Costco SWOT Analysis
Costco is one of the leaders in the US retail sector. As the retail industry has recovered following the pandemic, Costco enjoyed strong growth in 2022. Its revenue and net income grew significantly in 2022 compared to the prior year. The retail giant also realized impressive sales growth along its eight ecommerce websites.
The foundation of Costco is set on its promise to deliver its customers quality products at lower prices and an organizational culture that values its employees as its most important assets. Costco enjoys strong competitive advantage in the retail sector and is also present in several markets outside the United States. Its premium inhouse brand Kirkland signature also enjoyed significant growth in 2022.
At the end of 2022, there were a total 847 Costco locations operational worldwide. While the US is the largest market of Costco, the other significant markets include Canada, Mexico, Japan, UK, Australia, Korea and Taiwan. The company also has 2 stores operational in China.
Costco wholesale operates a chain of membership based warehouses and ecommerce websites in the US and many more markets around the world.
In this SWOT analysis of Costco, we will analyze the strengths and weaknesses of the retail leader as well as its opportunities and threats.
Strengths:-
Brand Equity:-
Costco enjoys strong popularity and is among the most trusted retail brands in the United States. The company has dedicated itself since its foundation to customer satisfaction. It has achieved higher customer satisfaction by investing in product quality and lower prices as well as customer service. Strong brand equity has resulted in higher sales and customer loyalty. Customers buy a large range of products of their needs from Costco. The customer experience offered by Costco is also a crucial factor that has helped it maximize brand equity.
Strong culture:
Another key strength of the company is its organizational culture. Costco started its operations in 1983 and has always invested in its culture since it is one of its core drivers of popularity and competitive advantage. Costco is appreciated throughout the industry for its unique culture and for its focus on employee satisfaction. Its culture focuses on higher equity and maximizing satisfaction while also driving performance. Since culture is a key driver of competitive advantage, Costco has seen its reputation strengthening over years.
Best employer:
When it comes to employee management, Costco is cited as one of the leaders in this area. Costco’s focus has remained on motivating employees to deliver their best performance and maximizing customer satisfaction. However, that does not mean making them do back breaking work for extra long hours or extracting performance using negative methods. It has been one of the world’s best employers for the past several years industrywide1. In the retail sector, no other employer has been able to match what Costco does for its employees. Apart from good wages and benefits, the company has also been providing its employees a safe workplace and promoting diversity and inclusion at workplace. This has resulted in superior employee performance and higher organizational productivity.
Financially strong:
Costco is among the leaders in the US retail sector. It is also a financially strong brand that has experienced solid financial growth since the pandemic. As the impact of the pandemic has slowly waned, Costco experienced solid revenue growth. Its net revenue grew 16% in 2022 while its net income grew 17%. The company has experienced growth in sales along its e-commerce channels also. Moreover, its inhouse premium brand Kirkland signature experienced stronger sales globally in 2022.
Supply chain management:
Another key strength of Costco is its focus on supply chain management which has helped it deliver quality products to its customers at highly competitive prices. The retail giant manages a very lean and efficient supply chain. The company has also adopted advanced inventory management techniques to cope with inventory loss. Since supply chain is a key differentiator in the retail industry, mastering the supply chain game has helped Costco reduce operating costs also and generate higher profits while responding to customer demand with higher efficiency. The company buys most of its merchandise directly from the manufacturers and routes it to cross docking depots or to its warehouses directly2.
Weaknesses:
Dependent on the US market:
Costco is in a strong position as a retail brand. However, the company depends mainly on the US market for a large part of its total net revenue. The US is its largest market and accounted for around 73% of its total net revenue or $165.3 billion in 2022. A sizable part of its total revenue is coming from the US market and that leaves the company prone to economic changes in the US market. An economic decline in the US could severely hurt its business.
Slow pace of innovation:
Compared to the other leading physical retailer in the US – Walmart, Costco’s pace of innovation has remained a lot slower. Walmart has been making significant investments in innovation and has built strong e-retail capabilities. It has also acquired some other businesses to strengthen its ecommerce infrastructure. On the other hand, Costco has been trailing Walmart, its leading rival, in terms of innovation. It share of revenue from the ecommerce business has also been much lower when compared to what Walmart has achieved. The pandemic has brought significant changes to the retail sector and particularly accelerated the pace of technological change in this sector. Costco however, does not appear to be as aggressive in terms of innovation as its leading rivals are and instead of strengthening its omnichannel presence like Walmart, it still depends on its in-store sales for a large part of its total net sales.
Limited physical footprint:
Costco is among the leading rivals of Walmart, which is the largest retail player in the United States. However, when compared to Walmart, its national and international footprint is much smaller. Walmart has more than 5300 stores operational throughout the US and it has stores in several formats to serve the diverse needs of customers. Costco has only 583 warehouses in the US and Puerto Rico. Its total global footprint is limited to just 847 warehouses at the end of 2022. To faster grow its sales and customer reach, the company would need to open more stores in the US and overseas markets. It has entered the Chinese market, which is a strategically important market and can be a significant source of revenue for the brand. However, it has only two stores operational there.
Limited product assortment:
Costco deals in a limited range of merchandise when compared to its leading rival Walmart. It sells merchandise in mainly three categories that include foods and sundries, nonfoods and fresh foods. The non-foods category includes products like major appliances, electronics, health and beauty aids, hardware, garden and patio, sporting goods, tires, toys and seasonal, office supplies, automotive care, postage, tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosk, and jewelry. Walmart deals in a much larger assortment of products which helps it attract customers from diverse segments including small and large businesses.
No spending on marketing:
Costco is a leader in the US physical retail sector. However, it has not achieved this position through a large spending on marketing. It has relied on its popularity and other organic sources of demand. However, the retail sector is experiencing intense competition. Other players in the US retail sector including Walmart and the other leading retailers like Target or Krogers spend heavily on marketing. Costco still relies on its brand awareness and the other inexpensive sources of marketing to create demand and customer loyalty.
Opportunities:
Global expansion:-
There are several markets around the globe where opportunities exist for Costco. However, the company has remained slow in terms of expanding its global footprint. It can expand its business and number of stores into more countries and also expand its physical footprint in its existing markets. The company can use its existing capabilities and financial strength for global expansion which will help it grow its customer base and revenue while also mitigating the competitive pressure from other retailers.
Digital marketing:
Costco enjoys very strong brand equity as one of the leading US based retailers. It also enjoys high customer loyalty. However, in terms of marketing, it has mostly relied on the use of conventional tools and methods. While the company’s position is strong in the US and some more markets, it can further grow its demand and brand awareness using paid marketing tools and mainly digital advertising and promotions. The company is doing well financially and investing in digital campaigns can help it grow sales and revenue even faster.
Innovation:
One area where Costco is still lagging when compared to its leading rivals in physical retail is innovation. Other retailers have quickly turned to the use of technology in various operational areas. They are using advanced technologies like AI and machine learning to drive higher sales and customer loyalty. Walmart is investing a large sum in research and development each year so that it can build advanced ecommerce capabilities and compete with e-retailers like Amazon. Costco must also invest in technology since it has become a key differentiator and a leading channel of faster growth for the physical retail brands in the US and other markets.
Acquisitions:
Costco is financially strong and can invest capital in strengthening its competitive advantage and core business through acquisitions. Several other retailers including the leading US based retailer Walmart have also adopted this strategy to achieve faster growth. Acquiring smaller brands to strengthen its capabilities in various areas including supply chain, ecommerce and other areas will help the company achieve superior competitive edge and achieve faster revenue growth.
Threats:
High competitive pressure:
The retail industry has been experiencing intensifying competition. There are several large and well known players in the US physical retail sector which enjoy strong brand awareness and customer loyalty. These brands are also investing aggressively in innovation and marketing. Amazon is the leading player in the ecommerce sector and the main rival to those trying to achieve higher sales through ecommerce channels. Higher competitive pressure means Costco will need to focus more on product quality, customer service and customer retention.
Legal and regulatory threats:
There are several types of legal and regulatory pressure also before the physical retail brands operating in the US and overseas markets. Apart from labor, product safety and technology related laws and regulations are also critical to retail operations. Compliance is essential in all these areas since non compliance results in regulatory action and hefty fines. Moreover, the laws vary from market to market and the company is required to remain compliant in all the markets where it operates.
Growing operating expenses:
The operating expenses of Costco have kept growing each year, affecting its profit margins. The costs of merchandise and labor have kept growing. In 2022, while its total net revenue increased by more than $30 billion, its net operating income increased by only $1.1 billion and net income by only around $800 million. It was because the company’s merchandise costs increased by around $29 billion in 2022 compared to the prior year. So, the growing operating expenses including selling, general and administrative expenses at Costco can hurt its profitability.
Changing consumer preferences:
Consumer preferences with regards to shopping are changing since the pandemic. While consumers have become more health conscious and aware of the environmental impact of businesses, they have also turned towards digital channels for purchasing. It is not just the leading e-retailers like Amazon, but smaller businesses selling online through platforms like Shopify are also experiencing sales growth. As consumer preferences around the world are changing, Costco will need to adjust its strategy accordingly to maintain its market share and growth rate.
Conclusion:
Costco is among the largest US based physical retailers. It has achieved strong brand awareness and seen impressive market growth in both the US and overseas markets. Costco is among the leading rivals of Walmart. Like Walmart, Costco also promises good product quality to its customers at lower prices. However, its business model is different from that of Walmart and its overall physical footprint compared to Walmart is also much limited. The company operates a chain of membership based warehouses in the US and several more markets including Canada, Mexico, UK, Australia and Korea. It has also opened two stores in China. Overall, there were 847 Costco warehouses operational at the end of 2022. The company experienced 16% revenue growth in 2022 compared to the prior year.
However, when compared to Walmart, Costco’s physical presence in much limited in the US and globally. Walmart has more than 10,500 stores operational across the globe which includes more than 5,300 in the US alone. Costco will need to expand its presence globally and in the emerging markets particularly at a faster pace. It will also need to spend more on innovation to keep pace with its leading rival Walmart. Another critical thing that Costco needs to focus upon is marketing. Since competition in the retail sector is intensifying and companies are investing aggressively in marketing, Costco will also need to turn to modern marketing tools and technologies including paid promotions to improve its market share. Its operating expenses are growing fast and the company will need to achieve higher growth from ecommerce channels and focus on extra demand creation methods.
Costco is appreciated a lot as an organization with a unique culture which is the fundamental driver of its competitive edge. It has been investing in employee motivation and improving employee productivity and job satisfaction. Overall, it has a strong competitive advantage which it can further improve faster through innovation.