Costco Company started in 1954 as a startup venture and grew into the third largest retailer in the United States and seventh in the world. The Company is a membership warehouse for merchandises for retailing industries. The memberships had since grown to over 686 with revenue generation of over $116 billion annually. The pioneer, Sol Price was a discount merchandiser. The goal of the business was to provide local retailers with merchandises at economical prices (Thompson 2018). Therefore, using the three-circle analysis, it will be relevant in providing a detailed understanding of the competitive strategies the Company uses to compete with other similar companies. The investigation will further examine the Costco competitive approach in comparison to the competitors in offering the services and products to the consumers. The analysis will provide information on the Company's point of difference, the positions of parity, and the competitors' points of difference.
The First Circle: Customers’ Needs
The first circle of the analysis represents the customer’s needs. The first circle will combine the key features of the Company with the beneficiary needs to the consumers. Therefore, the analysis will be used to examine the team’s consensus regarding the most important customers’ or customers segments’ wants from the product or services offered by Costco. Selecting the right product that customers want is key. Costco provides the customers with a selection of about 3,700 active merchandises that are sold at bargain prices. The goal of Costco is to provide the members with the opportunity to save costs significantly (Thompson 2018).
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Consequently, Costco has utilized the strategy of selling 85% of the items being quality brand-names and the remaining 15% of the products have the Company's private label "Kirkland Signature" brand. The Company's branded items have shown an increased 20% sales of merchandises (Thompson 2018). Therefore, the use of the label branding provided Costco an opportunity to expand the Kirkland Signature product selections leading to increased sales penetration to 30%. The strategy shows that the Company uses low pricing, adding of a new feature, advertising utilizing the brand labels to increase customers and sales (Thompson et al., 2018).
Costco business model focus on providing excellent customer services has influenced the perception of the Company by the consumers in a positive way. The business adheres to strict ethics rules that include; taking care of the employees, taking care of the members, environmental stewards, respecting suppliers, and rewarding the stakeholders (Thompson et al., 2018). The approach of putting the participating parties first has made Costco successful in operations and sales growth globally. The ability to generate high sales and rapid inventory turnover has been influenced by the offering of the low-priced selected products that are privately-labeled to the paying members.
The target market of Costco differs from those of the competitors in the market. The Company targeted small businesses and high-income households. According to Sol Price, he believed that "the richer people are, the more they like to save" (Coriolis Research 2004). The strategy targets the rich with bargain prices. Once the customers see what is on offer, they tend to spend more. Furthermore, the membership criteria focus on those with enough to pay and are impulse buyers. The strategy to attract more customers has led to increased growth in the membership subscription from businesses and customers from 1989 to 2003 as shown in figure 1 below.
Figure 2: Membership Numbers Growth Rate 1980-2003 of Costco (Coriolis Research 2004).
The Second Circle: Customer’s View of the Company’s Offerings
The customer’s view of the Costco offerings is based on the products pricing, location, products quality, product discounts, and merchandise selections (Thompson 2018). Costco customers felt competing companies like Sam's Club provided items that are less-upscale and less expensive, for instance, the treasure-hunt items. Sam’s Club provided customers with products and services at low prices. Some of the merchandises that attracted customers to the competitors’ offerings included the branded products, fresh-food departments, photo processing department, and a self-service gasoline pumps section (Testa 2015). The availability of these products and services within proximity made it easily accessible and pocket-friendly.
According to Thompson (2018), the merchandise categories sales for groceries and food from 2013 to 2015 has increased by 3% every year, while the sundries and hardlines departments sales have decreased by 2% each year as shown in the exhibit 2 below.
Figure 2: Exhibit 2 of Costco Major Merchandise Categories Sales 2005-2015 (Thompson 2018).
The Third Circle: How Customer’s View Competitors’ Offerings. The third circle tends to combine the key features of both the Costco and those of the competitors. Costco has two key competitors in North America: Sam's Club and the BJ's Wholesale Club with market shares of 34% and 7% respectively. Costco has a market share of 59% creating a competition based on pricing, location, members’ services, and merchandise quality, and product selection factors (Thompson 2018). Therefore, consumers, who are the retailers, provide a different view on the offerings of the competing companies. For instance, the customers buying from Sam’s Club, which is Walmart’s subsidiary, price their products at attractively low costs. The customers feel the competitors’ prices are affordable.
Additionally, competitors who trade on narrow categories of merchandises like the Lowe’s Trader Joes’ Bets Buy, and Home Depot have a significant market share in their respective products (Thompson 2018). The narrow product category and discounting provide stiff competition to Costco Company. Therefore, the customer segment narrows down to majorly the small business owners, small restaurants, households, and nonprofit organizations.
Conclusion
The three-circle analysis has been elaborative in understating the competitive strategies Costco uses to compete with similar companies. The critical approach identified were uses of products pricing, locations of warehouses, products quality, product discounts, and merchandise selections (Thompson 2018). The three-circles has further shown how the beneficiary needs, the key features of the company, and the key features of the competitors impact on the approaches used by Costco in running the business.
References
Coriolis Research, (2004). Understanding Costco: Costco Wholesale. Coriolis Research, New Zealand: Auckland.
Testa, P., (2015). Decoding the Formation of a Retail Giant: The Evolving Geography of Costco’s Store Network . University of North Texas, TX: Denton.
Thompson, A. A., Peteraf, M., J.E., & Strickland, A. J., (2018). Crafting & Executing Strategy: The Quest for Competitive Advantage , United States: McGraw-Hill Create.
Thompson, A. A., Jr. (2018). Case 4: Costco Wholesale in 2016: Mission, Business Model, and Strategy. University of Alabama, AL: Tuscaloosa.
