Costco Case

Porter Five Forces Analysis: Costco Wholesale Corp.

James Rothaar

MBA 8800

Wilmington University

August 3, 2014

Porter Five Forces Analysis: Costco Wholesale Corp.

Introduction

Costco first opened its doors for business, in 1976, in San Diego, California, in a converted airplane hangar, and began its business originally known as the Price Club. Its first customers were business owners only. However, the firm determined that it could achieve more growth by also serving non-business owners as well. The first Costco warehouse location opened in Seattle, Washington, in 1983. It became the first company ever to grow from zero to $3 billion in sales in less than six years. Costco and the Price Club merged in 1993, under the name PriceCostco, owning 206 locations with $16 billion in annual sales. It has operated under the Costco name since 1997 (Costco, n.d.).

Threat of New Entry

The threat of new entrants into this business sector is low due to the high-cost, low-margin nature of the warehouse club industry. The barriers to a new entrant are very high, as competitors, such as Costco, Sam’s Club, and BJ’s Wholesale Club, have substantive scalable economies that would not be easily attainable by newcomers to the industry. Additionally, the advertising and marketing expenditures required to attract members would be very high, as the leaders of the industry could strongly contest new companies from entering the business. A niche or a specialty big-box retailer may be able to compete on price for certain items, but doing so across-the-board would be cost-prohibitive at this mature stage of the industry (Wall Street Journal).

Bargaining Power of Suppliers

The suppliers of Costco consist mostly of manufacturers of products that the warehouse clubs stock. Although the majority of these manufacturers are large companies that produce highly recognizable brand names, these suppliers are not necessarily in a sufficiently strong position to...