A case study of Costco Wholesale Corporation
Background information
This is an American membership-only warehouse that offers an array of products, currently; it is the largest membership-only Corporation in the United States and second largest retailer globally, after Walmart. Its headquarters are in Issaquah Washington in the United States of America. The store started operation in 1938 in Seattle, after that, it merged with Price Club in 1983 to form PriceCostco. However, in 1997, executive members from Price left the merger to venture in different but the related retail store, which led to dropping of the name Price in the PriceCostco as noted by Thompson (2010). As an aftermath, t executives rebranded all the stores to Costco and the company changed its name to Costco Whole Sale Corporation. As of 2015, the company had 174,000 workers and 674 warehouses in US and other countries such as Canada, Japan, and Mexico among others. Notably, it had 81 million members base that contributes significant profit in the form of annual membership fee.
Introduction
The report focuses on Costco Wholesale Corporation success through discussion of its approach to addressing the needs of stakeholders such as customers, employees, the immediate community, shareholders as well as compliance with regulatory guidelines. After that, it will embark on Five Forces analysis to determine the strong and weak forces facing the corporation in the retail industry. Besides, it will conduct SWOT Analysis to evaluate both internal and external environment as well as give communication plan to create awareness of the recommendations made based on the analysis. Finally, it will look into governance mechanisms, leadership and the corporate social responsibilities adopted by the corporation and their impacts.
Costco’s success analysis
The retail giant frequently defies rough business cycles that slash the profits of its competitors due to of low prices policy. To wrap it up, the company's success is a multi-facet of the interplay of major factors in the warehouse business such as the mission, vision, and maximization of the stakeholders' welfare throughout its operation. As such, the discussion below analyzes the impact of these factors on the performance and growth of the corporation.
Objectives
The general goal of the company entails provisions high quality products at affordable prices alongside giving value for money to its customers as noted by Dyck and Neubert (2010). The general goal had a significant impact on policies of Costco throughout its operation and led it to adopt as well as review changes, operations and deals to maintain it through several mechanisms. For instance, the company pursues low price policy to an extent of cancelling supply contracts, as was the case with Coca-Cola. In other cases, it conducts large-scale operations to realize economy of scale, which affords the company profit margins at low prices. Eventually, the low prices fuel sales volume, thus, maintaining profitability and winning of new members year after year. The next mechanism is that it incurs zero expenses in the advertisement since its sales revenue is comes from the club members. Thus, it incurs minimum operational costs that mirror in low prices in comparison to its competitors; therefore, quality products offered at low prices attract more customers.
Besides, the goal induces the company to employ techniques and methodologies that yield quality products to the customers. For instance, the company stocks fresh food and quality meals at its food courts. As such, the customers are attracted to its stores and end up spending on other merchandise in additional to the quality and fresh foodstuffs. Ultimately, it increases sales volume and profitability.
Stakeholders
Here, the corporation attaches a lot of importance to its customers, employees, suppliers and shareholders through numerous techniques, though some reduce its profit margin. The company has a strategy of maintaining customer loyalty through membership sales thus eliminating the operation costs related to advertisement expenses. Likewise, it uses psychological selling by attracting customers to the stores through low priced foodstuffs in the company’s food courts, which has numerous benefits. For instance, they court clients’ end up spending on other products and creating a sensation in the social media particularly in the Facebook to discuss their favorite snacks. Impliedly, this sensation creates customers’ awareness and loyalty to Costco. Presumably, treating customers well always benefit the business. In other instances, the corporation increases workforce’s productivity and performance through fair remunerations and compensation packages. Notably, Costco employees get the highest rate in the retail and wholesale industry. Resultantly, the return per employee is also among the highest in the industry.
Costco Wholesale’s Five Forces Analysis
Costco Wholesale Corporation harnesses all the forces of competition to its advantage, which catapulted its performance from a local store to an international wholesale giant. However, to maintain global position, the corporation should control all the external and internal forces of competition in the retail industry. As such, the section evaluates five forces analysis and the effect of each on the corporation performance. In the case of suppliers force, it selects suppliers that align with its mission and vision owing to a large number of suppliers in the market. For instance, the corporation switched its soft drink supplier from Coca-Cola to Pepsi to maintain its low price policy; hence, the corporation has a strong bargaining power.
In the second case, buyers’ power, it gives its consumers optimum satisfaction through quality products at low prices. Factually, consumers have higher bargaining power because there are close substitutes for the Costco's product, strong competitors such as the Walmart and access to the internet as price comparison tool, thereby, customers can switch to other retails that best serve their needs. As such, Costco should prioritize on meeting the customers’ needs at the lowest price possible. Customarily, the corporation has done well in keeping the prices low, thus, it should maintain through reduction of cost drivers.
Thirdly, it faces competition from other large retailers in the industry as shown by BOONE (2012). Thus, competition is a strong force considering that demand is price elastic and firms are in fierce competition to gain large market share. Moreover, the number of large-scale retailers is big which makes competition continuous and threatening. Nonetheless, the fixed membership in Costco serves well to mitigate the effect of competition due to loyalty created. However, it should do more to cut its cost functions and retain its customers since competition is intense in the retail industry globally as shown by the graph below.
Source:http://marketrealist.com/2016/01/analyzing-investment-fundamentals-costco-wholesale-corp/
Still, the corporation experiences substitution force since most retailers employ related business model and strategies. More particularly, the absence of switch costs and a large number of suppliers who produce substitute products pose a strong opposing force to Costco. Therefore, this force reduces its profit margins in once sector such as the food courts to attract consumers to other sectors in the stores. Notably, it is important for Costco to come with strategies to slow this force since it might reduce its profitability further in future. Finally, there is force related to the new entry in the retail and wholesale industry. However, though new firms will not face any barriers to entry, corporations such as Costco are already established and benefiting from economy of scale. Thus, the new firms costs of operations will be relatively high which gives Costco an upper hand in dealing with this force.
Costco Wholesale Corporation SWOT Analysis
SWOT Analysis is an effective tool for evaluating both the internal and external environment in Costco Corporation operations. Consequently, it aids the business in mitigating adverse effects and maximization of its strengths as well as taking advantage of the available opportunities to maintain its global leadership and grow its profits and sales.
Strengths and weaknesses
This section analyzes the internal environment to enable Costco's management to adjust its policies and models to optimize sales and profits. In the case of strengths, the corporation enjoys strong market presence due to unique business model and quality products associated with the strong brand as shown by Thain and Bradley (2012). Besides, the large expansive supply chain enables it to bargain for large deals, which lower prices due to the economy of scales. However, it faces inherent weaknesses due to its policies. For instance, although the membership yields significant profits it limits its profits due to exclusivity. Finally, the limited stocks to cut storage costs and low priced food stuff such as hot dogs limit the profitability of the corporation.
Opportunities and weakness
This section looks at the external environment of Costco to adjust to external forces that affect its operations. Looking for the opportunities, it can expand its sales and profitability through the opening of new and additional stores in such countries as China and other emerging markets such as India, South Africa and Brazil among other. Additionally, expansion and diversification of membership from the current three types as well stocking more products in its store would lead to more growth. Nonetheless, there are threats in the retail industry that if not curtailed may limit its growth. For instance, the emergence of online stores such as Amazon and Alibaba will reduce the number of shoppers in retail business due to the convenience they offer to customers. Moreover, there is fierce price competition from other retailers as shown by the top ten retailers graph above. Still, the customers are shifting their preference from high-calorie products offered in the food courts to evade lifestyle diseases such as hypertension.
Costco Wholesale Corporation strategic plan based on SWOT Analysis
The Corporation will embark on franchising strategy in future to earn profits from the franchise fee since it has strong market presence and brand. This move aims at increasing profitability, as it will attract high fee owing to the popularity of its products. Moreover, the firm will expand the stocked products and membership types. Besides, it will review the advertisement policy plan, more specifically; it will embark on advertisement in new markets to increase customer awareness and sales volume.
The firm will also expand the number of stores to 1000 in the next five years particularly in Africa and Asia continent though takeovers of local retailers in these markets. Consequently, it will offset the adverse effects of brought by online stores and fierce competition from other retailers. Notably, the new market has higher growth and new opportunities compared to developed markets due to saturation of the retail market. Finally, it will increase community activities to win the loyalty of customers to wedge the competition in the industry by retaining its customers.
Level(s) and type(s) of strategies the firm may use to maximize its competitiveness and profitability
In the first category, the corporation will engage marketing department in conducting market research and continuous study to make sure they are ahead of competitors. Thus, it will ensure that Costco meets market demand at all times. Additionally, the same team will evaluate ways of increasing market share through advertisement in new markets, market mix strategies and offering of the franchise to increase market growth and the market share. Essentially, the marketing strategies will boost competitive power against online stores and other retailers globally.
Still, to address the entire workforce performance, Costco management will share the goals through performance management to create synergy required to maintain its leadership in the retail market. Moreover, the corporation will expand remuneration and compensation packages to be more inclusive and robust. In the final analysis, their productivity will increase the profitability and market share in the saturated retail market.
Communications plan the to make the strategies known to all stakeholders at Costco
The communication plan will be threefold to cover all the stakeholders in a comprehensive manner. Of note is that immediate stakeholders are the employees, thus, Costco management will write an internal memo outlining current situations, planned recommendations, and the perceived benefits of adoption. Besides, the similar document will be available to various departments to enable customization of goals to align with entire recommendations. Secondly, there will be posting of recommendations on the websites and as well as distribution to consumers through mails. Finally, the shareholders will get the information through the annual general meeting reports that will reflect on the assumed recommendations. This will yield benefits of participatory management to Costco.
Corporate governance mechanisms used by Costco
The corporation employs three corporate governance techniques to ensure attainment of the set goals as well as compliance with stipulated regulations by the relevant authority in its areas of operations. Firstly, the internal mechanism encompasses progress and growth of Costco activities through monitoring of workforce, internal auditing, job specification as well as development and execution policies among other activities as discussed by Rezaee (2008). This mechanism serves the objectives of internal stakeholders such as the managers, employees and the shareholders and creates responsibility and performance culture.
Secondly, it deals with the external mechanism through compliance with government’s standards and requirements such as tax returns, trade unions stipulations and other guidelines provided by relevant regulators. Besides, industry association is a major player in this category in foreseeing firms’ operations in creating social responsibility. Finally, Costco factors in the independent audit practice since it helps the corporation in determining the true view of its financial conditions. This is quite important in attracting and retaining customers in the corporations since audit reports give investors' confidence, thus, independent audit leads to transparency and accountability in the corporation.
Leadership style in the Costco Wholesale Corporation
The leader, CEO of the Corporation, approves all the decisions made, thus, despite the contribution from other stakeholders, the leader has the last word on policies and strategies. Overall, the leadership concentrates more on customers and employees through adherence to corporate culture. This, in turn, helps the corporation in maintaining order and benefiting from diverse management team in Costco. However, to increase leadership effectiveness, it is important to factor in both direct and indirect l styles, that is, it should aim at tasks, relations and change as well as efficiency, reliability, adaptation, and innovation. Consequently, it will help its operations and models to remain relevant and robust in addressing the needs of the market.
Costco corporate social responsibility
Costco’s focuses on children, education grants, and health services in its effort to improve humanity wellbeing. Thereby, it continually accepts and makes reviews of requests for charity and community activities throughout the year. A case in point is the Express Scripts Foundation, which it contributes to support nonprofit organizations who offer education grants to needy children. In the second case, one of its stores located in Wayne, NJ provides children with backpacks in Paterson. This has the effect of creating customer loyalty as well as building the participating employees synergy, which increases their productivity in job performance.
References
BOONE, L. O. U. I. S. E. (2012). Contemporary marketing, 2013 update. s.l.: Cengage Learning Custom p.
Dyck, B., & Neubert, M. J. (2010). Management: Current practices and new directions. Boston, MA: Houghton Mifflin.
Rezaee, Z. (2008). Corporate governance and ethics. Hoboken, N.J: Wiley.
Thain, G., & Bradley, J. (2012). Store Wars: The worldwide battle for mind space and shelf space, online and in-store. Chichester, West Sussex: John Wiley & Sons.
Thompson, J. B. (2010). Merchants of Culture: The Publishing business in the twenty-first century. Cambridge, UK: Polity.
