Costco is a leading U.S. based retail brand. It operates membership based warehouses in US as well as Canada and several more markets. Its business model is different from that of Walmart. The number of Costco members as well as its revenue has increased sharply in the recent years. The company has achieved very high level of popularity and brand equity based upon its consistently low prices for its members as well as excellent customer service. Through a large warehouse chain, the company has been able to manage its business efficiently.
It offers its members merchandise at prices that are consistently lower than everywhere. However, the retail industry is marked by very high level of competition. Apart from Walmart, there are many more competitors that are competing for market share with Costco. The company is now also using its e-commerce channels to reach its customers. It has focused on increasing the sales of its private level brands. While Costco is popular mainly for its low prices and its excellent customer service, it is growing its number of warehouses as well as commerce sales. This is a swot analysis analysing the main strengths and weaknesses of the company as well as its main opportunities and threats.
Brand equity is a major strength of Costco. It has been able to build strong brand equity through its focus on product quality, prices and customer service. The brand has consistently delivered on its promises to its customers. These are the main reasons that millions of customers trust Costco. In this era of heavy competition in the retail industry, it is important to build trust and apart from everything, customer service is a central focus for Costco which has helped it win millions of customers’ trust.
Large chain of warehouses:-
Costco has established a large chain of warehouses throughout US and in other select markets including Canada and UK. The number of Costco warehouses throughout the globe is now higher than 750. This has helped the brand reach a large number of customers and grow its sales and revenue. The highest number of Costco warehouses are there in US at 527 in 2018. Canada has 100 Costco warehouses. There are around 135 more warehouses located internationally and the company had 762 warehouses operational as of 2018.
Financial performance :-
The financial performance of Costco has kept growing stronger. Over the last three years, it has experienced sharp growth in memberships and revenue. Net sales as well as income from membership fees have also grown. Strong financial performance enables it to invest more in expansion and e-commerce leading to higher growth. Revenue of the brand increased to 141.6 Billion dollars in 2018 from 129 Billion dollars in 2017. Net sales of the brand increased from 126.2 Billion dollars in 2017 to 138.4 Billion dollars in 2018.
Consistently lower prices are also a major strength of Costco. The brand has always tried to charge the lowest prices from its customers. The members need to pay membership fees but after that they can save a lot on individual products. Costco buys in bulk and manages its operations efficiently cut down costs. This has enabled the brand to charge consistently lower prices from its customers. The result is higher popularity and customer loyalty.
Merchandise range :-
Costco offers a large merchandise range to its members. It offers merchandise mainly within five categories that include food and sundries, hardlines, soft lines, fresh foods and ancillary. The food and sundries segment include dry foods, packaged foods, groceries, snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies. The hardline include major appliances, electronics, health and beauty aids, hardware, and garden and patio. Fresh foods segment includes meat, produce, deli, and bakery whereas the soft lines include apparel and small appliances. Gasoline and pharmacy businesses are included under the ancillary segment.
Huge customer base:
Costco is a popular brand whose customer base has kept growing fast in the recent years. The number of total members grew to 94.3 Millions in 2018 from 90.3 millions in 2017. There are several membership classes at Costco that suit the needs of various customer segments. Its Gold Star memberships for individuals is available for $60. The company also enjoys a very high renewal rate of around 90% in US and Canada which are its largest markets.
Investing in e-commerce and technology :-
Costco is also investing in e-commerce to grow its sales and revenue. In 2018, its net e-commerce sales represented around 4% of its total sales. Its e-commerce websites are operational in US, Canada, Mexico, UK, Korea and Taiwan. In certain other countries, the company also offers business delivery, travel and various other services online.
Dependence on US and Canada markets :-
The company depends upon US and Canada for a large part of its sales. These are its two biggest markets. US accounted for around 72% of its total sales in 2018 whereas Canada for nearly 15%. Costco’s sales in the other international markets was even less than 15%. United States accounted for around 102.3 Billion dollars in 2018 whereas Canada accounted for around 20.7 Billion dollars in 2017. This leaves the brand highly dependent on these two markets, and especially on the US market.
Low focus on marketing :-
Traditionally, Costco has not spent a lot on marketing. It has mainly depended on word of mouth and publicity for marketing. The company does not spend anything on marketing except sending emails and coupons to existing members. Its competitors spend much larger sums on marketing including Walmart. Its biggest rival is Walmart whose advertising and promotions expenditure runs in billions. Other rivals of Costco also spend a lot on advertising and promotions. Costco’s low expenditure on marketing is leading to higher competitive pressure and growth related pressures.
– Digital technology for sales and service:-
Digital technology and AI have brought great opportunities for the retailers including Costco. It can use several free channels for marketing. Apart from that digital technology is all making it easier for brands to serve their customers and address complaints. Overall, the use of digital technology can help grow customer base and offer better service. Not just digital technology but AI and other modern technologies are also helping businesses like Costco grow their supply chain and business efficiency and retain their customers for longer.
– Investing in digital marketing:-
Costco does not spend anything on marketing and promotions. However, it can use digital channels for low cost advertising and promotions. It can use social media and the other digital channels to grow its market share and promote deals. Digital advertising is much less costly as compared to traditional advertising channels. Costco can assign a small budget to digital advertising to grow its customer base and sales.
– Investing in emerging markets:-
Costco has limited its presence to a few key markets. It can expand into emerging markets and China to grow its sales and revenue. India is a fast growing market and can prove to be a highly profitable market. Walmart as entered the Indian market by buying a larger stake in Indian online retailer Flipkart. Costco can also use e-commerce and other channels to grow its presence in the emerging markets. It will help the brand grow its sales and revenue as wells customer base.
Expanding product line:-
Costco can also increase its product line to include more products. Compared to Costco, Walmart offers a much larger assortment of products which has led to higher sales and profits. If Costco expands its product line farther, that too could help the brand attract more customers and build a larger customer base.
Barriers to membership growth :-
Costco is a membership based warehouse chain. It charges a small fee for membership. Even if the fees are not very large there are certain barriers to growing tis number of memberships faster. The key barriers to membership growth include limited presence compared to Walmart as well as lack of focus on marketing. marketing is important for growing sales and memberships. However, Costco does not focus on it as much as its competitors.
Competitive and regulatory barriers :-
Competitive pressures in the retail industry have grown. Apart from the largest retailer walmart, Amazon is also creating competitive pressure through its growing presence. These two are market leaders but there are more retail brands that are creating competitive pressure on Costco. Regulatory barriers have also grown in the retail industry and the level of government and legal oversight has grown.
Labor costs and prices of raw materials:-
While there is already too much downward pressure related to pricing on the leading retailers, the costs of raw materials are also growing. Apart from that labor costs and hourly wages are also increasing leading to rising operational costs. Costco obtains merchandise from a large number of suppliers. Due to the increasing costs of merchandise, the profits can shrink even with high revenue. However, to retain customers, it is important that the brand has to keep the products’ prices low.
Costco is a leading retail brand of USA. While its main market is USA< it has also maintained an impressive presence in Canada. Other markets where Costco is found include UK, Mexico, Korea and Taiwan. The brand is investing in e-commerce to achieve fast growth. While it revenue and profits have grown rapidly in the recent years, the road ahead is full of challenges. Apart from the high level competition, there are regulatory pressures and rising operational costs. Costco has never invested in advertising. however, it must use digital channels for better promotions and to grow its market share and customer base. Apart from that it can use technologies like AI to offer better customer service. The brand can slo achieve faster growth by expanding into the emerging markets and extending its line of merchandise.
Sources : Costco Annual Report 2018.