Included were department stores, discount stores, wholesale clubs, and online retailers. It talked about when each came about and its impacts to the retail industry. Department stores were first to transform the retail industry in the late 1800s. They created the new pastime of window-shopping as well as revolutionizing retailing by offering a variety of products in one location and being known for great customer service. In the 1960s discount stores arose.
These were the first retailers to differentiate themselves by concentrating less on the shopping experience and focusing on delivering lowest cost items. Wholesale clubs came along in the early 1980s. These stores were similar to discounters in their pursuit to offer the lowest price for goods, but they went about it in a different way. These clubs offered memberships, large quantities, bulk items, limited selections, and basic stores to be able to offer the lowest prices possible. The most recent retailer segment to enter the market was online retailers.
Online retailers were thought to be the next big thing and take over the retail industry; however, it has shown that not as many customers have been transitioning as previously projected. Second, was a look at the industry growth for retail. The findings came to the conclusion that the sales for the retail industry, as a whole, grew similarly to GDP. Retail industry is a mature industry with companies achieving growth in excess of GDP only through stealing sales from competitors or becoming international. Lastly, a look at Costco specifically was done.
Costco Wholesale was founded in 1983 and started on its path to expansion when it merged with Price Club in 1993. Costco and Price Club were pioneers in the wholesale industry, and they take great pride in having invented and developed the club warehouse concept. However, it did not take long for competition to enter the segment to take a piece the market share. A discussion of Costco’s strategy and its competition concludes the case study which is discussed in more detail below. Questions: I. Performance and Competitors
Costco has two main direct competitors, Sam’s Club and BJ’s Wholesale Club. The three of these companies compete in many ways. Even though Costco is seen as number one by most reports, they all go up and down frequently in categories of operation in which they dominate. Sam’s Club is Costco’s largest wholesale club competitor. Sam’s outnumbers Costco in terms of number of warehouses and worldwide members. This could lead one to believe that Sam’s would then be the best. However, Costco has larger total revenues, sales per store, and operating income than Sam’s Club.
How is this possible? The main reason is within their differing strategies. Sam’s Club targets a lower income customer than Costco which tends to bring the outcome of Sam’s customers spending less per visit than Costco’s. Other reasons Sam’s Club struggled to gain a significant market share right away included suffering large amounts of turnover and lacking a differentiation strategy from Wal-Mart Corporation. These two reasons have slowly diminished leaving the main difference as their target audiences.
Costco’s other main direct competitor; BJ’s Wholesale Club, tends to be more similar in strategy and differentiates through the environment of their stores. BJ’s Wholesale’s strategy is similar to Costco since they both target small business owners and middle-class customers, even though BJ’s charges a lower membership fee. Both stores include many high-value goods in the product line to increase sales per customer and increase store visits through supplementary products. Where they differentiate is the size, style, and method of running each individual store.
BJ’s operates smaller stores that place an importance on investing in improving flooring, lighting and signage to enhance the atmosphere and making the stores feel less like a warehouse. Also, within these stores BJ’s tends to carry more SKUs and variety of products to meet the vast array of customer’s needs. Costco attempts to cut prices by offering lower number of SKUs to make the process of distribution more easy and cost effective. Since BJ’s offer more SKUs they need to make up for the extra cost, which tends to come to the customer in marking products up more than Costco’s 14% cap.
BJ’s methods have led the company to see sales and profit growth greater than Costco’s. BJ’s customers also visit the store about 12 times per year, putting it above the average of 9 times per year for Costco and Sam’s club. BJ’s also surprisingly reported greater gross margins, allowing it to claim its operations were even more efficient than Costco’s. Looking further at each company’s financial ratios, a few additional conclusions can be made. Walmart has the highest return on equity and return on assets meaning it is the most efficient at generating returns on shareholder investment and company assets.
Costco has the highest inventory turnover, meaning it keeps products in inventory for a shorter amount of time than the other companies. BJ’s tends to have the lowest debt levels which demonstrate it is less dependent on leverage. All three have remained stable in efficiency, meaning that turnover is consistent within each firm. II. Strengths A core strength for Costco is their ability to be first in the marketplace and their strategy of keeping things simple. Costco has a few basic guidelines they follow for running their business.
Strategies must be simple, easy to communicate, and easy to continue. Having this simple way of operation is also a great strength of theirs because they created it. Costco, who merged with Price Club, was the first of its kind. They aren’t trying to mimic someone else’s creation or strategy, but instead they are continuing to do what has been successful. Costco reaps all the benefits of the first mover advantage.
As a result, they become number one in several categories. Costco out ranks its competitors through their growing membership, sales per store, and their higher revenues. III. Strategy Costco targets a wealthier clientele of small business owners and middle class shoppers to differentiate itself from Sam’s Club. Costco values their customer which is demonstrated by promising to not markup products more than 14% over the distributor’s price. Costco also has a goal of delivering the lowest per unit price on the products it sells. Selling in bulk allows them to reach this goal. Along with this goal, Costco will not sell items in bigger sizes if it doesn’t also lower the price for its customers.
Another strategy that Costco uses to keep prices low is limiting the number of SKUs from their vendors. This reduces immense production costs for manufacturers allowing them to focus on one item, in one color, in one style, to one location. Costco also keeps expenses down through their stores being in warehouse facilities with no fancy designing or features. The stores are treated more like warehouses to keep costs down for distributing goods. Pallets go directly from the truck to the floor in the store. No extra cost of a floor design or storage in the back.