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Swot Analysis of Costco Company

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Executive Summary

Under the leadership of Jim Sinegal and Jeff Brotman the inauguration of the first Costco took place in Seattle Washington in 1983. The membership based warehouse club was the first company to ever grow from 0 to $3 billion in less than six years. Throughout the past few decades Costco has done a phenomenal job in maintaining their entrepreneurial spirit. Under the leadership of current CEO Craig Jelinek they have reported gross profit on their financial statements every year for the past 13 years, other than in 2009, during the recession.

We have used available resources to analyze the company thoroughly. By performing a SWOT analysis, we have identified weaknesses and threats that can ultimately have a negative impact on the company’s performance. Costco’s management style is one of many strengths that sets them apart from their competitors. While the wholesaler believes financial performance depends on the ability to control costs, some of these costs are out of their control. Unlike their competitors, employee compensation is not one of the cost they seek to minimize. Costco’s philosophy is that in order to achieve long term goals, the company has to maintain compensation at higher levels than the industry average. As a result, the company expects lower employee turnover and increase employee satisfaction. Essentially, these strengths caused by internal factors can be utilized to take advantage of opportunities brought by external factors.

After evaluating the strengths, weaknesses, opportunities and threats we were able to elaborate on our findings and decided what effects these had on the company. Our discussion on the information found led us to come up with suggestions Costco could employ to minimize the weaknesses and threats within their organization and take full advantage of the strengths and opportunities.

Introduction

Costco Wholesale is a multi¬billion dollar global retailer with warehouse club operations in eight countries. As a membership warehouse club, Costco dedicates to bringing their members the best possible prices on quality brand¬ name merchandise. With hundreds of locations worldwide, Costco provides a wide selection of merchandise, plus the convenience of specialty departments and exclusive member services.

The company’s first location, opened in 1976 under the Price Club name, served only small businesses; later, the company also served a selected audience of non¬business members.

In 1983, the first Costco warehouse location was opened in Seattle by James Sinegal and Jeffery Brotman. It was beginning of an extraordinary era for Costco: it became the first company ever to grow from zero to $3 billion in sales in less than six years. When Costco and Price Club merged in 1993, the combined company had 206 locations generating $16 billion in annual sales.

Strengths

Operations

Costco and its subsidiaries began operating in 1983 in Seattle, Washington. Nowadays, it engages in the operation of membership warehouses in the U.S., Canada, U.K., Mexico, Japan, Australia, and Spain. It also has majority¬ owned subsidiaries in Taiwan and Korea.

The company strategy is to offer its members’ low prices on a limited selection of nationally branded and select private ¬label products in a wide range of merchandise categories. This will typically produce high sales volumes and rapid inventory turnover. Warehouse ¬style stores are the main places where Costco sells its products. The main places for product distribution are warehouse ¬style stores, online store, and mobile app.

Marketing

As a large retailer, Costco Wholesale offers a wide variety of products and services. This element of the marketing mix identifies the firm’s outputs. The company has very attractive low prices on practically every good or service offered in its stores and on its website. Some services offered by Costco are photo printing services, life insurance (under Life Services), and payroll services (under Business Services). This element of the marketing mix shows that Costco Wholesale Corporation has expanded its product mix to a considerable degree of diversification. Costco Wholesale promotes its products through four main marketing communications tactics: sales promotion, direct marketing, personal selling, and public relations.

Financial

Costco Wholesale Corp has the Financial Strength Rank of 7. It shows strong financial strength and is unlikely to fall into distressed situations. COST’s high cash coverage means that, although its debt levels are high, the company is able to utilize its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment.

Weaknesses

Although Costco is a leader in the industry, weaknesses in their structure can put them at risk of losses. As reported in their latest financial statements, Costco has identified a weakness with their Information Technology General Controls (ITGC). The company relies heavily on information technology to record high volumes of transactions. This weakness not only affects financial reporting but more importantly investor confidence and stock price. As a result of this discover, management is working towards resolving the issue in a timely and effective manner. Also mentioned in their 2018 financial report is the concern for product range. Costco has a variety of products in each warehouse, but when compared to their competitors the product range is limited. On average, Costco stores approximately 4000 products in there warehouse, whereas Walmart stores about 50,000. This weakness can drive consumers towards the competition and away from Costco. Lastly, and perhaps one of the weaknesses that has been ongoing since the store first opened its doors, is that foot traffic is limited to those customers who hold a membership. In spite of the fact that memberships are sold with the incentive of savings, memberships set limits.

Opportunities

Market Control

Costco being the giant in wholesale produce, constantly has the competitive edge. Because Costco offers electronics, produce, clothing, alcohol etc. to its consumers; It will always have areas to pursue market control in. For instance, if either one of the markets/industries experiences any type of industry revolution, Costco has the power and capital to invest into the up and coming company. If the company tends to boom and do well, Costco will already have a stake in the company.

R and D

Costco has the capital to “R and D” any of the platforms it offers products from. Let’s say Costco would like to partner with a wine company that is not well known but has a quality product; Costco could then offer prime space in a few of its locations to test out its wine products. If it does well, they can then offer more locations for a higher profit, and if they do not do well; Costco can scrap the product and start fresh with a different company/product.

Costco is sought after for many opportunities for growth. Forbes has listed Costco as number four, on its 2018 list of top companies to work for. With already 231,000 employees, it seems it will keep growing if it can keep up with the demand from its consumers. Costco pays its employees very well, has great healthcare coverage, and retirement and compensation plans. There is no wonder why people will continue to flock to Costco for opportunity.

Threats

One major threat Costco will need to identify and overcome, is the possibility of them being too big of a store for people to comfortably want to shop in. Standing in line, waiting to pay for your items at Costco can take anywhere from thirty to sixty minutes. There is a share of people who do not like to shop at such a large place and do not want to wait in line for the purchase of just a few items. There is a demand for a “smaller” and more gentile Costco experience. At a recent family gathering, I asked 30 people if they would shop at a place similar to Costco but is smaller and can purchase items not in bulk. Out of the thirty people, twenty¬ five of them would shop at a smaller, quicker, Costco.

Costco could set up “satellite” stores. The stores can be much smaller, with self-¬checkout and the option to purchase everyday items not in bulk. Some Costco members find it difficult at times to head into the store when purchasing smaller items.

Costco does not offer a delivery service. Many competitors have already adopted and grown with the demand of its consumers. A mobile delivery system is on the rise for many companies. It is catching like wildfire and leaving many companies behind. 7¬11 and Walmart have caught on to this technological and logistics innovation. Walmart has introduced “Spark Delivery”, an app which will allow consumers to order groceries and other products from Walmart, and have them delivered straight to their homes. 7¬11 has introduced “7NOW”. 7NOW will allow consumers to order anything from the convenience store and have them delivered straight to their doorstep. Everything from snacks, alcoholic beverages, and even food such as a chef salad can be delivered.

Discussion of Findings

Costco’s philosophy is to provide its members with quality goods at the most competitive prices. It does not focus its efforts on maximizing prices in the short term, but instead focuses to maintain a perception among its members of “pricing authority”, or consistently providing the most competitive prices. These bring customers back to the warehouse, since they have the belief that they are in fact getting the best price on a wide array of products. The company also uses its gasoline business to draw members to warehouses. While this business is relatively lower margined than others, it again drives higher volumes of other higher¬margined products.

Costco uses bulk/wholesale discounts as a form of sales promotions to lure consumers to its warehouses/stores. Members are guaranteed low prices for products sold per pack or in wholesale amounts. In addition, Costco uses direct marketing through emails to members, as well as The Costco Connection, which is a monthly publication that promotes products available at Costco warehouses/stores. On the other hand, personal selling happens when sales personnel persuade customers to purchase certain products at the warehouses. Costco applies public relations to boost its corporate and brand image. For example, the company has sustainability programs for its supply chain, and gives donations to support programs for children, education, and health and human services. The lack of advertising is a major factor that separates Costco’s marketing mix from those of other retailers like Walmart. Costco does not advertise, and relies more on its low prices and product value to attract consumers. Thus, this element of the marketing mix shows that Costco Wholesale Corporation effectively promotes its business and products even without advertising.

Costco has rapid inventory turnover combined with high sales volume, contributing to higher revenues. The high sales volume ensures high revenues in spite of low selling prices. The high sales volume contributes to high operating efficiency. Higher operating efficiency is achieved through the minimization of variable costs, and variable costs are lower when volumes are higher. Therefore, the operating efficiencies achieved by volume purchasing, along with efficient distribution and reduced handling of merchandise in a no-frills warehouse, allows the company to operate profitably at lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.

Costco’s business model has proven to be effective since the day they began operations. However, the weaknesses described previously are issues the company still faces today. Recently, management discovered the company’s information system had many flaws. What this means to Costco is that analysis on sales trends and cost related to daily operations could be inaccurate. This may mislead management and result in inadequate annual budgets. The issues presented by this discovery does not only affect internal users, such as management and the board of directors but also outside users such as investors. As a public company, Costco relies on the support of investors to continue grow as a company. In addition, the company is also aware that their product range is limited when compared to other retailers such as Target, Walmart and Sam’s Club. With efforts of keeping the prices low for customers, the company offers Kirkland, a brand own by them. Nonetheless, the variety of products is limited. For consumers who value choice, a Costco membership may not be attractive. The company is not meeting customer needs in that aspect. On the other hand, by sticking to this strategy they are able to satisfy the need of low costs to existing customers. Also affecting sources of revenue is the limitation of foot traffic. Once a member, the warehouse provides each customer with a Costco card. The card is necessary to enter the premises and it is also required at check out. This then eliminates the probability of a non-member to shop at the warehouse. To illustrate, we can look at the Costco store in Fullerton. While the city is the home to many families, there is approximately 3 colleges/Universities within a 4 mile radius. Though buying groceries in bulk may be attractive to families, college students do not need as much and may not have an incentive to purchase a membership. However, due to how conveniently located the store is, it most certainly attracts a non¬members on a daily basis. The consumer is then rejected at the door and that is how the company limits potential sales. Though it is not causing losses, it not allowing revenue to grow by rerouting traffic to the competitors.

Conclusions & Recommendations

In light of the SWOT analysis presented above, it is up to management to decide which measures need to be taken to continue to operate profitably. Costco Wholesale is one of the leading firms in the industry. They are able to maintain such an outstanding position by constantly reviewing SWOT analysis. As a result of detailed examination, our team has narrowed down to the most important finding in each of the following sections: Strengths, Weaknesses, Opportunities and Threats.

Costco should take advantage of the opportunity to control the market by utilizing their biggest strength; Strong market presence. According to the most recent quarter, COST held 13.1% in market share. That is about 32% more than the next runner up, Home Depot Inc., who only held 9%. In order to maintain their status, they need effective coordination among various departments within the company. To detect effective or ineffective coordination the company relies on technology. The use of technology allows them to analyze which products sale and which do not. It also allows them to keep the right amount of inventory on hand to maximize profit. In addition, information technology is a great resource to see just about anything going on within the company. However, as stated earlier, executives know their IT department is weak. As a recommendation, we believe Costco should invest more into the technology side of their business. The implementation of strong information systems will result in a decrease of expenses in the long run and will allow them to protect their status. Finally, and also relating to the company’s weakness, is that they are not offering the services that most competitors have begun to use. This is a huge threat to the company’s revenue because it is now convenient for consumers to use an app and have the goods delivered to their door without the need to drive to a location. Costco should begin to consider the newer generations who have been using technology all their lives, as they will be the generation that determines whether Costco stays in the game or is surpassed by others.

In conclusion, Costco Wholesale has abounding advantages that puts them in the lead among others. They have plenty of room to grow and become appealing to younger markets by being instantly accessible.

References

  1. Corporation, C. W. (n.d.). INVESTOR RELATIONS OVERVIEW. Retrieved from http://investor.costco.com/
  2. Costco. (n.d.). Welcome to Costco Wholesale. Retrieved March 10, 2019, from https://www.costco.com/about.html
  3. Ernst & Young LLP. (2018, October 25). Annual Report. Retrieved from https://www.sec.gov/Archives/edgar/data/909832/000090983218000013/cost10k18.htm
  4. Gara, A. (n.d.). Costco Wholesale on the Forbes America’s Best Employers List. Retrieved from https://www.forbes.com/companies/costco¬wholesale/#199f23bd2b29
  5. How Financially Strong Is Costco Wholesale Corporation (NASDAQ:COST)? (2019, January 06). Retrieved from https://finance.yahoo.com/news/financially¬strong¬costco¬wholesale¬corporation-130744 993.html
  6. Kissinger, D. (2017, February 06). Costco Wholesale SWOT Analysis. Retrieved from http://panmore.com/costco¬wholesale¬swot¬analysis
  7. LLC, G. (2019, February 28). Costco Wholesale Corp (NAS:COST) Financial Strength: 7 (As of Feb. 2019). Retrieved from https://www.gurufocus.com/term/rank_balancesheet/COST/Financial-Strength/Costco¬W holesale¬Corp
  8. Publishing, V. L. (n.d.). Value Line The Most Trusted Name in Investment Research. Retrieved from http://www.valueline.com/Stocks/Highlights/
  9. Thompson, A. (2017, February 06). Costco Wholesale’s Marketing Mix (4Ps) Analysis. Retrieved from http://panmore.com/costco¬wholesale¬marketing¬mix¬4ps¬analysis

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