COSTCO SWOT 2024 | SWOT Analysis of COSTCO

Company: Costco Wholesale Corporation
CEO: W. Craig Jelinek
Founders: James Sinegal, Jeffrey Brotman, Sol Price
Year founded: July 12, 1976 (as Price Club), September 15, 1983 (as Costco)
Headquarter: Issaquah, Washington, United States
Number of Employees (2021): 288,000
Locations: 782
Cardholders: 98.5 million
Type: Public
Ticker Symbol: COST
Market Cap (Jun 2022): $210.40 billion
Annual Revenue (FY 2021): $195.93 billion
Profit |Net income (FY 2021): $5.01 billion

Did you know that Costco hasn’t changed the price of its $1.50 quarter-pound 100% beef hot dog and 590 ml drink in 34 years?

Table of Contents

Costco’s Strengths

Low Prices: Costco’s low price strategy is a major strength of the retail giant. Costco adopts a strategy of stocking high-quality items, which are sold in bulk-size at low-profit margins in warehouses style stores. The organization wants to be known for a high-quality, low-priced For example, according to fortune, an average markup at Costco is 11%, vs. 24% at Walmart, and 35% at Home Depot.
Membership Business Model: Costco’s business model is different than most other retailers; they charge an annual membership fee of $60 from its members. And only the paid members can shop at Costco.
Loyal Customer Base: Costco has been able to build a large, devoted, and loyal customer base. Costco has 5 million cardholders (2019) around the world, and their cardholder’s membership has been growing year over year. In 2019, member renewal rate was 91% (US) and 88% (Canada).
Doesn’t waste money on advertising: Costco has no budget for advertising. In comparison, Walmart spent $2.9 Billion, and Target spent $1.4 Billion on advertisement in 2018. In an interview, Jim Sinegal, Cofounder, and former CEO, says that “Advertising is Evil because it cost huge sums of money, which would lead to higher prices of the merchandise and that’s bad for the company and our customers.”
Pass savings to customers: Costco maintains a competitive edge by keeping the operational cost as low as possible. It enables the organization to be less reliant on making huge profit margins in sales, thereby allowing its customers to have better savings on purchase.
High-Quality Products: One of Costco’s philosophy is to provide its members with the highest quality products at the most competitive prices. Quality is achieved through direct bargain and purchase from manufacturers. Costco’s strategy is to maintain a good perception of its products and services, which has ensured brand loyalty.
High Paying Retail Jobs: Costco has built a happy workforce and a loyal employee base by paying the highest salary and benefit amongst its competitors. The retail giant currently pays a minimum wage of $15 per hour, which has enabled them to hire a highly-skilled workforce. The strategy has influenced other retail giants like Walmart and Target to raise their employee salary.

Costco high paying retail jobs — Image source: www.realmoney.thestreet.com

Generous Perks and Benefits to Employees: Costco provides generous benefits to its employees. It includes full health and dental insurance for both full time and part-time workers, good paid time off (PTO) for vacation, personal time, and 401(K) with stock options. Costco employees also receive a greater level of responsibilities at work, which keeps them highly motivated and happy.

Costco’s median wage salary — Image source: www.realmoney.thestreet.com | Costco’s median wage

Low employee turnover rate: A happy workforce means minimal employee turnover and better customer satisfaction. Costco’s employee turnover rate is below 6%, which is very low for the retail industry.
America’s Best Employer: According to Forbes surveys, Costco has held a top 5 position for many years in the row. In 2017, Costco was ranked at # 1 position, and in 2019, it is ranked at # 4 position.

Image source: Statista | America’s Best Employers 2017 Survey

Strong distribution Network: Costco has been able to spread its international and local presence through its strong distribution network system. In 2019, Costco operated 782 warehouses across the US, Japan, Mexico, Spain, China, Taiwan, France, South Korea, and Iceland.
Big pizza chain: Costco is the 14^th largest pizza chain in the US. With over 700 locations with food courts, Costco is even bigger than California Pizza Kitchen.

Costco’s Weaknesses

Limited Product Selection: When you shop at Costco, you have a wide variety of products ranging from clothing, furniture, jewelry, toys, TVs, and lots more. But your choice for individual products is limited in relation to other retail giants. In an average Costco store, you would find about 3700 product SKUs compared to 150,000 product SKUs at Walmart and 80, 000 product SKUs in a Target store.
Cost of Transportation: When you buy items in bulk, transportation can become very difficult, especially for people living in urban areas or cities. You would spend additional cost in transportation with Costco as compared to other online retail giants like Amazon and Walmart’s (e-commerce) subsidiary Jet.com that offers free / discounted shipping. It is a major weakness of Costco.
Cater to smaller customer base: Due to its smaller product selection, Costco is unable to attract a wider customer base, who want a bigger selection of products and in smaller quantities.
Lack of Global Presence and high dependence on selected markets: Although Costco has a large number of warehouses around the world, the US and Canada account for the majority of its warehouses. They also account for 80% of its revenue. Out of the 782 Costco warehouses around the world, 543 and 100 are located in the US and Canada, respectively. It means the organization lacks a global presence.
Aging customer base: Costco has an aging problem. The majority of its customer base lives in the suburbs, owns vehicles, and buys in bulk. It is mostly attributed to its lack of digital advertising and limited eCommerce. Busy urban/city population and the millennials prefer quick shopping through local stores or eCommerce sites and the goods delivered to their doorsteps. Costco has a limited eCommerce presence; this means they are unable to attract younger customers. According to statistics by Evercore ISI, Costco’s average customer age is around 50. Estimates by other firms range between 40 and 45, which is unfavorable because this market segment is small compared to millennials. In the recent past, Costco has been trying to lower its average customer age by introducing organic produce and sustainably made items to attract younger shoppers. [1]
Research and Development: Costco spend a significant amount in research, but it’s still far less than the major players in the retail sector. This has made some of Costco competitors gain a significant advantage in product innovation and customer satisfaction.
Slow eCommerce Adoption: The pace of Costco’s eCommerce adoption has been slower than retail overall. In the Q2 of 2020, eCommerce penetration for the retail sector was above 20%, which nearly three times more than Costco’s 7% online penetration. In the current digital age, Costco’s slow eCommerce adoption makes it very difficult for the retailer to attract millennials who prefer quick shopping options. [2]
Poor Curbside Pickup Implementation: According to a 2020 survey, 25.5 million households used the curbside pickup option in August alone from 10.1 million households in August of 2019. Curbside grocery pick is the main 2020 trend, which allows customers to buy groceries online and pick them up at the store. Many grocery retailers like Walmart have grown their revenue immensely in 2020 from curbside pickup. Unfortunately, Costco has failed to implement curbside pickup. This is a major weakness because consumers are reluctant to purchase in-store and prefer to order online and scoop up their groceries outside the store without leaving their car. [3]

Costco’s Opportunities

Online Presence (E-commerce): There has been a significant increase in the number of people using the internet and shopping through eCommerce sites. It means that there is a great opportunity for Costco to expand its eCommerce platform for shopping. In 2019, only 4% of its total revenue is contributed to e-commerce. In Q3 and Q4 of 2020, Costco focused on exploiting an increase in demand for online shopping by expanding its eCommerce platform. Costco’s online sales grew in the last 12 months ended Aug. 30 (its fiscal year), though it did not break out specific online sales figures. During its Q4, eCommerce accelerated Costco’s online sales in Q3, ended in May 2020, grew 64.5%, and accelerated 90.6% year-over-year in Q4 2020. In the 12 ended August 2020, its online sales growth was 49.5%, which a major improvement compared to a 7.9% eCommerce growth in fiscal 2019 and 9.7% in fiscal 2018. Costco still has the opportunity to beef up its online business further and attract more customers who feel reluctant to shop in-store due to the health crisis. [4]
Digital Advertising: The number of social media users is growing every day. Facebook has 63 billion, and Twitter has 126 million daily active users. This means there is a great opportunity for Costco to reach out to potential members by advertising digitally. Costco has 0 tweets and 2.15 million likes on Facebook. In comparison, Walmart has 34 million likes, and Target has 24 million likes on Facebook. Through social media, Costco can promote its products and services significantly. The retailer already opened its first store in Shanghai, with a second store expected in 2020. Its rapid expansion strategy in China is a major opportunity for long-term growth based on the high demand for essentials in the market. [5]
Global Expansion: Costco has a great opportunity to enter into new markets, including China, and continue to open new warehouses.
Health Consciousness Customers: Americans and people all over the world are becoming more health-conscious. It implies that Costco can take advantage of and promote healthy alternatives in its food courts and grocery section.
Tax Policy: The US government’s reduction in tax is beneficial for Costco. It would mean paying a lesser amount in tax and utilizing these saving for expansion.
Transport Industry: Transportation industries are adopting smarter technologies through shipment consolidation. Consolidation has greatly reduced the cost of transporting commodities, which can be beneficial to Costco and further reduce its operational cost.
Supply Uncertainties: Although the global health crisis is a threat for most businesses, retailers that offer essentials are better positioned to meet the needs of consumers and grow. Panic shopping induced by the shortage in supply of essentials enabled Costco to increase its total revenue rose over 10% to $39.07 billion and gross margin by 6.25% to $816 million in Q2 of 2020 ended Feb. 16. Costco can continue exploiting this opportunity for short-term growth. [6]
Expand through acquisition: Costco can expand into related fields like delivery services by acquiring small or medium companies established in the sector. In 2020, Costco acquired Innovel Solutions that was servicing the company since 2015, for $1 billion. The acquisition gives Costco another revenue stream since Innovel continue to serve retailers like Sears and other third-parties. [7]
Adopt Flexible Purchase Options: Costco’s rivals like Sam’s Club, Kroger, and Whole Foods have grown their sales by introducing curbside pickup offerings. Analysts believe that curbside grocery pickup is here to stay. Costco has the opportunity to grow its grocery revenue by adopting a curbside pick, which is flexible and demanded by customers. [8]
Coronavirus Outbreak – Although the coronavirus outbreak is a threat for most businesses due to supply chain challenges, however, this situation (atleast for the short-term) is turning out to be a big opportunity and business booster for Costco. Customers (due to fear of short supply) are stocking up essential everyday items such as water, food, medical supplies, disinfectant, toilet papers, etc. Forbes reports, in the last week of February, Costco had about a 20% increase in sales.

Costco’s Threats

Brand Reputation: Product recall can be terrifying not just for the possible financial losses but also for the lasting reputational damage. When an organization’s reputation is damaged, it becomes very challenging gaining it back. For the retail business, reputation is a key factor in the brand’s long term success. Costco was affected by a product recall in November 2015. Its rotisserie chicken salad was recalled from all its stores due to the outbreak of E. Coli toxin, and 19 people were infected. This has greatly affected Costco’s reputation.
Controversies – Costco got into trouble over after it placed the Bible under its fiction sector. Many people had a big problem with labeling the Bible a fiction, and the story went viral. Costco made an apology by sending an apology email to Fox News and subsequently removed the Bible from the fictional section.
Security: Costco gathers and hands over its customers and employees’ information to a third-party cloud service for safekeeping. This includes their customers’ cashless banking details. If these details fall in the wrong hands, it could spell doom.
Political uncertainties: Costco is internationally operated, which implies that they are open to political problems in the countries they operate.
Ecommerce and technological developments: The world has gone digital, and these days people prefer shopping through their smartphones. Technological advancement of their competitors poses a serious threat to Costco. Customers are attracted to shop on platforms where the goods would be delivered to their doorstep. Costco’s neglect to robust e-commerce might be the beginning of its downfall.
Price Competition: Manufacturing costs have dropped in recent years, and other retail giants are exploiting ways of reducing operational costs. This has led to intense price competition, which is a threat to Costco.
Bad economics: Bad economics affects every business, including Costco. Bad economic implies lower sales.
Exchange Rates: Fluctuating exchange rate can significantly affect retail organizations that operate internationally.
Competition: Walmart and Amazon are very aggressive competitors, and they are constantly upping their games. Walmart is currently the largest retail conglomerate in the world ($514.40 billion annual revenue). It has been investing very heavily in the acquisition of e-commerce websites such as Jet.com, Bonobos, ModCloth, Shoes.com, Moosejaw, and Flipkart, while Amazon is the largest on the internet.
Fake products: Costco was sued after it emerged that the retailer was selling a ring designed to look exactly like the most iconic Tiffany engagement ring. The courts ruled in favor of Tiffany & Co. and required Costco to pay nearly $20 million in damages. It is likely that some customers will never try to purchase high-end jewelry and brands at Costco due to suspicion of being sold fake products. [9]