LWL | Analysis of Costco's Business Model
Abstract
This research paper analyses the different aspects which make up the business model of Costco Wholesale Corporation. During 2014-2024, Costco's success during this decade can be attributed to their unique business model with Costco's mission statement and their ‘membership-only warehouse club business model serving’ as the skeleton of the model. The study employs various business tools, including Porter's Five Forces, Ansoff Matrix, and Porter's Generic Strategies, to assess both internal and external factors contributing to Costco's success. The results of this research paper showcase Competitive rivalry ,Bargaining power of buyers /consumers and Threat of substitutes or substitution being the top priority of costco ( according to porter's Five forces analysis) with the Bargaining power of supplier being the least of their concerns. The generic strategy of Costco is their cost leadership( low costs, low prices) with an element of differentiation through memberships that makes them stand out amongst the highly competitive retail market. Market penetration and market development are their key focuses for this fiscal year as shown through savings offers and discounts as well as newly opened international branches in Jiangning, China and Zaragoza,Spain and 3 upcoming japanese branches. Costco puts an emphasis on promotion and pricing in particular among the marketing mix along with place. These different factors of their business model have enabled them to have a steady and fast growth rate ( 7.75% increase year-over-year) even during times of recession/stagflation.
Table of Contents
Introduction
Goals and significance
Methodology
Porter's Five Forces Analysis
Porter's generic strategy
4 ps Price mix
Conclusion
References
- Introduction
Costco Wholesale corporation is a MultiNational Enterprise(MNE)with 884 stores worldwide as of 2024. Founded on 15 September 1983, Kirkland, Washington, United States by Jeffrey H. Brotman and Jim Sinegal, Costco is considered to be one of the most financially successful corporations in the world, with it being ranked 11th in the Fortune 500 companies 2024 with a market capitalization of 395.74B( as of August 2024) as well as a 7,75 increase in revenue . The industry it operates in is the retailing sector as the 3rd largest retail business in the global economy as of 2024. The product line of Costco ranges from home appliances,jewellery and mattresses to computers,TVS and even rentable cars. The growth strategies implemented have started to come to fruition in recent years as the company's revenue in the last twelve months went up to $253.70B, up 7.75% year-over-year. In the fiscal year ending September 3, 2023, Costco had annual revenue of $242.29B with 6.76% growth.’-(stockanalysis.com). This is a result of their unique business model, attracting a large demographic of consumers through bulk-buying(economies of scale) and storing in large warehouses (which keeps costs low for the business) and selling at narrow profit margins. However these narrow profit margins are compensated through Costco's membership plan of 65 dollars, utilising a ‘membership-only warehouse club business model’(-cascade strategies), which generates the bulk of their profits ‘$4.6 billion last year in membership fees -- equal to about 73% of its profits.’- ‘the Motley Fool’.
The topic that will be researched on are ‘ the different aspects of Costco's business model and the success brought from each aspect of the model’
- Goals and significance
The goal of this research paper is to evaluate Costco Wholesale Corporations(Costco) success with their unique business model within the last 10 years ( 2014-2024) . This will be done through analysing Costco's business model through 5 key business tools , Ansoff matrix, Marketing mix,Market segmentation,Porter's 5 forces as well as Porter's generic strategy. These tools will help analyse the aspects of Costco's business models individually and find out how the model contributes towards Costco's financial success. This study is important to understand the competitive nature of business, specifically the retailing industry and understand how business models play a crucial role in the overall success of a business. In this research paper, we will be analysing how exactly Costco has achieved such astronomical growth in recent times ( 2014-2024) as well as understand the different components that make up Costco's business model and how each of them contributed to the financial success of Costco.
- Methodology:
The methodology of this paper will include evaluating Costco's business model using 4 business tools:Porter's 5 force, Ansoff matrix, Porter's generic strategy and Marketing mix
to analyse the impact of the different aspects of Costco's business model on their recent success.
Costco's mission statement
All business models revolve around a mission statement as their core objective and supplementary strategies being used to achieve the said mission statement.
Costco’s Mission Statement and Code of Ethics-( adopted from Costco)
‘Here at Costco, we have a very straightforward, but important mission: to continually provide our members with quality goods and services at the lowest possible prices. In order to achieve our mission, we will conduct our business with the following Code of Ethics in mind:
- Obey the law.
- Take care of our members.
- Take care of our employees.
- Respect our suppliers.
If we do these four things throughout our organisation, then we will achieve our ultimate goal, which is to reward our shareholders.’
- Costcos Porter's 5 forces
Fig.1 Porters 5 forces
Adopted from Platinum pro
Porter's Five forces, Published on Harvard Business Review in 1979 by Michael Porter, analyses the industries Competitive Forces. These 5 forces namely Competition, Supplier Power, Buyers Power, Threats of New Entrants and Availability of Substitutes. In this research paper I will be conducting an analysis on the retail industry in specific, which Costco is a part of. Porter's five forces in this
research paper will be will be broken down into the specific factors related to the force( the pressures/ factors which impacts the competitiveness of a company in an industry) and be given a rating per each factor as well as an overall rating of each force ranging from High,Moderate or Weak .
Costco Competition/Competitive Rivals
Industry growth- ‘Retail Industry Market was valued at USD 21237.64 Billion in 2022 and is projected to reach USD 41368.44 Billion by 2030, growing at a CAGR of 7.69% from 2023 to 2030.’( verifiedmarketresearch.com). The industry growth for retailing on a global scale is
moderately high as even though it may not compare to fast growing sectors such as IT or renewable energy, due to the large size of the industry itself the expansion is sufficient enough to consider it a stable and significantly growing industry.
Force- Moderate Force
Number of competitors- Due to Costco being involved in various retail sectors, the competitors it faces are extremely high, with their main competition being Retail giants such as Amazon, walmart, Target, Whole Foods, Home Depot, carrefour, Best Buy and Aldis along with numerous mid sized and local stores.
Force- High force
Similarities in what's offered-Costco's products and services themselves are homogenous to other firms' products in the industry.
Force- High force
High exit barriers- Costcos Barriers to exiting the retail industry are high as Costco has grown and diversified into different sectors of the retailing industry. In addition to this the fixed costs of trucks and warehouses make it difficult for Costco to exit the industry.
Force- High force
Overall Competitive force- High
Supplier power
Number of suppliers- the population of merchandise sellers is high in Costco, thus any individual supplier won't be able to easily impose demands on Costco as their absence won't affect the company as much.
Force- Weak force
Switching costs- for retail giants such as Costco, there is heavy competition to become a supplier for Costco and thus switching costs for the corporation are relatively low as it won't be very time consuming or expensive to switch suppliers as their product line is not defined by unique products but rather large availability of a variety of products.
Force- Weak force
High supply and low forward integration - due to there being a high supply of products, suppliers have even less power over Costco. Suppliers also have low forward integration and have limited control over their products in Costco Warehouses.
Force - Weak force
Overall Supplier power- Weak force
Buyer power
Switching costs- the costs of switching for consumers are low as there are numerous businesses offering the same products as Costco.
Force- High Force
Number of buyers- a large number of buyers across a large demographic shop at Costco as it is an already established business with low costs
Force- High force
Availability of substitutes- due to the large amount of substitutes consumers have a great amount of power as they can switch easily due to the low costs and still find a large number of substitutes available( same product essentially)
Overall Force-high force
Threat of Substitutes or Substitution
Customer willingness to go elsewhere- customers are able to go elsewhere due to the large number of substitutes Costco's products have in hopes for a better deal.
Force- High force
Availability of close substitutes- substitutes which are similar or close in nature to that of Costcos are available due to the relatively homogenous products Costco sells
Force- High force
Overall force- High force
Threat of New Entrants
Economies of scale- Costco benefits from large economies of scale, specifically purchasing economies of scale (bulk buying).
Force - weak force
Shoppers’ low switching costs- low switching costs makes it easier for consumers to switch from Costco to other businesses
Force- high force
Barriers to entry- barriers to entry while considerably low for the retail industry, require important documents and considerable fixed costs making it somewhat difficult to enter the industry Force- moderate force
Overall force- Moderate force
|
Porter's Five forces Strength of force |
|
Competitive rivalry High |
|
Bargaining power of buyers /consumers High |
|
Bargaining power of suppliers Weak |
Threat of substitutes or substitution High
Threat of new entrants or new entry Moderate
Porters five force analysis on Costco shows that the corporation faces high difficulties in 3 of the 5 forces, significant difficulty in 1 of the 5 forces and no difficulty in 1 of the 5 forces, where threats of substitutes,competitions and consumer buying power is high whilst new entry threats is moderate with supplier bargaining power being the weakest force and thus the lowest concern.
5.Ansoff Matrix Analysis
Fig.2
Adopted from Strategic coffee
The Ansoff's Matrices is ‘a strategic planning tool that provides a framework to help executives, senior managers, and marketers devise strategies for future business growth’.(-wikipedia)
Developed by russian american igor ansoff, it looks at 4 different strategies for growth with varying risks, namely market penetration, market development, product development and diversification
Market penetration- Costco's market penetration strategies revolve around their membership model. Members are retained and gained through Costco's membership model which allows access to their warehouses with discounted goods for the price of 65 dollars ( as of 2024) for their gold star and business memberships and 130 dollars for their executive membership. In addition to this Costco entices customers with appropriate benefits to each plan such as holiday savings offers, resale eligibility and discounts on select Costco travel services. This is the main strategy used by costco among the others in the ansoff's matrix and is the least risky to implement as it involves ‘penetrating’ the existing market with existing products .
Market development-Market development of Costco, entering a new market with existing products, includes expansion into other countries and ‘markets’ outside of the United states. Some of the most recently established Costcos are in jiangning,China and Zaragoza, Spain with 3 upcoming Costcos in japan. These warehouses will all include the same selection of products( as stated in product mix) as in the usa. This is moderately risky as the taste of individuals in different countries have different preferences and tastes; however for Costco, as the products they sell are relatively homogenous across the globe, the risk is effectively negated as consumers all across the globe use essential products.
Product development Costco's new product- as of 2024 Costco's food court would be undergoing a change adding numerous items to their warehouses with the addition of sushi in some
storefronts, chocolate chip cookies and chocolate ice cream. In addition to this Costco will be remodelling their app to make it easier to switch between online and in person purchasing. Diversification- while not being a primary focus for Costco, diversification of location and addition of new products are being conducted in tandem with each other. In 2024 specifically Costco has started selling Swiss crafted gold( implemented october 2023) and will carry it into their upcoming in Okinawa Nanjo,Ogori and Higashiomi locations in Japan, imposing a maximum of 5 pieces of gold per membership available through pre-ordering online for the gold and getting it shipped or picking it up storefront.
- Porter's Generic Strategy:Costco
Porter's generic strategy is split into 3 main competitive strategies: focus, cost leadership and differentiation. Costco wholesale corporation primarily falls under the cost leadership strategy as their business model relies on their purchasing economies of scale( bulk buying) capabilities and large warehouses. This in turn allows Costco to keep their average costs low ( due to low transportation and storage costs) and allows them to keep prices low for consumers, making their store seem more appealing. The bulk of the revenue made at Costco is made through their large quantity of sales due to them selling quality products with extremely narrow profit margins, allowing them to create a loyal consumer base ( as shown through their membership renewal rate of 93 percent as of 2024). In addition to this there is an element of differentiation for Costco which sets them apart from the rest of their competitors is their membership model. Despite being a warehouse retail business with a large amount of sales, the bulk of their profits, as said prior in the research paper, come from their memberships. This membership model is what allows Costco to
sell products for cheap and also allows for discounts and savings offers which prove as an incentive to shoppers
- 4 ps Market mix
Product mix in Costco's 4ps Marketing mix
The 4 ps marketing mix was created by marketing professor E. Jerome McCarthy and revolves around 4 factors which are crucial to any successful marketing strategy. These factors include Product, Price, Place and Promotion.
- Appliances
- Auto & Tires
- Baby, Kids & Toys
- Clothing & Handbags
- Computers & Printers
- Electronics
- Furniture
- Grocery, Floral & Pets
- Holiday, Gifts & Tickets
- Home Improvement
- Health & Beauty
- Home, Kitchen, Bed & Bath
- Jewelry & Watches
- Office Products
- Patio & Outdoor
- Sports & Fitness
- Travel & Luggage
- Photo Center services
- Optical services
- Hearing Aid Center services
- Gasoline
- Business Services
- Home Services
- Life Services
- Adopted from Andrew Thompson 4ps marketting
Costco's product line, although limited in comparison to other retailers, goes over a large variety of goods and services allowing them to gain competitive advantage due to their “one stop shop” nature. Due to their growing line of products, shown through their recent diversifications as well as diversification to meet growing demands and wants. The extra services offered by Costco apart from their base warehouse products can include, photo printing services, life insurance and more according to Andrew Thompson(2024)
Price in Costco's 4ps Marketing mix
Costco utilises the market orientation price strategy, which sets prices based on the conditions of the market. The goal of this strategy is to be able to adapt to the market conditions and offer the best possible deals to the consumer, lining up with Costco's mission statement, effectively retaining them whilst being able to generate high revenues whilst keeping the business stable during recessions /stagflations. In addition to this Costcos usage of high-low pricing allows for the attraction of consumers due to low prices who then stay for longer to purchase or browse their high priced items.
Place in Costco's 4ps Marketing mix
Costco utilises its Warehouses as the physical stores to sell their products allowing for in store browsing of goods and services. In addition to this Costcos app and e-commerce website are integrated and can be used simultaneously allowing for easy purchasing of goods. Costco utilises a mix of technology and traditional commerce to connect with customers and overall generate more sales.
Promotion in Costco's 4ps Marketing mix
Costcos offers discounts for bulk purchasing or buying given to businesses to make it easy to access quality and trustworthy goods from a well reputed brand and enticing them to purchase from. In addition to this holiday offers and limited time discounts for members further entice individuals to
purchase products during those time periods. In addition to discounts, another main aspect of Costcos promotion tactics is their public relations. The company utilises public relations to boost corporate/brand image. Sustainability and Zero waste programs, such as their plan to reduce plastic
waste as well as use 75 percent recycled plastic for their staple $4.99 rotisserie chicken . In addition to this their publication of their mission statement played a crucial role in gaining consumer trust further increasing their reputation as a whole.
- Conclusion
In conclusion Costco’s remarkable success in recent years is attributed to their effective business models as well as successful implementations of growth initiatives .. Despite facing high competitive pressures,strong buyer powers and threats of substitution( porter's 5 forces), Costco's strategic focus on cost leadership( porter's generic strategy) though maintaining low costs and high sales volumes through bulk purchasing and large warehouse operations to offer customers the best possible prices( in accordance to their mission statement). An element of differentiation ( porter's generic strategies) shown through their membership based warehouse model as it generates the bulk of costco's profits (73 % of 2024s profits) whilst keeping consumers satisfied with low prices of memberships and in store good selections gradually being diversified( with costco utilising high-low pricing and market oriented strategies, 4ps marketing mix). Costco's business model is extremely robust allowing for numerous strategies of growth for the business with the main focuses of Costco being Market penetration and Market development. In addition to this costcos focus on public relations through sustainability and action programs aligning with their mission statement , has ensured continued profitability, consumer retention( as shown through their retention rate of consumers) and market expansion, even in times of recession/stagflation.
- References
Works Cited
“Costco.” Statista, www.statista.com/topics/4399/Costco/#editorsPicks. Accessed 7 August. 2024.
“Competition by Segment: Costco Wholesale Corporation.” CSIMarket, csimarket.com/stocks/competitionSEG2.php?code=COST. Accessed 1 Sep. 2024. “Costco Wholesale’s Marketing Mix (4Ps) Analysis.” Panmore Institute, panmore.com/Costco-wholesale-marketing-mix-4ps-analysis. Accessed 5 Sept. 2024.
Pritchard, Justin. “4 Problems with Costco's Business Model.” Investopedia, 12 Jan. 2016,
www.investopedia.com/articles/markets/011216/4-problems-Costcos-business-model -cost.asp. Accessed 26 July. 2024.
“Costco Wholesale Corp. (COST) Profitability Ratios.” Stock Analysis on Net, www.stock-analysis-on.net/NASDAQ/Company/Costco-Wholesale-Corp/Ratios/Profit ability. Accessed 3 Sep. 2024.
“How Costco's Unique Business Model Resulted In Global Success.” Cascade, www.cascade.app/studies/how-Costcos-business-model-resulted-in-success. Accessed 3 Sep. 2024.
Backman, Maurie. “This One Item Helps Costco Earn Billions of Dollars per Year (It’s Not Rotisserie Chicken).” The Motley Fool,
www.fool.com/the-ascent/personal-finance/articles/this-one-item-helps-Costco-earn billions-of-dollars-per-year-its-not-rotisserie-chicken. Accessed 28 August. 2024.
“Retail Industry Market.” Verified Market Research,
www.verifiedmarketresearch.com/product/retail-industry-market. Accessed 7 Sep. 2024.
Fox, Chris. “Growth and the Ansoff Matrix.” Strategic Coffee, 18 Aug. 2016, strategiccoffee.chriscfox.com/2016/08/growth-ansoff-matrix.html. Accessed 4 Sep. 2024.
“Costco Wholesale’s Generic and Intensive Growth Strategies.” Panmore Institute, panmore.com/Costco-wholesale-generic-intensive-growth-strategies. Accessed 30 August. 2024.
“Changes Coming to Costco.” FinanceBuzz, 14 Aug. 2023,
financebuzz.com/changes-coming-to-Costco. Accessed 31 August. 2024.
