|Costco Wholesale Corporation (COST)
|Issaquah, Washington, USA.
|W. Craig Jelink
|$195.9 Billion (2021)
|$ 5.01 billion (2021)
|Walmart, Target, Amazon, BJ’s Wholesale Club, Home Depot, The Kroger Co.
Costco Wholesale Corp. is one of the leading warehouse clubs headquartered in the Issaquah region of Washington state in the USA. Costco also has its operations in Canada, Australia, UK, Japan, South Korea, Taiwan, and Mexico. The company engages in a wholesale retailing industry, offering products ranging from groceries to home electronics, clothes, etc. It offers its members a variety of branded and private-label products across multiple categories- groceries, produce, deli, electronics, jewellery, fuel and etc. Costco operates over 820 stores globally and reported a revenue of $195.9 billion in the 2021 financial year according to its annual report. With its business model of membership warehouses, the company has managed to sell items in bulk at sustainably discounted rates to its members, who are liable to annual subscription fees. The low-cost leadership model has made Costco rank at 10th position among the global top regarded companies in 2019 (Murphy, 2019). Let’s now go over the SWOT Analysis.
Table of Contents
Costco Strengths 2022:
Warehouse Club Model.
Costco has introduced a unique business model that is different from its competitors, whereby the customer has to be a member or own a Costco membership card to buy from them. This way, the company charges its customers an annual membership subscription of $60 (Costco Wholesale, 2021). As of the current year, according to industry reports, Costco only has Walmart as competition in the context of the warehouse club business model, with a stable market share of 22.5% (Daly, 2021).
Low-Cost Leadership Model.
Costco applies the low-price strategy, which has helped the company strengthen its position as a retail giant in the industry. The company focuses on stocking high-quality products and selling them in bulk at low prices. For example, the company has not changed the price of its beef hot dog and a 590 ml drink deal for $1.5 in 34 years (Pomranz, 2020). As per inflation, economists say that the price should be $3.65 today. However, Costco has not budged. ostco is the price leader in the retail landscape through its lower-than-average markup and membership model. The average markup at Costco is 12.5 percent while Walmart is 24 percent and Home Depot, 34%.
Costco relies on a high sales volume to sustain its business model and often sells its food court products and fuel at a steep discount or below costs for certain items. Costco recorded the highest foot traffic per gas station of any brand and its shopping frequency increased 6.8 percent worldwide on a quarter-on-quarter basis. Rising costs of living and stagnant income growth will complement Costco’s business model.
Retaining Loyal Customers.
Based on Costco’s pricing strategy and business model of membership, the company is able to retain its customers and build a loyal customer base. In 2020 this customer base constituted 105 million cardholders, as shown in the figure below (Statista, 2021a).
Costco made $3.9 billion in membership fees during the 2021 financial year and it accounts for nearly 60 percent of its net profit as its merchandise costs and operating expense accounts for 98.5 percent of its net sales.
Higher Profits through Less Advertising.
Costco is known for allotting no budgets to advertising. Compared to Walmart’s and Target’s advertising budget in billion, this shows that the company saves billions and redirects its profit into internal operations (Taylor, 2019). In an interview in 2013, the founder of Costco explained how advertising is evil, and they instead rely on other branding strategies (Byrnes, 2013). The company has been consistent ever since.
Ideal Employers are leading to Low Turnover Rate.
Since the company does not spend on its advertising, it leverages the profits to pay high wages to its employees. Keeping a happy workforce strengthens the company’s customer service position. High wage coupled with other perks that Costco provides to its employees, such as paid time off for vacation and 401(K) stock options, makes the company the 4th best Employer in America and 13th best in Canada (Forbes, 2021).
Costco has an SKU (Stock Keeping Units) of around 4000, a figure significantly lesser than its similar competitors, which improves its turnover and cash flow. Costco concentrates its purchasing volume on fast-selling models, and sizes which allows it to reduce its COGS (Cost of Goods Sold). Costco mainly stocks products in case, carton or multiple pack quantities to reduce handling costs and stocking time. Those cost savings from bulk purchasing and operation streamlining allow Costco to offer lower prices than its competitors.
Costco Weaknesses 2022:
Next to No Advertising.
Since Costco is now operating among other countries, having no advertising or marketing strategy in place might harm company profits. Less advertising will lead to a lack of brand awareness in regions besides the USA and Canada, making it difficult for Costco to have a high customer base globally.
Limited Global Presence.
As per the previous point, Costco’s revenue and profits rely on USA and Canadian markets, i.e., 80%. Out of the 782 warehouses in the world, the brand has more than half of them located in America and Canada alone (Statista, 2021b). This makes the company dependent on only two regions, whereas others have a restricted presence.
Transport Cost on Customers.
Since Costco only enables bulk purchasing, it often involves the hassle of transportation, especially for customers coming from urban areas or cities. Hence to tackle such problems, companies like Amazon or other e-commerce platforms provide free delivery services, outnumbering the benefits Costco gives to its cardholders.
Restricted Target Market in Terms of Age.
Costco has targeted chiefly people living in suburbs who prefer to buy groceries in bulk (Kunst, 2019). Therefore, the store’s e-commerce platform is not commonly used and has limited facilities among its members as older people are still new to this type of shopping. Whereas, majority of the younger population prefers online shopping and groceries to be delivered at home. Hence Costco’s ageing customer base might make the company outdated among other age groups (Nijjar, 2016).
Declining household size due to improved fertility rate, mortality rate and changing lifestyle weakens the membership business model as the membership is less appealing for smaller households with lower purchases. Costco’s membership catered to large bulk purchases becomes less appealing to the current market. Costco’s membership is also $15 and $20 more than its closest competitor, Sam’s Club. In the 2021 financial year, Costco made 70 percent of its profits from memberships (as its merchandise operations are running close to breakeven) and that figure might decrease in the coming years. Costco might have to reduce its membership price to adapt to changing consumer trends and competition.
Costco Opportunities 2022:
Target Different Customer Demographics.
The fact that Costco has an ageing customer base concerns future projects of the company’s profit. Consequently, there is room to cater to younger adults via facilitating e-commerce shopping.This way, the company has numerous opportunities to invest more in its online platform and make it accessible for all age groups (Wang and Xu, 2017).
Digital Marketing and changing shopping preferences
Given the consumer behaviour during the Covid-19 pandemic, social media presence has increased. Small scale or multinationals are all present on either Instagram, Facebook, Twitter, or YouTube (Zoe, 2020). This gives Costco a chance to market its services cost-efficiently and attract customers in regions where the operations are less popular, such as the UK, Australia, Japan, etc. Further marketing through digital platforms will also help Costco reach a new target market for the younger aged population.
Ecommerce and utilizing wide network of warehouses
Costco ventured into the e-commerce sector in 2018 joining the ranks of Walmart and Target. Ecommerce accounts for 11.3 percent of Costco sales revenue while it accounts for 12.7 percent of Walmart sales. The online grocery market is projected to grow 25.3% annually from 2022 to 2030. Costco’s competitive advantage lies in having a large warehouse serving as a retail outlet and a fulfilment centre to facilitate its e-commerce operations. Costco can improve its efficiency metrics and reduce its operating cost by creating a synergy of resources (e.g. technology and labour) between the retail and e-commerce operation. 86% of shoppers rank delivery time as a major factor to shop with a brand again and those synergies will improve fulfilment time and consumer satisfaction.
Costco Threats 2022:
Costco has aggressive competition from global giants of wholesale and retailing such as Amazon and Walmart. The online growth of these platforms is a point of concern for Costco, considering the company is still in its infancy when it comes to e-commerce. Reports show that Walmart has a market share of 68.1%, whereas Costco only covers 22.5% of the US market (Daly, 2021).
Decrease in Per Capita Disposable Income of Customers.
Aside from competition coming from online and other retailers, Costco’s revenue might also be impacted by a reduction in disposable income. By the end of 2021, disposable incomes are expected to decrease, making consumers spend less per trip to warehouse clubs and supercentres (Daly, 2021).
Data Security Issues.
The company has hired third-party cloud computing services to maintain and protect its customer data. This makes customer data and personal bank details vulnerable to attacks and privacy breaches (Upguard, 2021). Given that the company’s revenue generates from members-only customers, any data loss of customer identity might cost Costco a fortune in terms of profitability and reputation.
Electric Car Adoption:
Gasoline sales account for 9 percent of Costco’s net sales in the 2021 financial year. Costco has a 636 discount gas station network to complement its overall business model by increasing store traffic. Increased electric vehicle adoption will decrease the demand for discount fuel and Costco might have to repurpose its existing infrastructure to discount charging stations to maintain its competitive advantage. EV accounts for less than 7 percent of global vehicle sales and it is growing at a compounded annual growth rate of 33.6 percent. This exponential trend will increase Costco’s capital expenditures significantly in the near future as EV charging station is expensive to build coupled with low margin. Industry leaders such as Chargepoint have reported five consecutive years of negative net income and BP (British Petroleum) do not expect its charging business to turn a profit before 2025 despite operating for 4 years.
The competition in the membership-only retail warehouse club is heating up brands like Sam’s Club and BJ Wholesale Club are scaling up their price-cutting activities and improving their membership benefits. Sam’s Club is partnering with multiple entertainment companies to offer better deals on hotels, tourist attractions, live events and rental cars. Sam’s club memberships are also priced lower and offer more brand selections while Costco offered more in-house private brand. Studies show that consumers are 75 percent more likely to purchase a product if they can recognise their brand name. Costco also has kept the prices of most of its loss leaders (e.g. the food court $1.50 hot dog and rotisserie chicken) for more than 30 years despite inflation increasing every year in a bid to increase foot traffic to its stores. Expansion of the loss leaders’ range to increase its competitiveness will put downward pressure on its profitability.
Costco SWOT Analysis Conclusion 2022:
Drawing on the SWOT analysis, it should be noticed that Costco Wholesale Corporation has been a major player for a very long time now. With its unique business model, the company has been able to stand out. However, given the internal weaknesses of not catering to the younger population and limited budget allotted for advertising can hinder the growth and revenue of the company. Further aggressive competition coming from online and brick-and-mortar wholesale giants like Walmart and Amazon can further increase problems for Costco if the management does not respond to the changing consumer behavior quickly.
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- Kunst, A. (2019). People who Shopped at Costco in the United States in 2018, by Age. Statista.
- Murphy, A. (2019). The World’s Best Regarded Companies. Forbes.
- Nijjar, P. (2016). The Future of Costco Depends on these 3 Factors. The Motley Fool.
- Pomranz, M. (2020). Why Is Costco’s Hot Dog Combo Still So Cheap? A Death Threat. Food & Wine.
- Statista. (2021). Costco: Memberships Worldwide 2014-2020. Statista Research Department.
- Statista. (2021b). Costco: Number of Warehouses 2020, by country. Statista.
- Taylor, K. (2019). Costco has a brilliant strategy that allows it to get great press, save money and pay workers $15 per hour. Business Insider.
- UpGuard. (2021). Costco Wholesale. Up Guard.
- Wang, R and Xu, E. (2017). Costco: Breaking Down the Bulk. IVEY Business Review.
- Zoe. (2020). How COVID-19 has Changed the Digital Marketing and Advertising Landscape. Innovation Visual.