Costco Internal And External Analysis

Costco Wholesale Corporation conducts business in the retail industry. It is a members-only warehouse store with widely varied merchandise including groceries, electronics, and health & wellness supplies, sold in large quantities at a discount. In this paper "Costco Internal And External Analysis," we will research of full activity of the company.

According to the company’s 2017 annual report, there are 746 stores across the world. The company’s largest presence is in America. The USA contains 518 stores, Canada has 98, and Mexico has 37. 546 of the 746 stores have gas stations as well. In 2017 the company had about 90,000 members and had an 87% renewal rate worldwide. Threat of rivalry is high. Costco operates in a consolidated market*. Its key competitors are Walmart (25% market share), Kroger (13%), Safeway (6%), Publix (4%), Whole Foods (2%), and Target (2%) Costco takes up 8% of this market. Other smaller stores make up the other 40%. Demand in this market is both inelastic and stable. Because Costco largely operates as a grocery store, the demand will virtually never cease. Bargaining power of buyers is high. If consumers are not satisfied with Costco, they can easily switch over to Sam’s Club and get pretty much the same experience. If they don’t want to buy large quantities at discount prices, they can get regular sizes of goods at Walmart or Target. This is because there are very low switching costs. Because consumers are the main buyers, it is nearly impossible for them to enter the industry. The threat of substitutes is high. Costco is already behind in comparison to Walmart, who takes up the biggest market share by a wide margin. Because Costco is a “superstore” like Walmart, Sam’s Club, and Target, it has multiple strategic groups. Costco’s strategic groups include food, sundries, hardlines, fresh foods, softlines, and ancillary goods. Like Walmart, Costco’s main strategy is cost leadership. Because you are able to buy goods in bulk quantities, you are able to get a much lower price per unit than if you just bought one of that specific good. One area that Costco has stood out is it’s private labeling under the brand “Kirkland”.

Costco is also impacted by macroeconomic forces along with Porter’s five forces. The first of these is political. Costco has 228 stores operating outside of America. Most of these are in Mexico, Canada, United Kingdom, and Japan. These foreign branches of Costco are subject to political risk. They are also face exchange rate risk and risk of changing tariffs in these countries. The company faces economic factors as well. Now that the US economy is just about out of recession, wages have risen. Due to the rise in wages, people have more money to spend on goods and services that Costco offers. This presents both an opportunity and a threat for Costco. People have more money to spend, but people who still don’t make too much money may rather get low priced goods at Walmart rather than paying for a membership fee at Costco. Technology is another macroeconomic factor. Costco has recently started focusing on ecommerce. This also poses both an opportunity and a threat. The opportunity is that it may be easier to sell goods online. The threat is that this sector of retail is dominated by amazon.

Internal Analysis

Costco’s internal environment allows them to seize opportunities while planning to avoid threats. Costco has a number of strengths. One of these strengths is the price of their goods. Costco operates on a wholesale business model. Because of this, consumers are able to buy bulk quantities of goods for very cheap. Goods that they have private labeling for are sold at even cheaper prices. Another strength is its rapid inventory turnover. Because of the volume it sells goods at, it operates very efficiently. The combination of high inventory turnover and high sales volume keeps its variable costs low while achieving a lot of revenue. Another strength of Costco is its customer service, which will be discussed below as a competitive advantage.

Though Costco has a great deal of strengths, it also has some weaknesses. The biggest weakness it that you have to be a member to shop there. In order to enjoy all the goods and services they offer, you have to become a member. When you show up you have to flash your card to someone. They offer four different types of memberships. Two of these are for consumers and two are business memberships. They are priced at $60 and two of them are priced at $120. The main reason this is a weakness is that it may turn certain customers away. It could appear to some that Costco is only looking for affluent members. It also puts a ceiling on the amount of memberships they can have because even though it can be as low as $5 per month, some people may not want to pay. Another weakness Costco faces is that is sells in bulk quantities. I listed this as a strength because the bulk quantities are priced low, but it can also be a weakness because not everyone needs to get 8 of a single good. It is cheap in terms of price per unit, but you have to buy at least a few units at a time. This could also deter people from shopping there. Rather than buying a 36 pack of coke at Costco, maybe a consumer would rather get a 6 pack at Walmart. According to GuruFocus, Costco’s ROIC is currently 27.76% and its WACC is 9.11%. This has higher than it has been in the last five years. ROIC was at 21.79%, 20.84%, 23.23%, 20.67%, and 22.35% in August of 2013, 2014, 2015, 2016, 2017, respectively. Costco has a distinct competitive advantage when it comes to its customer service policy. When it comes to your membership, you can cancel anytime and receive a full refund. All goods (with the exception of electronics, diamonds, custom products, cigarettes and alcohol) may be returned and refunded at any time following the purchase date. It doesn’t matter if it is five years later. This displays VRIN attributes. This return policy is both valuable, rare, and non-substitutable. It is imitable, but it has yet to be imitated. This is something that differentiates Costco.