Case Analysis #1 – Costco Wholesale in 2018: Mission,
Business Model, and Strategy
Costco Wholesale was founded by Jim Sinegal in 1983, who took a small start-up company to the third
largest retailer in the United States in 35 years (C-17). Costco also became the seventh largest retailer in
the world in those 35 years. Costco’s strategies are unique, and they are what helped Costco reach
heights of success (C-17). I have been appointed by MGMT3015 at ANU to do an analysis on Costco’s
strategy and give implications for future ventures. To achieve this, Costco’s SWOT analysis will be
discussed in detail using models from the textbook by Thompson and Colleagues (2009).
Strengths
The business model framework is considered the outline that many companies use to successfully deliver
products that are valuable to the customer (Thompson et al., 2009). This framework encompasses the
profit formula (denoted by P-C) and the Customers Value Proposition (denoted by V-P). Costco’s strategy
relates to this model as they are adamant to give their customers the most value possible by shopping
there (C-21). Costco deliberately used a low-cost provider strategy to ensure that customers get
unbeatable prices (C-21, C-24). They set their cost at a 14% profit margin, compared to the standard 25%
in the market, to give customers unbeatable prices (C-22). For examples, jeans that normally retail for
$50 were sold by Costco at $29.99 to attract customers and “create a riot” (C-22). By doing this, Costco
hoped to attract new members, and loyal customers, which is evidenced by their membership revenues.
Costco’s strategy to come out profitable is through their membership fees (C-21). Memberships are
critical to Costco’s profit-formula as they normally equate to more than the company’s net income in a
fiscal year. For example, in 2017, Costco’s membership fees were $2853 million, whereas the net income
was $2714 million (Exhibit 1, C-19). Hence, the membership model becomes a critical part of Costco’s
profit formula. Costco has attracted loyal members as their membership renewal rates were 90% in the
US and Canada, and 87% for their warehouses around the world (C-28). This can be in part due to
Costco’s low-cost provider strategy as this strategy is most used to gain competitive advantage and build
customer loyalty (Thompson et al., 2009) and Costco’s customers are regularly choosing Costco over their
competitors.
Weakness
Costco has a low product selection, they offer 3800 items to customers on a regular basis and 900 of
those are constantly changing (C-21, C-22, C24), they call this a “treasure-hunt” style of shopping, which
centres around not having constant products, and having less of a selection to choose from. Customers
are not given options in the brand or the quantity of the product. Some customers might be deterred by
the large quantity of the items, but Costco executives believed that 8 out of 10 people are likely to buy in
bulk (C-23). Costco calls this the “intelligent loss of sales” as customers are in essence spending more
because they are buying bigger products. If Costco limits its choices, customers will be forced to buy in
bulk and in turn, it will be beneficial for Costco in the long-run.
On the other hand, Sam’s warehouse offered 4000 items in their store and another 59,000 items on their
website (C-34, C-35). BJ’s Warehouse, another competitor, stocked 7200 items, all significantly more than
Costco’s offerings. We can use the five forces framework to analyse why Costco’s customers would be
more likely to switch to a brand with more offering (Thompson et al., 2009). The five forces framework
denotes the competitive pressures arise as a result of competition from rival sellers, potential new
entrants, substitute availability, supplier bargaining and buyer bargaining (Thompson et al., 2009). To
look at the weakness of a small product selection, we will consider substitute availability. This
competitive pressure denotes that if there is a better substitute available elsewhere, and customers have
low cost of switching providers, they will (Thompson et al., 2009). Hence, having a small product
selection, while Costco’s competitors operate near the retail warehouses (C-37), Costco is at risk of
loosing consumers to BJ’s and Sam’s warehouse. Additionally, the membership fees for Sam’s club and
BJ’s are much less than Costco’s (C-36, C-37), hence, consumers would actually benefit from switching
providers. The consumers would not only save on their membership fees, but they would get access to a
much wider product range.
Opportunities and Threats
The SOAR framework depicts four possible moves by rivalling companies based on Strategy, Objective,
Assumptions and Resources and Capabilities (Thompson et al., 2009). It is important for Costco to
consider the strategies of Sam’s club and BJ’s to guide their own strategy. Costco does not participate
much in marketing, they rely on their “treasure-hunt” style of shopping to entice customers to come into
the warehouses regularly (C-25, C-26). Costco sometimes sends newsletters to their subscribed members
via email; however, they do not have a large marketing team that focuses on attracting new business (C26). I am going to analyse the strategy aspect of both BJ’s and Sam’s club to understand what
opportunities Costco should invest in.
BJ’s and Sam’s Club have a considerable online presence. Where BJ’s participates in a lot of marketing
campaigns and promotions to promote new warehouse openings, to increase customer awareness of its
Clubs, locations, and products they offer (C-39). On the other hand, Sam’s club has an online presence in
the form of their ecommerce store (C-35). They have 59,000 items available online (C-35), which gives
customers the ease of shopping from their own home, and a vast array of products to choose from. BJ’s
and Sam’s club strategy is very public heavy, and they are dominating their online presence. This gives
Costco an opportunity to venture into the online market and consider having a marketing presence to
attract more customers.
Costco stores attract a very niche demographic of customers, as Costco Warehouses are generally located
in the suburbs, far from busy malls (C-28). This attracts customers with a family or elderly customers, as
that’s the type of profiles that reside in suburban neighbourhoods. In contract, BJ’s strategy is to have
stores and warehouses in the suburbs like Costco (C-37, C-39) but also have stores in malls, that were
easy to access from the city (C-39). This enables BJ’s to attract a wider demographics of customers. In this
technological day and age, customers prefer to have ease of access. According to the Five forces
framework mentioned before, a buyer has a lot of impact on the company’s strategy (Thompson et al.,
2009). This means that the company should market to the type of buyers they want to attract, because if
they don’t then the buyers have the freedom to switch providers. BJ’s market to a wide demographics
and are accessible to both the suburban residents as well as those in metropolitan areas (C-39). This can
be a threat to Costco, as they are missing out on a wider demographic of customers by only focusing on
the needs of one kind such as families, elderlies, and small business owners.
Both examples mentioned above can be translated as an opportunity or a threat for Costco. If Costco
does not take the opportunity to become more accessible or create an online presence, its competitors
will surpass the brand. This is a threat to the company as it would lose customers. These customers are
an important aspect of Costco’s profit formula as membership fees play a significant role in Costco’s
balance books. Therefore, if Costco takes the opportunity depicted above, then Sam’s Club and BJ’s might
not be considered a threat in the Company’s future based on these matters.
SWOT Summary and Implications
Strengths:
 Low-cost provider
 Attracting loyal customers and
membership renewal rates.
Opportunities
 Online/marketing presence
 Accessibility
 Increase product selection
Weakness:
 Small product selection
Threats:
 Lack of Costco’s online presence
compared to competitors.
 Accessibility of competitors to attract a
more wider customer demographic.
Costco is strong in providing consumers with a low-cost option. By doing this, the customer value
proposition increases in their business model, which in turn attracts a loyal customer base and return
consumers. However, Costco’s low product selection might deter customers from shopping at Costco,
especially because competing companies have a much larger product catalogue to choose from.
According to the five forces framework, customers are more likely to change providers if there is a better
substitute availability elsewhere. This can also be an opportunity for Costco to increase their product
offerings, or it may turn into a threat of loosing the loyal customer base Costco has set up.
Costco has limited market presence and does not trade with ecommerce stores. It’s competitors so, and
their strategy might be more accessible to customers, and they are likely to choose Sam’s club or BJ’s
over Costco. Additionally, Costco warehouses are in suburban areas, whereas BJ’s are also located in the
mall. By having a specific type of location, Costco is missing out on a more diverse demographic of
customers. This is an opportunity for Costco to start building a marketing strategy and build an online
brand to target a more varied audience.
Overall, this analysis has uncovered ways that Costco could offer more products to attract more
customers, which is the heart of Costco’s business. If Costco continues to expand in departments that its
competitors are in, then it can win the largest market share and continue to maintain competitive
advantage.
References
Kellett, P., Thompson, A. A., Strickland, J. A., & Gamble, J. E. (2009). Crafting and Executing
Strategy: The Quest for Competitive Advantage.