Industry Analysis (Essay Sample)

Industry Analysis
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Industry Analysis: Costco
This describes a market evaluation instrument devised to offer an organization with an idea of the intricacy of a specific industry (Dobbs, 2014). In other word, it is an initiative intended to determine the market variables that influence the manner in which the particular industry develops. Ordinarily, many organizations would apply Michael Porter’s Five Forces model of market appraisal to review the market variables within their industries. However, a new market opportunities analysis model, the six forces model, which is an extension of Porter’s Five Forces model, is more prudent when making a comprehensive appraisal (Eryilmaz, 2014). This model will be used for this analysis. Essentially, the model addresses the following forces: 1) competition or rivalry among existing organizations; 2) new entrants; 3) end users or consumers; 4) suppliers; 5) substitutes and; 6) complementary products, public, or the government. The main distinction between this new model and Porter’s is the introduction of companies or "complementors" that produce strongly related commodities as the sixth force. In addition, this analysis intends to demonstrate the degree of intensity within Costco’s industry (specialty retail store) and the manner in which it will achieve its desired profit margins in terms of long-term returns on its invested capital (ROC) and long-run growth. To establish sustainable competitive advantage, the company has to cut cost through operation excellence, speed, innovation, implement triple bottom-line accounting, and successfully manage the intricacies emanating from its own operations and the environment.
Competition or Rivalry among Existent Players
Costco operates in the specialty trade store industry, one that is characterized by fierce rivalry. As per a report by IBIS World (2014), this industry currently has over 4,000 product brands across 660 warehouse outlets in nine countries, employing around 219,130 people. Despite its dominant market share in the industry, Costco (share price of $126.50) faces intense rivalry from three large organizations: Target Corporation (share price of $63.81), Wal-Mart Stores (share price- $ 76.84), and Dollar General Corporation (share price- $ 63.10) (NASDAQ, 2014). In addition, the market concentration within any industry typically influences the manner in which management practices execute a dispersion of environmental practices. For instance, if an organization such as Costco operates within an industry characterized by a few dominant players, there is s tendency to adopt identical practices pertaining to environmental and quality practices. The marketing position of Costco in relation to its rivals is exhibited by the figure below.
Figure 1: Market position of Costco relative to its competitors
Currently, in terms of market capitalization, Wal-Mart Stores leads the pack with over $247.7 billion in market capitalization as per 2014 figures (NASDAQ, 2014). On its part, Target Corporation’s market capitalization is $40.4 billion. Costco Corporation had a market capitalization of $55.4 billion. Dollar General Corporation was at the bottom of the pack with a market capitalization of .19.14 billion. This information is summarized below.
Figure 2: Specialty retail Industry - Related companies
Source: Google Finance (2014)
Despite playing second to Wal-Mart in terms of market capitalization, Costco is the United States’ biggest specialty store operator with over 660 membership warehouse stores. It serves over 71 million people in the country, as well as in Canada, Mexico, Japan, Australia, South Korea, the U.K., Taiwan, and Puerto Rico (Hoovers, 2014). Its stores offer more than 4,000 products. In terms of revenues, in 2012, Costco enjoyed a growth of 11.5 percent in retail revenue growth, which rivaled that of its closest competitor, Wal-Mart at 5 percent (Rudarakanchana, 2014). However, in terms of aggregate revenue, Wal-Mart is still the dominant retailer, amassing a whooping $469 billion to Costco’s $99 billion in annual revenue. From a global perspective, Costco improved its ranking to sixth (see figure 2).
Figure 3: Global rankings in the specialty retail sector
Source: Rudarakanchana (2014)
To have a better comprehension of Costco’s standing in relation to its competitors, t is prudent to analyze pertinent financial statistics as summarized in the following table.
Company

Costco

Target Corporation

Dollar General Corporation

Wal-Mart Stores

Price Information


Current last sale- CLS

$126.5

$63.81

$63.1

$76.84

Trade Information


Percentage of shares outstanding

1

6

3

1

Average Daily Volume

1,733,435

5,088,319

6,145,622

5,611,203

Earnings


Earnings per share- EPS

$ 4.48

$ 2.38

$ 3.30

$ 4.87

Dividend Information


Annualized dividend

1.42

2.08

N/A

1.92

Dividend yield

1.12

3.25

N/A

2.52

Analyst Information


Mean Recommendation

2.14

1.92

2.05

1.77

Forecast earnings growth

11.98 %

17.80 %

35.60 %

9.71 %

Industry Forecast Earnings growth

16.23 %

16.23 %

16.23 %

16.23 %

Figure 4: Specialty Industry Financial Statistics
Source: NASDAQ (2014)
New Entrants
According to Dobbs (2014), profitable industries with prospects of high returns tend to attract new rival firms. This contributes to the existence of many organizations that ultimately reduce the profitability for all organizations within the industry. Unless existing organizations can deter the entry of new firms, the abnormal profit rates will drift towards zero. Alternatively,
From Costco’s perspective, its entry into new markets can make it even more profitable and get more hold of the market (Rachapila & Jansirisak, 2013). Definitively, the specialty trade industry is experiencing progressive growth. Between 2009 and 2014, the industry registered a 1.5 percent growth, while its total revenue was 41 billion in 2013 (IBIS World, 2014). This was an improvement after the 2007 economic recession that had seen a sharp decline. It is projected that the industry will achieve an annualized 1.5 percent growth between 2014 and 2019, implying that it remains lucrative to potential entrants. The figure below exhibits the projected growth of Costco’s share price (note that the red line denotes the trend for other competitors).
Figure 5: Source: Trefis Report (2014)
In Costco’s industry, the main players have established a dominant presence that makes it difficult for new entrants to dethrone them (Rachapila & Jansirisak, 2013). This dominance is characterized by factors such as economies of scale, loyal customer base, distribution, and inventory control. Costco’s stock price is estimated to be approximately 10 percent premium to the prevailing industry prices, implying that it is highly regarded (it is bankable). In addition, some consumer reports have established that consumers can save around 55 percent if they purchase from large stores such as Costco and Wal-Mart, which fosters customer loyalty (Hoovers, 2014). Costco’s annual store sales growth has been an average of 6 percent over the past three years, which is because of entry into new markets.
In pursuit of this, Costco enjoys economies of scale, which in turn gives it the advantage of selling at lower prices (IBIS World, 2014). Costco purchases its supplies in bulk, has a large storing space, packages in bulk, and has gigantic-sized orders. For instance, as a warehouse retailer, it offers products at a markup of only 15 percent while a majority of its competitors markup their products by over 25 percent. Such low-cost leadership strategies have the potential of deterring competitors from entering the industry (Eryilmaz, 2014). Additionally, Costco’s revenue base offers it the ability to change its brand offerings regularly, a feat that cannot be matched by new entrants. In terms of inventory turnover, Costco’s performance is impressive.
Figure 6: Costco's ranking in inventory turnover
Source: NASDAQ (2014)
Capital requirements are also a critical factor for potential entrants. Subsidiaries need massive amounts in capital expenditure to overcome industry barriers (Eryilmaz, 2014). For Costco, setting up a warehouse requires in excess of $1.5 million. As per the company’s form 10-k , the company’s subsidiaries have to remain in tandem with its primary objective of preserving principal and generating yield, implying that they have to be liquid enough to meet current obligations.
Buyer Power
The consumers’ power and the need to retain customer loyalty are among the most significant outcomes for a strategic process and business marketing efforts (Eryilmaz, 2014). A consumer’s continued relationship with an organization mirrors the long-term objectives and inclination. Purchasers who value the alternatives and outcomes of the prevailing period are perceived as having a short-term orientation (Jaradat, Almomani, & Bataineh, 2013). It is imperative to point out however, that a consumer’s dependence on a supplier’s products establishes a positive relationship and influences the continuity relationship. By establishing a members’ club throughout its warehouses in the world,...