Costco Weaknesses

The short answer to this common question is yes. Costco sells food and drinks, health and beauty products, clothing and accessories, jewelry, toys, furniture and home goods, and even electronics and appliances. Because many of these products come in bulk sizes, Costco offers great savings in addition to high quality. This warehouse club offers deals on many national and regional name brands online and in its warehouses. Additionally, this retailer sells its Kirkland Signature products.

In the recent years Walmart has been far our performing its top two competitors; Costco and Target. With a market cap of 212,195,024, Walmart had beaten its competitors who remain at 65,969,279 for Costco and 43,701,237 Target (NASDAQ, Competitors). This means that for Walmart, the total market of all of their goods and services far surpasses its top two market competitors. As investors, you may ask why Costco is second to Walmart’s regarding sales. Well when we take a closer look, we see that “Walmart’s treatment of its customers and employees has not always been then best.

As we know time is changing. Therefore, staying on top of your game is hard, but also crucial for success in the industry. For Costco, this might need them to update their processes and goals, I believe the future lies with online shopping. Especially to compete with companies like Amazon. For a better overall success, online shopping will cover an even bigger part of a market share.

Costco and Sam’s Club is two wholesale stores that provides a wide selection of merchandise, at an exceptional price. Sam’s Club is a warehouse club that is owned and operated by Walmart. It was founded in 1983 after the Walmart founder Sam Walton. Sam’s Club operated about 660 membership warehouses across the world. Also, Costco is a large retail, wholesale club, as well.

Earlier this year, American Express announced termination of the co-branded relationship with Costco. This relationship, which goes back 16 years, would expire March 16,2016. Obviously this decision gave American Express a big hit. On Feb 12 when the news was broke to the public, Amex shares dropped 6%. In this memo, I want to give some advises about how American Express make up the lost after breaking up with Costco.

Business Model: The business model Costco use is MEMBERSHIP-ONLY WAREHOUSE CLUB that allows their members to access wide range of merchandise at a low cost which result in to high sales volume and rapid inventory turnover. Costco allows non-members to purchase but they have to pay 5% fees if they buy from the COSTCO.COM or they have to use cash card or stack coupon for the purchase from the store. (The krazy Coupon Lady, 2014) Business Strategy: Costco’s main business strategy is to provide their customer a quality product at a low cost. To sell the product at a low price, it reduces their cost or tighten their cost mainly through the following ways.

This unusually high ratio generated high growth anticipation amongst investors since companies with lower debt usually offer higher P/E ratios. However, in 2015, the ratio fell to 12.875 which points how much the stock was overvalued initially and was a product of an accounting artefact. The stock market immediately reacted to this due to drop in expectations. Was it Anticipated? DSH’s collapse came as a major surprise to the market.

In Costco’s macro-environment, a variety of factors could affect the company’s economic viability. External factors such as inflation, foreign currency exchange rates, levels of unemployment, reduced consumer confidence, and changes in tax policies could unfavorably affect the demand for Costco’s products and services. Prices of some goods and services including food products, are often variant and subject to fluctuations deriving from changes in domestic and foreign supply and demand, competition, taxes, labor costs, or delays in delivery which could significantly affect Costco’s sales. Therefore, the product’s costs and selling could also increase affecting financial results. Other important economic factors include the increasing international

Costco Wholesale Corporation strives to grow and expand through their competitive retail and pricing strategies in their market. As a retail firm, Costco depends on cusumer purchasing capacities (Gregory 2015). Costco offers a limited number of items that are afforadable quality services and goods to their consumers and believes it aids to their continued growing and expanding success. Costco is driven by cost leadership for their retailer store because they would rather maintain the lowest prices possible which enable customers to return. Costco largely relies on their pricing and retail strategy to continue sales and organization success.

Cost of equity was calculated using the 10 year UST rate, 5.02%, because it is a good measurement of the risk free rate, plus the firm’s beta, 0.56, multiplied by the risk premium, which we concluded to be 5%. This gave Blaine, when unlevered, a WACC of 7.82%. When taking the $40 million debt and $100 million cash buyout of stocks into account, cost of debt is now a factor. Cost of debt was 5.88%, the bond rating of a AAA rated company like we assume Blaine

The discount stores industry is highly competitive. Costco Wholesale Corporation directly competes with Wal-Mart stores and its subsidiary Sam’s Club, Target Stores, Kroger, BJ's Wholesale Club, and indirectly competes with e-commerce businesses such as Amazon.com etc. The key aspects of Costco's strategy have already been identified as ultra-low prices, limited product selection, treasure-hunt merchandising, to low-cost emphasized efficient productivity and its long-term growth strategy. Considering the data available (Exhibit 3) and from the chart below, over the past five years’ average revenue growth of Costco is higher than its competitors which is 8.31% where as Walmart landed with 3.54%, Kroger with 7.17% and Target with 2.13%. From the above chart, we can clearly observe that Costco’s sales are increasing linearly at a steady rate YOY.

Costco, regardless of external pressures from other wholesalers such as BJ’s Wholesale and Sam’s Club has distinguished itself and experienced tremendous success as a result. In 2010, Costco brought in a net income of 1.3 billion whereas its competitor BJ’s Wholesale drew in only 132 million. The following year, Costco’s net income grew to 1.46 billion while BJ’s’ fell to 95 million. Ever since the mid-2000’s, Costco’s profit has steadily increased while it’s competitors have struggled to simply keep their profits from plummeting. Part of the reason Costco’s profits remain so high is because they outnumber their competitors in terms of store locations.

Key Trends – Globalisation One of the main opportunities Costco has is more global expansion to specific targeted countries. Although operating in many countries, Costco is heavily dependent on the U.S. and Canadian markets. It still has the opportunity to expand into the Asian and Australian markets where it has a limited presence. Costco has the capability to operate about 100 stores in Taiwan, Korea and Japan combined and about 20 stores in Australia. It currently has 41 stores in Taiwan, Korea and Japan combined and 6 stores in Australia.

3.0 Concepts 3.1 Resources and Capabilities In order to achieve and sustain competitive advantage, a business needs both resources and capabilities. Resources are assets that are owned or employed by an organization. The organization utilizes and uses these assets to carry out their business operations. Resources can be grouped either tangible assets or intangible assets.

What are the two types of core competencies that drive a firm’s competitive advantage? Which firms demonstrate a clear competitive advantage because of (a) major value-creating skills/core capabilities and/or (b) superior assets or resources? Which firms have demonstrated sustainable sources of competitive advantage? The two core competencies that drive a firm’s competitive advantage are cost leadership and differentiation.