Costco Company is one of the largest warehousing companies catering to its members with a broad range of consumer product lines. The company attracts its customers majorly by means of a membership program featuring a comparatively low pricing tactic and offering various merchandise that includes household appliances, auto products, baby care items, bed and bath accessories, electronics, food and wine, furnishing accessories, health goods, jewelry, electronic media and games for every age (Costco Wholesale).
The company has been following this plan of lowered pricing since the beginning which plays a vital role in increasing the membership at large. The membership program offered by Costco is categorized for customers. Business memberships can be availed at an annual charge of $50 limited for licensed businesses, farmers, NGOs, government authorities, and ranchers specifically. Gold Star membership is for people who are unable to fulfill the requirements for business memberships. Executive memberships can be availed at an additional cost of $50 for both memberships mentioned earlier (Costco Wholesale).
The company started its business in 1976 with the name of Price Club. It was created to cater to small businesses however a large customer base bearing non-business masses enforced the organization to further grow their business by selling products to them. Initially, the company observed exceptional growth in terms of sales and revenue.
Today Costco has spread all over the globe featuring 554 locations in major countries like Korea, Japan, Taiwan, The United Kingdom, Mexican states, and the U.S.A. It has employed 140000+ of manpower worldwide and a huge base of 54.5 million cardholders. The company holds its shares in NASDAQ under the symbol COST and is on the Fortune 500 list of companies steadfast on the rank of 29 (Costco Wholesale).
The company is rivaled by significant giants like Wal-Mart and Target with Wal-Mart holding its place as the leader of the discount and variety store market. Wal-Mart has an industry capitalization of 197.55 billion dollars while Costco is in the third position bearing only 25.43 billion dollars. Companies like Target, Dollar Tree Inc, Big Lots Inc, Family Dollar Stores Inc, Fred’s Inc, Price Smart Inc., and 99 Cents-only stores are tough competitors of Costco as well (Yahoo! Finance).
Costco, like other warehouse-based companies, offers a wide range of products covering almost every aspect of life. It has been shelving items from baby care to household items as well as entertainment and business tools to cater to every customer’s requirement. Like Wal-Mart, The products offered by other competitors in the market are nothing but identical to what Costco has to offer. Differentiation of product range among the companies is negligible, consequently, there are no such products that differentiate Costco from any other rivals in the market (Costco Wholesale).
The nature of non-price competition
Non-price competition is a marketing strategy in which companies discriminate their offered product line which is based upon physical attributes and functionality instead of lowered price tags. It is basically a sort of promotional strategy which attracts the customer to buy the same product from one company instead of the other just because the first company is having an achievable advantage for the customer. Considering Costco here, it often emphasizes this strategy to gain success. The website of Costco’s company is full of promotional stuff, featuring the most advanced electronic systems available to purchase with FREE gifts like DVDs. And more to add to this, they are offering free delivery of furnishing items for the consumer which means a free of cost transportation to any place as per desire.
This compels the customer to think about saving money in terms of transport charges, consequently attracting customers to purchase the item. Costco also offers computers with free software which is actually costly in the market. This promotional strategy is a non-price competition that pushes the customer to purchase from them and save money. The company, therefore, attains the benefits of an increasing, dependent number of clientele who are bound to buy, resulting in better revenue figures.
Saying that non-price competition is not facilitating the giants of the marketing would be wrong since every discount and variety store uses this method to gain more credibility in terms of variety and quality of products (Symeonidis).
Ability and impact of price setting
Costco is at large, known for its low pricing strategy to retain its huge valuable customer base. The ability of price setting is on the higher side for this company since it has a comparatively lowered rate of products from other competitors. Due to the reduction in various products along with different promotional deals and free gift promotions, competitors of Costco are compelled to reduce the prices of products overall to avoid the circumstances of price wars in the market. The impact goes further; when Costco still has the capacity to cater to a large number of customers while others get short of promotional stuff. Lowered price rates are one of the most famous characteristics that Costco possesses. Wal-Mart faces competition due to the major factor of pricing the products which are more or less identical with Costco (Costco Wholesale).
The membership part which is offered by Costco is an effective way of retaining valued customers. High levels of customer service and reliability keep the customer entrusted within the company. The membership programs provide additional benefits which impact the market gradually stealing customers that were once mingled with its competitors. Offering money-back guarantees to members only publicizes the membership part as beneficial for those who haven’t been enrolled as prestigious members of Costco (Costco Wholesale).
Barriers to entry and exit into the industry
Any such issues that can obstruct the ability of a company to enter the market or industry are known as barriers to entry. Similarly, any issues that limit the company’s exit from the market are called as barrier to exit.
The company at its own behalf does not have any barriers for a new competitor to enter the market however there are certain barriers that may hinder a newcomer on the platform to overtake these giants. The barriers are not kept by Costco but the market in which Costco is involved too.
The first barrier that comes is the requirement of huge volumes of production or product line in this sector. The sales to breakeven the cost level per unit for profits is a barrier. Secondly a hefty amount of money is required as the capital investment which is used to initiate the business, hence proving the condition to be another barrier to entry. The affinity for buyers of a specific company to switch to a new comer is quite unforthcoming which in turn limits the entry of a new competitor in the market. The leading giants of the market are already dominating the market with recognized product line and brands from around the world. Making a competent branded product involves a lot of time and money, consequently It is considered to be a barrier. Industries like discount and variety stores industry tend to have a limited amount of newcomers since it requires permissions and licenses from the governmental authorities making it quite difficult for a starter. The standards of a market also confines a competitor to enter since it has to meet the standards of quality as well as manpower, allotted manufacturing land area etc.
Barriers that hamper the capacity of a competitor or company to leave the market is a totally different scenario from the entry part. Once entered the market, further obstructions come in way to hinder, and when a competitor decides to leave, there are certain issues that come in the way. The first of it, is the investment in the equipment which is specifically bought to cater the needs of the organization’s manufacturing, in the retail industry it’s the huge shelves placed in the warehouse which cannot be readily used somewhere else, secondly specific soft ware which are implement to maintain the databases and customer relationship modules. On the other hand, extremely dedicated skill by the market participants which cannot be operated in other markets or industries tend to be an obstruction to leave the industry. Thirdly, and above all, far above the ground levels of committed preset expenses have a propensity to prevent the company from leaving the industry (Costco Wholesale).
The possibility of the existence of long run profits
Since Costco works on a low pricing strategy like many other giants of the industry depend upon, the chance of earning profits on a longer run are likely to be bright. Since on the initial level, due to the fewer margins of profit, ability to earn quickly is a vague thought, therefore in a greater passage of time, if it is reviewed in the Annual report, the profits have gone higher since the very beginning. The company believes in great earnings but keeps it slow in order to cope up with the ever-attractive low pricing method. As it is said, “slow and steady wins the race”, the company creeps towards the profits since they are sales and revenue has grown at large. the best example would be a food product worth $5. The company bought it for $4, and sold it keeping a $1 profit at a rate of 20%. The other companies did the same, so Costco, hypothetically, reduced the price for $4.5 as total selling price. Customers got attracted by this price since it overtakes the selling prices offered anywhere else. Initially, the profits for Costco were less as compared to others, but the pricing attracted a large number of customers, eventually raising sales and profits on the whole (Costco Wholesale).
How are wages and salaries determined in the industry?
Costco provides extra benefits and perks to its employees to keep them dedicated as well as motivated towards their work. It also offers excellent remuneration packages that suit the skillful employees working at Costco. To be more specific the company has employed people under three different conditions. It has hourly employees who are working full time; similarly it also caters employees who work part time. Salaried employees are also there working with many benefits. The company has a policy of providing health benefits to all the employees with different plans available according to their nature of job. The hourly employees who work part time can avail benefits after 180 days from initial date. Hourly employees who work full time can avail the same benefits after the completion of 90 working days. Salaried employees have the benefits right from the initial day, distinguishing Costco on the whole as a caring employer in the industry (Costco Wholesale).
Costco Wholesale. Annual Report 2008. Annual Report for FY08. Issaquah: Costco Wholesale, 2008.
Costco Wholesale. Costco has Great Benefits. 2009. Web.
Costco Wholesale. Why Become a Costco Member? 2009. Web.
Symeonidis, G. “Price Competition, Non-Price Competition and Market Structure: Theory and Evidence from the UK.” Economica, Volume 67, Number 3 (2000): 437-456.
Yahoo! Finance. Costco Wholesale Corporation (COST). 2009. Web.