Costco Five Forces Analysis

Porter’s Five Forces Analysis of  Costco:

Costco is among the leading brands in the retail industry. Apart from being one of the three leading retailers in US, it is also the leading membership based warehouse chain in the world.  The brand has utilized an unconventional business model. It is best known for its low prices and its excellent customer service. The brand holds immense clout over its suppliers and has created a strong brand image in the industry. This is a Porter’s five forces analysis of Costco.

Bargaining power of suppliers: low

Except a few major brands, the bargaining power of Costco’s suppliers is low. The reason is that Costco is a large retailer brand that makes bulk purchases from its suppliers. This gives it immense clout and bargaining power against them. However, while the switching costs for Costco are low,  its suppliers cannot afford to lose business from Costco. In such cases, where the purchasing brand has higher influence, the suppliers are bound to follow the rules it sets. The same applies to Costco suppliers who have to follow ethical practices to remain a supplier. Moreover, the chances of forward integration by the suppliers are low while Costco has the ability to integrate backwards. All these factors reduce the bargaining power of the suppliers while giving the retailer better bargaining power.

Bargaining power of buyers:

Costco is a membership based retail chain. Its buyers are members that generally buy products in bulk.  However, when it comes to individual members, they do not hold enough clout or bargaining power. The loss of a few customers never has a significant effect on the brand’s financial status. Moreover, the brand offers low prices to its members. They can switch to the other retailers like Walmart but the same convenience and kind of customer service is not available at all brands. Moreover, a membership at Costco provides some exclusive advantages. All these factors keep the bargaining power of the buyers of Costco moderate.

Threat of Substitutes:

There are not many substitutes for the customers of Costco that can offer similar convenience or low prices.  Apart from Walmart and target there is hardly a brand that can offer competing prices or convenience. Customers can switch to the other brands but then the same convenience, customer service and matching prices will not be available. The threat of substitutes gets mitigated by the excellent customer serviced that Costco provides as well as its low prices and other exclusive benefits available to its members. Overall, the threat of substitutes for Costco is low to moderate.

Threat of new entrants:

The threat of new entrants for Costco is low. The kind of supply chain and distribution system that Costco has managed is not easily imitable. Its competitive advantages and brand image of an ethical and accountable brand cannot be obtained or imitated easily.  There are other factors too that limit the chances of new players entering the market. Apart from capital investment, there is also a need of skilled human resources to build a brand like Costco. New brands would also have to struggle to obtain the same customer loyalty and reliance.  All, these factors make it difficult for the new players to enter the retail sector. Gaining a market share against the established players becomes difficult for new ones. The threat of new players entering the market is very low for Costco.

Competitive Rivalry among the existing players:

The level of competitive rivalry among the existing players is moderately high. While Costco and Walmart are the two leading players in the retail sector, there are other players like Target and Best Buy which also hold some clout in the retail sphere. The rivalry among the leading players is quite intense while the smaller brands also pose some competitive threat. The industry is in the maturity stage of its life cycle where the number of firms is fewer. The firms generally compete in terms of quality or on basis of low costs. Rivalry among the existing firms is a low to moderate force in the retail industry.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.