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COSTCO WHOLESALE CORPORATION: MARKET EXPANSION AND GLOBAL STRATEGY

Costco Wholesale Corporation (Costco) became the worlds second-largest global retailer (see Exhibit 1). In 2016, the company had been successfully established in eight countries. It was clear that Costcos next steps would have to build upon this momentum and that the company would have to expand operations. For any retailer, selecting new countries and an appropriate entry mode was of utmost importance, as different markets presented different challenges and considerations. Before the company could create an expansion plan, it was necessary to analyze the entry methods it had used in its prior expansions to understand the factors that had contributed to each success. What would be the best method for entry based on existing barriers in terms of culture and operational constraints?

COSTCO WHOLESALE CORPORATION

Headquartered in Issaquah, Washington, Costco was the largest membership warehouse club in the United States, with 481 warehouses in 43 states and Puerto Rico. Costco had more than 80 million members and employed more than 200,000 full- and part-time employees around the world. The company sold brand name products at low prices and high volumes and offered ancillary service departments such as gas stations, pharmacies, food courts, optical centres, one-hour photo services, hearing centres, and travel services at its warehouse locations. Costco also offered its own private label brand, Kirkland Signature, at its warehouses. Some of Costcos global competitors were Walmart Inc. (Walmart); Walmarts membership club, Sams West Inc. (Sams Club); Amazon.com Inc. (Amazon); Metro Inc. (Metro); Carrefour Group (Carrefour); the Home Depot Inc. (Home Depot); and Best Buy Co. Inc. (Best Buy).

GLOBAL EXPANSION TO DATE

34 Costcos 2014 sales totalled US$112.6 billion, of which $32.1 billion was from international operations.

That year, the companys international operating income saw more growth than Costcos total operating income (see Exhibit 2).

In the five-year period ending in 2014, sales from the companys international branches showed a significant increase compared to its U.S. branches (see Exhibit 3).

Costcos international expansion began with its entry into Canada in 1985; by October 2015, Costco had established 206 warehouses in eight countries outside the United States, as well as online storefronts in Canada, the United Kingdom, Mexico, and China. Several other retailers, such as Carrefour, Walmart, and Tesco PLC (Tesco), boasted a larger global presence than Costco, but the success the company had managed to achieve in all eight of the international markets it had entered was noteworthy (see Exhibits 4 and 5). Costco employed a variety of global expansion strategies in each of the eight markets.

COSTCOS 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 Costcos lower prices, and an increase in customer savings offset the cost of the membership fees. Costco offered two basic membership types: Gold Star memberships for individuals and Business memberships for businesses. For an additional fee, each of these memberships could be upgraded to the Executive level, which guaranteed shoppers 2 per cent cashback on valid purchases made throughout the year. Although Walmarts Sams Club also offered cashback to its customers, it set a yearly cap of $500 per customer. Costcos no-cap cashback presented a convincing incentive for frequent shoppers to purchase Costco memberships. Moreover, Costco allowed its customers to cancel memberships at any time during the year and offered reimbursements of the unused portion of the membership fee. This hassle-free membership model allowed Costco to record a high membership compound annual growth rate of 7.1 per cent in the five years from 2010 to 2015. Complementing the high membership renewal rate in the United States and Canada, Costcos international operations saw a significant 88 per cent

75 per cent of Costcos gross profit, recruiting and retaining members was a key focus.

increase in its membership renewal rate in 2015.

As revenues from membership fees contributed more than 75 per cent of Costcos gross profit, recruiting and retaining members was a key focus.

Limiting the Range of Products to Enable Operational Excellence

Costcos primary business model was built around the strategy of stocking a limited number of stock keeping units (SKUs), promoting sales of a limited range of products. A typical Costco warehouse stocked

Leveraging the Kirkland Signature Brand

Kirkland Signature was Costcos in-house brand, introduced to offer premium quality products at prices that were 1020 per cent lower than those of other national brands.

In 2014, Kirkland Signature products contributed 25 per cent of Costcos sales, a significantly higher penetration rate than other warehouse club house brands (18.1 per cent). Without the need to invest in promotional activities, Costco was able to strengthen the Kirkland Signature brand by introducing several new products across a broad range of categories every year. As of 2014, Costco typically earned a profit margin of 15 per cent on its in-house brand products, compared to 7 10 per cent for other brands

Costco began to use third party e-commerce channels such as Google Express and InstaCart, seeking to make Kirkland Signature products available to a larger consumer base.

QUESTION Option analysis

1.What are the four available modes of entry for global expansion and the pros and cons of each? Which ones has Costco used in the past? (20 Marks)

Students should identify the correct modes and conduct a thorough pro-con

PLEASE USE THE TEMPLATE BELOW

	MODE	PROS	CONS
1		* * *	* * *
2		* * *	* * *
3		* * *	* * *
4		* * *	* * *