Costco Wholesale Corporation: Market Environments, Core Competencies

Introduction

Costco Wholesale Corporation is a conglomerate based in the United States which operates as a global food retailing firm. It traces its origin back to 1976 when an innovator in warehouse club retailing, identified as Sol Price, launched its first organization in San Diego (Von Briel, 2018, p. 217). However, Jeffrey H. Grotman and his co-workers started the first Costco in 1983 in Washington (Von Briel, 2018, p. 217). Since its establishment, the corporation has witnessed a series of developments and emerged as one of the most successful syndicates globally. At the start of the 21^st century, Costco’s geographical coverage had already extended to areas such as the United States, Mexico, Europe, Australia, and Canada (Von Briel, 2018, p. 217). It was also recognized for offering its employees lucrative compensation packages and other exceptional rewards, becoming the leading firm in the retail industry. This paper discusses Costco’s external and market environments, its essential resources, and core competencies and proposes a set of solutions to its future challenges.

External and Market Environments of Costco

The external environment of Costco consists of several factors that may either promote or undermine its operations. Therefore, the company has formulated several strategies that address the opportunities and threats recognized in its macro-environmental analysis. In addition, improving its competitive advantage involves continuously examining its external landscape to assess the changing aspects. There are several forces that have been identified in its external environment.

Costco’s political setting has significantly impacted its performance both directly and indirectly. These forces refer to the governmental actions that influence the productivity and operations of a firm. For example, the political stability of the most significant markets presents an opportunity to this American brand. Therefore, it has the chance to develop its business model without any minimal interference from government involvement in businesses. However, some countries have regulatory pressures that bring adverse effects on the operations of Costco. For example, the company has managed to expand its activities to more than 200 brick-and-mortar- stores outside of the United States (Kanakaratne, Bray and Robson, 2020, p. 102). On the other hand, political disruption can have detrimental effects on the processes of retail brands, especially by destabilizing the efficiency of the supply chain functions of the retailer. In addition, the firm has the opportunity to enhance its policies and strategies to surpass the expectations based on ecological and animal regulations (Kanakaratne, Bray and Robson, 2020, p. 102). In essence, the political forces influencing this company have provided more opportunities than threats that may impact it in the long term.

The economic environment of a business is also imperative in its pursuit of goals and objectives. Costco needs to match its operations with the markets or economies’ prevailing economic situations (Herkenhoff, Ohanian and Prescott, 2018, p. 105). Due to the increasing transnational trade agreements have created several opportunities for retailers by expanding their supply chain and warehouses. Moreover, with the rapid growth of emerging markets, Costco Wholesale has the chance to establish its stores in these developing markets to boost its revenues (Herkenhoff, Ohanian and Prescott, 2018, p. 89). Moreover, considering the world’s recovery from past economic recessions, consumers have gained confidence and are willing to spend more on retailers’ products.

Costco’s industry has witnessed a tremendous transformation, especially in economic performance. It has been performing well as the condition of the globe has improved; for example, in 2015, it accumulated approximately $20 trillion (Rao, 2017, p. 6). The labor market condition has also improved in the past few years, suggesting that individuals have more disposable income to spend on retail products. These are an indication that companies such as Costco are likely to have a prosperous future. Regardless of the opportunities, economic forces have also brought uncertainties that pose a threat to Costco’s strategic existence. The world has experienced a recession in the past, and during the declining period, consumers were cutting their expenditure.

Socio-cultural forces have been influencing retail operations, especially in regard to consumer behavior. Since most countries have advocated for corporations to adopted social responsibility initiatives, Costco has several opportunities of improving its corporate social responsibility (CSR) program, which ultimately enhances its brand image and consumer perception (Von Briel, 2018, p. 217). It also has the chance to elevate customer satisfaction levels by incorporating policies and approaches for better animal rights and environmental performance.

Irrespective of the opportunities presented by the social forces in the world, some threats also exist. For example, the emergence of the coronavirus pandemic has generally disrupted a majority of businesses around the world. Most supply chain networks have been disrupted, making it difficult for corporations to ship their products globally (Kannan and Veazie, 2018, p. 95). Considering the advent of this pandemic, the retailer sector’s brick-and-mortar operations have witnessed adverse effects while its online segment has seen an increase in the number of consumers purchasing groceries (Kannan and Veazie, 2018, p. 95). It is attributed to the social distancing measures that various governments have stipulated in different countries to contain the spread of the coronavirus. Therefore, Costco Wholesale should draft a change plan to avoid the detrimental consequences of the pandemic should it reemerge in the future.

Technology is a significant resource that improves the retail performance and the competitive advantage of companies involved. In the case of Costco, the increasing adoption of e-commerce transactions has presented an immense opportunity for it to attract a significant market share through online sales (Von Briel, 2018, p. 217). Moreover, the corporation can also implement automation technologies to improve its organizational effectiveness. In addition, the American giant can also consider improving its innovation strategy by implementing the use of information processing, knowledge management, and Human Resource (HR) analytics to improve its business performance.

Opportunities and Threats

Costco Wholesale is the second largest retail corporation in the world, with Walmart in the leading position. It attributes its success to its ability to address its internal and external forces. Moreover, the company has several opportunities and threats emanating from its external environment. Its external strategic factors emphasize the need to incorporate changes in its business approaches. For example, it has the opportunity to expand its business operation by diversifying, primarily through mergers, acquisitions, partnerships, and other strategies (Peker, Kocyigit and Eren, 2017, p. 544). Global markets have the potential to increase their revenues, specifically countries such as China and India, which offer a higher profit margin than their home country, the United States (Goić, Levenier and Montoya, 2021, p. 104). When it first opened its store in Shanghai, it was shut due to overcrowding on an opening day (Rao, 2017, p. 6). Therefore, the company should consider expanding its operations, stores and broadening its product catalog.

Another opportunity available for Costco to pursue is to attract younger consumers and expand its product portfolio. Currently, the retailer has a consumer base adjusted towards the older generations, baby boomers. However, these groups of consumers are known to spend less considering that they have different tastes and preferences from their younger generations, the millennials. Therefore, the American brand can consider investing in marketing campaigns to attract the younger population, which will ultimately balance the deficit in revenue (Kanakaratne, Bray and Robson, 2020, p. 102). Costco can achieve this by offering exceptional products and increasing its organic choice of food to consider the health-conscious millennials.

Irrespective of the opportunities available in Costco’s external environment, there are several threats to consider. For example, product recalls can tarnish a corporation’s brand reputation, as seen in the case of the American brand. In 2015, this company was affected by a product recall where its rotisserie chicken salad was infected with Escherichia Coli toxin (Kanakaratne, Bray and Robson, 2020, p. 105). According to a Center for Disease Control and Prevention survey, 19 individuals were affected following the outbreak (Kanakaratne, Bray and Robson, 2020, p. 106). A majority of the illnesses were reported to have emerged from the western United States. Another controversial scenario that jeopardized Costco’s brand image is when its shrimp was connected to slave labor (Goić, Levenier and Montoya, 2021, p. 105). The egg conditions at a Costco supplier are an incident that was also damaging to the company’s reputation following an investigation that discovered the chickens were living in harsh conditions (Peker, Kocyigit and Eren, 2017, p. 544). Therefore, the company should stay vigilant and try to avoid incidents that will impact its long-term strategic existence.

Another threat facing the American company is the increasing use of e-commerce platforms and dominant competitors in the retail segment. While online shopping has presented several opportunities for most retail brands, the brick-and-mortar aspect of operations is in jeopardy as more consumers are opting for in-house shopping at the convenience of their smartphones or computers (Peker, Kocyigit and Eren, 2017, p. 544). The retail industry also encompasses some dominant brands such as Walmart, Amazon, Target, Kroger, Walgreens, and Whole Foods Market, and Tesco that offer exceptional products and services, making the competition in this industry aggressive (Rao, 2017, p. 6). In particular, both Walmart and Amazon are considered the primary competitors of Costco, and they are continuously improving their business approaches. Currently, Walmart is the largest multinational retailer with approximately $514.40 billion and invests in purchasing e-commerce sites such ModCloth, Bonobos, and many more (Goić, Levenier and Montoya, 2021, p. 102). As a result, Costco should also consider improving its generic competitive and intensive growth strategies to enhance its competitive advantage.

Key Trends

Costco Wholesale Corporation operates in the global food retail sector, which has indicated several trends over the years. For example, one of the most significant driving forces in the retail industry is the right to health consciousness, where baby boomers have also developed an inclination towards wellness (Kumar et al., 2020, p. 1286). As a such, producers have responded by enhancing the health credentials of their products. This act has been manifested in cutting processed sugar, fats, and sodium presented in foodstuff. For farmers, these trends have been seen in increased consumption of garden-fresh and local foods. Millennials have also been a significant part of this trend since they demand authenticity and a desire to minimize the environmental impact of large-scale food production.

Another significant trend has been seen in the diversity of food. Cultural changes are considered a driving force in the global grocery and retail segment since the world has also seen some changes to the variety of products offered. Therefore, individuals should expect this diversity to influence consumer shopping behavior. For example, numerous in-store signage and product packaging are developing to be multi-lingual, according to the demographics of the masses (Von Briel, 2018, p. 217). Therefore, Costco and its competitors should gain insight into the customs of various people within their communities, such as halal and kosher restrictions in the Islamic and Jewish laws, respectively. Another significant trend that is revolutionizing the retail sector is home automation. Some companies such as Amazon have already implemented automation technologies to aid the process of product ordering and delivery (Herkenhoff, Ohanian and Prescott, 2018, p. 89). In essence, the future of the retail sector is expected to change following the innovative technologies already in store.

Review of the Market

Costco operates in the retail market dominated by some exceptional corporations. Its primary target market is the middle and high-income individuals, including those consumers who are opting to buy products on a daily basis. Moreover, its revenue generations are mainly based on its reliance on the North American market (Goić, Levenier, and Montoya, 2021, p. 343). Costco’s customers have also exhibited unique characteristics, especially in their purchasing habits. For example, Asian clients accounted for about 19% of Costco’s expenditure, whereas African Americans represented 5.3% (Rao, 2017, p. 6). Moreover, white consumers accounted for approximately 60% of the total customer spending at the retail corporation (Rao, 2017, p. 6). Figure 1 below indicates the distribution of consumer spending, whereas figure 2 shows the sales revenue of the American company

Costco’s market also has several barriers to entry for corporations that are intending to establish their operations for the first time. For example, a firm requires massive capital investment to develop and successfully run a business. In addition, access to distribution channels is also considered a barrier to entry because a retailer will need to create an extensive supply chain network for the free flow of products (Von Briel, 2018, p. 217). Lastly, cost disadvantages are considered a source of entry barriers since incumbents have access to trademarked product technologies, favorable locations, and experience curves. Therefore, a new entrant will have to consider the above factors before successfully starting a venture in the retail industry.

Evaluation of Organization’s Key Resources

Costco has several resources and capabilities which has enabled it to establish a strong presence in the retail industry. For example, the corporation is well-known for its differentiated brand, the Kirkland Signature. The latter was established in 1995 when Costco recognized the need for exceptional quality of products at affordable prices (Rao, 2017, p. 6). This business model is unique as compared to other archetypes from Walmart and Amazon. In addition, as the leading membership warehouse club in the U.S., Costco has established a massive market presence accompanied by its extensive supply chain, which is regarded as one of its strengths. Its membership grew from 90.3 million to 94.3 million between 2017 and 2018 (Kannan and Veazie, 2018, p. 97). In essence, these core competencies have enabled it effectively compete against other competitors in the industry.

Costco is also known for its pricing strategy, where it offers its customers a well-defined and differentiated customer experience. However, it also provides the customers lower prices with exceptional marketing rewards such as discounts. Its sources from a massive number of suppliers and obtain materials in large quantities (Von Briel, 2018, p. 217). As such, the company acquires products at low prices, and the advantage is then passed to the consumers. Conversely, it has been able to minimize operational costs by aiming at business efficiency.

Costco’s success is also attributed to its human resource management and organizational culture. Today, the company has about 254,000 employees from diverse backgrounds and skilled in multiple fields (Rao, 2017, p. 6). Considering that Walmart has been criticized for its wages and work environment, Costco has been recognized for its unique corporate culture and employee management program. It has continuously been acclaimed as one of the best American employees for its compensation packages. As a result, it has managed to develop one of the most talented workforces through its dedication, collaboration, and innovation.

Costco’s financial resources can be seen from the revenues and sales generated from its businesses. In essence, cash at hand refers to any amount of money that is available or investments that can easily be converted into cash. According to the American giant’s financial performance, its cash at hand has been increasing since 2013, signifying that it has been generating revenues ever since (Kanakaratne, Bray and Robson, 2020, p. 104). Figure 3 below illustrates the annual cash on hand in million U.S. dollars for Costco.

Solutions to the Future Challenges of Costco

Considering the current status of the retail industry, companies such as Costco are expected to face some challenges in the future. In an era when consumers prefer online shopping rather than physical going to supermarkets, Costco’s brick-and-mortar operations are more likely to deteriorate in the future. In particular, digitization is transforming the way customers shop, presenting a long-term threat to Costco. Moreover, due to the emergence of a group of people who are health-conscious and prefer organic over processed food, Costco’s sales may face a decline in the future. In response, it is recommended that the American giant should make the right decisions and completely migrate to an online platform as soon as possible. The company should heavily invest in an e-commerce platform and improve its strategy to increase sales. Therefore, Costco should aim at improving its digital strategy to improve its competitive advantage over such brands as Walmart and Amazon. Lastly, it should consider investing in health consciousness to include organic foods in its product offerings fully.

Conclusion

This paper has discussed the significant forces shaping Costco’s external environment and explored its core competencies. In addition, it has also identified potential challenges that the retail industry is most likely to experience. The American giant is considered the second most dominant company after Walmart and dictates a significant portion of the market share in the United States. However, considering the social trends such as the emergence of a health-conscious group of consumers, a retailer such as Costco is more likely to face some challenges in the future. Therefore, it should intensify its involvement in ensuring that its product offerings have organic products to satisfy the customers’ needs. In addition, digitalization is currently driving this industry, and in the future, e-commerce technologies are expected to take control of retail companies. In essence, Costco should capitalize on its core competencies and access to advance technologies to start the process of implementing an e-commerce platform.

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