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Costco Wholesale Corporation is one of the major wholesalers that use the membership technique to sell products such as food, sundries, appliances and apparels to its customers at discounted prices. According to Dalavagas (2015), the organization has membership warehouses in the U.S, Canada, Mexico, Spain, Australia, Japan and U.K. The organization has a rapid inventory turnover and huge sales volume. The organization basically operates at low gross profit margins comparing to other traditional wholesalers and merchandisers. Therefore, for Costco Wholesale Corporation to increase its competitiveness in the wholesale industry, the organization has to evaluate its business and corporate level strategies, business environment and compare its strategies with those of its major competitors.
Business Level Strategies
Costco Wholesale uses the focus strategies to offer quality products to its customers at a low price. According to Baroto, Abdullah and Wan (2012), one of the focus strategies implemented by the organization is the global membership system which offers its members the discount prices of the products. The implementation of the membership system enabled the organization to charge a fixed annual membership fee which can be used for the reduction of operational and management costs incurred by the organization (Tai, 2014). In addition, through its membership system, the organization obtained a global membership number of more than sixty six million customers (Tai, 2014). However, despite Costco’s members having a strong purchasing power, the membership system is an ineffective long-term strategy for the organization since its competitors such as Sam`s Club offer inexpensive membership fees. Besides, some other organizations in this industry do not charge any fees.
The organization also uses the discount pricing strategy as one of its business level strategies. According to Gregory (2017), the discount pricing strategy enables the organization to offer high quality products to its customers at the lowest prices. The organization has implemented operational strategies such as maintaining minimum operation costs expenses in its stores, purchasing its merchandise directly from manufacturers, reducing its inventory losses and credit card costs and managing its advertising costs to enable it offer discounted prices on its products for the members of the organizations. It also allows non-members to use Costco cash cards to shop at the organization’s stores. The discount pricing technique has significantly increased Costco’s sales volume since the corporation sells few brands of products in its stores (Gaille, 2015). Therefore, the organization has increased the number of loyal customers by implementing a good discounting model for its products. The cost leadership strategy is an effective long-term strategy since the organization can obtain sustainable profit margins through large sales volume and obtain a sustainable competitive edge over its competitors.
Corporate Level Strategies
An organization should identify its key business units and processes in order to implement its corporate level policies. The implementation of effective strategies enables an organization to expand its operations and create unique products for its consumers (Daniel, 2015). According to Salimian, Khalili, Nazemi, and Alborzi (2012), Costco uses the expansion strategies to increase its growth levels and competitiveness in the wholesale industry. This is indicated by a variety of products such as food, appliances, gas and pharmaceuticals that the organization offers its customers. The diversification approach implemented by Costco is significant to the long term success of the company since the expansion of its business portfolio will enable the organization to attract a large client base and increase its sales volume which will eventually raise its profit margin and increase its competitiveness.
The organization uses retrenchment strategies to control its stagnant processes. According to Oaks (2015), Costco organization is extremely busy at a certain period of the year. This makes the organization to recruit more seasonal employees during the high season and dismiss the employees during low seasons to continue running its regular operations. The organization has implemented the retrenchment strategies to control the firm’s work processes during the low season to enable it manage its business units effectively. The retrenchment technique is not important to the long term success of Costco since it is only used when the economy is in recession. Therefore, the organization should develop more effective strategies such as focusing on increasing its growth rate to gain a competitive edge in the wholesale industry.
Competitive Environment Analysis
The attractiveness of any industry is positively correlated with its profitability since little competition yields more profit. Therefore, organizations use the Porters five forces analysis to evaluate external and internal forces in order to develop the organizations’ strategies that will allow the companies to obtain a competitive advantage over their competitors. The wholesale industry is based on discounted pricing which increases the rate of competition. In the wholesale industry, competitors offer low prices for their products to attract more customers since consumers are extremely sensitive to changes in prices. Therefore, the threat of rivalry is the highest in the wholesale industry due to competitive pricing and low profit margins.
Barriers of entry in the wholesale industry are high since huge economies of scale are required to cut down costs to fairly competitive yet lucrative prices. New entrants face the risk of low profit margins and high competition which increases entry barriers since costs incurred do not match the expected profit margins. Furthermore, such big wholesalers as Costco and Sam’s Club command brand loyalty which makes it hard for new entrants to increase sales to match those of its competitors due to high costs involved. To create mutually beneficial contracts suppliers are required to use competitive pricing techniques whereas wholesalers need massive sales volume. Therefore, suppliers have low bargaining power in the industry because they rely on wholesalers to make large sales volume.
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According to the analysis of the competitive environment, Costco’s major rival is the Sam’s Club organization. This is indicated by Sam`s Club sales volume and profit margins and growth rate. According to Baroto et al., (2012), Costco had seventy billion dollars as the organization’s net sales while Sam’s Club made net sales worth forty four billion dollars.
In this industry, major wholesale organizations struggle to win customers away from their counterparts. Since individual customers have no power to influence the prices of products they opt to change the wholesale company choosing among the competitors. Thus, Costco faces huge competition from Sam’s Club which also offers discount prices to its customers and charges less annual membership fees than Costco. Sam’s Club has also implemented strategic plans to increase its membership rate by offering discounts on purchase and rolling out a program that charges low membership fee to college students. Therefore, Costco faces a high threat from substitutes which makes the company lower its prices substantially to retain its customer base.
According to Dinesh (2011), Costco lacks a marketing and promotional strategy which may affect its future performance since its major competitor, Sam’s Club spends an estimated amount of fifty million dollars annually on advertisement and promotions. Costco’s membership fee is also more expensive than Sam’s Club membership fee. Costco organization strategy of offering few products compared to its competitors can become a major challenge to the organization since consumers’ needs are dynamic and they require a variety of products to choose from. Sam’s Club currently offers low prices comparing to Costco which could be a threat to the Costco eventually. Therefore, if Costco do not enhance its strategies to match the changing business needs in the wholesale, its major competitor, Sam’s Club will become the whole industry’s business leader in the long term period.
In slow cycle markets Costco will remain successful in the long term period while Sam’s Club will be successful in the long run in fast cycle markets. According to Mir (2009), slow cycle markets refer to strongly shielded resource positions where competitive pressures do not easily influence an organization’s strategic competitiveness. Therefore, organizations that have unique products and strategies are able to dominate the market for a long period of time. Costco’s focus and cost leadership strategies help the company to differentiate its products from its competitors making it an ideal organization to be effective in slow cycle markets. Sam’s Club will be successful in fast cycle markets since the organization has established effective strategies such as advertising and discount pricing that could threaten the success of Costco.
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For any company to remain competitive in the wholesale industry it is important to enhance company’s strategies evaluating its business and corporate level strategies and its business environment. The Costco Wholesale Corporation’s business level strategies are discount pricing and membership system technique. The organization’s corporate level strategies are diversification and retrenchment strategies. The analysis of five forces competitive model indicates that there are high entry barriers which decrease the threat of new entrants in the wholesale industry. The suppliers bargaining power is also low, the buyers bargaining power is high and competition in the industry is high which lowers the overall profitability of the business. Costco’s unique products and strategies will allow it to remain competitive in slow cycle markets, whereas Sam’s Club Company will become competitive in fast cycle markets. Therefore, Costco has to develop effective business and corporate action plan to increase its competitiveness in the wholesale industry.