Costco Case Study PDF

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Case study based on Costco financials and performance of the year...

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Professor Skalnik MKTG 465 February 15, 2020 Case Study for Costco

SWOT Analysis This technique is used to determine the internal strengths and weaknesses of a firm and the

external opportunities and threats the firm faces.The following chart is a reflection of Costco’s products and services and how it represents the internal and external situations within the company. Strengths 1. 2. 3. 4. 5. 6.

Low Costs Operational Excellence Benefits for Employees Products/Experience/Brands Code of Ethics Business Model

Opportunities 1. 2. 3. 4.

Loyalty Perceptions Customer Experience Delivery Systems

Weaknesses 1. 2. 3. 4. 5.

Pricing Limited Product Mix Large sizes Marketing/Advertising Target Market

Threats 1. 2. 3. 4.

Shareholder perception Competition Consumers Economy - PESTLE

Key Success Factor - Merchandising Competitive advantage Yes there are many competitive advantages because they are still successful despite the weakness in advertising. Costco sustains a competitive advantage by offering low prices, a limited product line and limited selection, and a “treasure-hunt” shopping environment. They offer high wages and benefits for their employees, which has developed a strong employee loyalty to the company. Porter’s 5 Forces “Porter Five Forces Analysis is a strategic management tool to analyze industry and understand underlying levers of profitability in a given industry. Netflix, Inc. managers can use Porter Five Forces to understand how the five competitive forces influence profitability and develop a strategy for enhancing Netflix, Inc. competitive advantage and long-term profitability in CATV Systems industry” (FernFort University). The following are the results of the five forces for Costco. 1. Competitive rivalry or competition (strong force) because there is a high number of competitors that are focusing on unique ideas to outdo Costco. a. Large number of firms (strong force) b. High variety of firms (strong force) c. Low switching costs (strong force) 2. Bargaining power of buyers or customers (moderate force) because consumers can easily switch over to Walmart or Sam’s Clubs. However, an unsubscription will not affect the financial status of Costco.

a. Low switching costs (moderate force) b. High availability of substitutes (moderate force) c. High quality of information (moderate force) 3. Bargaining power of suppliers (weak force) because no single firm can demand from firms like Cotsco. a. Large population of suppliers (weak force) b. High overall supply (weak force) c. Low forward integration (weak force) 4. Threat of substitutes or substitution (weak/moderate force) because other commodities are accessible, but not coming at the convenience and price that Costco has. a. Low switching costs (weak force) b. High availability of substitutes (moderate force) c. High performance-to-price ratio of substitutes (weak force) 5. Threat of new entrants or new entry (moderate force) because low switching costs give consumers an easier chance to switch to the new entrants. a. Low switching costs (strong force) b. Moderate cost of doing business (moderate force) c. High economies of scale (weak force)

Key Success Factor - Bargaining power of buyers or customers Generic Competitive Strategy Placed in Quadrant 1 - Cost Leadership a. This generic strategy entails low costs reflected through low prices. Customers expect significant savings when they buy from Costco.

Ansoff Turbulence Level and Justification Costco has a level two- to level 3 turbulence. They are aware of their market competitor of Sam’s Club and are able to be reactive and anticipatory in response to change. Being efficiency driven gives Costco an advantage to focus on production and still satisfy the needs of their consumers.

Ansoff Product/Market Expansion grid Ansoff’s matrix highlights four intensive growth strategies that brands can utilize to grow their sales and market share. They include market penetration, market development, product development and diversification. Costco used the growth strategy of market penetration aggressively in 2018/2019. Costco used this strategy to sell more to its existing customers that are part of their membership program. Marketing towards families, those customers are attracted to shop at Costco for its bulk purchases, low prices, and attractive deals. Costco’s market development is most evident in its efforts to its expansion of warehouses/store locations. This intensive strategy is used to grow their sales internationally so they can attract customers to the newly opened locations. Costco’s growth strategy of product development has been stable with their continuation of using brand names and quality products. Adding seasonal and limited products within their store, all while expanding in high-quality Kirkland products have been a successful strategic objective for their company. Finally, diversification, for it can be risky but also proven to be extremely successful. Costco has diversified primarily in regards to services. Many of the services they have introduced are still very new to the Costco name and consumers are still discerning how they will respond to these service additions. Some of these include travel insurance, water delivery, installation of home amenities, logo design, and payment processing. This supports Costco’s strategy of cost differentiation too through the products they provide. Marketing Mix Elements a. 7 P’s i.

ii.

iii.

iv.

v.

Product: Costco Wholesale Corporation sells its products under 5 broad categories, and each of these serves as separate product lines. All of its products are sold under the brand name of Costco Wholesale Corporation. Price: The current pricing strategy to set the price level that Costco Wholesale Corporation follows is a competitive based pricing strategy. This is because the data on competitors is easily available due to a large number of competitors that exist within the industry. Place: Costco Wholesale Corporation sells its products through two marketing channels. The first is where it sells directly to its customer through its online website. The second is where it sells to wholesalers who then sell to different retailers located all over the country. These then sell to its customers. Promotion: They use multiple media channels to promote its products. It uses traditional media, which includes an advertisement on television and radio. This is beneficial due to its large reach and ability to attract a large number of people. It uses online and social media advertising, which is cheaper and beneficial due to the increasing usage of the internet. People: They have people working under its sales team that play a vital

role in its marketing efforts. These people have been trained in persuasive techniques, but also to show respect to the business customers taking into consideration their preferences. vi. Process: Costco makes sure that its products are always available at retail stores has systems installed where retailers can notify when their inventory levels are low. Costco Wholesale Corporation provides them with more products while ordering its productions to replenish its stock. This ensures that products are always available to customers when needed. vii. Physical: Costco sells its products in a distinct color packaging that is easily identifiable on retail shelves. These are placed on special shelves provided by the company, which also have a distinct color and design. This makes it easier for customers to locate such shelves in busy retail stores. b. Internal Marketing Issues i. Costco has a business model that is heavily dependent on customers and their loyalty to the company. ii. They do not provide a “grab-n-go” shopping atmosphere like some competitors. iii. One problem with Costco's model is that buying in bulk is not ideal for some consumers, especially those that live in cities where it might be difficult to move large items from the store to their homes. iv. Many consumers also want the convenience of online shopping, which Costco has been slow to adopt. Financial Ratios Lost of Revenue/Gross Profit = 152,703 - 132,886/152,703 = 12.98 Liquidity = current assets/current liabilities = 23,485,000/23,237,000 = 1.01 Leverage = debt/equity = 29,816,000/15,243,000 = 1.96 Inventory = costs of goods sold/inventory = 132,888,000/11,395,000 = 11.66

Organizational Issues Costco’s organizational structure depends on the location and operations of the firm. Within these firms they hold a lot of power. Executives at Costco do not earn high salaries like other executives in highly profitable companies. The CEO, W. Craig Jelinek, thinks that he should have a fair salary to what people on the floor are making, but does not need his to be 100 times greater than those doing front of housework that keeps him successful. It is this leadership style that makes him a celebrity and personable boss that people within the company look up to and admire. This view of leadership as inspirational helps the employees to buy into the strategy that Costco has had in place for so many years. “It is interesting to note that while Costco believes in paying its employees well by the standards of its chosen industry, it also believes in maintaining a relatively small workforce without actually cutting into its service for its customers — something that helps to keep its costs manageable,” Money Inc. wrote. It has been assumed that nowadays the trend to increase the profits is by cutting the salary and wages of the employees. Despite this, companies are paying high wages and benefits to the employees of their company so that the performance of them can be increased. As Costco continues to be a cost-effective company, they will keep expanding their revenue to best pay back their company for what they deserve in exchange for their hard work.

Christian Worldview Comments a. Alexander Hill’s Ethics Model i. Holiness 1. Integrity ii. Justice 1. Fairness 2. Code of Ethics: Obey the law, Take care of our members, Take care of our employee, Respect our vendors 3. “The law is irrefutable!” 4. The next four codes all have to do with the way that they treat their people. The company’s goals are to take care of their members, take care of their employees, respect suppliers, and reward stakeholders. 5. They stay to create a safe, healthy harassment-free work environment, maintain competitive wages, honor commitments made, provide top quality products for the best prices in the market. 6. Their standard employee rate is $17 per hour that is significantly more than the mandated United States minimum wage. Employees also receive full health and 401(k) benefits. 7. Costco enjoys very low employee turnover and low theft rates. iii. Love 1. Compassion b. Community issues i. Costco’s target market: older generations 1. Unclear that they can gain a new market of millenials 2. Competition with Amazon ii. Business Model 1. One problem with Costco's model is that buying in bulk is not ideal for some consumers, especially those that live in cities where it might be difficult to move large items from the store to their homes. 2. If consumer preferences change, Costco could be left with large amounts of unwanted, and possibly perishable, goods Recommendations As economies continue to fluctuate, Costco must be able to adapt and adjust to those changes. For instance, they could diversify their products to include things that go along with the trends like greater quantity of organics and longer lasting deals on certain seasonal products. Also, since Costco does not have a great online presence, they should use that as an opportunity to enhance their relevance in the shift to digital and convenient shopping that consumers are

looking for. Once they create that online presence, Costco must be able to keep up with it and update their media just as often they do their store. This is in order to compete with the emerging online retail market and stay ahead of the rising trend of online shopping for groceries and other necessities....