Costco Case Study

A company is only as attractive as the industry they belong. It is key to understand the opportunities and threats imposed on the industry when doing company specific analysis. Michael Porter’s Five Forces Model provides an excellent foundation for company and industry analysis.

The IbisWorld™ Warehouse Clubs and Superstores September 18, 2007 report (IW) describes the barriers to entry as high due to the “Dominance of players currently in the industry, The cost of establishing or purchasing a retail outlet, weak product differentiation, and established relationships with suppliers.” The top four companies in this industry account for over 90% of market share and industry revenue. And the trend has been that through market exit and acquisition the number of smaller firms is decreasing. The capital requirements of opening and maintaining a new store are relatively high compared to other similar retail establishments. Land acquisition and store construction costs can easily exceed $10M with additional funds needed for labor and operating stock. Weak product differentiation is prevalent in the industry with each warehouse carrying similar products and brands. Because of warehouse pricing strategies, suppliers are sometimes hesitant to provide goods to clubs to protect their already thin margins. This fact coupled with the pre-existing long running relationships between clubs and suppliers can prevent new or smaller players from getting comparable pricing and credit terms. These factors result in a positive outlook for pre-existing top four companies and a negative one for any pre-existing small or potentially new chains.

The bargaining power of suppliers to warehouse clubs is relatively weak due to the market dominance of the top four players as well as their extreme volume purchasing agreements. “Warehouse clubs buy most merchandise directly from manufacturers or importers, typically in full truckloads. Volume purchasing allows companies to receive substantial discounts, resulting in savings to the customers. Frequently, companies work directly with manufacturers to develop special sizes or packaging to reduce handling costs and provide the best possible consumer value. Because of the sizable sales opportunity, competition for club business among manufacturers is fierce and most warehouses clubs enjoy favorable purchasing terms.”

Due to the high threat of substitutes warehouse margins are very small. Traditional supermarkets and retail outlets are direct competitors to warehouse clubs and are often times closer to the customer and provide other value added services that the “no-frills” warehouse clubs don’t provide. Research has also shown that a substantial percentage of trips to stores are quick trips which make the traditional outlets proximity and product sizes disadvantageous to most warehouse clubs. This clearly presents a threat to the industry as a whole.

Rivalry among competitors describes the intensity of competition between existing companies