Costco Wholesale Corporation is the largest warehouse club chain in United States. However, Costco’s success is not limited to, but encompasses US. It has established itself in seven other countries and became the ninth largest retailer worldwide. Costco aims to offer the highest quality product with the lowest price possible. In addition to the low-cost strategy, Costco sees innovation as an intellectual feat essential to maintain customer loyalty. Unlike many other retailers, whose innovation came to no avail, Costco’s “treasure-hunting” scheme is regarded by many experts as a core competency that surpasses all other retailers. The claim is backed up by Costco’s rapid growth in sales, as the recent economic downturn has yet to affect Costco’s financial performance.
In order to determine the feasibility of entering a new market, few aspects of business must be carefully examined. These aspects of business include firm-specific advantages, country specific advantages, country environment, retail industry as a whole, and competitors. Costco’s competitive advantages need to be addressed for the sake of transferability. Without knowing the competitive advantages that can be utilized, developing strategy is a fruitless toil. Similarly, country environment has to be analyzed in order to locate potential risks, as risks are hindrances to Costco’s well-being. However, one ought to realize that country environment is insufficient for tracing the risks. The industry as a whole may carry risks on its own. Therefore, Porter’s five forces model is used to capture the full environmental analysis. Lastly, competitor analysis is crucial to Costco since Costco tries to differentiate from its competitors to avoid price war.
Potential Risks of Investment
One of the most important reasons for analysis is to identify all possible risks. Base on the analysis, all dimensions of the risk has been identified. It is imperative to resolve all risks in order to be successful. However, even though numerous risks have been identified, only the risk relevant to Costco is discussed, as it is unnecessary to address risks that are extraneous to Costco.
Drawing the inferences from the aforementioned facts, recommendations are given as directions for Costco to approach Australia. Costco is advised enter Australia as wholly-owned enterprise. It is best for Costco to locate its warehouses in urban areas in order to capture market share in a hasty manor. Lastly, ways in which Costco can use to acquire more customers are given to conclude the report.
Originally established in 1976 as “Price Club”, Costco Wholesale Corporation (Costco) is the current global segment leader of wholesale club store. The very first Costco warehouse is established in Seattle, Washington in 1983 and Costco soon became the first company ever to grow from zero to $3 billion in sales in less than six years. Costco currently operates 562 warehouses world-wide, with majority of its operation in the United States with 409 warehouses. Costco al operates in seven other countries, including 77 warehouses in Canada, 32 in Mexico, 21 in the United Kingdom, seven in South Korea, six in Taiwan, nine in Japan and, one in Australia (Costco, 2009). It is the third largest retail in the United States and 9th largest retail in the world. Costco is membership based, thus consumers are required to pay an annual membership fee. Costco offers three types of membership: gold star member, business member, and executive member. There are approximately 54.9 million members around the globe and Costco maintains a high renewal rate of 87%.
The business model for Costco is quite simple: it aims to sell the highest quality products for the lowest possible price. This is made possible by using plain spaces to sell products in bulk at deep discounts. According to Jim Sinegal, CEO of Costco Wholesale Corporation, Costco is able to offer low prices “by eliminating traditional costs associated with wholesalers such as salespeople, fancy buildings, delivery, billing and accounts receivable and able to run a tight operation with extremely low overhead,” all of which enables Costco to pass on the savings to consumers (Costco, 2009). To elaborate, low price can be achieved with selling products in large quantity and selling them fast. Goods sold in Costco come in large amount. Therefore, Costco is able to receive low prices on products. Selling of goods in larger packages also reduces packaging cost and saves labor cost, thus increase the efficiency. Costco chooses to sell a limited number of items in a broad range of categories. By narrowing the choices of products, sales volume increases, a method that allows Costco to bargain at an even lower prices. If Costco is unable to drop price of a merchandise, it eliminates the product altogether. For example, when Costco is unable to reach the price agreement with Coca-Cola, it stopped carrying Coca-Cola products because Costco members do not benefit from the best possible price (Fredrix & Skidmore, 2009). Aside from offering brand-name products, Costco possess a brand of its own, Kirkland. The Kirkland carries a variety of products ranging from clothing to food, and it strictly follows the concept of high quality at low price.
Price and quality is not the mere aspects of business that Costco considers. Costco also focus on customer shopping experience. It provides a unique “treasure hunting” shopping experience to its members which encourages its members to stay loyal. Costco offers no directions to the placement of items, and a quarter of Costco’s items are displaced different on daily basis. As a result, shoppers are presented with new and different merchandises each time on the same aisle (Schmit, 2009). Occasionally, Costco also put special items on sale, such as a discounted designer bag, and blend the discounted goods with other merchandise. This creates a sense of excitement. However, all of these are not possible without its employees. Thus, Costco also aims to satisfy the needs of its employees by providing competitive wages at an average of $17.00 US per hour along with additional benefits. The benefits lead to increased productivity and a low turnover rate that saves Costco from unnecessary training costs of hiring new employees (Business Week, 2004).
Costco enjoys great success and it maintains a respective financial status despite the recent economic crisis. According to Costco’s fiscal year 2009 (ending August 31st, 2009) operating results, net sales for 2009 is at $69.89 billion US, although it is down from $70.98 billion US in 2008 (Costco, 2009). The reason for the slight decrease is due to the softness in US sales related to the economic crisis and weaker foreign currencies. However, as the economy slowly recovers, Costco has an increase in sales. Its net sales in September 2009 is $12.53 billion US – an increase from the same period last year of $11.97 billion US (Costco, 2009). Based on Costco’s 2008 annual report, the company has steady improvements each year dating back to 2004. Net sales improves significantly from $47,149 million US to $70,977 million US in 2008. Net income also increases significantly as well from $882 million in 2004 to $1283 million in 2008. All in all, Costco has successfully implemented its business model and the proof lies in its financial terms.
Costco has a very strong market position in the US and this has allowed it strong bargaining power over suppliers, and consequently competitive prices for its goods (Datamonitor, 2008).
Costco’s innovation has created a differentiated method of sales. Certain items in the warehouse are available for limited periods of time, providing customers with a ‘treasure-hunt atmosphere’ where customers are instilled with the idea of ‘buy it now’ (Costco Connection, 2006). This allows Costco to benefit from increased frequency of visits from members.
Costco’s participation in the global market has allowed it to develop a global supplier network. Domestic and international products are purchased in bulk, directly from manufacturers (Marketwatch, 2009). These supply chain efficiencies allow for reduced costs. Additionally, suppliers benefit from good relations with Costco as it provides them with a means for entering into international markets (Coriolis, 2004). Costco is well-connected with its suppliers, and this allows for obtaining their goods at low prices. This has allowed Costco to impose low mark-up on its goods, and thus high returns on low margins
The United States of America consists of a population of approximately 307 million, growing at a rate 0.975%. The US has the third largest population in the world (CIA World Factbook, 2009). With this in mind, there is plentiful demand for necessities in the American market.
US has the largest national GDP in the world, standing at $14.4 trillion and accounting for 23% of the gross world product. The per-capita GDP of Americans stands at $46,900 and ranks 10th in the world (CIA World Factbook, 2009). Naturally, high disposable income led to the rise of spending culture.
With the North American Free Trade Agreement (NAFTA), goods can be imported and exported freely between the US, Canada and Mexico (naftanow.org). This benefits Costco through an increase in potential suppliers throughout NAFTA regions.
Costco’s strategies in its home market are primarily based on their FSAs. This evidently shows that Costco operates in Quadrant 4 of the CSA/FSA Matrix. However, it is not to say that the CSAs do not contribute to any of the success for Costco. The mere implication is that Costco’s own advantage weighs significantly more than the factors it relies on the country.
Economic Integration/National Responsiveness
“Exporting Costco’s philosophy of quality and value requires four elements: the right people, the right location, and the right products at the right price.” Jim Murphy, Senior Vice President of Costco, undermines Costco’s position with regard to the global integration and national responsiveness matrix (Costco Connection, 2006). Costco, as a MNE, has continued to provide these elements in its warehouses worldwide, integrating their method of sales across continents while adapting to local tastes and practices. Upon analyzing Costco warehouses around the world, inferences indicate that Costco operates in Quadrant 3 of the Global Integration/National Responsiveness Matrix.
Costco understands the need for adaptation for international business while expanding existing products into the new markets. In Mexico, American goods are perceived to be of high quality. Costco takes this advantage by adapting its sales mix to consist of 44% import goods and 56% local goods. Food products in Costco Mexico are catered towards the local population while other necessities are directly imported (Costco Connection, 2006). However, Costco in Japan differs from the traditional ‘single sales floor with surface parking’ in every other country. Instead, it has double sales floors with parking located above. This serves as an adaptation to the lack of land in Japan. Significantly different than that of Japan, it is common in South Korea for consumers to sort through potatoes. Costco diversified its method of sales from the traditional ‘sack of potatoes’ to allow the Korean consumers to continue doing so (Costco Connection, 2006).
Even with all these adaptations towards local markets, Costco still maintains its method of sales. Membership is still required to shop in Costco, and material is still sold in bulk across all warehouses. Costco continues to maintain close relationships with its local suppliers worldwide, allowing them to continue selling quality goods at low prices. Kirkland products are sold internationally across all subsidiaries, and membership is usable internationally. Costco continues to be globally integrated as well.
In the analysis of Costco’s international subsidiaries, Costco focuses on both global integration and national responsiveness. Its international success can be attributed to this position in the matrix, and it should remain in this position while expanding to Australia. The cultural similarities between Australia and Canada can be used in determine the product mix.
Host Country Country-Specific Advantages
Australia is a popular destination for foreign direct investment (FDI) and it ranked eleventh in A.T. Kearney’s 2007 FDI Confidence Index (NSW Department of State and Regional Development, 2009). There are several reasons for the attractiveness of Australian market: Large market demand, steady economic growth, secure business environment, and abundant resources.
Australia has a population of 21 million (Australian Bureau of Statistics, 2009) and this number is steadily rising at a rate of 1.28 percent (Euromonitor International, 2008). By year 2020, the population is estimated to be around 24.7 million (Euromonitor International, 2008). Drawing from these numbers, there is an ample demand.
Aside from the demand, Australia is economically stable. Australia has experienced growth for more than 15 years until the recent recession (Euromonitor International, October 2009). Its Gross Domestic Product (GDP) is 1,015 billion, which is around 1.64 percent of the world’s economy (Trading Economics, 2009). This makes Australia an attractive market as economic growth is predicted for the future. Its strong economic performance has also led to higher personal wealth, increasing the purchasing power of the consumers. The real per-capita disposable income increased at an average annual rate of 3.2% and reached A$23,200 in 2007 (Euromonitor International, February 2009).
The general environment of Australia is that of an advanced and developed country, technologically and politically. Technologically, it has world-class infrastructures (Euromonitor International, 2007). Politically, it has an efficient and transparent regulatory system, a low perceived level of corruption and a fair judicial system (Euromonitor International, 2007). In fact, it ranks ninth out of 163 countries in the Corruption Perception Index in 2006 (Euromonitor International, 2007). All of these factors increase the attractiveness of conducting business in Australia, as political risks are relatively low.
Some other advantages include a large land mass and an overall growth in consumer expenditure. A large land mass is important for companies like Costco, where space for storage is important. A growth in consumer expenditure is mainly due to a decreased unemployment rate and increased per-capita disposable income (Euromonitor International, February 2009).
Not only are the consumers in Australia are spending move, they are also more value and cost-conscious. According to Nielsen data in 2008, more than half (56%) of the surveyed Australians were checking shelf prices more carefully and 30% said that they switched to different retailers in an effort to reduce their grocery bill (as cited in Euromonitor, February 2009). With Costco’s low pricing strategy, this trend will serve to attract consumers at least for groceries.
To conclude, Australia offers and attractive business environment in general through its economic growth and low risk environment. Consumer trends towards a more price sensitive shopping habit further create value for Costco to expand in this country.
Transferability of Firm-Specific Advantages
Costco’s FSAs have proved to be the core reason for its success. It is rational for Costco to retain as many of its FSAs in entering the Australian market, or possibly develop even more FSAs.
Costco as a wholesale club will still maintain its strong market position even in this new market. However, the wholesale club industry in Australia is still relatively new. Costco can take this as an opportunity to monopolise the wholesale industry in Australia. To do this, there may be a need for Costco to market and promote more heavily in the Australian market.
Costco’s innovative method of sales should be retained, while introducing local products into its product mix. This would mean Costco needs to attract domestic suppliers for both products and services. This should be made easier as local suppliers attempt to enter the international market through Costco’s international position. Costco should continue to provide diversified products and services, to maintain the convenience for its members, and provide differentiated goods such as American import or private label products such as Kirkland.
Although Costco has the potential to transfer most of the FSAs that have contributed to its success, there is a constant need for adaptation in entering the Australian market. Costco needs to try to present itself as a local company that takes into account the needs and wants of the Australian consumer to ensure its success in the Australian market.
Host Country CSA/FSA Matrix
According to the aforementioned analysis on the CSAs and FSAs of Australia, it is appropriate to place Costco in Quadrant 3 of the CSA/FSA matrix. Australia as a country offers numerous advantages that make the expansion for Costco possible. Furthermore, Costco’s competitive advantages very strong and most are transferable to Australia, placing it in the strong end of the FSA matrix as well. Overall then, it is in a desirable position and it is recommended that Costco establish business in Australia according to the matrix.
Porter’s Five Forces Model
The attractiveness of retail industry can be determined by examining the Porter’s five forces model. The bargaining power of suppliers is low. There is a high supplier concentration relative to the industry concentration, and the switching costs for firms are low. There is a low degree of differentiation of inputs, since the products supplied are mostly commodities. The products are not unique or restricted to just one supplier.
The bargaining power of buyers is moderately high. The concentration of buyers is much higher than the concentration of firms. Due to the economic crisis, there is now an increase of price sensitivity. A survey “found that 75% of Australians consider ‘saving money when you buy groceries’ either ‘more’ or ‘significantly more’ important to them now compared to two years ago” (Datamonitor, 2009). Customers have high mobility, it is effortless to go to a different store and compare prices. It is also easy to search online for the best deal available. There is generally no switching cost for buyers, except for the membership fees. However, Costco has a “Risk-Free 100% Satisfaction Guarantee”, which allows a full membership fee refund if customers are dissatisfied.
The threat of new market entrants is moderate. It may be difficult for new market entrants because there are already companies established in Australia with high brand equity. There is high capital requirement to begin business for wholesalers. Another problem is that there is low access to distribution because of landlord agreements with the big companies, which blocks newcomers from accessing popular areas. There is expected retaliation by incumbents, which will most likely result in price wars. However, there are low government restrictions that prevent others from entering the industry, so the entry barrier is fairly low. Again, the switching cost for buyers is low, and research shows that customer loyalty has been decreasing in recent years.
The threat of substitute products is high. The buyer propensity to substitute is high. There is low perceived level of product differentiation and high number of substitute products. Although Costco carries a wide variety of products, there are still some specialty products that may not be available.
Finally, the intensity of competitive rivalry is high. Currently in Australia, there are two main retail chains, Woolworths and Coles. These two companies account for 80% of the market share (Thieberger, 2008). Although they do not operate as a wholesaler, they still offer a large number of similar products as Costco, and they also use the everyday low price strategy. One of the divisions of Campbells Wholesale operates as a cash and carry warehouse, which is the same as Costco. Although they only have 21 branches in Australia, they have been in business for more than 70 years. However, unlike Costco, they do not require membership. With these in mind, the five forces altogether illustrate that the retail industry is moderately attractive in Australia.
Taking a closer look at the duopoly in the Australian retailing industry, there are many strengths that Costco is capable of competing against, and weaknesses that support Costco to enter the country. Woolworths and Coles are both the market leaders in Australia, and they both have strong brand images. According to the 2009 Global Powers of Retailing Report, Woolworths is placed as the 22nd top retailers in the world, while Coles is placed at 29th (Deloitte, 2009). Woolworth has approximately 3000 stores operating in Australia, and has many well-known brands operating under. Coles has approximately 2900 stores operating in Australia and owns popular brands like Kmart and Target. As well, both companies offer diverse range of products. However, both companies do not pose much of a threat to Costco. Even though Woolworths and Coles both offer a variety of products, none can compete with Costco’s product line. Additionally, Costco has a greater advantage since it operates in 7 other countries spread across the world, allowing Costco to build a large and efficient supply network.
Weaknesses of the duopoly show that it is a great opportunity for Costco to enter the market right now. In June 2008, Woolworths issued a voluntary recall of their lamb products, due to the detection of a strange odor coming from the products. This recall affected Woolworths’ financial performance and the brand image (Datamonitor, 2009). It is a good opportunity for Costco, since their mission statement is to bring high quality at a low price to their consumers. Both Woolworths and Coles have been experiencing a decline in their gross margins, even though the revenues have been rising. There had been significant markdown activities to drive up sales and to reposition their brands. Coles was even forced to close some stores due to weak performances (Datamonitor, 2007). Costco can use this chance to enter the market and acquire some of the market shares. With its strengths and weaknesses, it seems quite clear that Woolworths and Coles do not pose much of a threat to Costco.
Potential Risks of the Investment
Although there are many potential lucrative gains in opening up in Australia, there are also some risks faced. Because of the geographic location, Australia faces many climate changes which increase the risk of storms, droughts, and possible cyclones. For this reason, it is imperative that Costco maintains a backup data barn to safely store any critical information, and attain adequate insurance to protect them in the case of a natural disaster.
Another risk faced by Costco is the skilled labour shortage that is affecting the economy. Although this risk mostly affects knowledge based industries, including the technology, accounting and engineering industries, Costco may be in need of managers or supervisors that require certain skills. This potential problem can be mitigated by providing proper training, or even sending ex-patriots to train the new employees. Also, using skilled migrants to fill the positions can help to evade this risk.
Australia’s floating exchange rate is also a likely setback. Australia’s currency is currently rising, however its floating quality means there may be transaction or translation risks faced by Costco. These risks can be alleviated by currency diversification in spreading out Costco’s financial assets through different, more stable currencies. In addition, Costco can also use exchange risk adaptation programs to balance the assets and liability to eliminate the need for monetary exchange altogether.
The most severe risk is cultural differences. Wholesalers have yet to infiltrate Australia. Thus, Australians are unaccustomed to purchase bulk products. However, there are several strategies to resolve the cultural distance. Costco can implement “tag-along” programs where it encourages multiple customers to shop together. The bulk product can then, be divided up amongst the customers. It is made possible since Australia is a relationship-driven country. Another strategy would be focusing on small family business or stores, where large quantities of products are required. In fact, Australian culture is slowly changing. As mentioned before in the host country CSA section, Australians are becoming value-conscious. Since this idea aligns with Costco’s core value, the cultural distance may eventually diminish on its own.
Because of Coles and Woolworth’s well-established duopoly and hold in market share, it may be hard to penetrate the market. However, Australia’s affinity for foreign brands, as well as a more accessible location can help to bring in a new player for this industry.
Australia, being the regional headquarters for about 500 multinational enterprises, has been praised persistently for its ability in facilitating new businesses. Using a wholly foreign owned enterprise as the entry method is the most logical and beneficial way for Costco to enter Australia. Because Costco has globally established distribution networks of high quality and calibre, it does not need the help of local companies to supply stock or a local network of intermediaries. This excludes the possibility of using a joint venture in this business enterprise. Because Costco’s two main competitors in Australia, Coles and Woolworths, have established a duopoly and comprise a large portion of the market share, it would not be competitive to use a joint venture either. Instead, by capitalizing on Australia’s affinity for foreign brands, Costco can establish its own name and reputation.
Initially, this store will target small and medium enterprises, supplying for the 28% of retail turnover represented by the processed food and beverage industry in Australia. It is best to locate the store in urban areas such as Sydney. The majority of the population lives in urban area, and rural inhabitants often travel to urban areas for work. This is a lucrative market because the local urban inhabitants account for one quarter of Australia’s gross domestic product, and have the highest median household income. The increased rate of migrants is also an important factor, as most of them choose to reside in urban cities. Additionally, Costco can avoid the main competitors, who situated in rural areas of Australia. After establishing a considerable consumer base, Costco should move to stocking local Australian goods. The advantage of global supply networks is increased because of the cultural diversity in Sydney, where people are more aware of the quality in the brands supplied by Costco. At the store opening, it is best to implement mechanisms that encourage customers to become acquainted to Costco by giving out free day passes and giving free upgrades at no cost. Referral programs can be implemented during and after the opening to boost the customer base.
Australian Bureau of Statistics. (2009). 3101.0 – Australian demographic statistics, Jun 2009. Retrieved December 2, 2009, from http://www.abs.gov.au/ausstats/abs@.nsf/mf/3101.0
Business Week. (2004). The Costco Way. Retrieved December 2, 2009, from http://www.businessweek.com/magazine/content/04_15/b3878084_mz021.htm
Company Spotlight: Costco Wholesale Corporation. (2009, May). MarketWatch: Global Round-Up, 8 issue 5, 99-105. Retrieved May 12, 2009, from the Business Source Complete database.
Costco in Australasia: Are they Going to Stock-up? (2004, June). Coriolis Research. Retrieved December 5, 2009, from http://www.coriolisresearch.com/?s=costco+australia
Costco – Company Profile. (n.d.). Costco Investor Relations. Retrieved December 4, 2009, from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-homeprofile
Costco Wholesale Corporation SWOT Analysis. (2008, June). Company Report, p1. Retrieved December 5, 2009, from the Business Source Complete database.
Costco Investor Relations. (2009). Retrieved December 2, 2009, from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-irhome
Costco 2008 Annual report. (2008). Retrieved December 2, 2009, from http://media.corporate-ir.net/media_files/irol/83/83830/2008_AR_Cost.pdf
Datamonitor. (2007, August). Coles Myer, Ltd. SWOT Analysis. Coles Myer, Ltd. SWOT Analysis, 5-6. Retrieved December 3, 2009, from Business Source Complete: http://web.ebscohost.com.proxy.lib.sfu.ca/bsi/search?vid=1&hid=113&sid=0c54da1c-7a63-4d2e-a00e-e35b2d3c24ed%40sessionmgr111
Datamonitor. (2009, May 29). Costco faces a challenge in establishing an Australian market presence but the timing is right. Datamonitor Research Store. Retrieved December 3, 2009, from http://www.datamonitor.com/store/News/costco_faces_a_challenge_in_establishing_an_australian_market_presence_but_the_timing_is_right?productid=2D1D7028-A4E6-4940-81A0-AD8A6DCCC945
Datamonitor. (2009, July). Datamonitor: Woolworths Limited. Woolworths, Ltd. SWOT Analysis, 5-6. Retrieved December 3, 2009, from Business Source Complete: http://web.ebscohost.com.proxy.lib.sfu.ca/bsi/search?vid=4&hid=113&sid=0c54da1c-7a63-4d2e-a00e-e35b2d3c24ed%40sessionmgr111
Deloitte Research. (2009, May 16). Global Powers of Retailing 2009. Retrieved December 3, 2009, from http://public.deloitte.com/media/0460/2009GlobalPowersofRetail_FINAL2.pdf
Euromonitor International. (2007, October 03). Australasia business environment: Proximity to Asia is key to region’s strength.
Euromonitor International. (2008, September). Future demographics – Australia.
Euromonitor International. (2009, February). Consumer lifestyles – Australia.
Euromonitor International. (2009, October 30). Australia: Country profile.
Fredrixe, E & Skidmore, S. (2009). Costco nixes Coke products over pricing dispute, Business Week. Retrieved December 2, 2009, from http://www.businessweek.com/ap/financialnews/D9C1KD4G0.htm
New South Wales Department of State and Regional Development. (2009). Foreign direct investment confidence. Retrieved December 2, 2009, from http://www.business.nsw.gov.au/aboutnsw/Trade+and+Investment/B6_foreign_dir_inv_conf_index.htm
North American Free Trade Agreement | NAFTANow.org. (n.d.). North American Free Trade Agreement | NAFTANow.org. Retrieved December 4, 2009, from http://www.naftanow.org/
Thieberger, V. (2008, June 23). Costco plans Australia foray to challenge duopoly. Reuters. Retrieved December 3, 2009, from http://www.reuters.com/article/rbssRetailSpecialty/idUSSYD11576320080623
Trading Economics. (2009). Australia GDP growth rate. Retrieved December 2, 2009, from http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=AUD
The Global Costco. (2006, October). Costco Connection, 21, 22-26. Retrieved May 12, 2200, from http://www.costcoconnection.com
The World Factbook. (n.d.). The World Factbook: United States. Retrieved December 5, 2009, from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html