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Costco on a Strategic Level

Introduction

Walmart was surpassed by Costco Wholesale Corporation (Costco) to become the second-largest retailer in the world. The company would need to increase its operations and build on this momentum in order for Costco to take the next steps. Any retailer must carefully select new markets and an appropriate entry strategy because different markets have different requirements and considerations. Before the business could develop an expansion strategy, it was necessary to look at the entry strategies used in prior expansions to identify the elements that made each one successful. What is the best entry strategy given the current operational and cultural restrictions?

Costco is the largest membership warehouse club in the United States. More than 200,000 full- and part-time employees were employed globally. The company sold brand-name products at low prices and in large quantities. At its warehouses, Costco also sold its own private label brand, Kirkland Signature.

Costco's 2014 sales totalled US$112.6 billion, of which $32.1 billion was from international operations. By October 2015, Costco had established 206 warehouses in eight countries outside the United States. The company employed a variety of global expansion strategies in each of the eight markets.

Canada 

Costco entered Canada in 1985, opening a company-owned warehouse in Burnaby, British Columbia. By 2015, Costco had expanded its operations to 90 locations across nine provinces in Canada. The company mimicked its U.S. growth strategy by expanding geographically into the country's east and west coasts. In 1992, Costco and Price Club had 12 warehouses each in Canada. Loblaws, the country's largest supermarket retailer, opened its first membership warehouse in 1991.

This was soon followed by Walmart, which entered the market in 1994. Consumers invested in the company's memberships and maintained their loyalty, year after year.

Mexico

Costco entered Mexico in 1992 through a joint venture with one of the largest Mexican supermarket chains. As of October 2015, the company owned and operated 36 stores in 18 Mexican states. Attracted by Mexico's large, urbanizing population and growing middle class, large U.S. retailers capitalized on the opportunity.

Costco's strategy was to open its warehouses in locations where Sam's Club had no presence and win memberships through a first-to-market advantage. As the prices of imported goods dropped following NAFTA, Costco's warehouses became a principal source of American-made products.

UK

Costco entered the United Kingdom in 1993, opening its first store in Essex. Price Club also entered the market by forming a JV with a privately-owned retailer. As a wholesaler, Costco's entry into the U.K. gave the company significant leverage to operate at a cost base lower than its local rivals. Costco's warehouse-style set-up and bulk product supply at discounted prices convinced the High Court to clear Costco to open its first store in the UK. Such publicity also attracted the attention of local retailers, who began slashing prices in anticipation of a price war.

South Korea 

In 1994, Costco granted a license to Shinsegae Department Store (Shinsegae), a major South Korean retailer, to open and operate a warehouse club store. By 2015, the company had expanded to 12 locations in South Korea. In 2014, Fortune reported that Costco's warehouse in Seoul had recorded the highest sales of any Costco worldwide. Between the 1960s and the 1990s, South Korea had one of the fastest-growing economies in the world. Foreign retailers were largely barred from this growing market because of government controls over land development, zoning regulations, and restrictions on foreign direct investment. The South Korean government implemented policies to protect the interests of smaller retailers.

Taiwan

Costco entered Taiwan via a JV with the nation's largest department store chain, President Group, opening its first store in 1997. By 2015, Costco had expanded to 11 locations in the country. The company capitalized on its foreign retailer image and imported about 35 percent of its products.

Japan 

Costco established its first warehouse in Japan in 1999; the wholly-owned subsidiary was in Hisayama. By 2015, the company had expanded to 24 locations in Japan. Costco targeted the wealthy segment of the population, those who had access to private transportation and made fewer frequent shopping trips.

Australia

Costco's first company-owned warehouse store in Australia opened in 2009 in Docklands, a suburb of Melbourne. By 2015, the company had expanded its operations to 8 locations in the country. For the five-year period ending in 2014, Costco accumulated losses of $44 5 million in Australia.

Spain

Costco's first wholly-owned warehouse opened in Seville in May 2014. The company opened its second warehouse in Madrid in October 2015. In mid-2015, Spain's unemployment rate was 22.4 percent, compared to the U.S. unemployment rate of 5.3 percent.

COSTCO'S GLOBAL STRATEGY: KEY SUCCESS FACTORS 

Increasing Member Recruitment and Retention

Costco was a pioneer in the membership warehouse club model, which required customers to purchase yearly memberships to shop at warehouses. Members benefited from Costco's lower prices, and an increase in customer savings offset the cost of membership fees. This hassle-free membership model allowed Costco to record a high membership compound  annual growth rate of 7.1 percent in the five years from 2010 to 2015.

Leveraging the Kirkland brand 

Costco's in-house brand, Kirkland Signature, was launched to provide premium products at prices that were 10–20% less than those of other national brands. In 2014, Kirkland Signature products contributed 25 percent of Costco's sales, a significantly higher penetration rate than other warehouse clubhouse brands. Costco began to use third-party e-commerce channels such as Google Express and InstaCart to reach a larger consumer base.

Limiting the range of products 

Costco's primary business model was built around the strategy of stocking a limited number of stock-keeping units (SKUs) and promoting sales of a limited range of products. A typical Costco warehouse stocks approximately 3,700 SKUs, less than many other big-box retailers. This allowed Costco to assign a greater area of the warehouse to each employee, which established higher productivity rates and increased overall profitability.

No-Frills Wholesaling Approach 

Costco's warehouses were designed for economy and efficiency, ease of product handling, and inventory control, and products were displayed on industrial-type pallets to facilitate stacking and stocking. To reduce electricity costs, Costco installed many skylights, sensibly placed throughout the store to utilize natural light. Costco avoided intermediaries in distribution; it purchased its merchandise directly from manufacturers. The company used free word-of-mouth advertising to localize its value proposition.

Meeting local needs 

Costco's "no questions asked" return policy allowed Costco to stand out. In countries such as Taiwan, where there was high retail competition, Costco partnered with a strong local retailer. The success or failure of its entry ultimately depended on understanding customers in each given market. Increasing the International Operations' Share of Total Revenue Despite its international success, Costco's revenue from operations outside of its home country remained insignificant. In 2014, international operations accounted for only 29% of the company's net sales. Costco's reliance on the United States and Canada made it vulnerable to regional uncertainty, which could have had a significant impact on revenue growth. Increased competition and changing government regulations in international markets were among the challenges faced by Costco.

Multi-channel retailing 

Costco's online activities were separate in the United States, Canada, Mexico, the United Kingdom, and China. South Korea has the highest smartphone penetration in the world. Despite the fact that the company had an online presence in five countries, its online activities remained siloed.

What’s Next?

With a global presence established in eight distinct markets, how can Costco establish itself as a leading transnational retailer? 
Provided economic changes have occurred due to Covid-19, Costco continues to push for physical experiences. How could Costco leverage its experience and continue its expansion successfully?

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