a higher sales volume – revenue of $71.422 billion (FY 2009) and Sam’s Club $1.6 billion (FY 2009)

They have only been accepting food stamp cards since May 2009.  Initially, Jim Sinegal, co-founder and president said, “Generally we don’t have customers who use food stamps.”  However, BJ’s decided to accept food stamps in April 2009.  Another obstacle that would affect food stamp recipients is the $50.00 annual fee.

Costco can overcome a decline in sales companywide by implementing the following:

1. Negotiating with more vendors to offer customers a wider array of choices.
2.  Offer Master Card (like Sam’s Club and other competitors)
3. Research the Hispanic market and cater to that segment
4. Offer Hi-Fi
5. Reduce the 5% fee for nonmembers ordering through web site.
6. Change to “No membership” required.   The demographics for this segment of the population would be large (lucrative).

Critical issues based on the external environment are:

Five Forces

Threat of Entrants

Costco probably does not have to be concerned with a Threat of new Entrants.  They have studied the market (time and cost of potential new businesses, economies of scale, cost benefits, and technology); they know who their competitors are (Sam’s Club and BJs).

Previously, they acquired any potential threat.  In 1993, they merged with Price Club (called Club Price in the Canadian province of Quebec).  The new company was called PriceCostco.  However, Sol and Robert Price founded Price Enterprises and left in December 1994.  In 1997, the company changed its name to Costco.  All of Price Club locations were rebranded Costco.

Bargaining of Suppliers

As mentioned previously, Costco is satisfied with its house brand, Kirkland, and they are adamant about buying the absolute cheapest wholesale price from their vendors.  It would be difficult for suppliers to increase their prices with the knowledge that Costco would opt to choose another vendor.   However, Costco relies only on select vendors.  So, the vendors are definitely in a powerful position.  The size and number of the supplies needed automatically place the supplier in a enviable position.

Bargaining of Customers

If customers are satisfied with a product, they tend not to argue about a low price.  Costco has quality standards, so the average consumer does not feel a need to switch.  With 563 locations in 2009, there is a Costco in virtually every neighborhood.  Consumers know the different between the three major players.  So, if they started with Costco, they probably will be reluctant to change.

Threat of Rivalry

The retail membership industry is a distinctive one, with only a few competitors.  Technically, the mathematical formula = Number and capability of competitors.  As mentioned previously, Costco, Sam’s Club, and BJs are the top three retail membership clubs.  Costco has the highest sales  – $71,442 billion (even though they have fewer warehouses than their competitors).

Predictably, they copy each other.  If one of them offers a new product/service, then the other company also offers a new product/service.  So, the level of the Threat of Rivalry will continue at the same pace.

Threats of Substitute Products

This area can be defined as the ability of your customers to find an alternative method to your product or service.  As seen in the Table above, Costco is lacking features (e.g., does not cater to minorities or Hispanic market, does not offer more than one credit card, does not offer little perks like Wi-Fi).  Consumers like choices.  I believe the Threat of Substitute Products is an issue.  Costco should re-consider its strategy and possibly reinvest with the consumer in mind, not necessarily the lowest price.

Social

According to a news release in November 2010, Costco Wholesale Japan, was recognized by Japan’s Minister of Health, Labour and Welfare for its excellence in promoting gender equality and for being a family-friendly employer.  Additionally, on August 31, 2010, Costco released a statement confirming that they do not tolerate the mistreatment of animals (this was in connection to a video showing inhumane activities to animals by a vendor).  Additionally, they have a Green/ecological policy that entails “managing new construction and the many aspects of ongoing operations in an energy-efficient and environmentally friendly manner (Corporate Sustainability and Energy Group – CSEG).”

Technological

Costco’s technology includes skylights in all warehouses with solar panels on 37 buildings, and an impressive recycling program, and a highly effective logistical system for inventory reduction.

Government

According to their 2009 annual report, “. . . changes related to government fiscal and tax policies and other economic factors could adversely affect demand for our products and services or require a change in the mix of products we sell.”

Issues that the company will be facing are higher interest rates, energy costs, levels of unemployment, healthcare costs, and reduced consumer confidence.  Additionally, they are aware of cost containment at every level:  Shipping/warehouse (high turnover of products to reduce inventory costs, facilities management (use of solar panels to reduce expenses), human resources (retaining the best management staff as well as hourly employees). etc.

The issue that is of the greatest importance is unemployment and consumer confidence.  When the consumer is reluctant to spend money (even if your prices are reasonable), your business is affected.

Works Cited

Retrieved from http://en.wikipedia.org/wiki/Costco. 11 Nov. 2010

Retrieved from http://en.wikipedia.org/wiki/Porter-five-forces-analysis. 11 Nov. 2010

Warehousing Education and Research Council. Retrieved from http://www.werc.org/search/default.aspx?keywords. Web. 11 Nov. 2010