The key problems for Costco involve the current global financial conditions, demographics, the ability to keep market share in North America and the ability to find ongoing and reliable sources of merchandise.
The current economy is showing substantial declines in consumer durable spending as people defer such purchases as furniture and large appliances. In addition, according to the MasterCard financial report for May 2010, purchases of apparel have declined 6% for women and 10% for men with marginal increases for children’s apparel. The product categories for these two types of products encompass 29% of Costco’s business. Even though Costco is showing only a 3% decline this month over the same month in 2009, it is a worrying trend. They are, however, making up ground in products that tend to be more recession proof such as fine wines, snack foods and tobacco.
Demographics are troubling for Costco’s business model of large volume single size packaging of goods in order to minimize handling and restocking. With an aging population, more single and divorced people and smaller sized families, there are fewer and fewer people who need or want the huge sizes that are offered by Costco. I found it a wonderful boon when I was feeding a family with five children but now that I am on my own I no longer shop at Costco.
If we pair this problem with the problem of on going concerns for reliable supplies of merchandise we have a larger problem. According to Porter’s Five Factor Model of Forces, suppliers and competitors are gaining power over Costco. For example Proctor and Gamble finds Walmart/Sam’s Club to be their preferred merchandiser. Walmart/Sam’s Club has superior logistics and inventory management and they purchase ongoing supplies of P&G products in a variety of sizes. In addition, they stock a complete inventory of P&G products. This ensures that when production of merchandise is limited Walmart will be the preferred...