Introduction and Objectives
Goods are transported to markets, from warehouses, where they are sold to customers/consumers/clients. However, recently, some organizations introduced the concept of giving access to consumers/clients/customers to a warehouse, where they could buy products or goods at a considerable low price (in comparison to market price). This business design directly increases consumer surplus, which is an increase in real income, and it increases sales for the companies that sell their products through such warehouses (increasing their revenue and thus profit) (Safiullin, Ismagilova, DinaraKh, & Safiullin, 2013).
As the idea/business-design became more lucrative, more companies or firms adopted this idea to earn high profits. However, studies reveal that economies of scale and perquisite of potent business strategy have permitted only a few competitors in the market, which compete with one another intensely. Two of such competitors are Costco and Sam’s Club. These two companies have multiple warehouses in the United States, which sell various kinds of goods. However, consumers/clients/customers can buy from Costco, only if they are members of Costco operates chains that member-only (Zack Equity, 2014).
Sam’s Club, operated by Wal-Mart, is also a members-only warehouse chain, which operates all over America. It is quite evident that business design and targeted market of both Costco and Sam’s Club are similar. Both operate in similar and manner and attempt to generate revenue in a particular way.
In the year 1983, Costco opened its first Warehouse in the city of Seattle (Washington). The warehouse operated better the expectations, and it earned an abnormal profit. In the year 1993, Costco merged with Price Club, so that it could capture more market share (Luling, 2017).
Sam’s Club also opened in the year 1983, and it was a brainchild of Sam Walton. The warehouse had a business strategy, which was very similar to the business strategy of Costco, as the structure of the organization and its targeted market/consumer was similar. Also, both companies evolved similarly, as they were subjected to similar socioeconomic and political-economic realities (Sam’s Club, 2018).
As both companies competed in the same market; therefore, they were natural rivals. The business, of Costco and Sam’s Club, expanded on the expanse of each other. For instance, any measure or attempt, by any of these warehouses, to increase market share or consumer-base, resulted in a reduction of consumer-base or market share of the other company.
In economics, market share has great relevance and significance and as market share or size of consumer-base directly impacts sales, revenues, and profit. The most common method to earn a profit, for an organization that operates in a market, is to sell products and services. When an organization sells its products and services in the market, it earns revenue, and when the expenses (such as operating cost) are deducted from generated revenue, profit is left. However, if expenses exceed that generated revenue, then a company suffers loss. It aids us in understanding why the expansion of the consumer base is important and why organizations such as Costco and Sam’s Club are so keen to expand their market presence. However, it’s also evident that these companies have a slightly different strategy, when it comes to consumers, as they only allow those to shop in these warehouses, which have a membership (Shore, 2014).
Literature Review
In the United States, grocery competition is highly intense, which forces companies to take extraordinary measures. Most of the warehouses based their strategy on the competitive prices of goods that they offer, which intends to engage clients/customers for long periods of time (loyalty). However, companies like Sam’s Club and Costco have also introduced a membership-only feature to ensure that customers remain loyal to the brand (Daniels, 2017).
It is a known fact that when competition intensifies, both consumer-base and profit starts to dwindle. When profits start to decrease at an alarming rate, it becomes quite difficult for an organization to survive in a complete market, unless it innovates. It is true that companies can operate at break-even; however, it is hard for companies, which have invested heavily, to operate at break-even (Ready, 2013). Therefore, companies like Costco and Sam’s Club perpetually strive to swell their profit, which is an ultimate goal of a company or firm that operates in the contemporary market or corporate system (Bylund, 2015).
The study suggests that it is the market structure and market competition, which compels companies to devise and implement a particular type of business strategy. The more potent or effective a market strategy, in particular, market conditions, more it benefits a company. In fact, not only the strategy, but also the organization’s structure is influenced by the market. For instance, the size of the market, the number of competitors, producer surplus in that market, consumer-base, etc. influences organization’s structure and its strategy. Also, the market structure also influences, to an extent, capital structure of an organization, which likes its organizational structure, determines the capacity to exploit economic or corporate opportunities (Markgraf, 2018).
The contemporary market, in which Costco and Sam’s Club operate, can be identified as an Oligopoly market/industry, where economies of scale are large, which forms a natural barrier to entry. Companies, which operate in this market, compete intensely and they have devised various strategies to outperform others. One of the common sub-strategies is offering products at highly competitive prices. Some companies, such as Costco and Sam’s Club have introduced another sub-strategy, which is a membership-only, that aims to maintain the consumer-base. In such highly competitive markets, maintaining consumer-base or keeping the customer loyalty is extremely difficult; however, membership-only strategy facilitates companies like Costco and Sam’s Club in realizing this goal to a certain extent (Berger, 2017).
However, it is also true that this sub-strategy (membership-only) has its disadvantages, which are discussed in detail in various studies.
From the systematic scrutiny of the literature and evidence, we learn business strategy, of Costco and Sam’s Club, are based on three pillars, 1) Competitive Prices, 2) Expansion, 3) Location, 4) Brands and 5) Loyalty through the membership-only scheme. All three sub-strategies are of great importance, and both companies emphasize on these three strategies for greater returns. However, it is also true that some of the factors are more important than the other, which is why the stress or emphasis may vary from sub-strategy to sub-strategy (Dhamdhere, 2016).
Price Competitiveness is a micro-economics concept, which means charging a price equal or less than what the competitor is charging. Companies adopt this policy, primarily, to increase their market share as we know that price is associated with the quantity demanded. It is also apparent that this pricing method is adopted in such markets, where the sellers are selling similar or identical products. On /retail/grocery market, the products are similar in quality, which is why the prices of products do not vary drastically from one another. In case of warehouses, which offer products of different companies, it becomes highly essential to offer such products, of various brands, which are high in quality and fewer prices. It gives them a competitive advantage over their rivals.
Almost all the large grocery stores or warehouses claim to offer products at a highly competitive price, which compels companies in this market, to take additional measures to maintain the competitive edge. One such strategy or method is expansion. There are several strategies to expand corporate/operations. One of the most common strategies is opening a new unit in a new territory. This opening of new unit generates a consumer base, which is then tapped/exploited to generate revenue (by selling products to customers). Another method is of merger (horizontal), in which two companies that have the similar organizational structure (and operate in the same market) merge. It allows companies to expand their market share drastically in a very short period. In fact, Costco merged with Price to increase its market share, which benefitted Costco enormously. However, it is essential to acknowledge that very few mergers succeed.
For large grocery stores/warehouses, location is of great importance. Microeconomics studies, about the firm and market, also infer that location is a key in competitive markets, as it directly influences the size of the consumer base. Studies show that Costco stores are located at more convenient points, which are more accessible for customers. In contrast, stores of Sam’s Club are not as conveniently located as Costco’s stores.
What a warehouse decides to sell is of great importance. Most of the warehouses try to sell almost every product; however, smart grocery stores or warehouses sell products, which inexpensive and offer high quality. Both companies, Costco and Sam’s Club are very sensitive regarding brands that are sold in their markets. However, Costco seems to have better sense than Sam’s Club.
Members-Only is another sub-strategy, which is used by these companies to maintain consumer-base. However, this strategy is not very popular, as this strategy produces mixed results. For instance, membership makes a client/customer loyalty, as he/she has paid for membership and therefore prefers to shop from that warehouse, which membership he/she has. However, as non-members could not shop from the warehouses, the potential revenue could never be generated.
As Sam’s Club and Costco operate in the same market and offer similar services; therefore, their rivalry is natural. Both companies/organizations devise strategies to outperform the others. These business strategies include offering discounts and organizing sales (periodically), which intends to increase sale and thus profit. Discounts and sales are the most common methods employed to increase not only sales, but also consumer base, as it gives opportunities to potential customers to shop from these warehouses and become a member of it.
Sales and discounts also give opportunities to companies like Costco and Sam’s Club to impress their customers with their services. When companies sell similar products, the emphasis shifts to other aspects of the business to outperform rivals. As it is apparent that grocery market in the US is an almost perfectly competitive market; therefore, firms are price-takers (to an extent). It implies that to increase profits, these stores must emphasize on 1) sales and 2) services.
Sales and services are becoming a highly essential aspect of the business, and they embed at different stages of business. Companies like Costco and Sam’s Club have been using various strategies and techniques to increase sales and improve services. Other than discounts and sales-events, e-commerce is another instrument used by these companies to increase sale and improve their services. Evidence suggests that online presence, of Costco and Sam’s Club, have increased dramatically. Also, online services also facilitate those, who want to acquire membership of Costco or Sam’s Club.
It is natural to learn from the Rival’s strategy and devise a better strategy than a rival. The rivalry between Costco and Sam’s Club is facilitating the organizational evolution of both companies. Though, there is no mathematical formula or instrument to measure the size of evolution, of both organizations; however, the evolution is quite evident.
Large grocery stores, such as Costco and Sam’s Club offer goods or products, of various brands, at very competitive prices. As the prices of the products dwindle because of competition and services improve, consumers are the beneficiaries, as these aspects increase consumer surplus. Consumer surplus is directly associated with real income, which means that whenever prices dwindle and consumer surplus increases, the real income of a consumer increases, allowing the consumer to buy more of that income. (Safiullin, Ismagilova, DinaraKh, & Safiullin, 2013)
Different studies have revealed that consumption is an engine for growth and consumption, of an individual, depends upon income; more the income, more an individual buys. However, if the prices would be high, because of any reason, the purchasing power of an individual would dwindle and because of that real income also decreases. Therefore, when Costco and Sam’s Club offer goods or products at a low rate, it directly and positively affects their income (increase in real income) and as a consequence, consumption increases in the overall economy.
However, some studies suggest that Costco and Sam’s Club are not as inexpensive as they claim to be. The claim is that large grocery stores only appear to sell products or goods at low prices. Large grocery stores manipulate perceptions through various advertisement techniques. Therefore, real income, of individuals, never increases; however, the consumption size increases to an extent.
There is enormous evidence in favor of the argument that advertisements effectively build perceptions and they may trick consumers to buy more so that they may swell their profit.
Profit is an ultimate objective of a firm and all companies, which operate in the corporate or economic system. Profit fuels ambitions and influence strategies of Costco and Sam’s Club too. Profit, a firm can earn, only when it can muscle-down competition and out-perform it. All the studies, about profit, assert that strategy, such as prices, brands, and locations, are of great significance. According to the reports, Costco is smarter, than Sam’s Club, in determining better locations and brands. The effectiveness of the strategy, of choosing better locations and brands, has been translated into higher profits. The reports, about revenue and profit, reveal that Costco has earned more in comparison to Sam’s Club as Costco has a better strategy for location and brand.
It is imperative to understand and acknowledge that as profit is a prime objective of any firm; therefore, the performance of a company, firm or an organization is measured regarding profit. For instance, if Costco has earned more profit than Sam’s Club, in a particular financial year, then Costco has performed better than Sam’s Club. However, other factors are also considered during such analysis. For instance, the size of investment and market share also matter. However, in context of Costco and Sam’s Club, the performance of both companies to be measured by the profit they earned, as both companies are similar in structure and size of their investment.
Economic Analysis
Tables
Costco’s Income Statement
| The fiscal year is Sep – Aug | 2017 | 2016 | 2015 |
| Costco Revenues or Net Sales | 129.03B | 118.72B | 116.2B |
| Cost Of Goods Sold (COGS) | 111.88B | 102.9B | 101.07B |
| Costco Gross Profit | 17.14B | 15.82B | 15.13B |
| Research & Development Expense | – | – | – |
| Selling General & Admin Expense | 13.03B | 12.15B | 11.51B |
| Income Before Depreciation Depletion Amortization | 4.11B | 3.67B | 3.62B |
| Depreciation Depletion Amortization | – | – | – |
| Non-Operating Income | 62M | 80M | 104M |
| Interest Expense | 134M | 133M | 124M |
| Costco Pretax Income | 4.04B | 3.62B | 3.6B |
| Provision for Income Taxes | 1.33B | 1.24B | 1.2B |
| Minority Interest | 35M | 26M | 32M |
| Investment Gains Losses | – | – | – |
| Other Income | – | – | – |
| Income Before Extra ordinaries & Disc Operations | 2.71B | 2.38B | 2.41B |
| Extraordinary Items & Discontinued Operations | – | – | – |
| Costco Profit/ Loss (Net Income) | 2.68B | 2.35B | 2.38B |
| Average Shares used to compute Diluted EPS | 440.94M | 441.26M | 442.72M |
| Average Shares used to compute Basic EPS | 438.44M | 438.59M | 439.46M |
| Income Before Nonrecurring Items | 2.56B | 2.35B | 2.32B |
| Income from Nonrecurring Items | 114.64M | – | 57M |
| Costco Earnings Per Share Basic Net | 6.11 | 5.36 | 5.41 |
| Costco Earnings Per Share Diluted Net | 6.08M | 5.33M | 5.37M |
| EPS Diluted Before Nonrecurring Items | 5.82 | 5.33 | 5.24 |
| Preferred Dividends Acc Pd | – | – | – |
| Dividends Common | – | – | – |
| Dividend Per Share Common | 8.9 | 1.7 | 6.51 |
We have already discussed and established that sales are the most common method to increase revenue. From studying Income statement, of Costco, we learn that in the year 2017, the Net Sales or Revenue was around 129.03 billion, which is $10.31 billion more revenue than the last year. The growth in revenue is around 8.7%, which is impressive growth. The table also reveals that the cost of goods, which were sold, was around $111.88 billion, whereas, in the year 2016, it was $102.9 billion. The gross profit, which Costco earned in the year 2017, was 17.14 billion, whereas, in the year 2016, it was $15.82 billion. The increase in from the previous year is 8.3%, which is the healthy growth of profit.
Sam’s Club Income Statement
The figures above are related to net sales, and they are in millions. According to the statistics, in the year 2017, revenue generated by Sam’s Club was around $57 billion ($57, 365 million), whereas, in the year, it generated revenue around $56 billion ($56, 828 million). The increase is about 0.9%, which is not a great increase. When we compare the growth of Costco with Sam’s Club, we learn that the revenue of Costco has increased at a greater rate in caparison. As the criteria, of performance, are growth and profit, it is apparent that Costco has outperformed Sam’s Club (Sam’s Club, 2018).
Conclusion
In the end, it is concluded that the simplest method to measure the efficiency of two companies, which are similar in size, structure, and investment, is to compare their financial performance. The size of profit is one of the criteria, which is commonly used to judge the performance of a company in a financial year. Time-Series data, about revenue and profit, is studied to conclude. However, for better understanding, the comprehensive income statement is studied in detail.
For this assignment, we focused on Total Revenue, Total Cost and Size of Profit in consecutive years (from 2013 to 2017 in case of Costco and Sam’s Club). We did not focus on Marginal Revenue and Marginal Cost, as such precise and rudimentary data was not available. The time-series data which we retrieved from various sources was enough to judge the financial and other performances of selected companies. Also, data also provided us understanding regarding 1) how market share is increasing (of both companies) and 2) in which direction each company is evolving.
From our economic analysis, we have concluded that Costco is growing and earning at a quicker pace than its competitor, Sam’s Club. For instance, Revenue of Costco has grown 8.7% from the year 2016 to 2017, whereas the profit has increased around 8.3%. However, for Sam’s Club growth in revenue is small, which is only around 0.9% from the previous year.
These statistics only endorse what most of the studies have inferred that Sam’s Club is losing to Costco and there are several reasons for it. Two of the most evident reasons, on which most of the corporate experts have consensus, are 1) Location and 2) Brands. These two factors are given a competitive advantage to Costco, which allows it to sell more and thus earn more. Other reasons include 1) service, 2) online presence and 3) perception. Wal-Mart’s perception, among consumers, has polluted somewhat because of its policy regarding its employees, which has affected its sales somewhat. Therefore, Sam’s Club, a subsidiary of Wal-Mart, is finding difficult to compete against Costco.
References
Berger, J. T. (2017, October 31). Is Retailing Becoming an Oligopoly? Retrieved from http://www.wiglafjournal.com/corporate/2017/10/is-retailing-becoming-an-oligopoly/
Bylund, P. (2015, October 26). Is The Ultimate Goal Of A Business To Maximize Profits? Retrieved from http://www.smbceo.com/2015/10/26/is-the-ultimate-goal-of-a-business-to-maximize-profits/
Daniels, J. (2017, May 24). Wal-Mart regaining grocery share from competitors at ‘accelerating rate’. Retrieved from https://www.cnbc.com/2017/05/24/wal-mart-regaining-grocery-share-from-competitors-at-accelerating-rate.html
Dhamdhere, P. (2016, April 21). The Omni-Channel Tussle Between Sam’s Club And Costco. Retrieved from https://www.annexcloud.com/blog/2016/04/21/the-tussle-between-sams-club-and-costco/
Luling, T. V. (2017, December 6). 11 Things You Didn’t Know About Costco. Retrieved from https://www.huffingtonpost.com/2014/02/07/costco-things-you-didnt-know_n_4725587.html
Markgraf, B. (2018, January 1). How Does a Market Structure Positively or Negatively Affect a Firm? Retrieved from http://smallbusiness.chron.com/market-structure-positively-negatively-affect-firm-78927.html
Ready, K. (2013, April 15). Beyond Profit: The Ultimate Goal of Entrepreneurship. Retrieved from https://www.forbes.com/sites/kevinready/2013/04/15/beyond-profit-the-ultimate-goal-of-entrepreneurship/#69eefb736b65
Safiullin, L. N., Ismagilova, G. N., D. G., & Safiullin, N. Z. (2013). Consumer benefit in the competitive market. Procedia Economics and Finance, 5(1), 667-676.
Sam’s Club. (2018, January 1). Our History. Retrieved from https://corporate.samsclub.com/our-story/history
Shore, J. (2014, August 26). 4 Fast Ideas to Rapidly Grow Your Revenue. Retrieved from https://www.entrepreneur.com/article/236797
Zack Equity. (2014, September 16). Costco Sustains Sales Momentum Amid Intense Competition – Analyst Blog. Retrieved from https://www.nasdaq.com/article/costco-sustains-sales-momentum-amid-intense-competition-analyst-blog-cm391628
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