Full disclosure: I’m a big fan of Costco. In fact, I’m an Executive Level member who enjoys the benefits of that 2% discount on everything that’s purchased outside of gas. I live only 3 blocks from a location and have grown an appreciation for how frequently the inventory changes at my local store.
Living so close to a Costco also has it’s disadvantages, since it can be hard to get out of the store for less than $200 per trip.
In this analysis, I explore the ways Costco Wholesale evolved and dive into the current strengths, weaknesses, opportunities, and an overlooked threat to its position today. Let’s do this.
Strengths of Costco
Costco Wholesale Corporation, an American multinational company, is one of the giants in the retail wholesale industry with more than $192 billion in annual sales. The appeal of this warehouse is the bulk sizes, low prices, and an ever changing inventory that makes the shopping experience feel like a treasure hunt with each visit.
You must be a member to gain entrance into a Costco store. This members-only style of purchasing makes the customers feel special.
Moreover, they are assured that the merchandise they purchase is at a relatively attractive discounted price. Costco holds the record for the first company to grow revenue in six years from zero to $3 billion. Costco’s product lines include grocery, liquor, books, furniture, clothing and handbags, computers and printers, appliances, auto and tires, pet food, and unexpected gadgets and toys.
It was in 1983 when the first Costco warehouse was opened in Seattle, Washington. Two more stores were already opened by the end of 1983. In 2021, Costco has opened 804 warehouses worldwide, 558 of which are in the United States while the rest are in these 11 different countries: Canada, South Korea, Japan, Mexico, France, Iceland, Spain, Australia, United Kingdom, China, and Taiwan.
Better Employees – Costco pays their employees and provides better benefits than other retailers like Target or Walmart. And guess what? You can tell the difference. Costco employees are happier, faster, and happy to lend you a hand around the store if needed. At Walmart, it can be next to impossible to find someone to help if you need assistance finding something.
Membership-only model – Costco differentiated itself from its competitors by following a membership-only business model. In this strategy, the company was offering products exclusively to its members who paid an annual membership fee of $60 for the lowest level of membership and $120 for the executive members who enjoy more privileges and benefits like more savings from purchases.
From the income coming from the high membership fees, Costco has been able to achieve the goal of offering quality products at low prices to its members. The company was able to provide discounts by selling their bulk merchandise at prices almost equal to the costs of the items. This made the members satisfied since everyone appreciates value, whether you’re wealthy or middle income.
Loyal customers – Costco makes its members feel that they belong to an exclusive club with membership fees. There’s no shortage of reasons for customers to come back either. Costco often has a gas station on site, car wash, a food court with low-cost menu. The Executive Membership club level also gets you 2% cash back on everything you purchase outside of gas.
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In 2014, Costco was named number 1 in the specialty retail store business by the American Customer Satisfaction Index (ACSI), having a score of 84. The company has a very loyal customer base. Their cardholders who have paid for Costco’s annual membership fee has reached over 105 million in 2020. With the competitive prices Costco offers, the company’s paid members have continuously risen through the years.
Low-priced products – Costco has gained and maintained its popularity in the retail market due to its principle of providing its members with high-quality products at low prices in its various warehouses. Buying in bulk is not an issue to many, especially during this pandemic wherein all are somewhat more inclined to store stocks at home, thereby making Costco’s low-price strategy very attractive.
The company is able to sell its products to its customers at low prices by having good relationships with its suppliers and buying their merchandise in bulk. By sticking to the low-profit margin principle, Costco is able to increase the number of recurring overtime. Customers understand they’re getting a deal when they shop here.
Costco maintains ties with well-known product suppliers. Costco’s product line also includes private branded products such as Kirkland Signature. These appeal to customers who love buying products that are not too pricey but are of great quality. These products are produced by third-party manufacturers but are sold on a different label, which in Costco is under the Kirkland label. Examples of products sold under the Kirkland label are Starbucks coffee, Perrigo Infant formula, and Jelly Belly’s jelly beans.
No advertising costs – Costco does not advertise. The company relies on low prices and high-quality products to guarantee first-time sales and repeat purchases. It lures its customers, too, through direct emails sent to its exclusive members to inform them of in-store promotions, and/or discounts offered in its various warehouses.
Direct selling is also done by sales people to members already in the store to promote new items or push sales of those that lag behind. Zero advertising costs means a significant reduction in expenses, thus, enabling Costco to maintain their prices at the lowest possible levels.
Few stock-keeping unit (SKU) – Costco maintains very few SKUs per product, thereby resulting to lower inventory keeping costs. With this strategy, the company is also able to negotiate better with suppliers especially with regards to the costs of the products. Keeping only a few SKUs is positive to Costco’s suppliers since it means that there is minimal competition in the shelves.
Very good return policy – Costco has a very generous return policy given that they guarantee the customer’s satisfaction in each and every shopping experience. It will most likely give a refund for the whole purchase price given any scenario. In fact, the company will even refund membership fees of dissatisfied customers.
Acquisition of innovel solutions – Costco bought the logistics company Innovel Solutions from Sears’ Holding Company in March 2020. With this move, Costco can improve on its last mile services, making deliveries of big and bulky items faster and more efficient.
Many other warehouse companies like Walmart have struggled with supply chain issues over the past 2 years. Costco is taking actions to ensure their shelves are always full.
Weaknesses of Costco
Though Costco has a great number of strengths to its name, it also has its share of weaknesses. Some of these have been overlooked by company management.
Limited product selection – Compared to the other retailers in a warehouse set-up, Costco maintains a significantly low number of products, just a fraction of the competitor’s, 4,000 versus a competitor’s 50,000. This means that the buying market has only a few choices on-hand. One who is not yet a member and learns about this will surely prefer to go to the retailer offering a wider array of products. Minimal product selection translates to a smaller customer base.
Buying in bulk – While everyone loves a bargain, not everyone wants to buy everything in bulk. Costco offers products in bargain prices but customers have to shop in large quantities. Many could dislike this strategy since it is synonymous to a bigger cash-out and a need for a bigger storage space., not to mention the possibility of some of the products going to trash. After all, a 5 lb jug of ranch dressing isn’t always practical.
Costco must find ways to attract the millennials living in the urbanized cities but with the Costco strategy of selling in bulk, millennials who live alone can find this disadvantageous. Unfortunately, Costco’s business model doesn’t work when you scale down product size.
Mastercard not accepted in Costco US warehouses – Costco accepts only Visa cards along with checks, Costco Shop Cards, EBT cards, Debit/ATM cards, cash and Mobile Payment in its US warehouses. Mastercard is not an accepted payment method. Neither are more innovative crypto currencies like Bitcoin. This is to bring down costs related to credit card company transactions, hence, enabling Costco to pass savings to customers.
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E-commerce position – Costco is not keen as aggressive at developing and marketing e-commerce stores like its competitors. Though a significant 75.8% increase in sales was noted during the second quarter of the fiscal year 2021, Costco management will not pursue the e-commerce channel in the same way as to how the others in the retail and wholesale businesses are taking advantage of it.
This could be a mistake as it creates a power void online and leaves other big retailers like Amazon, Target, and Walmart to dominate the online space. We are seeing some of these retailers like Walmart start to offer membership programs for their online food delivery. In a few years, Costco could end up regretting this strategy.
Opportunities of Costco
Costco can strive to work on its weaknesses and continuously take advantage of its strengths to have a greater market share in the retail industry.
Increase product selection – Though a limited number of SKUs can call for lower costs brought about by good negotiations with fewer suppliers, this can also mean a smaller customer base. In order to increase the number of its loyal customers, Costco could look into increasing its product selection so that the buyers would have more choices.
Offer healthy products – The urbanized millennials is an attractive and a huge market that any seller could possibly consider. Given this, Costco can offer their needs, one of which are products for these health-conscious target market.
You can see that Costco is beginning to offer more and more healthy and organic products in their stores. You can usually find organic fruits, meats, and snacks now. This could flip into the advantage column if Costco continues.
Increase its branded line – Costco can look into getting new branded products since the Kirkland line has brought higher sales. One of the new(ish) food items Costco offers is nut, berry, and cheese packs under the Kirkland banner.
Go online – In 2021, Costco saw the positive effect of e-commerce. Their sales significantly grew. This can trigger Costco management to consider going online full-time like its competitors. E-commerce is so important now since most people prefer buying online for convenience or health purposes.
Use digital advertising – Advertising one’s products or services through various online platforms and digital channels has been a trend. The huge number of social media users cannot be denied and Costco can take advantage of this in order to further increase its clientele.
Promoting Costco through digital marketing can have a positive impact on the company’s performance. For one, the big market of millennials who also are avid social media users, can be targeted and influenced better to be loyal Costco members. Costco can also specifically advertise to the health-conscious individuals. The costs associated with digital marketing can be lesser than the gains Costco can get from the bigger volume of sales that it can generate.
Take advantage of innovel solutions – By acquiring Innovel Solutions, Costco can not only improve on its “final mile” services but also take advantage of Innovel Solutions’ specialties as a logistics company, and thus, gain revenue and better serve customers.
Threats of Costco
Product recall affecting brand reputation – Product recalls can not be avoided by manufacturers and sellers. Just like any seller in the retail business, Costco has had a number of product recalls which have tainted its reputation and has brought adverse effects on its revenues.
Some recalls are for food or drink found to have contaminants like glass, metal, plastic, bacteria or an undeclared ingredient and sunscreen found with a chemical associated with cancer .
Growing competition – Several small and huge players are actively making their way in the retail industry and many of these are relying on e-commerce. Considering how effective e-commerce is, Costco’s market share is at risk if Costco does not shift its gears towards on-line selling.
Through the years, many businesses have banked on this consumer need to save money by offering quality products at wholesale prices. One of these businesses is Costco Wholesale Corporation, also known as Costco, a company that started in 1976 as a warehouse club for business shoppers under the name Price Club.
Consumers get their essentials in stores that can give the greatest value for every cent they spend. They go to the store’s or warehouse’s location or visit the online shops of retailers who satisfy their being budget-conscious. Product quality and low-merchandise price are basically the factors that attract the buying public.
Bottom line, even with the ongoing challenges and lack of an online activity, Costco continues to be a powerhouse brand that will likely exceed $200 billion in revenue in the coming years. Ticker symbol COST is still a worthwhile investment to keep in your longterm holdings.