COSTCO.COM CASE STUDY
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Costco.com Case Study
Debra Zides
MET MG 448
E-commerce & Web Design
COSTCO.COM CASE STUDY
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Table of Contents
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Abstract
3
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Introduction
4
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Costco Background
4
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Costco E-commerce Business Analysis (SWOT)
8
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Strategic Management Factors
11
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Role of E-Commerce in Creating and Maintaining Competitive Advantages
12
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Conclusion
13
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References
15
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Abstract
This paper explores the evolution of Costco’s business strategy from its historically successful
Brick-and-Mortar retail chain into the Costco.com e-commerce landscape, thereby ensuring the
company maintains its competitive advantage in the global market.
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Introduction
This is a case study on www.costco.com; the e-commerce component for the wholesale
giant, Costco Companies, Inc. Unlike the majority of other companies identified in this case
study assignment (Netflix, Facebook, Craigslist, etc.), Costco has a successful pre-existing brickand-mortar (B&M) component. While discussing Costco.com, it is important to recognize that
there is only a single corporate shareholder model, a single Board of Directors, a single CEO –
all who are concerned with the bottom line sales and profits for the overarching company in the
retail market. In other words, the net sales must be considered in entirety between B&M and ecommerce. Thus, the analysis for the e-commerce business model is more about ensuring Costco
maintains its overall market competitive advantage by leveraging on line sales to access new
markets. Revising the Costco business model to include an additional e-commerce component
will require understanding a new set of the 4Cs as well (customer, competitor, complementor,
supplier), otherwise, Costco will not succeed in the on-line landscape.
Costco Background
What is the business?
Costco Companies, Inc. is in the wholesale retail market, originally starting as a B&M
chain of warehouses in 1983. The company began operations out of Seattle, Washington. Ten
years later, the company merged with the original pioneer wholesale membership firm, The Price
Company (started in 1976 in San Diego, California). Costco is currently ranked #18 by Fortune
500 (Fortune 500, 2015). In 2014, sales topped $110B ($2.06B net income) shareholders saw
$584M in dividends and $334M in share repurchases (Costco Wholesalers, 2014). As of the
Costco 2014 Financial Report, there are 671 warehouses in the U.S., Canada, Mexico, U.K.,
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Japan, Korea, Taiwan, Australia, and Spain. Costco does currently have an on-line component
which makes up 3% of the company’s net sales. The e-commerce capability is currently
available in the U.S., Canada, U.K., and Mexico.
As a B&M company, Costco’s primary competitor has historically been Sam’s Club due
to their similar business models. Other B&M competitors have included Wal-Mart, Target, and
Kroger. However, entering the e-commerce market, Costco will face new head-to-head
competition with the on-line giants such as Amazon.com.
Who is the customer?
The Costco customer is the retail shopper for both household and businesses. The
company is a membership-based retail chain. There are currently 76 million Costco members
worldwide (Costco Wholesalers, 2014). Members must be over the age of 18. Costco manages
customers based on three levels of memberships:
Gold Star Membership: for individuals/households for those wanting to purchase
products mainly for a household ($55/year in U.S.)
Executive Membership: Costco’s highest level of membership. Includes 2% Reward (up
to $750 per year) on most Costco purchases, as well as additional benefits and greater
discounts on their suite of services. ($110/year in U.S.)
Business Membership: available for business owners and managers, allows the purchase
of products for business, personal and resale use. Business members may also add up to
six additional card holders to their account for an additional $55 each, includes household
membership. ($55/year per card for business in U.S.)
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It is important to note that members are allowed to bring up to two guests with them into the
warehouses. Non-members may not purchase items, only the card holder. This is critical
because based on personal experience, when I bring a non-member with me into Costco, they are
typically responsible for increased purchases (i.e., “Hey Deb, buy this for me…”). Costco does
not maintain a financial metric as to how much of the net sales is generated by guests, but it is
not unreasonable to assume that this needs to be a factor as Costco considers its e-commerce
strategy. The question will be how to enable members’ guests similar opportunities in the online arena in order to increase sales?
What does the customer value in the Market?
Ken Krogue from Forbes best sums up what the Costco customer values in the market, “I
love Costco. I know I save money, but I can’t shop without spending three hundred dollars or
more. I trust their value. They offer high quality at a low price, with fast and immediate
access.” (Krogue, 2015) Krogue further articulates his perspective explicitly addressing the three
parts of his value equation: Quality, Price, and Speed (Krogue, 2015). It is the balance of these
three components that the Costco customer values.
What is the value proposition of the company?
Costco’s value proposition is, “continually providing goods and services at the lowest
prices” (Costco Wholesalers, 2014). Costco has an extensive partnership network across
manufacturers and shippers at its foundation. By identifying suppliers and complementors as
Costco “partners”, they can blur the lines and negotiate low pricing to meet the low pricing goal.
The business strategy has always been about “no frills” to enable the company to keep expenses
down. Costco ensures this balance by purchasing quality products in volume (less product brand
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options, but more volume of the quality brands it does carry).
Additionally, Costco strives to keep business operating expenses
down. As depicted in the Figure 1 to the right, Costco has a
financial metric to track its selling, general, and administrative
expenses (Costco Wholesalers, 2014). Having the metric enables
the company leadership to understand how much cost needs to be
passed along to the customer. By keeping this number low, it
Figure 1
enables Costco to keep overall prices low, further ensuring it can
beat competitor pricing strategies. Costco’s supply chain business model also allows for
expedited product purchasing. The company maintains backup suppliers in case a single supply
line is disrupted. Their depot concept ensures management of pallet deliveries to the worldwide
warehouses.
To note, in reviewing the 2014 Financial Report, Costco reports on a myriad of metrics in
both table and graph forms to provide the shareholders with a total company outlook. Of all the
opportunities to present highlighted data,
e-commerce is NOT one of those top
metrics. However, Costco does maintain
an Average Sales Per Warehouse metric
(Figure 2 to the right). Business leaders
recognize that in order to understand an
Figure 2
issue, it must be tracked. So, it is clear
from the lack of e-commerce metrics in the 2014 report, Costco has not historically valued the ecommerce portion of the retail chain. If Costco truly wants to incorporate e-commerce into the
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value proposition part of the business operations mindset needs to change and the company must
begin to track on-line metrics beyond the ambiguous metric, percent of net sales.
Costco E-commerce Business Analysis (SWOT)
As previously stated, Costco has already begun its entrance into the e-commerce market,
providing Costco.com websites in a subset of its global physical market locations. Despite the
lack of historic metrics and lack of prioritization, Costco does currently recognize the need to
ensure successful integration of e-commerce into the overall business model with this nod to ecommerce in the 2014 Financial Report:
“Our e-commerce business grew close to 20% in 2014, to nearly $3 billion in sales. Our Mexico website went live in
2014, adding to our online sites in the U.S., Canada and the U.K. We plan to continue the expansion of our ecommerce business into other countries where we have operations. The lines between online and brick-and-mortar
stores are blurring as multichannel retail is evolving as part of the everyday retail environment. Many of our
members are well-traveled digital shoppers who research product features, check official reviews and conduct price
comparisons online with the use of computers, tablets and mobile devices. We see this as both a challenge and an
opportunity, and continue to seek ways to enhance our website and mobile applications to better meet the needs of
our members. This year we improved the navigation, checkout performance and search engine optimization of our
web sites. We also relaunched our mobile site and apps for smartphones and tablets; and integrated several of our
inline and online buying teams to better leverage our combined buying power, get more key brands online, expand
our item selection, and provide even greater value to our members. Additional online capabilities are also being
evaluated. For example, we are partnering with Google Express in several markets to test delivery of online orders;
and we are working with Alibaba, on their Tmall site, to provide Costco merchandise to online shoppers in China.”
(Costco Wholesalers, 2014)
This paragraph is the predominant e-commerce information “nod” provided in the 76-page
report. If Costco is truly serious about expanding its on-line presence, the company must
explicitly define the priority and dedicate more resources to establishing and tracking the
activities. Here are the deconstructed SWOT elements for Costco entering the e-commerce
market as Costco.com based on its historical emphasis and experience in the B&M retail market.
Strengths of Costco in implementing an e-commerce business model
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Can Leverage the existing, globally recognized Brick-and-Mortar Costco brand
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Existing, limited on-line presence (Costco.com in some markets)
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Pre-existing health & wellness customer base familiar with the trend towards on-line
prescription drug purchasing (optical, hearing aids, prescription/OTC medications)
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Aligns with Costco’s sustainability vision; providing an energy-efficient,
environmentally-friendly means to expand customer outreach

Aligns with Costco’s “efficiency and cost control” mindset

Reduces handling of merchandise by another step – already an activity Costco knows
how to manage
Weaknesses of Costco in implementing an e-commerce business model

Misreading the on-line customer wants/needs by assuming they are the same types of
customers who use B&M (older customer base not comfortable with on-line
purchasing like the younger generations)
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Failing to translate the “no frills” physical warehouse into a “no frills” counterpart ecommerce website presence that still attracts customers
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Since only 3% of 2014 sales were on-line, current Costco staff may not know how to
effectively utilize e-commerce opportunities
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Historically a Brick-and-Mortar focused company; 140,000+ employees, which will
take substantial training to ensure e-commerce vision is understood at the lowest
levels

Data breach could result in a loss of Consumer “Trust” whereby Costco would lose
customers if they find their personal data has been stolen because customers would
then go to a competitor that has not had the issue
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Data breach could result in loss of Costco resources (financial cost to pay to find a
solution and human capital loss due to company resources being redirected from
current job to fix the data breach issue)
Opportunities facing Costco in implementing an e-commerce business model

Enter new locale markets faster (i.e. countries) because do not need to build physical
warehouses (although still need to address the Depot portion for e-commerce)

Target the younger generations comfortable with on-line services
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Expand into new markets with limited resources
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Increased profit for employees and shareholders

24/7 shopping option (versus current B&M limited 69-hour store week)
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Avoid challenge in acquiring property to build/lease new warehouses
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Enables addition of short-shelf-life products by reduced logistics steps
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Utilize e-commerce for “test market” of new products (don’t have to place in 663
stores, can start with limited inventory to see how it sells, then determine if the
product should be included in the B&M facilities)

Entice higher membership fees by leveraging shipping options to enhance various
membership plans (currently $55/year basic & $110/year Executive); similar to an
Amazon Prime membership solution
Threats facing Costco in implementing an e-commerce business model
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Direct competition with other existing e-commerce retailors (Amazon.com)

New e-commerce retailors entering markets
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Loss of the non-members to competitors who do not have membership requirements
(who did add to sales in the B&M stores but cannot make on-line purchases)

Shifts focus from Costco’s successful B&M activities disrupting established external
partnerships (i.e. American Express partnership ending 1 Jan 2016, but Sam’s Club
jumping on the termination and adding capability in their on-line purchase methods)
Strategic Management Factors
Why should Costco apply the e-commerce business concept into its business and management
strategies?
Costco needs to boost its e-commerce business concept in order to maintain its
competitive advantage in the wholesale membership market industry. The costs and timelines
for creating B&M warehouses in new countries make that a defunct means to be first to market.
Due to the low barrier to entrance into the retail market, companies need to focus on securing
customer loyalty starting with first-to-market. The threats that loom due to failure to embrace ecommerce as a key tenant of their business model outweigh any potential threats to entering the
market space.
Today, the Costco primary rival, Sam’s Club, is already moving forward with enhanced
e-commerce activities. Sam’s Club is well ahead of Costco and has recently unveiled its new
service, “Club Pickup”, which allows customers to, “…use the new service to place orders
online or through an app, select the location and time they want to pick up the order, and get
an email or text alert when the order is ready.” (Wahba, 2015) Sam’s Club is utilizing ecommerce to improve customer’s convenience opportunity – faster service, increased product
options, 24/7 shopping, etc. Costco needs to understand this threat and create a strategy to
overcome this competition.
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Sam’s Club is not the only competitor, as new companies are continually entering the
global market – all competing for the loyalties of a limited number of customers. There is a very
low hurdle for a consumer to switch from using Costco to another competitor. A low-cost
annual membership can readily become a non-factor to a consumer if they feel they will gain
more value from a competitor than the value of the Costco membership. In short, the global
market is already on the e-commerce train. Costco needs to decide if it wants to pivot current
strategy to prioritize securing market share, or perish as a company over the coming years.
Role of E-Commerce in Creating and Maintaining Competitive Advantages
Costco.com e-commerce can resolve several problems for Costco spanning the full
spectrum of challenges from declining member purchases to the challenges of breaking into
foreign markets. This spectrum addresses the numbers and types of customers within the global
marketplace. Implementing e-commerce activities ensures Costco’s continued competitive
advantage and presence in the ever-changing external global retail environment.
Costco’s business model is founded on membership. Currently, the membership renewal
is 91% (Costco Wholesalers, 2014). However, the predominant membership comes from an
aging population of baby boomers (Dalavagas, 2015). According to Dalavagas’ SWOT analysis,
“While Costco has a fairly broad customer base, it is more skewed toward older baby boomers.
As these customers age, they tend to spend less. The company needs to try and attract younger
customers, including Generation X and Y, who are savvier e-commerce shoppers.” (Dalavagas,
2015) If the baby boomers spend less, the Costco net sales will decrease as that portion of the
membership cuts down on its household purchases. A drop in sales is a red flag to the investor
community, which could rattle the Costco share values and lead to reduced consumer trust,
which competitors will be quick to attack and capitalize on. To resolve the membership issue,
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Costco must incorporate the e-commerce strategy to attract the younger customers who will have
strong buying needs in the future in order to make up for the losses of those from the baby
boomers as they transition out.
Costco is also looking to expand into new markets in foreign countries. The problem
with expanding into these markets are the nuances of building the actual warehouses. Every
country has different land leasing/purchasing/building laws. E-commerce activities could reduce
the need for a physical footprint, thereby expediting access to the new markets with reduced
resource requirements. Less money is needed if less warehouses need to be built. Less time is
needed to establish a website than building multiple warehouses, expediting access to the market.
Finally, less human capital is needed to build a website than to negotiate the B&M steps. All this
translates into faster sales and more money back to the company and the shareholders.
Costco is already moving forward with the initial steps to secure footing in e-commerce.
The business model just needs to ensure it effectively articulates the waterfall linkage from value
proposition to execution of specific e-commerce activities.
Conclusion
Costco is on the right track by identifying the need to integrate e-commerce into its
business model. However, this is not as simple as just building some Costco.com websites in
various foreign countries. There must be a concerted, explicit effort by the Costco leadership to
establish e-commerce as a specific pillar of the business strategy. From there, the company must
extend resources to create a business plan stemming from analyzing the SWOT. It is also
imperative that Costco recognize the 4Cs are not 100% identical between the B&M environment
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and the e-commerce environment. Failure to recognize the difference could result in failure to
create an effective market strategy.
The initial SWOT analysis tells us Costco has great strength to leverage its brand name,
its current customer base, and its initial on-line presence. Additionally, many e-commerce
activities already align nicely with current business operations priorities such as sustainability.
However, these strengths may also lead to potential weakness, because leaders could make
incorrect assumptions about the e-commerce customers, the competitors, and the data breach
risks in on-line purchasing. Externally, the opportunities for Costco.com include quickly
expanding into new markets, gaining new customers, and increasing net profits for
investors/shareholders. Costco must take care to consider the threats associated with branching
into this on-line market space – specifically going head-to-head with the global leader in on-line
retail. Failing to have a solid strategy could be fatal and seasoned competitors will take
advantage of Costco’s missteps.
The primary two competitive advantages Costco will gain from implementing/enhancing
its e-commerce business will be securing the next generation of shoppers and increased global
presence. All these feed into the bottom line financial result of net sales and net profits. With
increased profits, Costco can leverage its buying power and continue to create new industry
partnerships to bring the lowest cost, quality products quickly to the global market. Just as the
Costco vision maintains, “Continually providing goods and services at the lowest prices.”
Costco will ensure its ability to continue to meet the vision well into the future.
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References
Costco Wholesalers. (2014, December 19). Costco Wholesalers FY 2014 Annual Report. Retrieved from
http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-reportsannual
Dalavagas, I. (2015, February 9). SWOT Analysis: Costco Wholesale Corporation. Retrieved from Value
Line. Smart Research. Smarter Investing.:
http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__Costco_Wholesale_Corporation.
aspx#.VgBlbdFRGpo
Fortune 500. (2015, September 22). Fortune 500 . Retrieved from 2015 Fortune 500:
http://fortune.com/fortune500/costco-18/
Krogue, K. (2015, March 26). Forbes.com. Retrieved from What Is Value? The Costco Value Proposition:
http://www.forbes.com/sites/kenkrogue/2015/03/26/what-is-value-the-costco-valueproposition/
Wahba, P. (2015, June 4). Sam's Club overhauls pick-up service with eye on Costco. Retrieved from
Fortune 500: http://fortune.com/2015/06/04/sams-club-costco-2/