COSTCO Case Review

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COSTCO Case Review Costco is one of the leading physical retailers in the United States. It is one of the most formidable competitors for Walmart. However, the company's approach is very different from that of the other competitors, such as Walmart. While other retailers embrace open for all approach to retail, Costco is a chain of membership houses, and one is supposed to be a member to shop at Costco. The paper analyzes Costco's business model, the chief elements of Costco's strategy, whether Jim Sinegal was an effective CEO, the level of competition in the North American wholesale club industry, five-forces analysis of competition in the North American wholesale club industry, how well is Costco performing from a financial perspective, and the performance of the company from a strategic perspective. There is also a need to come up with viable recommendations to top management regarding how best to sustain the company’s growth and improve its financial performance.

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Costco Costco is one of the biggest warehouse and retail stores in America apart from Walmart.

Costco warehouse was founded in 1983 in Seattle by Jeffrey Brotman and Jim Sinegal (Mackey & Sisodia, 2014). Currently, the company has valued itself as a discount-based company wholesale where they can sell their products cheaper and in bulk to make a faster turnover of its commodities. The company's philosophy is taking costs out of the supply chain, and therefore it opts to do much of the operations by itself.

Costco’s Business Model and Strategy The company uses a membership-only warehouse club business model. Here, the consumers are supposed to pay a membership fee to access the low-cost products available at the company's stores. It is also possible for the non-members to accompany the members, but it is only the members who are allowed to purchase in these stores. The non-members may be allowed to use Costco cash cards to shop at the stores. The chief elements of the company's strategy entail lower prices, a restricted product line and selection, and an atmosphere that creates a treasure hunt for shopping. The model of the company can be said to be appealing because it makes it possible for the business to undersell the competition and ensure customer loyalty. It also incurs less money on initiatives such as marketing.

Strategy The strategy of the company is basically cost leadership. This entails keeping the lowest process possible. Even though other competitors use the same strategy, Costco combines the membership warehouse club business model to differentiate it from the other retail firms. The approach has made the strategy very effective for the company and enabled it to grow tremendously.

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CEO Leadership CEO leadership is important for a company because it is responsible for the overall success of a business entity. CEOs make top-level managerial decisions that affect the business positively or negatively. For instance, research has pointed out that CEOs with transactional leadership can successfully manage goal accomplishment and contribute to the enhancement of the firm performance (Mackey & Sisodia, 2014).

CEO Effectiveness To a greater extent, Jim Sinegal was an effective CEO. He deserves a B considering the manner in which he was able to craft and execute Costco’s strategy. He was able to develop a strategic vision of providing the company’s members with quality goods and services at the lowest possible process. The approach has made it possible for the company to attain a sustainable competitive advantage.

Core Values and Principles The CEO's core values underscored the value that the company's goods and services had to provide to the customer and how the employees were to be empowered to deliver this value.

He believed in empowering his employees, which is evidenced in how he promoted people from within the company because they have been nurtured by the company and are well aligned with the mission and vision of the organization (Grünig, Kühn & Montani, 2018).

Competitive Analysis There exist about 1,200 warehouse clubs in the U.S., and the biggest competitor among them is Walmart, with a market share of about 38%. Costco enjoys a market share of about 13 % (Mackey & Sisodia, 2014). The company is operating in a market that can be said to be at a maturity stage. Even though the industry is profitable, the sales growth can be said to below.

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Competition in the Industry The competition in the industry is relatively high, with competitors such as Sam's Club and B.J.'s Warehouse making it more concentrated. However, Sam's Club presents a major threat considering its large number of stores. B.J. is a less formidable competitor because it is majorly concentrated on the East coast.

The threat of new entrants The threat is relatively low because the company operates in an industry which requires a high level of capital investment and it takes time to build customer relationship and trust. Any new entrant is likely to face huge initial costs because of the first-mover advantage derived from the economies of scale.

Bargaining power of suppliers This force is low. The company can leverage buyer power in such a way that buyer power is not of much concern. The major suppliers are providers of labor, of which the company has managed to keep the employees happy and is not likely to alter the relationship in the near future (Grünig, Kühn & Montani, 2018).

Bargaining power of customers The bargaining power of customers is medium. The company has a large customer base with no individual customer having much influence. However, consumers have many options in the non-warehouse retail market such that the company must fight for the customers with lower prices and quality guarantees.

The Threat of Substitute Products This threat is high. There are a lot of substitutes when the products of the company are disaggregated across the industry segments.

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Conclusion From the above analysis, the most significant forces are threats of competitive rivalry and threat of substitutes. In equal measure, these are the forces that the company should leverage its resources to beat. Numerous competitors are always working to beat each other, and the customers have many options at their disposal, with very little switching costs for them to move from one brand to another (Mackey & Sisodia, 2014).

Financial Performance Considering some of the company's liquidity ratios, the company's current ratio has been on the rise since 2013, with the year 2014 recording the highest ratio of 1.12. This shows that the organization is well placed to pay for its current liabilities. However, the quick ratio of the company is not favorable. The quick ratio of less than 1, i.e., 0.46, shows that the company will not meet the current liabilities without selling its long-term assets. However, the company has exhibited an upward trajectory as far as these ratios are concerned from the year 2013. Costco Wholesale Corp.’s interest coverage ratio improved from 2012 to 2013 and from 2013 to 2014. It is clear that the company is garnering some strength in handling its obligations (Courtemanche & Carden, 2014).

Costco’s Competitive Advantage The company enjoys high customer loyalty, and therefore cannot easily lose any of its customers. This gives it an upper hand over the other competitors.

Competitive Advantage From the financial performance perspective, the company is turning in higher numbers for total revenue than both Sam's and B.J's. It enjoys a competitive advantage over the two

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performances. The competitors have many products, hence making rapid turnover hard to achieve. They also do not have loyalty programs that can measure up to Costco.

Competitive Strategy The winning strategy of the company cuts across the board. First, its model is favorable, and its customer service and product quality are exemplary. The low price strategy also works well for it. As such, it has a viable winning strategy.

Recommendations Given that the company's strategies have worked well, there is a need to work on scalability and unleash the same strategy. It can increase revenue if it opens more stores in many parts of the world. It should take advantage of the developing markets where the products can be sold in bulk. The company should maintain its membership approach as it pursues new markets.

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References Courtemanche, C., & Carden, A. (2014). Competing with Costco and Sam’s Club: warehouse club entry and grocery prices. Southern Economic Journal,80(3), 565-585.

Grünig, R., Kühn, R., & Montani, M. (2018). The strategy planning process: analyses, options, projects. Berlin: Springer.

Mackey, J., & Sisodia, R. (2014). Conscious capitalism: liberating the heroic spirit of business.

Boston, Mass.: Harvard Business Press.