Situation The third element of Costco’s pricing is
Situation Analysis and Industry Analysis of Costco
Costco is the largest discount warehouse in America, with several overseas branches in Canada, and Europe. It also has interests in the discount warehouse business in Mexico where it has a fifty percent stake in the Mexican Costco. Discount warehouses are a special kind of retail business where customers buy an annual membership in order to enjoy special discounts on all products.
Most of them operate on volume basis hence they generate income based on the sale of high volumes of the products in stock. Costco, unlike many retail outlets such as superstores and supermarkets, keeps a small inventory to simplify its business system, which requires high levels of efficiency in order to work as planned.
The existence and growth of the discount warehouses in the retail segment shows that it is a business model that is able to weather the storms of economic downturns such as those that the world has dealt with in the last five years. The trend that the segment possesses shows that there is still a huge potential for its growth, not just in North America, but also in the entire world.
The normal trend for businesses is to diversify in order to have a strong portfolio and to keep abreast with changing patterns as a way of assuring long-term profitability. The three key players in the segment each has its own competitive advantage and it should not be surprising if more players with experience in the retail segment jump in to cash in on the discount warehouse segment as part of their diversification strategy.
Problem Statement and Strategy Analysis
There are several lessons to learn from Costco’s business strategy. In order to decipher the elements of its business strategy, there is a need to look at its operational and management models. These two parameters will provide the basis for understanding the company’s strategy.
Efficiency is the critical component behind Costco’s operations. The business seeks to provide its members with the best prices based on low operating costs achieved by efficient operations.
The company sets its markup at about fourteen percent, compared to other wholesalers and retailers who set theirs at between twenty to fifty percent. This nature of pricing requires the stocking of products that the company can sell at significant discounts. As a strategic consequence, Costco can only stock a limited range of products, which meet this criterion.
The third element of Costco’s pricing is treasure hunt merchandising, which is the short term stocking of unique goods when available. This strategy serves to increase the urgency with which shoppers approach purchasing of the products at Costco because if they miss the opportunity to get those products, then they may never get the opportunity to get them at those prices.
The strategies employed by Costco make direct mail advertising the best way to reach its target customers with new product offerings and discounts available since all its members register before they can enjoy services of the company. This means that the company does not spend as much money on advertising as other retailers. This further helps to reduce operational overheads.
A key part of Costco’s strategy is its warehouse management processes. Costco fully embraces strategies that reduce its overheads such as locating the warehouses in locations with lower real estate value as compared to other retail stores. It also avoids using fancy branding and product placement methods. These measures, among others, make it possible for Costco to keep its prices down.
The management strategy of Costco aims at retaining organizational history and facilitating the development of local talent to ensure that the company retains the best talent within. The company has a strong history of promoting its employees to the highest positions internally. This policy makes the company attractive for the employees because they can plan their careers based on a certain level of assurance that if they perform well, they will get ahead in their jobs.
The company is pursuing various growth strategies to expand its operations. This includes opening new stores and expanding the floor space in existing facilities. There are new opportunities opening up for Costco in South America, Europe, and Asia where the company is developing new businesses.
Alternatives and Recommendation
In order to improve its business, Costco has two opportunities. One of them is to leverage its position in America and ensure it keeps ahead of the competition. So far, the company’s chief advantage is its historical position because it has been in the market longer than all the competitors have.
This means that it has been able to develop a strong knowledge of the market. However, if the company does not pursue aggressive market retention strategies, competition may edge it out. Both Sam’s Club and BJ’s Wholesale Club have come into the discount warehouse business with unique competitive advantages, which can upset Costco’s leadership position.
Costco needs to develop stronger loyalty programs to rope in its long time customers to ensure that the competition does not take them away. One potential area is the payment of the annual membership fees. The company could consider special waivers for members who have been part of the company for say ten years, and special waivers for those rejoining the company after some time without active membership.
The second option to pursue is to develop overseas business and to use the profits from there to shore up any shortfalls that may arise in the American market in the longer term. This option assumes that the company cannot do much to counter the emergence of competition, or it may be more expensive to try to keep ahead of the competition than the profits such efforts will bring in.
Since the company cannot use options such as the expansion of its product range, or a change in the locations of the warehouses without fundamentally altering its business model, it seems that geographical expansion coupled with a strong online business model holds the key to future profits for Costco.
In conclusion, Costco has had a brilliant run in its operations so far. This is commendable. However, it can no longer sit and enjoy its exploits because it will be dealing with stronger competition in the near future. This calls for a change in business strategy.
The most sensible thing to do is to leverage its current position in America by taking advantage of its long history and to pursue an aggressive overseas expansion strategy. There are many business opportunities opening up in Asia and South America alongside Europe that have the potential of assuring Costco’s of long-term profits.