Cost Co Wholesale: Competitive Advantage And Sustainability Analysis

2894 words - 12 pages

Competitive Advantage and Sustainability AnalysisIntroductionCostco Wholesale opened its first store in Seattle, Washington in 1983. Founders Jeff Brotman and Jim Sinegal had a simple yet powerful idea: allow people to save on basic necessities and consumer staples while taking advantage of special offers on high-end luxury items and durable goods. With $71 billion in sales and more than $1 billion in net income for their latest fiscal year, Costco is the leading player in the warehouse club segment of the discount retail industry, the fifth largest retailer in North America and ninth in the world.This objective of this paper is to analyze Costco's competitive advantage and business strategy. As part of this analysis, we will compare Costco's business model to its closest publicly traded competitor, BJ's Wholesale, to understand the competitive dynamics of their interactions with customers. Furthermore, we will analyze whether Costco's competitive advantages are sustainable in the long run.Market Overview and Key CompetitorsThe discount retail business is highly competitive. The warehouse club segment features three players with combined sales of $128 billion. Costco and Sam's Club (a subsidiary of Wal-Mart) account for 55% and 37% of sales respectively, and BJ's Wholesale comprises 8%. In addition to warehouse clubs, Costco competes with national and regional retailers such as supermarkets, supercenters and general merchandise retail competitors like Target, Kohl's and Wal-Mart. To a lesser extent, Costco also competes with single category competitors such as Lowe's, Home Depot, Trader Joe's and Whole Foods. However, Sam's Club and BJ's are the primary competitors in the segment, with Sam's Club representing its most significant threat due to its parent company's greater financial resources, supplier pricing power and market penetration. Given this context as well as competitive pressures, Costco has managed to retain its leading position because of superior operational efficiency and management execution, merchandising prowess and unique corporate culture.Operational Efficiency and Management ExecutionThe core strategy behind a warehouse club is to offer members low prices on recognized brands in high demand product categories. Costco arranges merchandise in stacks and pallets in basic, bare-bones warehouses. Value capture, from the club member's view, comes from low prices and increased willingness to pay for premium branded goods and drives sales of the merchandise. This results in high inventory turnover. Capitalizing on the high volumes requires cost discipline, operating efficiencies and effective distribution. Wal-Mart originally developed the hub-and-spoke warehouse-store system and pioneered the implementation of "cross-docking" in the early 1990s. Wal-Mart also developed IT systems allowing the company to track the movement of merchandise at all times in its network. Costco successfully copied Wal-Mart and implemented "cross-docking",...

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