The macro environment analysis of Costco Warehouse Corporation is given below
Political
Costco has its stores in different regions of the US. The operations are not limited to the US only, and the company has its operations foreign countries as well. The political scenarios differ greatly depending upon the geographical boundaries. However, the company has well stated industrial policy, technological policy and fiscal policy in compliance with the rules of the States and the regulations of the United States political parties. The political rules of US are majorly considered in internal policy formation. Due to this fact, the company has to face turbulent situations in some native countries due to the stability of political situations. However, largely the policies are aimed at the greater good of the labor and in compliance with the local labor laws as well. As a result, the company enjoys smooth relations with their workforce and the labor unions and organizations. Resultantly, the workforce of Costco is highly satisfied and motivated.
Economic
The economic conditions of the country have a significant impact on the business activities carried out in that country. The overall economic situation is a leading force behind the policies and decisions of the corporation. The economic conditions after going through the case seem stable and encouraging for the company. The business environment is favorable as well as the company is achieving the planned sales target consistently over the years in existing stores as well as the new stores. The factors behind this success are the consistent and moderate growth of the warehouse and the membership of the company. The economic factors that affect the profitability of the Costco Corporation are the tax systems, capital expenditures, commodity pricing and the exchange rates.
Social
The social forces play a vital role in determining the success of the business. The businesses become profitable by the customers they have and the customers always value the social and cultural values. One of the success factors behind the success of Costco Corporation is compliance with the local culture and valuing the cultural diversity in the regions where it is operational. The trade activities of the business are always in line with the local traditions, values, and the cultural events. The advertisements and the promotions are designed keeping in view the culture and local events of the host location. Moreover, the company considers the different social classes and tries to be cost leader by offering discount products. The product offerings of the company are also aimed at the high-income level group as the company offers treasure hunt where expensive products are also sold to this social class. The company values cultural diversity, and it is evident from the diverse workforce of the business. The workforce has people from different races and genders. The considerable female workers in the workforce show that business values diversity.
Technological
The business has a well-defined technology policy and is constantly moving towards the automation and technological up gradations to become efficient in its operations. The company has introduced virtual technological systems in all of its business units to favor technological expansion. Moreover, the company is upgrading the manufacturing systems to neutralize the negative impact of manufacturing activities on the environment and to minimize the carbon footprint. The investment in technological systems has increased considerably in the recent years. The company sources all these technologies from the environment of its operations and imports it as well where necessary.
Environmental
The environment of business operations determines the success of the operations of the business. Costco considers this fact, and it takes steps to reduce the negative impacts on the environment. The business has well-defined environmental and social responsibility strategies aimed at protecting the environment and non-renewable resources. The company has established solar panels for its energy needs in various warehouses.
Legal
Costco follows the legal framework of the countries where it is operating as well as the best practices in the market. The policies of the company are a mix of legislation of host countries and States as well as Legislation of US. The obligations of the business towards the employees and the stakeholders are in compliance with the legislative framework, and the company ensures to be a best employer and stakeholder.
Porter’s Five Forces Analysis
Internal Rivalry
Costco Wholesale Corporation (CWC) is competing in the highly concentrated wholesale market of the retail products. It is present in the highly fractionalized retail product market. The retail market is highly competitive as it ranges from furniture mart to the grocers. In addition to it, Costco Wholesale Corporation (CWC) is operating in other service markets such as logo merchandising and insurance. The company is providing the myriad tangential services and products, especially for executive members. The major focus of the firm is the wholesale retail. The major competitors of the organization are B.J.’s and Sam’s Club. Among all the competitors B.J.’s is least formidable due to its limitations and a lesser amount of store units of production. The store units of production of B.J.’s only existed on the East Coast of the region. Apart from it, the Sam’s Club is posing a greater threat to the company in the market. It is producing a greater amount of storage units with a number of units storing capacity.
Moreover, Cosco Wholesale Corporation (CWC) is enjoying the presence in larger numbers abroad. The Sam’s Club is getting benefit from the relationship with that if Wal-Mart that is providing buying power and cross-brand recognition in compliance to cross-selling of products. According to the analysts, Costco has an impressive ability to beat its competitors especially Sam’s Club based on different sales measures. However, there is a concern that Costco can lose its edge in the coming future. It is elucidated that Costco is successfully catering the high-end segment of the market by core competency, quality, and price. There are possibilities that the Sam’s Club can concur the Costco by the prices axes and quality. Nonetheless, Costco has to cater with the membership figures, provided sales target, and high-end demographics. It is reflected that the customers of the Costco Wholesale Corporation (CWC) are active and productive as compared to the per customer level of the competitors.
The expansion of the Costco Wholesale Corporation (CWC) seems to incur short run outlay of capital and can enhance the firm’s competitiveness in the longer run. In addition to it, the domestic expansion and profitability of the firm are associated with that of the urban sprawl of the country. The spread of a large number of retails capitalizes the metropolises by the combination of the reasonable prices of real estates and a population density of higher level. The actual relationship between the expanded markets and Costco’s retailing approach is less clear. For instance, the density of the Japan’s population and the little capacity of the denizen to store unit’s results in the bulk packaged goods.
Similarly, the issues that are central to the internal rivalry and the market of the wholesale retail in the world. The cost structure with a larger volume of warehouses is dependent on the volume of units. The capacity of the warehouses must be in compliance with the production units. The utilization of the vertical space is crucial. The shelving strategy of the company must accommodate the high inventory turnover. The volume of the store elucidates the struggle of the firm to maximize the relative power of buying and absolute power of buying along with macro-scale and micro-scale production. Secondly, the high focus on the capital, warehouse facilities and form of inventories makes the exit strategy difficult to apply in the time of need. If there is a need for the sale of the firm, it has to be sold at lower prices due to the maximization of the capital. It becomes unprofitable and not easy to convert into a new business. The organizations with higher competition face difficulty and disadvantage during exit. Furthermore, there is a struggle among the wholesale retailers for brand loyalty. The struggle is unique in its sense and needs more efforts to gain normal customers. The Costco Wholesale Corporation (CWC) is on lead for the given area due the proliferation through their tangible products and services such as banking and telecommunication. The product mix of the company provides the advantage over rivals due to entrenching and expanding the relationship with company’s customer. The major mechanism used for the loyalty of the customer is to issue the membership for which each retailer has to force the individual and commitment for small businesses. The switching cost of the association fee is also a barrier for the gain over the products and prices of the competitors for the full first-hand experience.
Entry
It is not the major concern of the Costco Wholesale Company (CWC) presently. There are no or fewer start-ups for the competition of the market of the given business. It is due to the advantage of being the initiator of the business that has gained the economies of scale. The major industry players always enjoy the competitive edge by experience from the past experiences. The new entrant has to face the initiation of the business with huge investment and large capital for the initial business. The given warehouse business is dependent on the high cost, so it is not possible for any new entrant to put forward such huge amount of capital.
The new entrant has to face the challenge of the lack of the business relationships with that of customers due to which they have to face a huge risk of loss. The Costco being the giant of the market has established good relationships with suppliers and customers that are impeccable to make for new entrants. The incumbent business has to face the price advantages. It is easy for them to price a new entrant out of the market. There is a much important question of entry for the Costco due to two reasons. The first is that an existing or new store can be an imperfect substitute and can strive for a close relationship. The store has to offer fewer products with a higher cost that is not fit for the wholesale retailer services. Despite the fact that Costco is shrinking in the market geographic segment radii, many customers still have to drive a wide distance to approach the local market warehouses. The customers also prefer to purchases fewer items from the retailers that are close to their homes.
Secondly, the powerful retailers that are head-to-head with that of the Wal-Mart launch their counterparts such as Sam’s Club. It can be done by leveraging the supplier’s relationships and capital resources to establish the retail warehouse chain. However, the target audience has not shown any intent of such nature, but Costco has to be careful about such kind of retailers as they have capital and knowledge of retail on hand.
Substitutes & Complements
The Costco has no perfect substitute as it is a multi-product wholesale retailer. The substitutes can be possible when the Costco can have the disaggregated sub-industry substitutes of the products and services that the organization is offering. For instance, the Costco has a product in the mattress section, if it has to compete with that of the media section and discount sections of the other stores’ mattresses. In each of the case, the demand for the product is likely lower in number as compared to normal cases. So the shopper experience and cost structure of big box retails is unique in its nature. The basic strategic issue of the substitutes of the company to the present date is the ability of the organization to expand the revenues as compared to the increase in the demand. The demand for the liquor and food of the Southern California of the company has increased as the grocery store strikes down with the demand. The wholesale retailers cannot be the substitute for the food supermarkets as the nature of the product is extremely different.
Supplier Power
The issue with the supplier of the Costco is that the major supplier of the organization is the labor. The relationship between the firm and the workers has been very complicated. The organization has willingly tremendous power to the labor that the remaining power has no explainable dynamics. The firm has not suffered from any of the non-union or union strikes so far due to the spread of the power among the workers. It has enjoyed huge revenues whereas all other grocery stores face a crisis. There is an issue to ponder on that the situation can be changed if the organization has to reduce the compensation packages of the workers in the time of need. It proves to the game changer. However, presently the given generosity pays off well in the favor of the organization. The Costco has taken steps to empower the supplier and were not seem to change the relationship shortly. The Costco is known for the ability to provide leverage regarding the supplier of the inventory items. The relative power of the organization in given situation is not to stock the given product in given time. It can help in develop the good relationships with that of the suppliers and ensures the prosperity and inventory for the future.
Conclusion
The Porter’s five forces analysis shows that the internal rivalry among the retail players is increasing. The retail market is becoming competitive, and the gains or profits are declining. The market share of the brands is stolen by the new entrants and the existing large size players. The notable such competitor is SAM’s club. It is working on the similar business model and can affect the profits of Costco considerably. Therefore, the business needs to reduce this internal rivalry. The expansion to the areas where currently Costco is not operating is a move to steal the market share of SAM’s and to fuel the competition. The company has already tried backward and forward integration in its supply chain to assume more control over the suppliers and the buyers. However, now the business needs to establish a brand loyalty for its existing brands such as Kirk. The management needs to focus on product line extension and advertising on the products of Kirk to make it more prominent and to build a brand image.
Another important dimension is the relationship of the company with its workforce. Costco has been known for being generous to its labor and is paying more than the industry average. Therefore, it enjoys the smooth relationship with its workforce. It is evident from the fact that the firm has never faced any law charges regarding labor and is away from the union blackmailing and matters yet. The workforce of the company is satisfied due to the wages and benefits the company is offering. The business has faced criticism from the industry experts and the panelists as well on the generous benefits given to the employees. However, the stance of the company on its people is rigid, and it has not cut any benefits. However, the management should reconsider restructuring the wages and benefits plans in the areas where the cost of living is less. The expansion into the areas where basic commodities are less expensive, a person can enjoy same living standard at less wage. Therefore, the management should consider restructuring the wages and benefits of the employees depending upon the geographical areas.
Driving Forces in Retail Industry
The business activities are becoming sophisticated in retail industry due to globalization and increasing competition. The businesses are trying through different ways to become competitive and the first choice of the consumers. In the recent past, some of the factors have predominately affected the way retailing business is done. These driving forces behind the changing landscape of retailing are the internet, changing taxation rules, saturation in the industry and increased competitive pressure. With the dot-com revolution, retailers are going online from brick and mortar to just dot com store fronts. It has reduced the cost of their operations enabling them to offer the merchandise at subsidized rates as compared to those stores having a large workforce. The online retail stores have increased competitive pressure for offline as well other online retailers. Therefore, the retail players are ensuring online presence at the web through the interactive store and real-time inventory management tools so that they can compete with the other retailers at dot com frontier.
Secondly, the local market of US is becoming saturated. It is no doubt the largest retail market with people buying more due to greater purchasing power and income. Resultantly, there are many other retail players in the market namely Sears and Wal-Mart that are of similar size. Therefore, the local market is becoming saturated. Moreover, the prices of the inputs and the cost of the operations are increasing as well. Resultantly, the retail businesses are expanding their operations either to the other areas or new geographical boundaries.
The international expansion enables the retailers to cut the costs due to less expensive resources abroad. Thirdly, the tax rates in the US have been revised and are not favorable to the big players. A large portion of earnings is going to tax payments. The taxes in foreign countries are less as compared to the US. It is one of the driving forces behind the international expansion of the retailers.
Key Success Factors
Costco is enjoying success in the retail business and achieving its growth objectives and aspirations each year. The main reason for this success is that the management has kept pace with the industry driving forces and responds to the changing environment with internal policies and strategies. An excellent example of this is the website of the company used for online selling. Moreover, the company sends coupons to the members on a monthly basis. These coupons are promotional and discount coupons to attract the existing shoppers. In this way, the company has maintained its present on the internet and using the internet as a channel of distribution and selling.
The leading factor behind the success of the business is its cost leadership. The company is cutting its costs and overheads and becoming cost efficient. In this way, the savings from cost cuts are passed to the end consumer in the form of discounts and low-cost products. Costco has maintained no-frill warehouses. They have removed all the frills related with the business operations to minimize the overhead costs. The warehouses are located at the main spots and near the highways to improve navigability. Moreover, the stores are designed for the metal structures with concrete floors. The basic reason behind all these setups is to minimize the overheads and reduce the cost operations. The unique selling proposition of the business is its discounts and benefits to the members, and they are known for this USP. Therefore, the management is focused on maintaining this USP rather than increasing their costs. The reason behind limited advertising campaigns is same as well.
The company relies mostly on the word of mouth advertising. They attract new customers with their cost efficient deals and merchandise and then retain these customers through promotions and discounts. They have a no-hassle return policy for retaining the customers and enhancing their shopping experience. The customers can replace the unused merchandise or faulty things without the hassle of going through exchange procedures. All these things are focused on creating positive word of mouth for the retail business as it is the only powerful tool of advertising for the company.
Costco has introduced treasure hunt merchandise to cater to the needs of an upper-class segment of the society. The basic purpose for this move was to attract the high-end customer as well. The treasure hunt merchandise bears high price tags and includes electronic devices; big brand tags and is available only once. After the stock is finished, it is not replenished with the same products. Therefore, the customers have to rush to purchase the treasure hunt products so that the stock is not finished before their shopping. This move has worked for the company and increased the sales considerably.
