Reference no: EM132156029

What are the biggest challenges Costco will experience in trying to expand globally?

Costco Wholesale Corporation is an American membership-only warehouse club selling a large range of products. The company opened its first warehouse in 1983 and currently is the second largest retailer in the U.S.—Walmart is number one. Costco, however, is the largest membership warehouse club chain in the U.S.

Costco operates about 700 warehouses across the U.S. and abroad. As of November 2015, the company had international locations in Canada (89), United Kingdom (26), Australia (8), Mexico (34), Taiwan (10), South Korea (12), Japan (20), and Spain (2).208

The company’s revenue has been growing the last few years, and international expansion is one key contributor. Net sales from international operations grew by 45% between 2010 and 2014. This compares to a net sales growth of 21% from Sam’s Club, the warehouse outlet run by Walmart, over the same period. “Margins from international operations are also higher, which has benefited the bottom line. That’s partly due to little or no competition from other warehouse clubs, as they’re a relatively newer concept abroad, and partly due to lower employee costs. Costco earned an operating margin of 4.1% from international sales in fiscal 2015 compared to 2.7% from domestic sales.”209

One investment analyst noted that Costco’s international strategy was very carefully devised. He concluded that the “retailer appears to be very selective in choosing the locations for expansion as a new store requires significant capital. Before opening an outlet, Costco looks to make sure that customer response will be good. For instance, the warehouse retailer has started its operations in China through an e-commerce partnership with Alibaba and has seen tremendous success so far.”210

Experts say that Costco’s international success is mostly based on the company’s ability to adapt to the local environment for each market it is operating in. Consider the changes Costco implemented when expanding to Australia.

Costco began by changing its selling practices. Rather than relying on coupons to draw-in customers, the company abandoned their use. Coupons are foreign to Australians and hardly anyone uses them. The company also dropped its use of Costco cards as a form of payment. While Americans like the use of such cards, management thought that Australians would like greater flexibility in payment methods. They were correct in this assessment.

“Also Costco decided not to invest any money in marketing. They played on ‘word-of-mouth’ marketing. It was smart as in Australia, this is probably the best marketing money can buy. Partially the success of this practice was ensured by the fact that many Australians and Americans travel a lot between the countries. The migration flow is quite strong there. This caused a certain amount of people to have first-hand experience with Costco. This played its role in attracting new customers.”211

Costco similarly used a customized approach when opening stores in Spain. It opened its first warehouse in Seville, Spain’s fourth-largest city, in 2014. Jim Murphy, Costco’s head of international operations, selected Seville because it has a population of about 1.3 million within a 30-minute drive of the store.

There are several challenges that Costco must overcome to effectively expand into Spain. For one, bulk purchasing is not popular because people have smaller families. The fertility rate is 1.3 children per woman, which is below 1.9 for the U.S. Retail prices are also depressed due to economic conditions, and people tend to buy small quantities in small shops that are close to their homes. Third, many people live in smallPage 141 apartments and houses, limiting the shelf space that can be used to store the larger packaged goods sold at Costco. Finally, there are challenges in getting suppliers to change their packaging to fit Costco requirements. These changes are costly for suppliers.

Costco tried to overcome these challenges by implementing a variety of customized solutions. First, it is sending employees to small businesses to discuss how they can save money by becoming members. Costco also is asking big employers to allow it to send representatives to talk with their employees in staff break rooms. Costco is also using local employees to run the operations. To meet local needs and tastes, Costco typically sells two-thirds of the products that originate in that country. “At the Seville Costco, the meat section will have Spanish specialties such as octopus, rabbit and piglet, depending on the season. The store will carry Spanish olives, tuna made by the locally famous brand Ortiz, and rows of hanging jamón ibérico, Spain’s answer to prosciutto.”212

Costco is planning to continue its international expansion through 2017.