Strategy Project - Cotco Detailed Analysis

Strategy Project - Cotco Detailed Analysis

• 1.
  GSBA 540 -Contemporary Issues in Competitive Strategy Group Project
• 2.
  Improve eCommerce experienceand overall online presence. Executive Summary 2 Following our analysis, we believe Costco’s current strategy provides them with competitive parity. The short-term potential for rivalry, buyer influence, and shifting consumer trends casts doubt on Costco's sustained viability in the long-term. Additionally, the current brick and mortar, warehouse model is declining, and Costco needs to continue diversifying their business. Therefore, we recommend the following to further Costco’s competitive advantage. 1 Explore new categories and distribution channels for Kirkland products. 2 Provide a cheaper, “online-only” membership option, targeting the younger generation. 3
• 3.
  Background of CostcoWholesale 3 MISSION: To continually provide our members with quality goods and services at the lowest possible prices.2 KEY STATS2 : - 858 warehouses worldwide, with 590 in the US & Puerto Rico - 3rd largest global retailer - 12th in Fortune 500 - 203,000 full and part-time US employees - Costco IPO’d at $1.67 (accounts for stock splits) and is currently priced at $561.47 USD (+12,500%)3 BUSINESS MODEL4 : - Costco offers a subscription membership for low prices on branded and private label products in a variety of categories (e.g., clothing, electronics, furniture) 1. https://investor.costco.com/company-profile/default.aspx 2. https://investor.costco.com/events-and-presentations/default.aspx 3. https://www.nasdaq.com/market-activity/stocks/cost/historical 4. https://businessmodelanalyst.com/costco-business-model/ Costco Wholesale Corporation operates an international chain of membership warehouses, mainly under the "Costco Wholesale" name, that carry quality, brand-name merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. The warehouses are designed to help small-to medium-sized businesses reduce costs in purchasing for resale and for everyday business use. Individuals also may purchase for their personal needs.1
• 4.
  Industry Definition 4 Company: Costco Wholesale BusinessLines:1 Brick and mortar stores, Memberships, eCommerce, Auto Sales Business Line Analyzed: Brick and mortar stores of membership based wholesalers Strategic Group: Sam’s Club (owned by Walmart), BJ’s Wholesale Geography: North America Time Frame: Present (2023 - ) 1 2 3 4 5 6 1. https://investor.costco.com/company-profile/default.aspx
• 5.
  Strategic Group Landscape Priceof Goods Membership Main variables for this segmentation are: 1. Low price of goods 2. Having a membership No Yes Low High
• 6.
  6 1 2 3 Analysis of ExternalEnvironment Analysis of Internal Environment Evaluation of Costco’s Current Strategy 4 Recommendations Agenda
• 7.
  7 Political > Trade Policies: US/internationaltrade agreements, directly impacts how goods flow in and out of wholesale retail stores > Government Regulations: product regulations (e.g., safety, food safety, labeling style, packaging) impact operations > Labor Laws: any regulations around labor (e.g., wage laws, unions) impacts labor cost and overall employee relations Economic > Current Economic Conditions: factors such economy growth/decay trajectories, inflation, consumer spending trends all impact demand for wholesale products > Income: demand for wholesale products is driven by varying consumer group income levels Sociocultural > Consumer Choices: products that consumers desire drives what wholesalers keep in stock; additionally shopping preferences (i.e., online vs. in person) differs for the new generation of consumer > Lifestyle Shifts: cyclical shifts in consumer lifestyle preferences (e.g., following COVID-19, people began prioritizing fitness and health, sustainability focus) Technological > Advancements: as AI continues to develop, the end-to- end supply chain, as well as warehouse operations, is going to require modernization (e.g., robots) > eCommerce: While wholesalers generally have websites set up as well, there is potential for retail brick and mortar stores to decline in popularity Ecological > Climate Change: environmental catastrophes can impact the established supply chain > Eco-Friendly Regulations: environmental regulations can potentially increase production costs; additionally there can be an increase in emission laws as political parties prioritize environmental sustainability Legal > Personal Data: wholesalers who retain customer data are required to adhere to established regulations > Lawsuits: potential for food safety regulation lawsuits P E S T E L PESTEL Analysis
• 8.
  8 Porter’s 5 Forces:Rivalry And Competitors Threat Factor Analysis High Product Differentiation Products within strategic group lack differentiation. Products and offerings are uniform across competition. Medium Perishability Several items offered by wholesalers have limited shelf life (e.g., fresh produce). However, this only makes up a portion of the products for sale in a store. High Number and Size of Competitors / Concentration There is a substantial number of players engaged in this strategic group that serve as direct competitors to one another. High Industry Growth The wholesale industry is mature, and tends to only grow as economies grow. There is no foreseeable growth avenue that could boost the growth in this industry. High Exit Barriers Assuming that each company owns their warehouses and related infrastructure, there will be a significant hurdle to sell off assets in the market and exit the industry. HIGH: There are multiple strong players within this strategic group that are equally vying for customers and market share. This leads to competitive pricing and continue searching for product differentiation. Suppliers Buyers Entrants Substitutes Rivalry or Comp.
• 9.
  9 Porter’s 5 Forces:Power of Suppliers Threat Factor Analysis Low Suppliers' Concentration/Number Relative to Industry Rivals Companies within this strategic group have multiple sourcing vendors. Diversity spans across multiple categories of products, further diluting the influence of a single supplier. Low Switching Costs Costs are overall low, as nearly all suppliers provide similar sourcing solutions and products. Uniformity reduces challenges with switching suppliers. Low Differentiated Products Nearly no differentiation in terms of product quality and brand from suppliers, leading to a uniform supplier landscape. Low Substitute for Suppliers’ Products Wholesale focus on high-quality products at low prices would be difficult for substitute products from other industries to replicate. Low Threat of Forward Integration Suppliers that are feeding this industry are relatively smaller players, when compared to companies in this strategic group. They do not pose as a threat of forward integration. Low Supplier’s Dependence on the Industry Rivals Our strategic group captures a majority of supplier sales. This level of market influence enhances bargaining positions with suppliers. LOW: Wholesaler’s in the defined strategic group demand large purchasing volumes, providing them with leverage during negotiations. Diversity amongst suppliers, and the potential for private labeling does minimize power of individual suppliers. Suppliers Buyers Entrants Substitutes Rivalry or Comp.
• 10.
  10 Porter’s 5 Forces:Power of Buyers Threat Factor Analysis Low Buyers’ Concentration/Number Relative to Industry Rivals The strategic group effectively serves a large chunk of the population, including consumer retail and business retail. High Switching Costs Minimal switching costs involved for the buyers to shift from one company to another. Cost of switching would only require cancellation of one membership and initiation of another. High Differentiated Products Products are highly undifferentiated in this realm, so buyers can choose to purchase from any of them depending on price preferences. High Price Sensitivity Price predominantly serves as the deciding factor, which means any increase in price would cause a drop in the customer demand for the products (i.e., no brand loyalty involved). Price increases could drive individuals to a competitor wholesaler. Low Threat of Backward Integration It is unlikely that any wholesaler consumer has the capacity to buy any of the firms in this strategic group, as their market cap is well into the billions. MEDIUM-HIGH: Consumers have the option to switch between wholesalers to find the best value for their goods. The limiting factor here is the membership model, but for our project, we assumed buyers are members of the three wholesalers in the defined strategic group. Suppliers Buyers Entrants Substitutes Rivalry or Comp.
• 11.
  11 Porter’s 5 Forces:Threat of Substitutes Threat Factor Analysis Medium Closeness of Substitutes / Switching Costs Substitutes may pose as a better choice, in term of convenience and services. However, but in terms of the range of products offered, there is almost no difference in the offerings. Low Quality / Performance & Price Ratio The allure of wholesale companies is the ability to purchase a wide range of products at lower prices, but most importantly, in bulk. Substitutes may offer a wider selection of better quality products, but they are generally priced higher and not in bulk. LOW: Wholesalers provide value in their offering of bulk goods for lower prices. The allure of this, and savings achieved, reduces the likelihood that a consumer will actively search for a substitute. Suppliers Buyers Entrants Substitutes Rivalry or Comp.
• 12.
  12 Porter’s 5 Forces:Threat of Entry Threat Factor Analysis Low Supply-side Economies of Scale or Scope Each firm in this strategic group has large scale operations than allowing for economies of scale. New entrants would struggle replicating this efficiency from the start. Low Demand-side Benefits of Scale / Network Effects The lack of consumer benefits from purchasing from a single wholesaler indicates there is no network effect. High Switching Costs If a new entry enters this strategic group, the switching cost for customers to change from their current wholesaler to the new one would only be the variance of the membership costs, increasing the threat of entry. Low Capital Costs A new entrant would require tremendous initial investment to build the warehouses and required support, indicating a low threat of entry. Low Access to Distribution Wholesalers have complex, established distribution channels, which would be hard to emulate by a new entrant. High Government Policy There is no reliance on law/policy for maintaining market position. Entrants could face common work laws (e.g., zoning, labor regulations, tax), raising the threat of a new entry LOW: The sheer volume of economies of scale required to enter this wholesale market drives the low threat of entry. Additionally, the complex supply chain and distribution networks make it difficult to imitate by a potential new entrant. Suppliers Buyers Entrants Substitutes Rivalry or Comp.
• 13.
  13 The following areour observations from the detailed external analysis of the competitive landscape: → While competitive rivalry and the bargaining power of customers are the most potent forces to be reckoned with, the other three Porter’s framework parameters continue to be weak/moderate forces. → The current economic slowdown and the associated drop in the overall consumer income is a challenge, as it negatively impacts the consumer’s buying pattern by decreasing their purchasing capacity. The technological advancements adopted by the industry can be seen as an opportunity for growth that Costco can work towards. Suppliers Buyers Entrants Substitutes Rivalry and Competitors External Analysis Summary
• 14.
  14 Resources and Capabilities Resources ●Employees, including employee loyalty ● Warehouses/stores ● Warehouse/store locations in prime real estate locations ● Website (i.e., eCommerce) ● Brand recognition/reputation ● Network of suppliers Capabilities ● Create and maintain customer loyalty (e.g., ability to charge membership fee, loved return policy) Ability to retain employees (high employee satisfaction) ● Provide a diverse range of quality products at an affordable price point through innovation ● Deliver private label products (e.g., food/beverages, cleaning products, sports gear, gasoline, etc.) ● Diverse range of third party products ● Provide additional services (e.g., pharmacy, optometry, auto sales program, travel deals, credit card, etc.) ● Allow customers to sample different products in store ● Ability to operate 7 days a week; logistics Core Competencies ● Acquiring and retaining customers ● Maximizing customer value, even if it means taking a loss (e.g., hot dogs and rotisserie chickens) ● Culture of caring for employees, and thus retaining their internal talent ● Providing a diverse range of products and services that customers unanimously agree are high quality ● Innovation ● Ability to create and maintain relationships with their private label suppliers and third party suppliers ● Supply chain management and logistics
• 15.
  15 VRIO Analysis Valuable Costco Wholesalehas an incredible ability to cultivate customer loyalty. This is achieved by offering a myriad of premium services and products, at low-prices. Rare While Costco is committed to delivering customer value, through high-quality offerings and cost-effectiveness, competitors in the industry are not terribly far behind. Companies like Sam’s Club and BJ’s are working to emulate Costco’s innovative model. Imitation Costly Replicating Costco's elaborate strategy demands substantial investment. The cost structure can pose as a barrier to imitation. However, despite the costs, Sam’s Club and BJ’s have closely imitated Costco’s membership based warehouse stores. Organized to Capture Value Costco’s streamlined supply chain and end- to-end operations have driven its success. Costco is well positioned to capture value and continuing expanding overseas by acting in accordance with its corporate mission statement.1 V R I O Yes No Taking all things into consideration, we believe that Costco has a competitive parity. Although they have a wide variety of resources, extensive capabilities, and strong competencies, there are several competitors in the market that are either closely imitating or in the process of trying to further imitate Costco. It is costly to imitate what Costco offers, but that has not stopped some very strong competitors from doing so. As a result, it is difficult to say if what they offer is rare anymore. 1. https://investor.costco.com/overview/default.aspx
• 16.
  16 Competitive Strategic Positioning Differentiation LowCost Costco’s core value lies in providing significantly discounted prices, while not compromising the quality of their products. The below explains several of the reasons Costco is able to drive up price and decrease cost in order to create a wider wedge in comparison to the average strategic group competitor. Differentiation: ● Employees are loyal to Costco because their salaries are higher in the industry, so Costco faces lower employee turnover and higher employee productivity ● Private labeling such as Kirkland Signature enables Costco to offer high quality products, spanning a range of categories ● Membership-based business model provides Costco with exceptional customer loyalty and at the same time further lowering price of products for their customers ● Wide range of store opening across the world makes Costco easily accessible for customers Lowering Cost: ● Spend very little on advertisement since they rely on word of mouth from their customers ● Simplistic store design saves capital ● Bulk buy makes the price per item significantly lower than what other competitors are able to achieve ● Costco’s high purchase volume from its suppliers make its total costs lower, as they can negotiate better prices Blue Ocean WTP Price Cost
• 17.
  Issue Recommendation Advantages Disadvantages 17 Recommendation #1 Improve eCommerceexperience and overall online presence X Re-allocation of resources might reduce Costco’s competitive advantage in providing customers with exceptional in-person shopping experiences X Bulk items and their logistics cost a lot to ship, which might cause Costco to lose its advantage in low cost X Competing with other eCommerce giants as a “new comer” requires significant resources Consumer preferences are changing, with more and more people shopping online. Additionally, people value a user friendly experience, as well as a quick overall shopping process. ✓ Allows Costco to gain access to customers who do not have a close physical store or do not want to shop in-person; being both online and offline can attract customers ✓ Lowering the cost for expanding retail stores or the expansion might be unfeasible ✓ Data collected online could help Costco analyze its product lineups and start sending target recommendations to customers
• 18.
  Disadvantages 18 Recommendation #2 Issue Recommendation Advantages X Developingrelationships with third party stores to sell Kirkland products through them and to build new categories within the brand could be very expensive X Another important point here is that when entering in new categories, Costco (Kirkland) may face big players. For this example, it may be a challenge to face furniture giants (e.g., IKEA) in the home furniture market Very mature and competitive industry, where profit margins are low and the tendency shows that they will be lower in the future, mainly because of a high inflation and low economy growth environment ✓ Kirkland already has a great reputation and loyal customers. This raises its customers willingness to try new products. ✓ Kirkland has a “low-cost” stigma. New customers, who may be unfamiliar with the brad, and are looking for new and less expensive options, would be open to trying new Kirkland products ✓ Kirkland is a Costco-owned brand, so it has a higher profit margin than other product lines Explore new categories and distribution channels for Kirkland products. For example a) sell golf clubs or ball in local sport stores. b) sell tires & auto products in local auto shops or c) Develop a Kirkland Home & Furniture product line
• 19.
  Issue Recommendation Advantages Disadvantages 19 Recommendation #3 Based onour PESTEL analysis, we believe the younger generation of consumers prefer convenience and affordability. Provide a cheaper, “online-only” membership option, targeting the younger generation. ✓ Younger generations could serve as an entry point for families that don’t currently shop at Costco ✓ Targeting younger generations could potentially result in a acquiring a new lifetime customer, which seems likely given the brand loyalty Costco customers display X The technological development and research required has the risk of becoming a sunk cost if the plan does not work out X Younger generations have more flexibility in shopping so they might not buy in to Costco’s business model (e.g., the mandatory pre-paid membership and having to buy in bulk)
• 20.
  20 Benefit of ImplementingRecommendations Provide a cheaper, “online-only” membership option, targeting the younger generation. Explore new categories and distribution channels for Kirkland products. For example a) sell golf clubs or ball in local sport stores. b) sell tires & auto products in local auto shops or c) Develop a Kirkland Home & Furniture product line Improve eCommerce experience and overall online presence Recommendations By focusing on younger generations, Costco could leverage them as a “gateway” to non-Costco families. This demographic could grow into life-long customers, due to the brand loyalty exhibited by many Costco shoppers. Costco’s Kirkland Signature brand possess a strong reputation and devoted customer base. This in turn suggests they would display greater openness to trying new offerings. Kirkland affordability also appeals to budget-conscious newcomers seeking new, cost-effective alternatives. Additionally, Kirkland has a better profit margin compared to external product lines. Enabling online access to Costco’s broad inventory allows the organization to reach customers who may not have the ability to access a store in person. Additionally, the growing consumer trend is moving towards online shopping, and this provides Costco with the ability to build a new channel for reaching customers. Additionally, online retail would provide significant data that could drive curated recommendations, further enabling customer engagement. Benefit of Implementation