VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY

HO CHI MINH UNIVERSITY OF TECHNOLOGY

SCHOOL OF INDUSTRIAL MANAGEMENT

GROUP ASSIGNMENT

STRATEGIC MANAGEMENT

TERM 232 - CLASS CC02 - GROUP 3

CASE STUDY

COSTCO WHOLESALE IN 2012

Instructor: Lai Van Tai
No. ID Last Name First Name Contribution
1 2053335 Đỗ Phạm Hoàng Phúc 100%
2 2053443 Nguyễn Thị Phương Thảo 100%
3 2053259 Phạm Ngọc Thảo Ngân 100%
4 2053007 Cao Văn Hoàng 100%
5 2052903 Đặng Thành Danh 100%
6 2053573 Dương Minh Tỷ 100%

Ho Chi Minh City,2024

 TABLE OF CONTENT

TABLE OF CONTENT ............................................................................................... i

LIST OF TABLES....................................................................................................... ii

LIST OF FIGURES ................................................................................................... iii

CHAPTER 1: INTRODUCTION ............................................................................. 1

I. Rationale for Choosing this Topic ................................................................................ 1

II. Research Objectives ...................................................................................................... 1

III. Scope ......................................................................................................................... 1

CHAPTER 2: MISSION, VISION, AND CORE VALUE ...................................... 2

I. Mision ........................................................................................................................... 2

II. Value Chain Analysis .................................................................................................... 2

III. Core Competencies and Resources ........................................................................... 3

1. Core competencies: ............................................................................................. 3

2. Key resources: .................................................................................................... 3

3. Performance vs. Objectives ................................................................................ 4

CHAPTER 3: OVERVIEW OF COSTCO WHOLESALE .................................... 4

CHAPTER 4: CORPORATE-LEVEL STRATEGY ............................................... 6

CHAPTER 5: ENVIRONMENT ANALYSIS .......................................................... 7

I. Internal analysis ............................................................................................................ 7

1. Resources and Capabilities Analysis .................................................................. 7

2. VRIO framework of Analysis ........................................................................... 13

II. External analysis ......................................................................................................... 14

1. PESTEL Analysis ............................................................................................. 14

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 2. Five Forces Analysis ......................................................................................... 17

III. SWOT Analysis ....................................................................................................... 23

CHAPTER 6: BUSINESS-LEVEL STRATEGY ................................................... 24

I. Costco is pursuing a low-cost leader strategy............................................................. 25

1. Pricing: .............................................................................................................. 25

2. Low-Cost Emphasis .......................................................................................... 27

II. Product Selection ........................................................................................................ 28

III. Treasure-Hunt Merchandising ................................................................................. 30

IV. Membership model .................................................................................................. 31

V. Intentionally “loss-making” products ......................................................................... 32

CHAPTER 7: RECOMMENDATIONS ................................................................. 32

I. Objective, Mission and Vision .................................................................................... 32

II. The competitors analysis ............................................................................................ 33

1. General picture between Costco, Walmart and Amazon in key of strategy ..... 33

2. Recommendation based on QSPM analysis and strategy analysis ................... 34

CHAPTER 8: CONCLUSION ................................................................................ 40

REFERENCES.......................................................................................................... 41

APPENDIX ................................................................................................................ 42

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 LIST OF TABLES

Table 1: Internal Factor Analysis Summary (IFAS) .......................................................... 14

Table 2: External Factor Analysis Summary (EFAS) ........................................................ 23

Table 3: SWOT Analysis ................................................................................................... 24

Table 4: Competitors Analysis ........................................................................................... 33

Table 5: A and B Strategy Analysis ................................................................................... 36

Table 6: Costco’s strategy recommendation ...................................................................... 39

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 LIST OF FIGURES

Figure 1: Total number of warehouses ................................................................................ 8

Figure 2: Total revenue and net income data - Fiscal years 2000 - 2011 .......................... 10

Figure 3: Memebership fees - Fiscal years 2000 - 2011.................................................... 10

Figure 5: Total number of warehouses (2007-2011) ......................................................... 19

Figure 6: Company 10- K Reports for fiscal year 2000, 2005, 2009, 2010, 2011 ............ 26

Figure 7: Company 10-K reports, 2005, 2007, 2009, and 2011. ....................................... 29

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Analysis of Costco Wholesale Strategy

CHAPTER 1: INTRODUCTION

I. Rationale for Choosing this Topic

Our group opted for the Costco case study due to its unique business model,
remarkable success in the retail sector, and emphasis on employee welfare and ethical
practices. Analyzing Costco's strategies and performance in 2012 offers valuable insights
applicable to contemporary business challenges. Additionally, the case study provides
ample opportunities to apply theoretical knowledge to real-world scenarios, enhancing our
analytical and problem-solving skills.

II. Research Objectives

The research objectives of the Costco case study in 2012 are to identify strengths
and weaknesses to conduct a SWOT analysis, aiming to understand how the company
operates. Subsequently, we will analyze Costco's strategies based on the SWOT analysis,
followed by evaluating the company's business strategy and operational effectiveness
during that period. This involves analyzing factors contributing to the company's success,
such as its unique business model and customer-centric policies, as well as its approach to
employee welfare and corporate social responsibility. Additionally, we aim to identify
challenges faced by Costco in 2012 and the strategies used to address them, drawing
valuable lessons for modern business management. Overall, this research seeks to provide
in-depth insights into Costco's performance and its significance for long-term growth and
sustainability in the retail industry.

III. Scope

The scope of the Costco case study in 2012 involves a thorough analysis of the
company's operations, performance, and strategies during that period. It encompasses an
examination of Costco's financial performance, business model, competitive position,
operational efficiency, marketing strategies, corporate culture, and responses to challenges
and opportunities. By delving into these areas, the study aims to provide valuable insights

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into Costco's performance in 2012 and its implications for contemporary business
management practices and strategic planning in the retail industry.

CHAPTER 2: MISSION, VISION, AND CORE VALUE

I. Mision

Costco's mission statement is “to continually provide our members with quality
goods and services at the lowest possible prices”. The company's corporate strategy is built
around this mission and consists of several key elements that enable Costco to deliver on
its value proposition to customers:

- Maintaining an extremely limited selection of products to drive purchasing power

and enable high sales volumes.
- Rapidly turning over inventory and selling most products before paying suppliers to
minimize inventory holding costs.
- Creating a “treasure hunt” shopping environment with a constantly changing
assortment of products to drive frequent customer visits.
- Focusing relentlessly on driving down operating costs in areas like store
construction, distribution, and marketing to maintain low prices.

These strategic pillars are all directly aligned with and support Costco's mission of
always providing the lowest possible prices to its members. By combining massive
purchasing power, minimal inventory costs, and low operating expenses, Costco's business
model is designed to continuously offer unbeatable value.

II. Value Chain Analysis

Looking at Costco's value chain, several primary and supporting activities stand out
as key sources of competitive advantage:

The most critical primary activities are:

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- Developing direct relationships with manufacturers to cut out intermediaries and

secure the lowest possible prices. Operating an extremely efficient logistics system
based on cross-docking to minimize inventory storage and handling.
- Generating enormous sales volumes per warehouse to spread out fixed costs.
- Achieving very high revenue per square foot in its stores.

Key supporting activities that enable the primary value drivers include:

- Building a strong corporate culture of engaged and motivated employees through

industry-leading compensation and benefits.
- Treating employees as true partners in the business to drive productivity and
customer service.
- Through this optimized value chain, Costco is able to match or beat competitors'
prices while still earning solid profits and growth. Its focus on the key value drivers
allows the company to maximize customer value.

III. Core Competencies and Resources

1. Core competencies:

- Expertly designed business model optimized for low prices and high efficiency.
- Deep experience in merchandising, supplier relations, and inventory management.
- Strong capabilities in warehouse club operations and customer service.

2. Key resources:

- Extensive global network of warehouse stores in prime locations.

- Powerful brand built on trust and reputation for quality and value.
- Loyal customer base of millions of fee-paying members.
- Highly engaged and productive workforce treated as partners

These unique strengths have been built up over decades and would be very difficult
for competitors to replicate. They enable Costco to maintain its price leadership and
continue expanding.

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3. Performance vs. Objectives

Costco has delivered impressive and consistent growth that meets or exceeds its
strategic objectives. Some key performance indicators:

- Net sales increased 14.1% to a record $88.9 billion in fiscal 2011.

- Comparable sales growth averaged 10% in 2011, double the 5% target.
- Membership fee revenue rose 10.4% to $1.9 billion in 2011.
- Costco opened 20 new warehouses in 2011 and plans to open 20-25 per year going
forward, expanding square footage by about 5% annually

The strong sales and profit growth demonstrate that Costco's strategic model is
working. The company is steadily gaining market share, adding new members, and
expanding its geographic footprint.

However, Costco has proven highly resilient to past challenges thanks to its
adaptable and flexible business model, strong financial position, and deep customer loyalty.
This reduces the likelihood and potential impact of major risks.

In conclusion, Costco's corporate strategy is well-aligned with its mission and vision,
providing a coherent and effective strategic direction. Costco's distinctive value chain, core
competencies, and resources provide the foundation for its competitive advantages in
delivering unbeatable value to customers and achieving profitable growth. While the
company must continue monitoring and adapting to competitive threats and risks, Costco's
strategy positions it for enduring success in the challenging retail industry.

CHAPTER 3: OVERVIEW OF COSTCO WHOLESALE

Costco was founded in 1983 by Jim Sinegal and Seattle entrepreneur Jeff Brotman
(now chairman of the board of directors). The first Costco store began operations in Seattle
in 1983, the same year that Wal-Mart launched its warehouse membership format called
Sam’s Club.

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By the end of 1984, there were 9 Costco stores in five states serving over 200,000
members.

In December 1985 Costco became a public company, selling shares to the public
and raising additional capital for expansion. Costco became the first company to reach $1
billion in sales in less than 6 years.

In October 1993, Costco merged with The Price Company. When the two companies
merged in 1993, Jim Sinegal became CEO, presiding over 206 PriceCostco locations
generating $16 billion in annual sales.

In January 1997, after the spin-off of most of its non-warehouse assets to Price
Enterprises Inc., PriceCostco changed its name to Costco Companies Inc.

When the company was reincorporated from Delaware to Washington in August

1999, the name was changed to Costco Wholesale Corporation. The company’s
headquarters are in Issaquah, Washington, not far from Seattle.

Costco’s fiscal 2011 total revenues were at a record high of $88.9 billion and net
income was at a record high of $1.46 billion. About 25 million households and 6.4 million
businesses had membership cards entitling them to shop at Costco, generating nearly $1.9
billion in membership fees for the company. Annual sales per store averaged about $146
million, about 85 percent higher than the $78 million figure for Sam’s Club, Costco’s chief
competitor. In fiscal 2011, 93 of Costco’s warehouses generated sales exceeding $200
million annually, up from 56 in 2010 and four stores had sales exceeding $300 million,
including one that had more than $400 million in sales.

In 2012, Costco was the third largest retailer in the United States, the seventh largest
retailer in the world, and the clear leader of the discount warehouse and wholesale club
segment of the North American retailing industry. It had a total of 598 warehouses in 40
states and Puerto Rico (433 locations), nine Canadian provinces (82 locations), the United
Kingdom (22 locations), Korea (7 locations), Taiwan (8 locations, through a 55 percent–

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owned subsidiary), Japan (11 locations), Australia (3 locations), and 32 warehouses in

Mexico through a 50 percent–owned joint venture.

CHAPTER 4: CORPORATE-LEVEL STRATEGY

Corporate-level strategy refers to the overall plan and direction a company takes to
achieve its long-term goals and sustain its competitive advantage in the market. It involves
making strategic decisions at the highest level of organization as:

- Deciding on the scope of the business

- Resources allocation
- Coordination between different business units

In the case of Costco, the corporate-level strategy is focused around its mission to
provide quality goods and services at the lowest possible prices. To achieve this, Costco
has developed a unique business model that emphasizes high sales volumes, rapid
inventory turnover and low operating costs.

This strategy is reflected in Costco’s value chain, which includes activities such as:

- Developing direct relationships with manufactures

- Operating an efficient logistics system
- Generating high sales volumes
- Achieving high revenue per square foot in its stores.

Costco’s corporate strategy is also supported by its core competencies and resources
such as its expertly designed business model, deep experience in merchandising and
inventory management, strong capabilities in warehouse club operations and customer
services, extensive global network of warehouse stores, powerful brand built on trust and
reputation for quality and value, loyal customer base of millions of fee-paying members
and highly engaged and productive workforce treated as partners.

• Directional strategy

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Costco has pursued a concentric growth strategy through expanding the number of
retail stores both domestically and internationally. This strategy has helped Costco increase
market share, reached more customers and took advantage of economies of scale. Costco
is also expanding into potential international markets such as Canada, The United
Kingdom, South Korea, Taiwan, Japan, Australia and Mexico, which helps the company
diversify risk, reduce dependence on the domestic market and seek new growth
opportunities.

Overall, Costco’s corporate-level strategy is well-aligned with its mission and

vision, providing a coherent and effective strategic direction. Costco’s distinctive value
chain, core competencies and resources provide the foundation for its competitive
advantages in delivering unbeatable value to customers and achieving profitable growth.
While the company must continue monitoring and adapting to competitive threats and
risks, Costco’s strategy positions it for enduring success in the challenging retail industry.

CHAPTER 5: ENVIRONMENT ANALYSIS

I. Internal analysis

In the Internal analysis section, we apply the VRIO Analysis Framework for
Strategic Planning to analyze the strengths and weaknesses of Costco.

1. Resources and Capabilities Analysis

1.1. Tangible resources

1.1.1. Physical
• Warehouse

In January 2012, Costco operated a total of 598 warehouses across various regions
including 40 states and Puerto Rico (433 locations), nine Canadian provinces (82
locations), the United Kingdom (22 locations), Korea (7 locations), Taiwan (8 locations,
managed through a 55 percent-owned subsidiary), Japan (11 locations), Australia (3
locations), and 32 warehouses in Mexico via a 50 percent-owned joint venture.

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Below is a statistical table showing the number of warehouses that Costco is

currently operating.

Figure 1: Total number of warehouses

The information shows us that Costco is steadily growing each year. The increasing
number of warehouses implies that Costco stores and supplies a large quantity of goods.
Moreover, due to its large inventory, effective warehouse management at Costco is crucial.
Evidence suggests that Costco's top managers always monitor the pulse of shoppers at their
warehouse locations to stay updated on what's selling well, and they excel at creating an
atmosphere of excitement, buzz, and certain noise within their warehouses. Such managers
have driven sales volumes above average - sales figures at Costco's largest warehouses
reach approximately $4 million to $7 million per week, with revenues exceeding $1 million
on many days.

To effectively manage warehouse inventory, forecast, and measure stock levels, it

is essential to manage the supply chain seamlessly and flawlessly from start to finish.
Costco bought the majority of its merchandise directly from manufacturers, routing it either
directly to its warehouse stores or to one of the company's cross-docking depots that served
as distribution points for nearby stores. Depots received container-based shipments from
manufacturers and reallocated these goods for combined shipment to individual
warehouses, generally in less than 24 hours.

Going into 2012, Costco had 12 regional cross-docking depots in the United States,
4 such depots in Canada, and 4 depots at various other international locations, which had a
combined space of 8.3 million square feet.

→ Strong point: Excellent warehouse management capabilities, bulk purchasing power,

efficient operations, efficient supply chain.

• Product

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Because warehouses storing a large quantity of goods typically imply a wide variety
of products, the product assortment at Costco is not diverse. Whereas typical supermarkets
carry about 40,000 items, and a Walmart Supercenter or a SuperTarget might offer 125,000
to 150,000 items for shoppers to choose from, Costco's merchandising strategy is to
provide members with a selection of approximately 3,600 active items. At this point,
customers may opt for a competitor that offers both a large quantity and a diverse range of
products.

Additionally, Costco is renowned for its business model of “wholesale to end

consumers”. This creates significant pressure on suppliers to reduce their product prices in
order to meet Costco's demands. This can decrease suppliers’ profitability and affect
competitiveness within the industry. While Costco may demand low prices, they still
require high quality and performance from their suppliers. This puts pressure on suppliers
to maintain or improve the quality of their products while still maintaining competitive
prices. If a supplier becomes too reliant on Costco, they may face significant risks if Costco
changes its strategy or decides to switch to another supplier.

→ Weak point: Limited variety of products, high sales volume.

1.1.2. Financial

Costco's fiscal 2011 saw a record high in total revenues at $88.9 billion and net
income at $1.46 billion. Approximately 25 million households and 6.4 million businesses
held membership cards granting them access to shop at Costco, resulting in nearly $1.9
billion in membership fees. The average annual sales per store stood at approximately $146
million, marking an 85 percent increase over Sam's Club, Costco's primary competitor,
whose figure was $78 million. In fiscal 2011, 93 of Costco's warehouses recorded annual
sales exceeding $200 million, a notable increase from 56 in 2010. Additionally, four stores
achieved sales surpassing $300 million, with one store reaching over $400 million in sales.

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Figure 2: Total revenue and net income data - Fiscal years 2000 - 2011
Overall, Costco's revenue has consistently increased year over year from 2000 to
2011, with only a slight decrease of approximately $1000 in 2009, which was not
significant, and continued growth in the following year. Net income has also consistently
increased alongside total revenue, with the company never experiencing a loss throughout
these years. This demonstrates that the company is being operated quite effectively.

Particularly, Costco's unique Membership fees policy has significantly contributed

to its profitability.

Figure 3: Memebership fees - Fiscal years 2000 - 2011

However, alongside this, Costco's strength lies in its ability to offer high-quality
products at affordable prices through its membership model and bulk purchase. Because it
purchases goods in bulk from suppliers, Costco benefits from economies of scale (where
costs and prices per unit decrease, increasing profitability and competitiveness). As a result,
Costco can sell quality products at super-low prices. However, over the years, Costco's
prices were only marginally above breakeven levels due to low markups. This resulted in
net sales revenues (excluding membership fees) barely covering all operating expenses and
generating only a modest contribution to operating profits. By selling low prices coupled
with high-quality products prompted Costco to seek higher profits by emphasizing
membership fees. However, relying heavily on the membership model poses a significant

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risk if customers dislike it and turn away from Costco. Therefore, a business will be
disadvantaged by relying heavily on membership fees to increase its revenue.

→ Strong point: Membership model, efficient operations, high-quality products at

affordable prices, bulk purchase.

→ Weak point: Low profit margin, membership fee dependency.

1.2. Intangible resources

1.2.1. Human

Costco operates with a clear commitment to maintaining principles and upholding

ethical and democratic values. Additionally, the company consistently prioritizes training
programs aimed at building a robust pool of resources to support its objectives.

In its human resources policies, the company particularly focuses on attracting and
nurturing talent. CEO Jim Sinegal also has a habit of caring for Costco employees. He
observed, “The employees know that I want to say hello to them, because I like them. We
have said from the very beginning: ‘We're going to be a company that's on a first-name
basis with everyone’”. Costco is widely recognized for its generous employee benefits and
wages, which has contributed to low turnover rates within the company. Starting wages for
new Costco employees were in the $10-$12 range in 2011; hourly pay scales for warehouse
jobs ranged from $12 to $23, depending on the type of job. Salaried employees in Costco
warehouses could earn anywhere from $30,000 to $125,000 annually. As a result, Costco
boasts a skilled, experienced, and highly professional workforce. The company prioritizes
the continuous maintenance and development of its workforce, which has been
instrumental in its success in retaining talented employees. Additionally, Costco takes pride
in its exceptional talents such as Jim Sinegal, the CEO, whose vision and expertise have
significantly contributed to the company's achievements in the wholesale and retail
industry.

→ Strong point: Employee satisfaction, strong leadership

1.2.2. Reputation

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• Customer Reputation:

Costco has earned a solid reputation as a trusted brand among its customers - The
inclusion of its private label, Kirkland Signature, enhances value by offering products that
match or surpass the quality of national brands, with 85% consisting of reputable brand
name items and 15% being the company's own label.

The company's primary objective is to ensure genuine comfort for shoppers when
they visit its warehouses. Costco is committed to fostering strong connections with its
customers, and one way it achieves this is through its charitable initiatives and active
involvement in community activities. Costco has built its reputation by delivering products
and services that offer honest value, exemplifying its dedication to providing quality
products at exceptionally competitive prices.

Costco's unlimited time return policy is a key element in its competitive advantage
and presents challenges for competitors attempting to replicate it. This policy enables
customers to return products, regardless of their condition, including used items such as
food, clothing, cosmetics, and medications, if they are dissatisfied. However, some
customers have exploited this policy by returning used items.

→ Strong point: Excellent customer service, strong brand reputation.

→ Weak point: Unlimited time return policy.

• Supplier Reputation:

Costco's purchasing of goods in bulk from suppliers is a direct outcome of its robust
relationships with suppliers. The company places significant emphasis on fostering strong
ties with its suppliers, positioning itself as a crucial customer through its substantial and
reputable volume purchases. These strong supplier relationships enable Costco to conduct
negotiations effectively, ensuring that its products are well-received and consumed by
customers.

→ Strong point: Strong brand reputation.

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2. VRIO framework of Analysis

After gathering and analyzing the data, we have outlined the VRIO framework as
presented in Appendix 1. We will arrange the ‘Core Competencies’ derived from the above
analysis for comparison and evaluation based on the criteria “Valuable, Rare, Inimitable,
Organized” against the market to determine which factors possess ‘Sustained competitive
advantage’,‘ Temporary competitive advantage’, prioritizing them as the strongest points
for the business strategy. Regarding points identified as ‘Competitive disadvantages’, we
will consider them as weaknesses and devise strategies to either eliminate or improve them.

After obtaining the VRIO assessment chart, we will list the main strengths and
weaknesses of Costco and present this assessment chart to the evaluating expert.

Weight
Code Internal Factors Weight Rating
Scored

Strengths (S)

IF 1 Membership model 0.1 4 0.4

IF 2 Efficient operations 0.1 4 0.4

IF 3 Strong leadership and Employee satisfaction 0.09 4 0.36

IF 4 Bulk Purchase and High Discount 0.08 3 0.24

IF 5 Excellent customer service 0.1 3 0.24

IF 6 Strong brand reputation 0.1 2 0.2

Weaknesses (W)

IF 7 Membership fees dependency 0.1 4 0.4

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IF 8 Low profit margin 0.1 4 0.4

IF 9 Limited product selection 0.09 3 0.27

IF 10 High Sales Volume 0.08 2 0.16

IF 11 Unlimited time return policy 0.08 2 0.16

Total Score 1 2.73

Table 1: Internal Factor Analysis Summary (IFAS)

The table above has been evaluated and scored by an expert. When scoring, the experts
considered the "Rating" to assess whether Costco performs well or not based on those
factors. And the "Weight" represents how important those criteria are in influencing Costco.

II. External analysis

1. PESTEL Analysis

1.1. Political Factors

Political factors refer to the government's actions and their effect on the external
environment of an organization (Costco). Costco is lucky to have set up stores in countries
that enjoy stable governments. For instance, Costco has over 400 stores in the US, 82 in
Canada, and 22 in the United Kingdom (Costco, January 2012). These countries are stable
and there are minimal government actions that may hinder business operations. Political
stability is an opportunity that needs to be exploited (Braun & Latham, 2014). Costco has
growth opportunities under minimal political disturbance. Similarly, based on the
provisions of the environmental and animal policies, the company can adjust its operations
to exceed these expectations (Chaput, 2011).

1.2. Economic Factors

Global e-commerce sales are expected to exceed $1.25 trillion by 2013, however,
another study suggests $1 trillion by 2014 (PRWeb.com, 2012). In June 2012, US e-

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commerce reached $54.84 billion in sales, roughly a 33.4% increase over the past two years
(YCharts.com, 2012). This presents an immediate opportunity for Costco to enhance its
online presence and mobile applications for consumers shopping online.

Increased demand for private label products is of critical importance and the time
frame is immediate. From 2008 to 2011, private label sales have increased 21% compared
to 3% for name brands. Consumer perceptions of high-quality brands to private label
brands also increased from 33% in 2008 to 38% in 2011 (MarketLine, 2012). Retail sales
in the US have also increased beyond forecasts to roughly 16.8% in the past two years.
This presents an opportunity for Costco to increase its sales position for Costco’s private
label Kirkland Signature products, which compose 25% of total sales (Datamonitor, 2012).

Low growth rates and consumer savings trends in the US and the UK markets have
an immediate negative impact on profitability. The US personal savings rate has slowly
decreased from 5.5% in January 2011, to 3.7% in January 2012, to 3.3% in September 2012
(YCharts.com, 2012). The US personal consumption rate has slowly increased by roughly
6.3% from August 2008 to September 2012, but roughly a 1% increase from January 2012
to September 2012 (YCharts.com, 2012). The slow decrease in savings and slow increases
in spending indicate a threat for Costco that consumers remain concerned with saving.

Strong growth predicted in South Korean and Taiwan markets presents an

immediate opportunity for Costco to develop additional operations and increase its
consumer base. According to MarketLine (2011), South Korea’s economy grew 3.6%, and
is expected to grow 3.5% in 2013 and 4.2% in 2014. However, the growth rate in Q3 2012
is only 1.6% (Trading Economics, 2012). In 2010, Taiwan’s GDP increased by roughly
10%, and grew by 4% in 2011 (Datamonitor, 2012). In Q3 2012, Taiwan’s GDP grew
1.02%, and is predicted to reach a maximum of 1.94% growth (Su, 2012). The importance
of establishing operations in these markets is less critical than in previous years, however,
emerging markets present the most growth opportunities over mature markets.

1.3. Social and Socio-Cultural Factors

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As of June 2012, 2.4 billion global Internet users exist (Miniwatts Marketing
Group). In 2013, global Internet users are expected to grow to approximately 3.5 billion
users. According to Internet World Stats (2012), 78.1% of the US population and 84.1% of
the UK population use the Internet. In 2011, BBC News reported nearly 50% of UK
Internet users accessed the web via mobile phone devices. The opportunities are similar to
those identified in e-commerce sales.

1.4. Technological Factors

Multichannel retailing is evolving at a fast pace. The opportunity is of critical

importance and the time frame is beyond two years. Other technological innovations
impacting future operations can be found in the Fitness Landscape Translation Analysis.

1.5. Environmental Factors (Physical Environment)

Unpredictable natural disasters such as Hurricane Sandy in 2012 create immediate

sales opportunities and pose physical threats to operations. According to the USA. Today
(2012), sales opportunities exist in the beginning to ending stages of a disaster, from when
consumers buy in bulk for preparation, to when consumers purchase items to restore
damages caused by the disaster. The physical threats pose harm to profitability within
warehouse operations, such as blackouts and roadblocks during a disaster.

1.6. Legal Factors

Increases in US healthcare costs and coverage for Costco’s 160,000 plus employees
are important and 107,000 US employees possess a negative impact for an indefinite time
frame to profitability. The increase in US worker’s minimum wage is of ongoing
importance. US unit labor costs increased by roughly 3% in the past 2 years (YCharts.com,
2012). In addition, Costco does not minimize employee benefits and is widely recognized
for paying higher than industry average wages to employees (Greenhouse, 2005). The
trends adversely affect operating margins.

→ Threats: Pose the most harm to future profitability.

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- Increasing labor and healthcare costs

- Fluctuations in foreign exchange rates
- Low growth in mature markets and heavy reliance on US operations
- Disasters in the physical environment

→ Opportunities: Align with Costco’s competences, skills, and capabilities to increase

potential profitability.

- Online sales opportunities

- Growing demand for private label brands
- Strong growth in Asian markets
- Multi-channel retailing
- An increasingly global mobile device user base

2. Five Forces Analysis

The allure of an industry correlates directly with its profitability. In theory, perfect
competition erodes profits to zero, meaning industries with the minimal competition are
inherently more appealing. However, perfect competition rarely exists in reality. This
discrepancy allows companies to employ the five forces model to assess both internal and
external factors, thereby shaping and adjusting their strategies to gain a competitive edge.
Ultimately, the overarching objective is to enhance stakeholder value, chiefly through
bolstering company profitability. Below, we delve into the specific five forces confronting
Costco within the American wholesale club industry.

2.1. Rivalry among existing competitors (Strong forces)

The competition among Costco, Wal-Mart’s Sam's Club, and BJ's Wholesale Club
is intense and expected to persist. All three rivals are vying to expand their membership
base and provide merchandise options and shopping experiences that incentivize members
to visit more frequently and/or spend more during each visit. This rivalry primarily revolves
around two key factors:

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- Offering prices consistently below those found at retail outlets and discount stores
was imperative for Costco. These prices had to be set at "bargain levels" to entice
members and ensure significant cost savings, exceeding the membership fees they
paid.
- Product quality and selection.
- The merchandise typically ranged from good to excellent quality and frequently
featured reputable brand names alongside a variety of private-label products.
- Costco maintained an inventory of 3,500 to 4,500 items, with a portion subject to
regular rotation due to opportunistic one-time purchasing deals pursued by the
company's procurement team. By comparison, conventional supermarkets typically
stocked around 40,000 items, while Wal-Mart Supercenters or SuperTargets boasted
as many as 150,000 items for consumer selection.
- The product assortment encompassed a diverse range, including appliances,
electronics, office and restaurant supplies, automotive essentials, toys and games,
light bulbs, batteries, cookware, tools, apparel, DVDs, books, canned and frozen
foods, fresh meats and seafood, fruits and vegetables, bakery goods, beverages,
wines, vitamins, personal care products, cleaning supplies, and paper goods.
However, within each category, the selection was often limited to fast-selling
models, popular colors, and large quantity sizes.

Figure 4: Major Product Category (2003-2011)

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In order to incentivize members to visit more often and enhance the appeal of one-
stop shopping, both Costco incorporated ancillary businesses within or adjacent to most of
their warehouses. These included gas stations, optical centers, photo centers, print and copy
facilities, pharmacies, food courts, and similar amenities.

Figure 5: Total number of warehouses (2007-2011)

To a lesser extent, competition also revolved around attracting members and
shoppers through convenient store locations, offering a comparatively pleasant shopping
environment within the large warehouse setting, and potentially ensuring satisfactory
checkout speeds.

All three club rivals are vigorously pursuing revenue growth, primarily by
expanding their store networks, attracting new members to both new and existing locations,
and striving to boost sales revenue and shopper traffic at established stores. As the industry
matures, rivalry intensifies, making rapid revenue growth contingent upon the pace of new
store openings and the ability to drive sales at existing locations.

• Consumers faced minimal switching costs, as membership fees were generally

uniform across competing clubs. In major metropolitan areas where two or more of
the three competitors were present, households and businesses could easily switch
their memberships between clubs or maintain memberships at multiple clubs, opting
to shop at whichever offered the most attractive deals at any given time.

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• Product line differentiation among clubs ranged from weak to modest, with
significant overlap in merchandise offerings. This similarity in product offerings
heightened rivalry among the clubs.

Costco has established a competitive edge in this industry compared to competitors

like Wal-Mart’s Sam’s Club and BJ’s Wholesale Club, thanks to factors such as a
significant market share, competitive pricing, customer loyalty, and high-quality products.
The comparison and evaluation among businesses are detailed in Appendix 2. These create
switching barriers to the point that some bargain-hunting shoppers prefer to shop at Costco
over other clubs when there are many clubs to choose from in their shopping area.
Therefore, it has the effect of weakening competition. The evidence is that in 2011, Costco
with revenue of 97.6 billion USD was nearly twice as high as Sam's Club (52.8 billion
USD) and nearly 9 times higher than BJ's Wholesale Club (11.7 billion USD).

2.2. Threat of new entrants (Weak forces)

From our perspective, the opportunity to enter the North American warehouse club
industry is largely restricted. Costco must be recognized as a formidable rival, benefiting
from substantial economies of scale that pose a significant barrier to entry for newcomers.

Significant capital investment is necessary for any entrant aiming to compete on a

level playing field with established industry players. The costs associated with marketing
and advertising to attract members and generate substantial sales volume, as well as to
overcome the loyalty of existing Costco members, would likely be substantial. For
instance, persuading a Costco member to switch allegiance to a new entrant would be
challenging, given the considerable switching costs involved. Furthermore, the existing
three industry incumbents are well-positioned to fiercely oppose the entry of a newcomer.

In conclusion, considering all factors, the prospects for a newcomer to achieve

attractive profitability in this industry appear bleak. Given its inherently low-margin nature,
with profits primarily derived from membership fees, it's questionable whether any external

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company, apart from perhaps Target (albeit with considerable risk), would entertain the
idea of entering this sector and competing directly against established giants like Costco.

In essence, the pool of potential entrants into the warehouse club industry is limited,
and the likelihood of new entrants emerging in 2012 and beyond is equally slim, rendering
the competitive pressures from the threat of new entry virtually negligible.

2.3. Threat of substitute products or services (Strong forces)

Small businesses and individuals/households have abundant substitutes for

shopping at Costco. Although substitute retailers may not offer prices as low as Costco,
they typically boast a much wider selection of merchandise and have a significantly larger
number of convenience store locations. Even members of Costco often purchase a
considerable portion of their needs from other types of retail or discount outlets.

In conclusion, the substitutes for membership and shopping at Costco exert a

relatively strong competitive force. This is in contrast to the bargaining power and leverage
of suppliers to the warehouse club industry, which is considered a moderate to weak
competitive force.

2.4. Bargaining power of suppliers (Weak forces)

Suppliers are the vendors responsible for manufacturing the inventory sold by
Costco for resale. Negotiating mutually beneficial contracts that demand competitive
pricing for both suppliers and Costco necessitates a significant volume of sales. While these
contracts offer substantial exposure to consumer markets, ultimately, it is Costco who
dictates the terms of these contracts in order to meet the expected low price demands of
consumers. This results in low bargaining power for suppliers.

As Costco reflects the aggregate consumer price demands, suppliers have limited
leverage over pricing. If a supplier cannot meet the highly elastic consumer price demands,
they risk losing out to more competitive alternatives. Given the large sales volumes
generated by Costco, suppliers cannot afford to forgo supplying inventory to them.

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Additionally, suppliers lack significant access to end consumers, further tilting bargaining
power in favor of Costco who have direct access through their warehouses.

Overall, the market dynamic is such that consumer demands dictate competitive
pricing, wholesalers create the market, and suppliers must compete to meet consumer
expectations reflected in wholesale prices.

While many suppliers are reputable manufacturers with recognized brand names,
they do not necessarily hold strong bargaining positions. Wholesale clubs like Costco and
Sam’s wield considerable buying power and bargaining leverage. If a manufacturer refuses
to offer attractive prices, they can easily turn to alternative sources. Moreover, because
wholesale clubs drive high sales volumes for manufacturers, they are often eager to do
business with them. This ease of switching suppliers weakens supplier bargaining power
and strengthens the position of wholesale clubs.

In conclusion, suppliers to wholesale clubs represent a relatively weak competitive

force, unable to exert significant pressure on their wholesale club customers to negotiate
better prices or more favorable terms of sale.

2.5. Bargaining power of buyers (Strong forces)

As mentioned earlier, the retail market is highly competitive and there are many
players offering various incentives to buyers. Switching costs are low and customers can
easily switch to other retailers with similar value propositions. Customers also have a large
number of alternative products to choose from. There is no information asymmetry because
customers can get information from other retailers if not Costco. With all these factors at
play, players in the retail market sell goods at marginal margins and boost profits through
economies of scale.

In addition, Costco operates member-only, no-frills warehouses creating barriers to

consumers. Consumers also consider the shopping experience next to the price when
deciding to make a purchase (McKinsey & Company, 2012).

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→ Threats: Strong negative impacts on profitability.

• Customer behavior
• Fierce competition with other brands
• Substitutes present

→ Opportunities:

• Domestic barriers to entry are high and the threat of new entrants is low positively
impacting potential profitability.
• Supplier power presents opportunities that positively impact potential profitability.

Code External Factors Weight Rating Weight Scored

Opportunities (O)

EF 1 Mass market demand 0.17 4 0.68

EF 2 Expansion capability 0.15 4 0.6

EF 3 Partnerships and acquisitions 0.14 3 0.42

EF 4 Private label brands 0.13 3 0.39

EF 5 Environmental sustainability 0.13 2 0.26

Threats (T)

EF 6 Customer behavior 0.15 2 0.3

EF 7 Fierce competition with other brands 0.13 3 0.39

Total Score 1 3.04

Table 2: External Factor Analysis Summary (EFAS)

III. SWOT Analysis

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After analyzing the internal and external environment, our team has derived a
SWOT model as depicted below. From this model, we will proceed to apply it to develop
strategies for the business.

STRENGTHS (S) WEAKNESSES (W)

(S1) Membership model (W1) Membership fees dependency
(S2) Strong leadership and employee satisfaction (W2) Low profit margin
(S3) Efficient operations (W3) Limited product selection
(S4) Bulk Purchase and High Discount (W4) High sales volume
(S5) Excellent customer service (W5) Unlimited time return policy
(S6) Strong brand reputation
OPPORTUNITIES (O) THREATS (T)
(O1) Mass market demand (T1) Customer behavior
(O2) Expansion capability (T2) Fierce competition with other brands
(O3) Partnerships and acquisitions
(O4) Private label brands
(O5) Environmental sustainability
Table 3: SWOT Analysis

CHAPTER 6: BUSINESS-LEVEL STRATEGY

Costco, a leading membership warehouse business, initially aimed to provide

quality goods and services at the lowest possible prices. However, their vision expanded in
their 2011 Annual Report, where top executives Jeff Brotman, Jim Sinegal, and Craig
Jelinek articulated a more comprehensive mission. In addition to affordability, Costco
pledged to deliver excellent customer service and uphold a strict code of ethics.

Costco’s successful business model revolved around:

• High sales volumes and rapid inventory turnover achieved by offering low prices
on a select range of nationally branded and private-label products.

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• Operating profitably with significantly lower gross margins compared to traditional

wholesalers, mass merchandisers, supermarkets, and supercenters.
• Member fees played a crucial role, providing supplemental revenues to enhance
overall profitability.
• A strategic approach that included:
- Ultra-low prices
- Limited product selection.
- Creating a “treasure hunt” shopping environment.
- Membership model
- Intentionally loss-making" products

The key elements of Costco's strategy were ultra-low prices, a limited selection of
products, a "treasure hunt" shopping environment, strong emphasis on low operating costs,
and geographic expansion.

I. Costco is pursuing a low-cost leader strategy

Costco's low-cost leader strategy is based on high sales volumes and rapid inventory
turnover. This allows Costco to operate profitably at lower margins than traditional
wholesalers, mass merchandisers, supermarkets, and supercenters. Costco's membership-
based business model generates revenue by charging annual fees to access stores, avoiding
premium real estate locations, and utilizing store space for product display. The company
also operates for shorter hours to minimize employee staffing costs. These factors
contribute to Costco's success as a lower-cost provider in the retail industry while
maintaining acceptable quality.

1. Pricing

Costco’s business philosophy centers around impressing customers with low prices.
They meticulously select items that can be priced at bargain rates, allowing their members
to save significantly on costs. This commitment extends even to customer requests for
specific items.

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Over the years, Costco has maintained a pricing strategy that focuses on limiting
price increases for brand-name goods. Unlike other discount stores that raise prices by 20-
50%, Costco’s price hikes have been more modest, typically around 14%. For their own
Kirkland Signature products, the maximum allowable price increase is 15%. Despite this
slight increase, Kirkland Signature items remain approximately 20% lower in price
compared to similar products from other brands. Some examples of Kirkland Signature
products include vitamins, juices, coffee, spices, olive oil, salmon, laundry detergent, dog
food, luggage, cooking utensils, trash bags, batteries, wine, spirits, towels, and toilet paper.

Costco’s commitment to low pricing means that their prices hover just above the
break-even point, covering operating costs but not much more. Interestingly, membership
fees have played a crucial role in their financial success. Between 2008 and 2011, over
70% of Costco’s operating profits (Exhibit 1) were derived from membership fees. Without
this revenue stream, their after-tax profits would be quite modest due to their ultra-low
pricing strategy and the imposition of profit margin caps on both branded goods (14%) and
private-label items (15%).

Jim Sinegal explains the company's pricing approach:

Figure 6: Company 10- K Reports for fiscal year 2000, 2005, 2009, 2010, 2011
For example, some years ago, Costco sold a hot brand of jeans for $29.99 while they
were $50 in a department store. If the traditional retailer will say: "I'm selling this for $10.
I wonder whether we can get $10.50 or $11. Costco will say: "We're selling this for $9.
How do we get it down to $8?" We understand that our members don't come and shop with

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us because of the window displays or the Santa Claus or the piano player. They come and
shop with us because we offer great values -> Despite offering products at lower prices,
Costco maintains a reputation for offering high-quality merchandise.

Costco's low-cost strategy is also supported by its membership-based business

model. For instance, people who are Costco members have to pay an annual fee to access
Costco’s stores, which generates revenue for the company and helps offset the lower profit
margins associated with low prices.

Costco management avoided premium real estate locations in order to control land
prices, it made a point of placing warehouses on high-traffic roads in or near upscale areas
that were easily accessible by small companies and inhabitants with above-average
incomes. They also save costs by utilizing all the store space for product display and not
using shopping bags, operating for shorter hours compared to other stores, typically
opening from 10:00 a.m. to 8:30 p.m., to minimize employee staffing costs. Costco, with
its wholesale and warehouse retailing segment, commands a 57% market share. In
comparison, competitors like Sam’s Club (a part of Walmart) hold 35%, while other players
like BJ and a few additional rivals constitute approximately 8%.

Costco’s strategic focus on delivering high-quality products at low prices has

enabled it to maintain its position as a cost leader in the industry. Wall Street analysts
criticize Costco for prioritizing customer satisfaction over shareholders' profits. Retailing
analyst Sinegal disagrees, stating Costco's commitment to long-term organization and
unwavering pricing is unwavering. Sinegal emphasizes Costco's unique value proposition
and dedication to ultra-low pricing, preventing it from falling victim to competitors.

2. Low-Cost Emphasis

Costco's low-pricing strategy involves minimizing operating costs by eliminating

frills and costs associated with conventional wholesalers and retailers. The company
operates tight with low overhead, passing on savings to its members. Costco warehouses
are metal pre-engineered with concrete floors and minimal interior décor, attracting

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shoppers due to low prices and merchandise selection. Merchandise is stored on racks
above the sales floor and displayed on pallets, reducing labor required for handling and
stocking.

Costco warehouses range in size from 70,000 to 205,000 square feet and operate on
a seven-day, 69-hour week closing earlier in the weekend, the gasoline outside of the store
usually expands the time resulting in lower labor costs relative to sales volume.

➔ The shorter hours of operation as compared to those of traditional retailers, discount

retailers, and supermarkets resulted in lower labor costs relative to the volume of
sales.

By eschewing the conventional frills and costs associated with wholesalers and
retailers such as salespeople, elaborate facilities, delivery services, billing systems, and
accounts receivable Costco streamlined its operations and significantly reduced overhead
costs. This lean operational model enabled Costco to achieve remarkable savings, which it
passed on to its members in the form of lower prices and enhanced value.

II. Product Selection

Costco, the popular membership-based warehouse club, set out to provide its
members with an extensive selection of 3,600 active items. Among these offerings, 85%
consisted of high-quality brand-name products, while the remaining 15% bore the Kirkland
Signature label. Surprisingly, despite the prominence of the Kirkland Signature brand, it
accounted for only 20% of the total sales during the fiscal year of 2011.

The diverse product range at Costco includes a wide array of items, such as:

- Rotisserie chicken
- Fresh meats
- Seafood
- Paper products
- Cereals

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- Dairy products
- Cheeses
- Frozen foods
- Flat-screen televisions
- iPods
- Digital cameras

Costco’s commitment to quality and value is evident through its Kirkland Signature
line, which aims to deliver goods that match or exceed national brands while maintaining
competitive price.

Figure 7: Company 10-K reports, 2005, 2007, 2009, and 2011.

Costco, a grocery store, faced an "intelligent loss of sales" when it only stocked a
325-count bottle of Advil, which many shoppers might find too large. This decision was
made to understand the bigger picture and to maintain efficiency. However, if Costco
stocked four or five different sizes of Advil, it could make the business more complex to
manage. To encourage frequent shopping and transform Costco into a comprehensive one-
stop shopping destination, the company strategically introduced ancillary departments
within or adjacent to most warehouses.

Here’s something what they included:

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Gasoline Sales: In 2011, Costco’s ancillary businesses experienced a 24% increase

in sales. Gasoline sales alone reached nearly $9 billion, marking a 40% surge over fiscal
2010. Only Costco members were eligible for discounted gasoline prices, and this
availability acted as an incentive for members to visit Costco more often and make
additional in-store purchases.

Costco Pharmacies: Highly regarded by members, Costco’s pharmacies offered

low-priced prescriptions. A significant factor contributing to these competitive prices was
the operation of three central fill facilities that reduced prescription costs by approximately
50%. These facilities primarily served Costco’s West Coast warehouses. Both prescription
and over-the-counter drugs witnessed robust sales and profit growth in fiscal 2011.

In essence, Costco’s strategic choices, whether related to product sizing or

expanding additional services, highlight their unwavering dedication to efficiency, value,
and member satisfaction

III. Treasure-Hunt Merchandising

To enhance member engagement and encourage customers to go shopping more

frequently, Treasure-hunt merchandise refers to the unique and unexpected items that
customers might come across while shopping at the store. These items are often not part of
Costco’s regular inventory and can include seasonal products, limited-time offers, and one-
time purchases of items that would appeal to the company’s clientele and that would sell
out quickly.

Costco’s product line consists of around 3,600 active items, with 20-25% of its
offerings constantly changing. The company's merchandise buyers made one-time
purchases of high-end or name-brand items with high price tags, such as expensive jewelry
and diamond rings. The strategy was to entice shoppers to spend more by offering
irresistible deals on big-ticket items or name-brand specials. The mix of featured and
treasure-hunt items kept changing, attracting bargain-hunting shoppers more frequently.

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Costco members learned to buy treasure-hunt specials because the items would likely not
be available on their next shopping trip.

Costco buyers often sourced these items legally on the gray market from other
wholesalers or distressed retailers, keeping the efficiency and effectiveness of Costco’s
management, these strategies allowed the company to maintain lower marketing costs than
other stores, discounters, and supermarkets.

IV. Membership model

The Costco membership is a crucial part of the company’s business model. Based
on the number of registered members (with an annual fee of $55), Costco commits to
providing products of high quality at prices that justify the amount spent.

However, what’s unique is that Costco doesn’t directly discount products using this
membership fee. Instead, they use it as an operating cost to run a system for purchasing,
storing, and distributing large quantities of products with high discounts. Then, Costco
passes that difference on to customers. This helps them maintain low prices without
compromising quality.

The Achilles’ heel of this model is its heavy reliance on the number of sign-ups,
which translates to customer satisfaction. However, with a membership renewal rate of
91% in North America and over 87% worldwide, Costco is undoubtedly delivering a
service that’s worth the annual fee.

Additionally, Costco keeps prices low by minimizing profit margins. While

competitors often run “loss leader” programs to attract customers, Costco is willing to do
so to ensure customer satisfaction with the annual fee they pay. Their private label brand,
Kirkland Signature, also contributes significantly to their profits. With a profit margin per
item of only around 10.6% (compared to the industry average of 24.7%), this brand brings
immense benefits to Costco.

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In summary, Costco’s membership model not only maintains affordability for

customers but also ensures profitability and sustainable growth for the company.

V. Intentionally “loss-making” products

Its tactics attract a large number of customers to look for bargain products. However,
during the shopping process and "lost", customers may accidentally "stock" on some other
products with high profits. This not only compensates for cheap products but also brings
profit if calculated overall for the supermarket.

The smart point here is that the dining area is always located deep in Costco's
warehouse. Customers who want to get to this "paradise" have to go through a series of
rows of fruits, vegetables and many products at "shocking" prices. This makes them sure
to pick up a few extra things so they don't miss out on the opportunity during their shopping
trip.

CHAPTER 7: RECOMMENDATIONS

I. Objective, Mission and Vision

New mission: To provide exceptional value to our members through low price,
high-quality products, outstanding service, and sustainable practices.

New vision: To be the world’s leading membership-based retailer, known for

innovation, ethical business practices, and positive impact on communities and the
environment.

The retail industry's attractiveness is influenced by market size, growth, consumer

trends, e-commerce, competitive landscape, regulatory environment, supply chain
complexity, and technological advancements.

The retail sector is a critical component of the global economy, driven by consumer
spending, population growth, and urbanization. Retailers must adapt to evolving consumer
preferences by offering innovative products, personalized experiences, and convenient

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shopping options. E-commerce has transformed the retail landscape, offering convenience
and a broader range of products.

The competitive landscape is highly competitive, with major retailers like Walmart,
Amazon, and Target dominating the market. Compliance with regulations is essential to
avoid legal risks and maintain consumer trust. Complex supply chains and technological
advancements also impact profitability and operational resilience.

Success in the retail sector requires agility, customer focus, and adaptability to
changing market dynamics.

II. The competitors analysis

1. General picture between Costco, Walmart and Amazon in key of strategy

Criteria Costco Walmart Amazon

Walmart focuses on reasonable
Costco focuses on prices and product variety. Amazon focuses on e-
Strategy focusing providing low prices Walmart has larger market share commerce and product
high volume sales sections and operates with variety
advanced technological systems.
Costco has a lower
Walmart has larger market share
market share than Amazon is the world's
Market share sections and operates with
Walmart and largest retailer.
advanced technological systems.
Amazon
Table 4: Competitors Analysis

In comparison with major competitors in the retail industry, such as Walmart and
Amazon, Costco's strategic recommendations can be evaluated within the context of the
attractiveness of the retail industry both in the US and globally.

In general, after analyzing and devising a strategy based on the development of

SWOT strategic analysis, some recommendations based on competitor analysis with

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factors of change in purchasing behavior, we determine There are two main groups of
business-level strategies that need to be considered:

• Continue to develop existing strengths based on differences and promote the

expansion of physical store systems along with business models to develop both
domestic and foreign markets without paying too much attention to commerce. e-
commerce. Maintaining operation of current e-commerce sites and developing
multi-channel sales (Ominichannel), expanding online products and creating the
effect of buying online and receiving at the store so as not to reduce the number of
customers coming. as store increases the model member's average speed.
• Prepare investment tools in technology and logistics infrastructure to focus on
developing the cross-border e-commerce market, limiting the expansion of physical
store chains but still retaining the core elements of core business model as well as
its differences.

2. Recommendation based on QSPM analysis and strategy analysis

In comparison with major of IFAS and EFAS analysis, we have built the QSPM
matrix to evaluate the rate both of strategy attractive score to be more suitable to business
when we create the strategy orientation recommendation. Therefore, as a result we have
the WAS of A strategy is more than B strategy, so we have some major strategy to this
orientation for business improvement.

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Figure 9: Comparison with major of IFAS and EFAS analysis

WAS A strategy B strategy

IF1 (S) - Membership model IF4 (S) - Bulk Purchase and High Discount
IF7 (W) - Membership fees dependency IF7,8 (W) - Membership fees dependency,
Highest score EF2 (O) - Expansion capability Low profit margin
EF7 (T) - Fierce competition with other EF1 (O) - Mass market demand
brands EF6 (T) - Customer behavior
IF4,5 (S) - Bulk Purchase and High IF5 (S) - Excellent customer service
Lowest score
Discount, Excellent customer service IF10 (W) - High Sales Volume

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IF10,11 (W) - High Sales Volume, EF5 (O) - Environmental sustainability

Unlimited time return policy EF7 (T) - Fierce competition with other brands
EF5 (O) - Environmental sustainability
EF6 (T) - Customer behavior
Table 5: A and B Strategy Analysis

WAS A AND B STRATEGY COMPARISON

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0
IF 1 IF 2 IF 3 IF 4 IF 5 IF 6 IF 7 IF 8 IF 9 IF 10 IF 11 EF 1 EF 2 EF 3 EF 4 EF 5 EF 6 EF 7

A WAS B WAS

Figure 10: Comparison with major of WAS A and B Strategy

a. Major criterias strategy

Our strategic planning process has identified five major criteria strategies to guide
our actions and decisions:

Accelerated International Expansion: We prioritize expanding our presence in

international markets to capitalize on growth opportunities.

Strategic Alliances and Joint Ventures: Building partnerships and alliances with
other companies will enhance our competitive advantage and facilitate market access.

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Investment in Digital Infrastructure: We recognize the importance of digital

transformation and will invest in upgrading our technology systems to improve customer
experience and operational efficiency.

Continuous Improvement in Supply Chain Management: Enhancing our supply

chain management practices will optimize efficiency and reduce costs.

Exploration of New Revenue Streams: We will actively explore new avenues for
revenue generation beyond our core business to ensure long-term growth and sustainability.

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b. Costco’s strategy recommendation

Criteria Costco Walmart Amazon

Costco's focus on emerging markets with similar economic conditions Walmart operating in E-commerce platform.
aligns with Walmart's strategy of expanding into growing economies. multiple countries.
Accelerated
Costco's move to prioritize markets with rising middle-class
International
populations and favorable business environments could provide it
Expansion
with a competitive edge in capturing new growth opportunities in
these markets.
Costco's emphasis on strategic alliances and joint ventures with local Walmart has previously Amazon, meanwhile,
Strategic retail players could offer a unique advantage. pursued similar strategies, has often opted for
Alliances and Costco's approach could help it navigate regulatory complexities forming partnerships with acquisitions to enter
Joint Ventures more effectively and gain insights into local consumer preferences, local companies in new markets.
thus accelerating its growth trajectory in international markets. international markets.
Costco's focus on further investment in digital infrastructure, Walmart has also made Amazon, in particular,
particularly in enhancing its e-commerce platform and omnichannel significant strides in has revolutionized the
Investment in strategy, is crucial for it to remain competitive in the evolving retail digitizing its operations to e-commerce landscape
Digital landscape and capture a larger share of the online retail market. compete effectively in the with its advanced IT
Infrastructure online space. systems and
personalized customer
experiences.

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Costco's emphasis on continuous improvement in supply chain Walmart has long been Amazon has also
management, particularly through technologies like blockchain and known for its sophisticated invested heavily in
Continuous
predictive analytics, is in line with industry best practices and will be supply chain management optimizing its supply
Improvement in
essential for it to remain competitive against its rivals. systems, allowing it to offer chain network to enable
Supply Chain
competitive prices and fast and reliable
Management
manage inventory delivery.
effectively.
Costco's exploration of new revenue streams, such as leveraging its Walmart offering financial Amazon is expanding
membership base to offer financial services or investing in healthcare services such as banking into areas like cloud
Exploration of
services, aligns with this trend of diversification. However, Costco and insurance computing and
New Revenue
will need to carefully assess these opportunities and ensure they streaming services.
Streams
complement its core retail business while providing additional value
to customers.
Table 6: Costco’s strategy recommendation

Generally, Costco's strategic recommendations are well-aligned with the competitive dynamics of the retail industry,
both in the US and globally. By focusing on international expansion, strategic alliances, digital infrastructure, supply chain
management, and exploration of new revenue streams, Costco can reinforce its competitive advantage and sustain its position
in the dynamic retail landscape alongside major competitors like Walmart and Amazon.

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CHAPTER 8: CONCLUSION

To sum up, this strategic management report on Costco Wholesale identifies the key
components that enabled the company's success under Jim Sinegal's direction. The retail
business has gained greatly from Sinegal's hands-on style, focused on consumers, efficient
operations, and effective cost management, which have made Costco a leader.

A culture of outstanding client service and employee engagement has been

developed by involvement in in-store operations and personal interactions with staff and
customers. As a result, there is now a loyal customer base and an enthusiastic staff that are
committed to providing an outstanding shopping experience.

Costco has simplified supply chain management, streamlined procedures, and

guaranteed consistent quality through its strategic emphasis on operational excellence,
which is demonstrated by its attention to specifics and commitment to effective retail
operations. Effective methods for cost control enable the business to maintain profitability
while providing affordable rates.

Despite the difficulties it faces, including fierce competition and possible economic
swings, Costco is well-positioned in the market thanks to its advantages in cost control,
operational excellence, customer service, and international and e-commerce growth
prospects.

Overall, Costco's effective strategic management has positioned the company for
success in the future, and it will be interesting to see how it continues to adapt and grow in
the years to come. /

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REFERENCES

1. Tran Thang. Costco Case: Costco Mission, Business Model and Strategy. 22 Feb. 2016,
www.slideshare.net/TranThang6/costco-case-costco-mission-business-model-and-
strategy.

2. “Read a Peerless Free Essay Paper about PESTEL Analysis of Costco and Porter’s Five
Forces Analysis of the Industry Now!” Best-Essays-Writers.org, 2 Nov. 2020,

https://best-essays-writers.org/essays/analysis/pestel-analysis-of-costco-and-porters-five-
forces-analysis-of-the-industry.html. Accessed 3 Apr. 2024

3. ElAlam, Younes. “Sustainable Solutions Paper.”

https://www.academia.edu/26862335/Sustainable_Solutions_Paper, Accessed 3 Apr. 2024.

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APPENDIX

Appendix 1: VRIO framework Analysis

Is a resource or capability
Core Competence Competitive Implication Economic Performance
Valuable Rare Inimitable Organized

Variety of products No - - - Competitive disadvantage Below normal

Profit margin No - - - Competitive disadvantage Below normal

Return policy No - - - Competitive disadvantage Below normal

High sales volume Yes No No Yes Competitive parity Normal

Membership fee model Yes Yes Yes Yes Sustained competitive advantage Above normal

Excellent customer service Yes Yes Yes Yes Sustained competitive advantage Above normal

Strong leadership Yes Yes No Yes Temporary competitive advantage Above normal

Employee satisfaction Yes Yes No Yes Temporary competitive advantage Above normal

High-quality products -
Yes Yes No Yes Temporary competitive advantage Above normal
Affordable prices

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Efficient operations Yes Yes No Yes Temporary competitive advantage Above normal

Efficient Supply Chain Yes No No Yes Competitive parity Normal

Warehouse management
Yes No No Yes Competitive parity Normal
capabilities

Bulk Purchase and High

Yes No No Yes Competitive parity Normal
Discount

Appendix 2: Competitive Profile Matrix

Costco Wholesale Wal-Mart’s Sam’s Club BJ’s Wholesale Club

Element Weight
Score Weighted score Score Weighted score Score Weighted score

Market share 0.15 4 0.6 2 0.3 1 0.15

Price competitiveness 0.2 4 0.8 3 0.6 2 0.4

Financial position 0.1 2 0.2 2 0.2 2 0.2

Product quality 0.15 3 0.45 2 0.3 3 0.45

Customer loyalty 0.2 3 0.6 2 0.4 1 0.2

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Distribution channel 0.1 2 0.2 2 0.2 2 0.2

Product option 0.1 2 0,2 2 0.2 2 0.2

Total 1 3.05 2.2 1.8

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