Instructions – Per the Syllabus
- Finalize your recommendations and implementation plans. Implementation plans are tactical issues that help a focal firm get the job done, making sure that the recommended strategic alternatives are well executed and implemented.
Strategic Marketing Analysis and Plan
Costco Wholesale Corporation
Table of Contents
Executive Summary 3
Introduction of Company 4-6
Market and Submarkets 6-8
External Environmental Analysis 8-10
Customer Analysis 10-11
Company Strengths/Resources and Weaknesses 11-12
Current Strategy 11-12
Proposed Goals 12-13
Appendix A 14
Appendix B 15
Appendix C 16
Appendix D 17
Costco is the largest membership only warehouse club and the second largest retailer in the world. It was started in 1983 in Seattle Washington. In order to shop at Costco customers must become members and pay a yearly membership fee. There are three different types of membership including business, executive, and gold star. Costco’s business goal is to provide members with high quality products at substantially lower prices and is able to accomplish this through its no frills warehouse approach as well as its economies of scale due to bulk purchases, and it superior supply chain. Costco offers everything from tires to jewelry, clothing, food, home-décor, health products, electronics and more. In addition, a multitude of services are offered such as gas, pharmacy, optical, travel, home and auto loans etc. However, although Costco warehouses are stacked to the brim with products, they carry a much lower number of what is known as a stock-keeping unit. As a result, less time is needed to stock, sort, and reorder products therefore it is simpler and cheaper to execute.
Costco’s strategy has continued to be sustainable and has led to slow and steady growth for the company both in members and stores. Currently, Costco operates in ten other countries with most of its sales in stores. However, Costco does have an online and mobile site for shopping. Costco members have continued to grow with numbers clocking in at 91.5 million and members continue to be loyal with 90% renewal rates. These members are typically higher income, college educated shoppers with a strong baby boomer presence. One of the biggest threats facing the company is the aging of its target population and its slow moves to capture the younger generations.
The main direct competitors of Costco are Sam’s Club and BJ’s as other membership wholesale places. In addition, the company competes national and globally with other supermarkets, department stores, specialty stores etc. Despite the intense competition in retail, Costco is able to maintain several strengths and competitive advantages over the competition. These strengths include its low cost strategy and its ability to execute it well for its customers. In addition, Costco excellent customer service and brand equity assist the company in keeping customers coming back. The company provides a unique shopping experience with little signage in the store and ever-changing specialty items, which leads to discovery and an exciting shopping experience. However, the company also has some weakness in its inability to capture the younger consumer market and its geographic dependence on certain areas, particularly California, Canada, and North America as a whole.
As a large corporation in the retail industry, Costco needs to be aware of the growing trends in the market as well as analyze the external market as a whole including areas such as political, economic, and technological forces. These forces can have a huge impact on sale and profits as well as the overall growth of the company. We explore some of these trends including home delivery kits, subscription boxes, and niche markets. In addition, we further examine things like currency fluctuations abroad, unemployment rates, sustainability and employment wages and treatment. Finally, in order to move forward as a company, Costco needs to examine its future goals and how these will be implemented and monitored. Some of these goals include expanding its e-commence and social media presence. In addition, examining ways to engage the millennial generation
What is Costco? For some it is the best place to buy in bulk for their large families, for others, it is a one-stop shop for everything they could need and still more for others it is a Sunday afternoon filled with discovery and endless food samples. Prior to the inception of Costco, both Jeffery Brotman and James Sinegal recognized these needs as unmet in the market, and as a result, Costco was born. The first Costco store was opened in Seattle in 1983; however, Costco’s history can be traced back even further, to 1973 and Sol Price. Sol Price was an entrepreneur who opened the world’s first membership warehouse club in California called Price Club, aimed at business members, thereby introducing a groundbreaking retail concept (“About Us”, n.d.). James Sinegal, having worked for and mentored by Sol, took what he had learned and opened his own “buyers club”. At the time warehouse outlets existed but the concept of a wholesale club in which wholesalers required shoppers to become members and pay an annual membership fee, was fairly new (“Costco Wholesale Corporation”, n.d.). In 1985 Costco became a publicly owned company and after over a decade of growth, Price Club and Costco Wholesale merged in 1993 to become Price/Costco Inc. (“About Us”, n.d.). In the mid to late nineties, the company introduced their own signature Kirkland line, introduced e-commerce through their website, and becomes known as the Costco Wholesale Corporation.
Since its inception, Costco has been a big-box store with a no-frills warehouse layout and bulk-packaged products. Most products are displayed on the warehouse floor for sale on the shipping pallets they were delivered on. As opposed to other stores, you will find no signs placed in the aisles, your purchases will not be bagged and you have to pay a membership fee just to walk in the door. Every person buying from Costco is a member but the membership costs are worth it because of the exclusive deals made available to them. There are three types of memberships available to shoppers, the Executive membership, the Business membership for business owners and the Gold Star (About, n.d.). This membership fee not only makes up eighty percent of the gross margin but it also serves to bring customers through the doors more frequently looking to get the biggest bang for their buck and maximizing savings (Lewis, 2016). Not only that, the membership revenue can help drive lower prices for products. This is important as Costco uses a value proposition and aims to offer high-quality, brand name products at lower prices than discount retailers and supermarkets.
The products offered in the warehouse are endless as Costco showcases one of the “largest and most exclusive product category selections under one roof” (About Us, n.d.). The categories include anything from groceries, appliances, electronics, apparel, hardware, furniture, health and beauty, to toys, automobile supplies and jewelry. The options are endless and ever changing. In addition, Costco offers a variety of services including food, travel, auto, optical, and business services. Despite the wide variety of products and the large store volume, Costco only carries 4,000 products at a time, compared to average of 40,000 found at most supermarkets (Costco Wholesale Corporation, n.d.). This tactic not only makes for easier inventory tracking, but more importantly increases sales volume and drives discounts aligning with Costco’s overall strategy.
This high-volume selling strategy has served Costco well over the years and continues to lead to slow and steady growth in both members as well as sales. The retail industry is a trillion dollar business in today’s economy and according to the National Retail Federation Costco is the second- largest retailer in the world. Costco’s sales trail only those of Wal-Mart and Amazon of which Wal-Mart has 11,528 stores to Costco’s 715 (“Inside Costco”, n.d.). In 2017, store sales rose by 4.1% globally and digital sales increased by 13% (Kline, 2017). It was also named the sixth most valuable retail brand in the world with a brand value of over 16 billon dollars (Duncan, n.d.). In the first quarter of 2018 sales increased by 10.5% and 43% respectively. Not only that, Costco continues to add new members and increase the number of stores. The total households with membership rose from 49.4 to 49.9 million with a 90% renewal rate. The company also saw total cardholder numbers rise from 90.3 million to 91.5 million (Kline, 2017). Costco adds about twenty-five stores each year and plans to continue in 2018. As a whole, the NRF projects that retail sales will grow between 3.8 to 4.4% in 2018 with a boost in online sales (Anders, 2018).
Several submarkets have started to take hold in both the retail industry as well as the grocery industry. In today’s world consumer convenience and personalization is key. As a result, in home food delivery kits have been on the rise with places like HelloFresh and Blue Apron are stamping their place in the food industry with 5 billion in sales in 2017 (“Meal Kit Market”, 2017). Meal kit delivery is a specialized sector of the market that according to Packaged Facts will continue to show robust growth. Not only that, subscription boxes as a whole have exploded in growth with an 800% increase in customers since 2014 (“Meal Kit Market”, 2017). These boxes include a wide-variety of goods from food, clothes, fitness, beauty product etc. According to Forbes there are about 5.7 million subscription boxes in the U.S and business to consumer subscription business have more than 11 million US consumers (Vozza, n.d.).
In addition, niche markets like Trader Joes continue to thrive in the hugely competitive world of the retail industry by differentiating themselves and offering unique micro-niche products. Not only that, the mindset of “going green” and health has caused an uptick of many submarkets in the fitness and wellness categories.
Currently, Costco operates a total of 749 warehouses worldwide with 519 in the United States and Puerto Rico combined (Smith, 2017). Other locations include Canada, Mexico, United Kingdom, Japan, South Korea, Taiwan, Australia, Spain, Iceland and France. The largest Costco is located in Utah at 235,000 square feet with the average size of a Costco store at 143,800 square feet (Smith, 2017). Floor plans are designed for efficiency and are often in suburban areas. Costco stores are most often found on the coasts with both California and Canada being key markets (Bowman, 2016). Most sales occur in the warehouse stores, however, consumers can also purchase products through Costco’s e-commerce website. Costco also has a mobile app to access information about products and to make a purchase.
It is important to note some common trends in the retail industry. Online shopping is a significant and growing sales channel in the industry. This means that more retailers are stepping up their online presence and working to increase sales from these online channels. At the same time, retailers are not underestimating the impact of the brick and mortar stores but have focused their attentions on making in store shopping more of a memorable and personalized experience to ensure shoppers are coming through their doors. As Wal-Mart, Amazon and Costco continue to become as broad as possible in their offerings, a trend of the opposite can be seen in many stores. Many retailers are focusing on personalization by being better than anyone else at one thing by narrowing their scope of offerings and specializing in a certain product category. In addition mobile shopping is on the rise with many stores working to incorporate mobile apps for scanning and payment. Consumers are also becoming more conscious of what they eat and are willing to pay more for better quality foods or for specialized diets like gluten free. Organic foods are huge with 3 out of 4 grocery stores carrying organic and 45 billion dollars spent every year (Pofeldt, 2016).
As with any company operating in any market, they need to be aware these trends as well as the forces in the external environment that can influence their growths and profits. These forces can range from political to economical, social, environmental, legal, and technological both nationally and internationally. Costco currently operates over 200 stores outside the United States and political stability or disruption in those countries can have large impact on the supply chain and the company as a whole. In addition, currency fluctuation in exchange rates can be costly as Costco operates on “razor thin margins” and even devaluation of 5% can be a difference between a loss and profits (Page, 2015). Local customs and cultures about shopping as well as logistical challenges, consumption behaviors, different tax structures and country rules can all have an impact on success abroad. However, Costco has been successful especially in Canada and Asia with the opening of a new store spurring 30,000 to 40,000 signups, which more than triples a US store opening in the first 12 weeks. In addition membership renewals are around 87.9% (Murphy, 2015).
Economic forces shape the business world and recessions as well as unemployment rates, condition of the labor markets, and consumer spending power can all impact growth and sales. Following the recession, the world economy has rebounded and is growing with an increase in disposable income therefore consumer confidence. Unemployment rates have dropped to 4.1% (“Unemployment Rate”, 2018). In addition, increasing international trade agreements give support for Costco to continue to expand not only its supply chain but also its stores (Smithson, 2017). All of these are good signs for the retail economy.
As far as social forces, people are changing the way they shop and want things at the touch of a button. Most consumers value great customer service and convenience and more than ever value personalized services. In addition, technological products are in demand more than ever. Artificial intelligence, big data mining, RFID technology, as well mobile payments all have an impact.
In term of environmental factors, sustainability and environmental responsibility have become hot button issues to buyers when deciding where to shop. Brands that strive to “go green” and reduce their carbon footprint not only increase their social image but it can actually increase their bottom line as well. According to Costco’s Sustainability Report 2015, their key focus is to enhance warehouse energy managements systems, expand package design initiatives, and further develop recycling and waste management systems. In addition, the goal is to maintain a carbon footprint growth less than the company’s sale growth. Finally, legal issues examined in this environment include current employment laws and any changes to those laws. In addition, Costco needs to follow laws on packaging and labeling products and be in tune to the legal climate of the countries it operates in. Brands that are engage in ethical practices and go above basic legal requirements can improve their social image and increase profits. According to Glassdoor in a 2013 report, Costco has the most satisfied employees (Cooperstien, 2013). The company is well known for taking care of its employees and offering pay-premiums, with an average wage of about 22.50 dollars an hour. In addition, they offer medical and dental of which 90% is paid for by the company (Romano, 2018). As we know happy employees lead to fewer legal issues. Also, with the 2017 tax cuts put into law, the company plans on investing that money into their employees. The CFO Galanti stated that Costco planned to boost compensation prior to the tax cuts and now “We’re going to do a little more because we can” (Romano, 2018).
As mentioned, the competition in the retail market is fierce and it is important for Costco to not only identify its main competitors but also to analyze the threats and strengths that they bring to the table. Costco’s direct competitors include other warehouse clubs primarily Wal-Mart owned Sam’s Club and BJ’s Wholesale Club. In addition, Costco competes with global and national supermarkets, department and specialty stores, as well as online retailers. Stores like Wal-Mart, Target and Amazon’s Whole Foods as well as Amazon.com are large competitors. Also, stores like Macy’s, Kohl’s, Best-Buy, Home Depot, Lowes, Trader Joes, Walgreens etc. all compete on products that Costco offers as well.
Despite the intense competition, Costco has managed to grow where rival retailers have struggled in the past year. This is in large part due to the their loyal customer base that continues to come through its doors in droves. Forbes reports about three million members a day enter stores or the equivalent of almost one-fifth of the U.S. population (Lewis, 2016). These shopper tend to be older, affluent, college-educated homeowners. The typical Costco shopper earns about 100,000 a year (Best, 2016). Baby boomers tend to be the strongest age demographic and customers tend to be from the suburbs and have a car as they are buying in bulk and need the storage space that it entails (Bowman, 2016). A third of the members hold executive memberships meaning they pay double the standard $55 fee (Best, 2016) In addition, Costco shoppers tend to spend nearly 150% more per shopping trip than the average consumer (2016). One of the biggest issues Costco faces is the aging of their target market and the inability to capture the millennial consumer group due to its current model. However, Costco is able to tout several strengths that enable the company to sit in the number two seat of the retail industry and sustain their competitive advantage.
Costco’s execution of its low cost strategy is one of its greatest strengths. Costco’s strategy aims to increase sales while cutting long-term costs. They achieve this through trimming freight costs, economies of scale, reducing packaging, and scaling merchandise. As mentioned earlier, reducing the amount of product choice results in cost savings for the company as it means having fewer products to track and display. In addition, this move increases the companies buying power, as suppliers need to bid for shelf space, which in turn drives down price. By selling in bulk, Costco saves on price and is able to ensure fast inventory turnover (Ross, 2016). Costco also has an established rule that items cannot be marked up by more than 15% over cost and does not let stores undersell it, which also helps maintain customer perceptions of Costco contanstanly providing the most competitive price (“Inside Costco”, n.d.). Due to its subscription based program, Costco is able to generate most of its profits from the membership fees rather than product markup which made it earning much more predictable and less susceptible to the rise and fall of the price competition in the industry, a huge strength (Kalogeropoulos, 2017)
Another big strength of the company is what is sometimes referred to as the “treasure hunt” as Costco makes shopping an event. By regularly mixing up the product lineup and offering deals that come and go, the company ensures that customers continue shopping at their physical store and that they keep coming back. Not only that, the sense of discovery leads consumers to explore the entire mix of products and often entices them to buy impulsively for things they didn’t expect to buy (Lewis, 2016)
Costco’s strength also lies in its brand equity and established loyalty among its customers and employees. Employee satisfaction and pay leads to more motivated and better working employees which decreases employee turnover and saves the company money. However, more importantly, this satisfaction leads to excellent customer service (Moore, n.d). The company also has a generous return policy and accepts returns almost a year later. As a result, the company is granted a loyal workforce and dedicated paid membership base.
In contrast to the strengths of having the exclusivity of member and profits of member fees, this can also be a weakness as well, as it prevents others who may not be able to afford membership from shopping at Costco stores. In addition Costco is highly dependent on its North American business with 87% of total sales in 2014 (Dalavagas, 2015). The company is also dependent on California and any slowing in demand could hurt the company. Finally, its e-commerce presence and older customer base is a weakness as well.
Moving forward Costco should focus on offering its customer base a strong digital product and expanding its e-commerce offerings. The company’s growth rate for digital sales at 11 percent lags both Target and Wal-Mart and the e-commerce market as a whole with around 15 percent growth (Boyle, 2017). In addition, half of Costco members are also Amazon prime members, which could cause losses as Amazon now offers many goods in bulk for prices rivaling Costco (2017). By growing the company social presence and e-commerce channel, the company has an opportunity to attract a younger customer base. This can be monitored by yearly growth rates, comparison to the competition as well as the amount of online traffic and sales. As currently according to Retail Wire, Costco has a long way to go in reaching millennial via Facebook and Twitter (Tuttle, 2014). Costco should work to beef up its social media and explore ways to target the younger generation as its current customer base is continuing to age. This may mean offering a student card in which roommates can share the membership and be considered a household thereby lowering the cost and making it more beneficial to buy in bulk to share. In addition, click and deliver options should continue to increase as this will also increase convenience and allow consumers without cars in city centers to shop. This can be implemented on a trial basis in areas of higher income to see the impact and can be measured in membership sales and growth of that demographic as well as ROI.
In addition, Costco may want to consider starting its own food delivery service boxes or buying up companies and using its efficient supply chain to provide produce for the kits. Costco could also look into bulk delivery for business fairs, conferences etc. Not only that, the company has a tremendous opportunity to “transition from a mostly North American company to a true global company” (“An Investors Guide”, n.d.). It store footprint is still relatively small so there is still plenty of room for expansion in abroad. Costco should continue to expand in the Asia countries particularly China. These initiatives can be measured by profits as well as sales and should be monitored quarterly.
Costco Wholesale’s Yearly Sales Growth 5 Years. (n.d.).
Membership Growth Rates (Tenebruso, 2017)
Customer Retention Rates (Tenebruso, 2017)
Costco’s Profitability Over 5 years (Kalogeropoulos, 2017)
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