Costco Five Forces Model Analysis

As previously mentioned, Costco does have some direct competition within the industry from companies such as, another big box retailer Sam’s Club, as well as, Target and Walmart. Comparing for instance, Costco and Sam’s Club, both retailers offer basically low prices, mass quantities, miscellaneous items for the home, and require individuals to pay in order to shop at the establishment (Quirk, 2016). There is a minimal difference in the amount individuals pay to be members of these establishments; Costco’s annual fee is $55 and Sam’s Club is $45 (Quirk, 2016). Although both retailers have various similarities there are a couple of differences that stand out. For instance, Costco extends opportunities for home mortgages, security

The competition between the wholesale club industry is pretty strong but is mostly dominated by the three main competitors which are: Costco, Sam’s club and BJ’s Wholesale club. These three wholesale clubs for the most part dominate the industry and take away customers from other retail stores because they can offer much lower prices, brand name items and a wide variety of items to purchase from them. When it comes to shares of warehouse sales, Costco had roughly 56 percent of sales, Sam’s club had 36 percent and BJ’s wholesale had a low 8 percent. Unlike most retail stores, these three display all of their items on pallets or their inexpensive shelving which provides them with low cost on décor, labor and advertising.

Market Realist retail analyst Phalguni Soni opined that “International growth would enable [Costco] to take the concept of the warehouse club to new markets and diversify its revenue stream (Soni Part 6).” Indeed, such revenue stream diversification would create value. It also helps that Costco’s international sales are growing faster than its U.S. sales (Soni Part 11).

In this broadcast I was amazed by how Costco was formed and the little secret things that Costco using to encourage people to buy more. Surprisingly that the employee from Price Club left his job, and open his own company, Costco. I first thought that Amazon would sell more stuff than Costco because their social network system which offers free deliver, good deal, more convenience, and various items are offered. However, Costco alone sells more stuffs than Amazon. I found many interesting about Costco. Costco is a giant store with a tiny selection, for example; there is only three options for plastic zip log. This is a key for Costco that they don’t offer many options due to the fact that they don’t want to spend more money on labor part to

“When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them,” he said. “We don’t want to be one of the casualties. We don’t want to turn around and say, ‘We got so fancy we’ve raised our prices,’ and all of a sudden a new competitor comes in and beats our prices,” he says.[10] Costco’s dedication to low prices has yielded impressive financial results. During December, Costco Wholesale Corporation reported a 9 percent sales increase as opposed to the projected 5 percent; an extraordinary 14 percent improvement compared to the same period last year.[11]

The dollar store industry caters to low-, middle-, and fixed-income buyers who are price sensitive. Regarding consumables, buyers are looking for the best bargain for an item that they will need to purchase again in the near future. The high threat of customer buying power drives profitability down. In contrast to buyer power, supplier power is low. This is due to the large number of suppliers that offer price-competitive, undifferentiated products. Suppliers must rely on the retail industry to sell their product, so forward integration is unlikely. The low threat of supplier power increases profitability. The threat of substitutes is medium. Since extreme-value retailers offer a focused assortment of goods in a small-box format, mass retailers such as Wal-Mart and Target are substitutes rather than competitors. On one hand, mass retailers have a larger assortment of branded goods, economies of scale, and are highly price competitive with extreme-value retailers. On the other hand, extreme-value retailers are more convenient due to the small-box format, allowing a customer to get in and out quickly. The products being sold are undifferentiated so price-performance tradeoff is low. The threat of new entrants into the industry is medium. There are areas of the U.S. with no extreme-retail presence, making it easier for a new entrant to open and capture market share. On the demand side,

These are usually one time buys at very low prices and that turn very quickly. Costco’s customers shop their stores and look for these deals. These customers also know that when they spot these bargains they have to act quickly, because they would not last for long and most likely would not return. This concept naturally led to even high turnover of the “Treasure Hunt” products and is a definite competitive advantage. These characteristics – Low Prices, Limited Selection and the Treasure Hunt shopping environment are all key components to their winning Strategy.

Costco understands the customers and they have fewer items in each category for customers to choose. Sometimes, too much items make customers confused because it is hard for them to make decisions among a lot of brands. At that time, some consumers may give up buying those items and it will be a loss for a company. However, Costco lists less items on the shelves and consumers can make decisions easily. For example, the manager introduced that they sale “HEINZ” tomato ketchup for customers to choose and help them to make decisions.

The US warehouse club and superstore industry includes about 20 companies; however the major competitors that Costco faces are Sam 's Club (owned by Wal-Mart), BJ’s Wholesale Club, and Meijer. The club superstore industry is so competitive that these four companies alone hold over 90 percent of sales. These superstores are able to offer competitive pricing because as large companies they can offer a wide selection of products and have purchasing, distribution, marketing, and financing advantages. Due to low margins, the profitability of these individual superstore companies depends on high volume sales and efficient operations. This is where Costco has been able to succeed and set itself aside from the competitors.

In 2010, Costco, Sam's Club and BJ's Wholesale Club were principle competitors in a nearly $125 billion discount warehouse and wholesale club industry. These companies dramatically changed the competitive landscape of retail by offering bargain-priced, broad selection merchandise to the masses through annual memberships. Major and local supermarkets, drugstores, department stores and the like have found it hard to compete with the substantially lower operating costs, advertising expenditures, overhead costs, and volume discounts offered by wholesale clubs. In addition, rapid inventory turnover affords wholesale discount clubs more cash on hand to finance higher percentages of inventory and secure better payment terms from suppliers than competing companies. Thus, chief competition has been within industry. All three warehouses employ a low-cost provider strategy; however, each has also developed ways of differentiating operating tactics and marketing strategies to improve the overall bottom line of the company.

Costco is among the leading global retailers which provide customers a wide range of merchandise, ranging from small to well-known brands. The company began operations in 1983. Over the years, Costco has been a retailer in low cost membership-only leader, in warehouse club of merchandise. Moreover, Costco does not offer frills warehouse business models as its competitors do.  Costco’s major competitors are BJ’s Wholesale Club and Sam Club (Costco, 2010).

The first of Porter’s Five Forces that impact Costco is the threat of new entrants. The threat of new entrants into the wholesale and membership retail space is low. There are several reasons why the threat of entrants into the market is low. The leading reason why the threat of entry is low is because an emerging company will struggle to have the volume necessary to compete with Costco. Costco is the sixth largest retailer in the U.S. As a major retailer, Costco has the highest discounts on a majority of its

Another important aspect is a limited selection of goods. Whereas Walmart or Target may have upwards of 150,000 items sold in their stores. Costco will have less than 4000. They also have their own private label which is only equal to 15% of what they carry in the stores, but it equals out to over 30% of their total sales currently. Another aspect of the product selection is that instead of buying many

Costco has many competitors with the primary two being Sam’s Club, a warehouse wholesale business being managed by Walmart, and BJ’s warehouse. Sam’s Club is offering the same services as Costco. They offer their customers lower prices than traditional stores and like Costco they sell their products in bulk to keep members interested. What makes them a threat to Costco is the cost of becoming a member to shop at their stores. For Costco’s basic membership, known as a Business membership, a price

Many of Costco’s strengths are held with their low prices, limited selection, and their employees. Costco prefers to hire from within and focused on career longevity and development for their employees. It was company policy to fill at least 86 percent of its higher-level openings buy promotions from within; in actuality, the percentage ran close to 98 percent, which meant that the majority of Costco’s management team members were home grown (Gamble & Thompson Jr., 2009, p. 226). Even with their many strengths, Costco still had some weaknesses. Their warehouses appeared to be very industrial, with concrete floors and merchandise displayed on wooden pallets. Costco also relied heavily on word-of-mouth advertisement, which saved the