Costco External Industry Analysis

After compiling Porter’s Five Forces; buyer power, the threat of substitution and competitive rivalry are all high making these the most critical factors in Comcast’s competitive environment. Customers want the best offer available while paying the least amount possible. The smaller the customer base gives them higher bargaining power to seek increasing offers and discounts. The threat to substitute is high since there are several services such as online streaming, cable and satellite providers that meet similar customer needs. High rivalry among existing competitors will drive down prices for more services and play competitors against each other. Overall, these three forces will affect the long-term profitability of the organization. Nature of the threats

Costco has many risks associated with its financial and operational performance. One of the biggest risks that Costco is facing todays is the competition from other retailers and wholesalers, such as Wal-Mart and Target. Costco compete with its competitors for customers, qualified employees and management personnel, suitable sites and suppliers. The retail business is extremely competitive and continues to get even more completive. Such events as the evolution of retailing in online channels has improved the ability of customers to compare prices and products and as a result enhanced competition. Any significant increases of competition may adversely affect Costco’s financial performance, and make Costco incapable to compete successfully in the future.

Trader Joe's faces several threats to its business, as competitors try to invade the company’s niche and attempt to imitate the company’s core strategies. The supermarket industry itself faces a major threat, as larger chains such as grocery retailers Wal-Mart and Tesco have begun to open small-format stores that mimic the Trader Joe's approach. This invasion results in additional cost pressure for incumbents like Trader Joe’s, which had to let go employees in order to become more cost competitive.

The US warehouse club and superstore industry includes about 20 companies; however the major competitors that Costco faces are Sam 's Club (owned by Wal-Mart), BJ’s Wholesale Club, and Meijer. The club superstore industry is so competitive that these four companies alone hold over 90 percent of sales. These superstores are able to offer competitive pricing because as large companies they can offer a wide selection of products and have purchasing, distribution, marketing, and financing advantages. Due to low margins, the profitability of these individual superstore companies depends on high volume sales and efficient operations. This is where Costco has been able to succeed and set itself aside from the competitors.

Costco is one of the most profitable retail stores in the United States at the moment. This is in spite of the prevailing tough global economic times and stiff competition from stores such as Wal-Mart and Target. Costco, a members’ wholesale retail store, was founded in 1983 in Washington by Jeffrey Brotman, who serves as the current Chairman of the board of directors and James Sinegal, the current company president. Costco has not been spared by the current global economic conditions. They have affected it in a number of ways that have made the company’s management respond in a manner that is meant to ensure that the business not only survives but grows even stronger. First, Costco has taken strong measures to keep

Costco is among the leading global retailers which provide customers a wide range of merchandise, ranging from small to well-known brands. The company began operations in 1983. Over the years, Costco has been a retailer in low cost membership-only leader, in warehouse club of merchandise. Moreover, Costco does not offer frills warehouse business models as its competitors do.  Costco’s major competitors are BJ’s Wholesale Club and Sam Club (Costco, 2010).

According to Deloitte’s 2014 Global Powers of Retailing Report, it identifies the 250 largest retailers around the world based on publicly available data for fiscal 2012 encompassing companies’ fiscal years ended through to June 2013; however, here mainly focuses on the Top 10 retailers’ analysis.

Costco is employing analysts to pinpoint the real reason for dropping sales, but at the time of the article, it can only question the certain operations in comparison to competitors. Rational thinking is based on solid facts where in comparison, bounded rationality is based more on knowledge and experience (Barros, 2010). Data analytics from social media might be able to provide better insight to targeting millennials. Also, sustainability is a very important topic to millennial shoppers yet Costco is an environmental laggard compared with its competitors (Van der Ven, 2014).

Potential new entrants into the market are a low threat for Costco. We have the advantage of economies of scale and having learned by doing. Our economies of scale come from better management coordination of processes, long term relationships with our suppliers, and enhanced employee performance with low turnover (Pearce et al., p. 100). The cost for a new entrant would be significant given the capital investment required to start up a warehouse business. Any

“The key elements of Costco strategy are extremely low prices, a limited selection of naturally branded and private label products, a treasure hunt shopping environment, strong emphasis on low operating costs, and ongoing expansion of its geographic network of store locations.” To provide low prices Costco caps its markup on brand merchandise at 14% compared to 20% to 50% at other supermarkets. The equals out to a sales revenue that only equales several million dollars. This number excludes all other operating factors including the membership fees. Another important element of the strategy is that unlike other retailers they don’t offer window displays or any other thrills with in the stores. They know because of the reputation and because of the value that they offer their customers that the items that they sell offer value over all else.

Costco is the best cost provider in the wholesale club category and the strategy is associated with Costco’s capabilities and resources, which includes; a streamlined supply chain, good supplier relationships, purchasing power, high sales volumes, quick inventory turnover, and excellent customer service. The three vital components of the company strategy are low pricing, limited product selection and high-end products acquired in closeouts and liquidations. While Costco strives to beat the competitors pricing, it also delivers exceptional value in its high-end offerings and customer service, giving consumers more for their money. Given its customers are the most affluent of all the warehouse clubs, with average incomes around $75,000 and this strategy works well for Costco. However, these customers are conscious not only about money but also value for the product, this fact is supported by the members who choose for executive

Costco Wholesale Corporation is in an industry where there are several of dynamic competition from huge chains such as Wal-Mart or Sam’s Club and Target, and yet it could maintain a competitive and profitable stance. Effective strategic planning is essential part in operating any business in relation toward adapting to organizational and operational adaptation to changing markets. Through inquiries, the influence in the recent economic trends, provide strategies that have use or could use in the adaptation to changes in the market related to issues of economic trends, such as recession and economic downturn. Costco Company’s research paper will further discuss the tactics that has

Costco will increase its revenue by 15% in the next five years upgrading to the “Executive” membership existing business and qualified members. The increase in revenue provided by the upgrade is almost 100% profit, and will help to provide a strong incentive to clients to save enough through their benefits and purchases to offset the cost of membership. Given that this is a low-margin business, membership fees can account for about 50-55% of operating profits. Over the past years, the sales mix has shifted towards services and away from department store related hard lines and soft lines. While all categories have shown strong growth over the past decade, the services/other category have been the standout. During the next five years, industry revenue is estimated to increase at an average annual rate of 5.2% to $531.5 billion. Growth will occur most likely because of improving disposable incomes, consumer sentiment and business sentiment, all of which act as key drivers for the retail sector. (See Table 1.)

At the end of 2012, Costco was a successful business, but there are some issues that they would need to deal with. These issues mainly arise from their previous successful ventures as a warehouse wholesale company. The first issue is that Costco has competitors that can actually be and are a threat to their success. Competition allows a company to improve itself and prove its prowess to its customers. However, when a competitor is able to provide the service at a much reduced cost, problems will arise. As for the second issue, it seems that Costco’s efforts to become an international company are moving slowly. They have not reached a point where their US and Canadian warehouses provide a backbone for their finances. Costco’s third issue is that their finances are too reliant on acquiring new members and not on selling their products. If they cannot keep acquiring new members at a steady rate, their financial infrastructure could suffer.

In the article, “The Five Competitive Forces that Shape Strategy,” Michael Porter argues that the five forces are an important element for managers and investors in the business industry. Porter stated that it is important to “understand the competitive forces, and their underlying causes” which many companies will use to determine if they will gain profit or not (Porter 80). Companies determine their profitability of the industry through the level of the force that they face. For instance, when the forces are favorable, most companies will be profitable. Porter gives a detail description of the five forces and explains the importance of each force. The five forces are the threats of new entrants, the power of the buyers, the power of the suppliers, the threats of substitute for products or services, and the rivalry among existing competitors. Porter believes that “a company strategist who understands the competition extends well beyond existing rivals will detect wider competitive threats and be better equipped to address them” (Porter 93). In other words, when strategists understand the different forces it will benefit them to make better decisions and to be ready to face the different challenges between competitors. In the article, Porter’s main goal is to present the importance of the five forces to the audience.