What is Costco’s business model (i.e.

key components and “blueprint” for delivering a valuable

product or service in a way that will be profitable, that is, a “money maker”)?  Is it appealing, given
the five-forces? Why or Why not?
Costco Wholesale Corp. is a US multinational, headquartered in Washington, operating in the business of
membership-only warehouse clubs. The firm has its roots in the Price Club warehouse that was
established in 1976 and is currently the second largest retailer in the world. The firm is well recognized in
the wholesale market as a cost effective solution. The mission statement is “to provide quality goods and
services at the lowest possible prices” and this stands out as the key component of the firm’s business
model.
The business is able to provide economical products owing to the nice business model:
a) Fixed revenue stream: Costco is a membership business which means it can compensate for low
cost with the fixed membership charges. This means that the firm is able to meet the low margins
from sales of packaged products by fixed income
b) Supply chain: The firm has been pretty success in cutting down the costs from supply chain
wastage. The firm picks most of the raw material directly from manufacturer and gets it directly
stored to wholesale joints thus cutting down the overall costs while maintaining quality.
c) Personal Label: Personal label products are a good source of higher margins and Costco is
looking to expand the sales from personal labels and improving margins.
d) SKU range: Since the firm is catering the wholesale business segment, they keep a much lower
number of SKUs than other retails thus keeping a tab on packaging and transport cost. Lower
number of SKUs also allow the firm to better negotiate with manufacturers.
Porter’s five forces is a tool that uses the impact of external forces on the business of the firm.
a) Threat of competition: The business faces high level of threat from competitors owing to the
wide range of players in the market like Walmart, Sam’s club etc. All these chains look to offer
best prices and hence have limited standalone competitive positioning.
b) Bargaining power of suppliers: The business has heavy churn for the available products and
since the firm is a heavy consumer of all products, the suppliers have limited bargaining power
with the business.
c) Bargaining power of buyers: The buyers is the strongest force in the industry owing to the low
switching cost between different sales units. This makes it important for the firm to focus on
advertising.
d) Threat of substitutes: There is limited scope for new substitutes to disrupt the market and hence
the force has less competition.
 e) Threat of new entrants: The business needs a well-established supply chain, strong positioning
and brand recall amongst customers. For new players, it is a bit difficult to establish this and
hence there is limited threat from new players.
Based on the impact from all these forces, Costco still has a wide potential and the firms is still a good bet
considering that it is able to maintain its positioning as the provider of quality good at economical prices.