Costco SWOT Analysis

Abstract

In this article, we present the SWOT analysis of Costco. The analysis provides in-depth insights into how Costco’s internal and external business environment is influencing its competitive positioning in the market. Costco management and other grocery retailers may read the article to learn important lessons. Policy makers, researchers and strategic management students may also read the article to gain insights into Costco’s business strategies, and know the latest trends shaping the grocery retail environment.

1. Introduction

As of 2023, Costco is ranked as the world’s 3^rd largest retailer. It is the largest retailer of organic foods, wine, rotisserie chicken, choice and prime beef, and is ranked #11 on Fortune 500 list.

This Costco case study presents a detailed SWOT analysis of Costco to understand how company’s strategic landscape is evolving in dynamic retail industry.

2. Company overview

Company name	Costco Wholesale Corporation
Year established	1983
CEO	W. Craig Jelinek
Industry	Warehouse club and retail industry
Number of employees 2023	304,000
Number of countries 2023	14
Revenue 2023	$242.29 billion
Profit 2023	$2.160 billion
Market capitalization 2023	$250.96 billion

3. Costco SWOT Analysis

First, the article conducts internal environmental analysis by presenting Costco strengths and weaknesses:

3.1. Costco Strengths

3.1.1. Strong financial position

Costco’s revenue over time has shown strong growth. It has grown from $87 billion (2011) to $223 billion (2022), as shown in following graph:

Source: Zippia.com

3.1.2. Well-diverse product portfolio

Costco has a well-diverse product portfolio with each product segment experiencing positive growth:

Source: Seeking Alpha

3.1.3. Value for money

What is most important to Costco and is central to its strategy?

The answer lies in its commitment to offer high-quality products at low prices while providing exceptional customer service. Costco’s success mainly lies in its low-cost strategy.

3.1.4. Market share 2023

Costco holds 62% market share in US warehouse club, followed by Sam’s Club (31%) and BJ Wholesale (7%):

US Warehouse Club- Market Share

Source: Winsight Grocery Business

3.1.5. Strong competitive positioning

Costco beats out the competition in terms of revenue, store count, operating income, and operating income per store:

Source: The Motley Fool

3.1.6. Strategic partnerships

Costco has successfully expanded its business operations through strategic partnerships. In 2023, Costco partnered with Sesame, and this partnership is just the beginning for company’s healthcare ambitions- Forbes.

3.1.7. Customer satisfaction

A 2022 survey with 36,000 customers revealed that customers are more satisfied with the Costco’s customer service than Walmart.

3.1.8. Best employer award

In 2023, Costco won Best company award for perks and benefits, and work-life balance. It is a key reason why Costco has lower employee turnover than its competitors.

3.2. Costco Weaknesses

3.2.1. Low gross margin

Costco has lower gross margin than competitors, as depicted in following graph:

Source: The Motley Fool

Although, this strategy helps Costco in gaining more sales, but it affects the company’s profitability as well.

Following graph shows further breakdown of Costco’s revenue and net income:

Source: Reddit.com

The graph shows Costco makes only 2.6% of the net income from its operating revenue.

3.2.2. Higher prices than competitors

Despite keeping the margins lower than competitors, Costco’s prices are still higher than Aldi and Walmart. Here is the 2023 price comparison:

Source: GV-Wire.com

3.2.3. Slowed growth 2021-2023

Costco’s overall sales growth has declined from 2021 to 2023, as depicted in following table:

Source: Seeking Alpha.com

3.2.4. Reducing R&D expense

R&D is vital for survival in today’s business world. However, Costco has reduced its R&D expense over last five years to keep the costs low. Whereas, its competitors like Walmart and Tesco are investing heavily on R&D, gaining an edge over product innovation.

3.2.5. Rising membership fee

Unlike other retailers, Costco operates on subscription based model, and only paid members are allowed to shop from Costco. As per Wall Street Journal, Costco is planning to increase its membership fee. Company’s revenue has already fell below the Wall Street’s expectations.

3.2.6. Weak ecommerce presence

Costco has weak online presence. In 2023, ecommerce sales experienced a 0.8% decline- CNBC.

Following graph shows the overall sales decline trend from 2020 to 2024:

Source: Insider Intelligence

3.2.7. Over-reliance on USA and Canada

Costco largely depends on the local market as 69% of its stores are in USA, 12.5% are in Canada, and only 18.5% are present in other countries. It increases the Costco’s vulnerability to the local market conditions.

Flipkart is facing a similar issue- overreliance on home market. Click here to know more

3.2.8. Supply chain difficulties

Costco is currently struggling with various supply chain issues, like- higher transportation, freight, labor costs, port delays, and demand surge in only specific product categories. It is directly affecting the Costco’s profit margin.

3.2.9. Limited product variety

Costco offers limited product variety due to its strategy to attain unbeatably low prices in specific product categories. It narrows down the Costco’s target market size compared to its competitors.

After discussing Costco strengths and weaknesses, now let’s have a look over Costco’s external business environment.

3.3. Opportunities for Costco

3.3.1. International expansion

Global grocery retail industry is experiencing strong growth. Here are the top countries leading the grocery retail industry:

Source: European Supermarket Magazine

Costco may enter in countries experiencing strong growth to strengthen its presence at international stage.

3.3.2. Online grocery shopping

The pandemic has accelerated the trend of purchasing grocery online, as depicted in following graph:

Source: Xstak.com

Costco may increase its online presence to benefit from growing ecommerce trends.

3.3.3. Automation and robotics

Retailers are benefiting from robotics technology to save costs. Costco is already capturing this opportunity by deploying robots for pizza making. The robotic technology has enabled Costco to make more than 350 pizzas per hour.

3.3.4. New market segments

Many new grocery retail segment are emerging (like organic grocery, vegan convenience food options etc.). Following graph shows the organic grocery growth in global retail market:

Source: Vantage Market Research

Costco may penetrate deeper in organic grocery segment to expand the customer base.

3.3.5. Changing consumer expectations

The Accenture survey revealed that grocery retail consumers consider multiple factors while making purchase decision, including:

• Online and Omni-channel options
• Convenience
• Personalized offers
• Community building options
• Ethical and sustainable sourcing
• Hygiene
• Wide variety
• Friendly service

Costco needs to focus on all these factors to fuel the business growth.

3.3.6. Digital marketing

Costco can enhance its presence over social media to capture the growing ecommerce trend. Following table shows the Costco’s potential to strengthen its social media presence:

Social networking sites	Costco (no. of followers 2023)	Walmart (no. of followers 2023)
Facebook	2.8 million	32 million
Instagram	1.3 million	3.1 million
X (Twitter)	69.5K	1.3 million
YouTube	20K	641K
TikTok	77.6K	1.5 million

Compared to Walmart, Costco currently has limited presence on leading social networking sites. Costco can use digital marketing tools to create personalized online advertising campaigns that may effectively target and engage its customer base.

3.3.7. Emergence of smarter technologies

Costco may invest on smarter technologies like- advanced route optimization software, IoT sensors and telematics, and block chain technology to reduce the costs and enhance supply chain efficiency and transparency.

3.3.8. Rise of convenience food

A recent survey by McKinsey revealed that consumers’ demand for convenience food is rising. Around 34% of the grocery retail CEOs marked convenience food as their top priority. Costco should also increase the convenience food variety to capture this trend.

3.3.9. Booming healthcare segment

Global healthcare segment is experiencing strong growth. Costco is already set to capture this trend, and should continue focusing on this growing segment to fuel the business growth.

3.4. Threats to Costco

3.4.1. Geopolitical tensions

According to NASAQ, an ugly combination of geo-political tensions, supply chain disruptions, and monetary policies is making business environment increasingly challenging for Costco and other retailers.

3.4.2. Sustainability concerns

Rising sustainability concerns have become a major challenge for grocery retailers. A report published by Natural Resource Defense Council revealed that the retailers like Costco adopt ecologically devastating practices like clear-cut logging. Such reports harm the company’s brand image, increasing the need to invest on sustainability.

3.4.3. Regulatory challenges

Considering the rising consumer claims about misleading labels, deceptive pricing, and insufficient digital accessibility, the regulatory environment is getting strict for grocery retailers.

3.4.4. Rising costs

Rising labor costs along with growing economic uncertainty has become a serious concern in global grocery retail industry. It can threaten the Costco’s profit margin, which is already thin.

3.4.5. Lawsuits and controversies

Regulations protecting the consumer data are getting strict. In 2023, Costco faced class action for sharing the consumers’ personal data. Such controversies and lawsuits can damage the corporate reputation.

Do you know Walmart faces around 5,000 lawsuits each year? Click here to know more.

4. Costco SWOT Summary

Costco strengths Strong financial position Well-diverse portfolio Value for money High market share Strong competitive positioning Strategic partnerships Customer satisfaction Best employer award	Costco weaknesses Low gross margin Slowed growth Reducing R&D Rising fee Weak online presence Overreliance on USA Supply chain issues Limited variety and higher prices
Costco opportunities International expansion Online grocery shopping Automation and robotics New market segments Changing consumer expectations Digital marketing capabilities Smarter technologies Rise of convenience food	Costco threats Geopolitical tensions Sustainability concerns Regulatory challenges Rising costs Lawsuits and controversies

5. Recommendations based on SWOT analysis of Costco

• Expand international presence by entering in countries with strong grocery retail growth
• Invest on ecommerce capabilities to capture the online shopping trend
• Continue investing on automation and robotics to reduce operational costs
• Diversity product offerings by increasing penetration in convenience and organic foods
• Enhance customer experience by emphasizing on convenience, personalization, ethical sourcing, and friendly service
• Strengthen presence over social media by launching personalized online advertising campaigns
• Invest on smarter technologies (like IoT, route optimization, and block chain) to optimize supply chain operations
• Address consumers’ sustainability concerns by adopting sustainable and ethical sourcing practices
• Navigate regulatory challenges by ensuring compliance with regulations governing pricing, labelling, and digital accessibility

6. Conclusion

Costco SWOT analysis reveals that the company’s robust financial position and market leadership serve as core strengths. While, thin profit margin, weak online presence, and limited international presence are some key weaknesses. Costco can strategically embrace the available opportunities and navigate threats by leveraging its strengths, and overcoming weaknesses.

Click here to read Walmart SWOT analysis

Click here to read Tesco SWOT analysis

7. References

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Mazur, C. (2023, June 15). 19 Impressive Costco Statistics [2023]: Revenue, Store Count, Trends, Facts, And Predictions. Zippia.

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Balasubramanian, S., MD JD. (2023, October 1). Costco’s Partnership With Sesame Is Just The Beginning For The Wholesale Retailer’s Healthcare Ambitions. Forbes.

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Stewart, B. (2023, September 26). Costco in charts: Adjusted comparable sales growth continues to slow. Seeking Alpha.

Pitcher, J., & Marino-Nachison, D. (2023, September 26). Stock Market news, Sept. 26, 2023: Indexes close lower, led by Nasdaq; bond yields stay above 4.5%. WSJ.

Repko, M. (2023, September 26). Costco tops quarterly earnings expectations, even as sales remain soft. CNBC.

Redirect notice. (n.d.-b).

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Redirect notice. (n.d.-c).

Vantage Market Research,https://www.vantagemarketresearch.com/. (n.d.). Organic Foods Market: Growth trends, 2022-2030 Forecasts. Vantage Market Research.

The path forward for European grocery retailers. (2021). In McKinsey & Company.

TipRanks. (n.d.). Costco Stock: The tactical operator against inflation. Nasdaq.Costco, don’t be complicit in selling forest destruction. (2020, January 22).