Costco: Market Expansion & Global Strategy Analysis

What are Costco’s competitive advantages and how can they leverage them to expand successfully?

Costco is one of the worlds leading global retailer with its presence in eight countries offering a diversified range of products and services. The company’s unique business model and global expansion strategies have led to its success. In spite of heavy competition in the retail industry, Costco has built a strong brand image by offering high-quality products at low prices with excellent customer service, along with other key factors.

Customer retention and loyalty: Costco’s membership warehouse model gave access to high-quality products at low prices to its customers. Customers paid a fixed amount yearly to gain memberships which allowed them to shop at Costco. Unlike other competitors in the market, Costco allowed its customers to cancel their membership any time of the year and also reimbursed the unused portion of the membership. While competitors set a cap on cashback, Costco’s no-cap cashback attracted more customers to be a part of a hassle-free shopping membership. This kind of flexible membership business model gave Costco an advantage to enjoy high customer retention and loyalty rate.

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Leveraging in-house brand: Costco launched a wide range of premium quality products under the name of “Kirkland Signature”, as its home brand. These products were superior in quality, had higher margins and were 10-20% less expensive than other brands that the company offered. Products under the home brand give a quality parity with national brands and also cost fairly less to manufacture and distribute to customers (Private labels taking over supermarket shelves). Kirkland products were made available to a larget set of audience by utilizing third-party e-commerce platforms such as Google cart which contributed to an increase of market share. In global markets, these products attracted customers to try out “American products” and also helped to capitalize Costco’s image as a foreign retailer. With constant innovation and diversification of products under the company’s private label, Costco can continue to increase sales and grow as an international retailer in foreign markets.

Efficient operations and store layout: Costco’s unique business operations model focused on limiting the range of products and its SKUs and promoted sales of these products. This strategy benefited the company in many ways. Firstly, it allowed the company to dedicate larger areas to individual employees’ which increased productivity and overall profitability. By focusing on a limited range of products, Costco benefited by dealing with lesser suppliers with lower negotiation and enforcement costs which resulted in reduced transactional costs. These factors helped Costco in achieving higher inventory turnovers than its competitors. Just like its products Costco has a diversified range of suppliers. However, they majorly eliminated operational costs by procuring products directly from manufacturers and eliminating middlemen. The warehouse-style store layout with basic design contributed to the higher efficiency of operations by allowing ease of storing, handling products, maintaining inventory and reducing electricity costs.

Understanding local markets, customer service and marketing:

Costco strategically has entered into foreign markets by carefully understanding local market situations, requirements, risk factors and potential growth. In most countries, Costco has partnered up with local retail giants. This has helped in gaining an initial foothold of local markets. Tying up with local partners helps in overcoming government regulations, setting up local infrastructure and managing different types of risks in foreign markets. Costco has gained an advantage amongst its competitors' by the process of localisation. The company has succeeded in most foreign markets by meeting local customer demands.

Complementing high-quality products at lower costs with excellent customer service is one of Costco's key competitive advantage. Customer service included “no questions asked” return policy, anytime membership cancellation, no-cap cashback and multiple payment options. Features like these made customers happy and made Costco stand out amongst competitors. Happy and satisfied customers led to free and effective word-of-mouth advertising. Other than coupon promotions and direct email marketing, Costco kept its marketing costs very minimal.

Healthy employee relations: While Costco’s major competitors have had a poor reputation for employee management, Costco has been named one of America's best employer. Costco’s great work culture, wages, collaborations and human resource policies have contributed to increased employee loyalty, job performance, productivity and better customer service.

What would be the best method for entry, based on existing barriers and culture and operational constraints in France, Iceland, China and India?

Costco’s has strategically expanded into countries with different entry modes depending on numerous factors that have an impact on the local market. Based on barriers and culture Costco will have to make important decisions with regard to the market size and scope for growth, government regulations, local infrastructure and cultural differences to choose the best entry mode.

France:

Challenges: The economy in France has been highly developed over the years with a free-market orientation. France is closely located to another strong economy, the United Kingdom allowing easy trade between both the countries. However, a critical political issue known as the ‘Brexit” has affected business relations and interests between the countries. With Costco already operating in 27 locations in the UK should consider this political barrier as it may be a potential risk of distribution channels, trade networks and movement of people between both countries. Opportunities: As mentioned above France is an economically developed nation with sophisticated customers. Manufacturing has declined over the years in the country, resulting in a requirement of imported products. As the French market is mature and sophisticated, there has been an increasing interest in American culture, consumer and food products giving Costco a great opportunity to dominate the French market. In addition, as there lies a huge potential of E-commerce in France, Costco can increase sales and revenue by creating a strong omnichannel for customers.

Mode of entry: As no players exist in the warehouse concept stores in France, Costco can gain the advantage of being a first-mover. Warehouse concept stores are to see a 113% growth rate in the current year. (Exhibit 1) By considering the above factors, the best mode of entry for Costco to enter France would be a wholly-owned subsidiary, as the company can have maximum control on operations and a high resource commitment in the French market.

Iceland:

Challenges: Firstly, Iceland is an island with a very low population. Secondly, due to poor climatic and geographical conditions, there lies a necessity for agricultural and fresh food products to be imported. However, high tariffs are applied and import restrictions are implied, respectively. This results in Costco having to depend on other suppliers in European markets. Lastly, due to the implementation of new economic policies, establishing a Joint Venture with a local company is challenging.

Opportunities: Iceland economy is stable with most of its consumers being innovators and early adopters, giving Costco an opportunity to introduce new Kirkland products suitable for the local market. As mentioned earlier, due to poor climatic conditions Iceland is highly dependent on imported products such as organic food and fresh food products.

Mode of entry: With the above-mentioned barriers and opportunities, it is ideal for Costco to enter the Iceland market as a wholly-owned subsidiary to access maximum control on operations and to procure fresh food products from EU suppliers.

China:

Challenges: Reports show that American companies in China face numerous problems with regard to government regulations, rising operations costs, increase competition, regulatory risks and an increase in non-tariff barriers. Foreign companies in China face day to day business problems due to delayed and opaque legalisation procedures with respect to registrations and permits. Rigid import restrictions and industry policies limit the access of foreign products and services, resulting in less control of operations for the foreign company in the Chinese market. This inversely promotes local products and domestic companies backed up by local governments. As the majority of Costco's revenue comes from its private-label Kirkland Signature, importing and selling them in the Chinese market would be a big challenge. Costco’s competitors, Metro and Walmart along with local partners (JVs) share the market with 65.2% and 34.8% respectively, who have increased competition by providing value-added services such as “next-hour delivery”. (Exhibit 2)

Opportunities: With the worlds largest population, vast size, changing demographics, and increase in the middle-class population create a major opportunity for Costco to expand to China and achieve great economies of scale. With the Chinese manufacturing industry becoming more advanced with technology, Kirkland products can be manufactured in China helping to overcome import restrictions. Warehouse concept stores are a niche in China and continue to see extensive growth over the coming years. As fresh food is the drive engine of supermarkets in China, Costco can offer American fresh food along with localised products to build an American brand image that attracts young and affluent customers.

Mode of entry: To grow in the long term in the Chinese market Costco should partner up with a local company to carry on business activities as a joint venture. A local partner would be beneficial by providing knowledge on the vast Chinese market, its target audience and their requirements, government regulations, industry policies and performing marketing activities and other business operations as per local cultures are crucial aspects for Costco to succeed in a complex market. Such a collaborative partnership would allow a medium level of control on operations, resource commitment and dissemination of risk between both the entities.

India:

Challenges: One of India's biggest barrier for international companies to enter is lack of local infrastructure. Many investors and MNCs face non-transparent and unpredictable regulatory regimes. As the government controls what and how things can be sold on e-commerce platforms, this discourages foreign companies to enter India. Due to policies on data localisation and local content requirement, and other rigid government norms, carrying on day to day business operations for Costco in India would be a challenge. One of Costco’s key product is fresh food items, importing such items are made mandatory to be approved by a government department. As India is multi-cultural and diversified amongst different regions, Costco would have to implement different business and marketing strategies regionally resulting in increased operations costs. Overall, due to rigid government regulations and political differences between the central and state governments, India appears to be an unstable market for foreign companies.

Opportunities: The warehouse concept of supermarket stores has been an untapped industry in the Indian market. With rapid urbanisation, an increase in the population of millennials and the middle class there has been a demand for international products.

Mode of entry: To gain a strong foothold in India, Costco should enter into a Joint venture with a local company in the initial phase to establish themselves in such a complex market. As mentioned earlier, India's diversified market and audience size are complex to understand and deliver for a foreign company. A strong local partner would help in strategically expanding into regions with suitable infrastructure and resources. A Joint venture would primarily benefit Costco by overcoming government regulations and rigid import norms.

Based upon Costco’s business model and the potential for a large consumer base, should Costco enter densely populated Asian countries, such as China and India? Justify your decision.

With economic, demographic and technological factors rapidly increasing the rate of change in these Asian countries gives Costco an opportunity to expand innovatively. As countries like China and India have a vast potential of growth in terms of population and economic growth are set to become the backbone of the world's economy (Michelle Grant, Megatrends Reshaping The Global Retailing Industry). As per Euromonitor International, these Asian frontiers will account for 50% of the world's production and global consumer expenditure by 2025. Within the next five years, forecast says China will account for 25% of the overall industry’s sales growth.

Another key factor is the increasing growth of digital consumers in Asian countries. With consumers becoming more tech-savvy by utilising multiple devices to interact with company services and products. As mobile internet retailing is rapidly on the high, it will also account for more than 58% of total e-commerce sales. Particularly with increased access to smartphones access in emerging markets like India and China will allow Costco to expand with omnichannel business strategies.

Unlike developed economies, these frontier markets have been seeing a gradual increase in the proportion of middle-class people of the population. As the middle-class focus on acquiring most of their money and optimising