Costco Case Study

Background

Costco Wholesale Corporation (NASDAQ: COST) (“Costco” or the “Company”) is a membership-only warehouse club founded in 1983 in Seattle, Washington, United States. The Company, run by industry patriarchs James Sinegal and Jeffrey Brotman, is known for offering low-price, limited-selection, and retail treasure hunts for its consumers. As pressures mount from competitive rivals like Sam’s Club (operated by Walmart) and BJ’s Wholesale Club to raise prices to pad small profit margins, Costco has maintained its mission to provide its members with quality goods and services at the lowest possible prices. Under the direction of Executive Vice President of Wholesale Industries Timothy L. Rose, Costco has hired ONYX Global to conduct extended due diligence and analysis of the Company’s operations, competitive landscape, and plans for the future to advise the feasibility, profitability, and sustainability of Costco’s expansion.

Costco’s 2010 revenue was US$88.9 billion, earned from four primary sources: (i) Merchandise sales of name-brand products; (ii) Merchandise sales of Kirkland Signature products, its private label brand; (iii) Annual membership fees; and (iv) Ancillary services such as food courts, photo centers, and pharmacies.

Analysis

Porters 5 Forces

The Bargaining Power of Suppliers : Low

-Switching costs are low

-Inability of supplier to vertically integrate into industry due to high volume of products being purchased

-Costco finances more inventory via payments terms versus working capital, sells goods before it has to pay suppliers

-Not reliant on any one supplier, and has never experienced difficulty obtaining inventory and had many alternate sources due to suppliers risk, and not their own

-Given the large scale of business and rapid inventory turnover, it is clear suppliers enjoy the relationship

The Bargaining Power of Buyers: Medium

• Many options available, not limited to to wholesale. Able to buy in bulk at competing companies such as target
• Switching costs are low; there are no membership fees for many companies and no cancellation fee when applicable  
• Costco refunds any membership with a customer who is dissatisfied
• Costco reciprocates via loyalty with worldwide renewals at 87.3% in Q3 of 2014
• Low differentiation between products and this diminishes the loyalty of customers
•  High quality of products provided, low prices, and wide variety
•  Need to account for financial status of customer base
• High volume of customers

The Threat of Substitute Products/Services: High

• Large amount of substitutes available in the market, including Sam’s Club an BJ’s
• Low switching cost (annual membership fee)
• Many suppliers
• Wholesale centric
• E-commerce being the new one stop shop, ex. Amazon

Threat of New Entrants: Low