Warehouse Club and Costco

Topics: Costco, Warehouse club, Financial ratios Pages: 13 (3006 words) Published: December 3, 2012
Competition among the North American Warehouse Clubs: Costco Wholesale versus Sam’s Club versus BJ’s Wholesale Issues at Hand: Costco pricing strategy from a quantitative standpoint exposes an issue. The firm’s strategy to set profit margins at a level where operating costs are covered and earning a profit through its membership program where the price of memberships is not competitive enough bring forth potential high risk for net profit losses. For example, if sales decline due to an unforeseen circumstance or simply because of heightened competition. In order to be able to pay for additional capital costs as Costco continues to expand and compete in extremely competitive marketplace, the firm needs to better attack its rivals through a sustainable strategic position. Rationale for Issues: With an increasing gross profit of 0.41% between 2006 and 2009 it appears the firm is moving in a positive direction during this period. However, Costco is experiencing declining net profit margins of -0.31%. With the current pricing strategy in place, the firm could potentially lead to a profit loss. With Costco continuing to expand and open new stores, capital costs will continue to rise. With regards to the dividend payout ratio, Costco has increased its dividends paid out to shareholders each year, instead of reinvesting additional earnings back into the firm.

Proposed Integrated Strategy: Costco has the low-cost provider strategy because it provides low cost to its members compared to its rivals. Costco also has the competitive advantage over its competitors enabling them to grow faster and be more profitable. But, for a company to achieve a cost advantage, its value chain activities should be cost efficient. For examples, willing to capture economies of scale and using the power of bargaining to obtain low prices from suppliers. Finally for a low cost provider strategy to work out, it must have the following: 1. Prices among competitors should be vigorous: Costco for example sets the prices as low as possible so that to win customers that is sensitive to price and to win price war among rivals. 2. When there is no differentiation between products: If there is no differences between products rivals sell, customers would surely choose the one with the lowest price like Costco for example. 3. Difficult for newcomers to compete: Since Costco’s strategy is to provide low cost to its members, it makes it very difficult for new rivals to enter the market and compete with them.

The proposed strategy is appealing for Costco, because its prices compared to rivals is extremely competitive and as a result are able to increase the firm’s market share and overall sales. The products offered are not highly differentiated amongst its industry rivals, therefore customers are highly price sensitive and in order to achieve product differentiation, Costco charges lower prices compared to its rivals for the same brands. In order to strengthen Costco’s competitive position, the firm needs choose the best possible way to attack its rivals. The current price of memberships needs to be aggressively set to the lowest possible price in order to undercut industry rivals and gain market share.

Charging a lower membership price alone will not remedy the declining net profit margin. Costco needs to also gain market share through aggressively lowering costs and thereby lowering prices through its bargaining power with suppliers. Because Costco purchases in high volume, the firm has high bargaining power, and as a result can dictate its terms with suppliers; also making it harder for competitors to beat. The firm needs to increase market share high enough that it in turn increases net profit margins and minimizes costs. The barrier to entry is also drastically reduced because Costco currently has 56% market share in the wholesale industry. If Costco is successful in gaining additional market share through aggressive membership fees and setting the...
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