Analysis and Evaluation
Since the inception of Costco in 1983, one of its drawbacks is, they have 4,000 selections of merchandise compared to their competitors. In addition, customers can only purchase merchandises in bulk. Consumers who shop at Costco do not have the choice to pick up one single item, for instance a can of soup. Although Costco prices are low and the consumers get more for their money, more consumers are wasting food because they no longer have the big families. Costco needs to look at the demographics and re-evaluate their business model, as this could be detrimental to the company. In today’s society, more families are getting divorce and are becoming single parents.
The big families are almost none existent; therefore, most consumers do not need to purchase in bulk. Many consumers want to have choices when it comes to the amount of food they purchase. One may say there are other shopping establishments a consumer may visit to get exactly what they want; however, that is beside the point. Giving consumers the choice to purchase individual merchandise will not only bring in more business but also an increase in cash flow, which will also increase profits for Costco. On the other hand, Costco competitors such as Wal-Mart stocked up 40,000 to 150, 000 items for shoppers to choose from and Sam’s Club have over 16,000 items. Sam’s Club have the treasure-hunt items but tend to be less upscale and carry lower price tags than those of Costco. Both Wal-Mart and Sam’s Club give shoppers more choices than Costco even though Costco offers a cheaper price on their merchandise.
Costco spends very little in advertisements and they totally rely on their name and word of mouth by their customers. Compared to Sam’s Club they spent about $50 million annually advertising and direct mail promotions.
Furthermore, Costco does not have a Public Relation department, which is not good business practice, even though they have been around for years and they are doing well financially. However, there are many opportunities for one of its competitor to come in take away their market share. Costco does not attract people who are below the poverty line; they cater to the business consumer and urbanites that have an annual income of $100,000; therefore, people who are impoverish cannot afford the membership fees and bulk purchase. In addition, Costco membership fee is more expensive compared to Sam’s Club.
Costco needs to improve the variety of choices by giving the consumer more than 4,000 items to choose from while their competitors are actually giving customers what they want. Costco needs to take into consideration the economy; people have lost their jobs and the recession, as customers are looking for cheaper prices and ways to saving money. Furthermore, if Costco does not come up with new and innovative strategies to entice low income and single household family to their establishment they are giving their competitors the upper hand.
Costco should also focus on the advertisement because number of its rivals is already doing intense advertisement. In today’s global and technological world, many businesses are being aggressive and are taking advantage of investing heavily on the marketing. Costco cannot continue to use the concept of sitting back and waiting for their customers to spread the word by mouth.
Costco needs to move in the direction of the 21st century by being more proactive by utilizing technology and a PR department for marketing purposes. It is true that company like Costco are doing good in economic downturn but competitors like Sam’s club is outperforming Costco in pricing which could be biggest threats to the Costco even though Costco keeps relatively branded and qualitative product than that of Sam’s Club
The Five Forces Model of Competition
Good substitutes everywhere
Price not significantly higher
Comparable product features
More variety of features
Low switching cost
Potential new entrants
Small pool entry candidates
High barriers to entry
Weak bargaining power
Some switching cost
Large membership base
Costco has the best value
Weak bargaining power
Low switching cost
Many substitutes exist
Large quantities are needed
Costco is on top
Quality is slightly better
Buyer demand is growing
Buyers switching cost is low
Low product and services• Strong brand• Excellent merchandise• Exceptional employees• 54 million members• Economics of scale• Efficiency| James Sinegal is 79• Maintain high wages• 42% higher than Sam’s Club• Comparatively less attractive store layout for luxury items• Declining or inconsistent profit margins• Primary focus on business customers rather than individual customers| Opportunities| Threat|
Recession- Easier to find bargain luxury-items- Increased popularity of Costco• Expanding foreign markets- Europe- China – India
• Positive image in terms of employees pay and social responsibility• Increasing brand awareness| Fierce competition•Costco cannot attract people who are below poverty line due to its membership fees and bulk purchase•High competition from Sam’s Club and BJ•Political problems in other countries|
Thomspson, A. A., Peteraf, M. A., Gamble, J. E., & Strickland III, A. (2012). Crafting & Executing Strategy (19th ed.). New York, New York: McGraw-Hill/Irvin.