Introduction
Costco Wholesale was founded in 1976 and public in 1985. Costco has expanded its business to various countries like in North America, Europe, Asia, Africa, and Oceania. The company has applied its vision and mission in every country it enters. Furthermore, the company’s performance in every country is being monitored carefully. Costco Wholesale often retail in relevant countries to adapt the taste of consumers there. Back in the late 1960s and early 1970s, major American airlines flew to Europe, where they were seen as price setters. At that time, the U.S. airline and airport industries were growing quickly relative to those in Europe, and managers wanted to gain experience with price leadership by expanding capacity. Lower unit costs and lower prices led to faster increases in air traffic. Today, airlines are still seeking new markets that can accommodate sizeable growth in service. Expanding into arenas where you are not currently present may offer companies opportunities for revenue growth from new demographic segments, broader price points, increased brand visibility, and addition of a fresh product or service line. However, company executives need to understand local consumer behaviors and preferences, demographic and cultural factors, and have knowledge of industry and competitive factors overseas. Retailers around the globe are merging and acquiring international companies. Firms have recognized overseas markets as strategic arenas for driving revenue growth, vertical and horizontal chain integration, and financial performance. It is very natural for specialist firms in the industry to merge or acquire facilities in their markets. Captive marketers gain greater control over the customers they serve in overseas markets when production and or distribution facilities are owned. Marketing justice or risk associated with changing suppliers is reduced. Scale ecologies may be generated downstream to serve world markets. Large companies are likely to be successful as they expand their global retail operations.
Cultural and Legal Differences
When a business decides to sell its products in different legal jurisdictions, it typically has to negotiate cultural and legal differences. The simple act of shopping is extremely culture-bound. In some cultures, people enjoy shopping, and the trip to the market is a heyday of social interaction. In the United States, shopping is almost a form of warfare. Platinum retailer Costco is a screaming success in its American stores. Unfortunately, the company has had mixed results internationally. In some countries, people balk at the idea of shopping at a warehouse club. In others, Costco has struggled to adapt to local tastes. There’s something else to consider: Costco has a good understanding of U.S. law, but it is far less familiar with foreign legal systems. For Costco to succeed globally, it must not only understand the different types of products in demand but also find partners that can help the company negotiate challenging legal environments.
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Failure to comply with the law in other countries can invite fines and increased operating expenses, making it less likely that the company will see a return on investment. The right frame of mind also extends to corporate culture. In South Korea, Costco has made limited inroads because of the installation of a Seoul store where customers can buy napa, a watery kimchi relished by nearly all Koreans. Relationships also count for a lot in South Korea, and without wholehearted local partnerships, global retailers can quickly wear out their welcome. Costco is only just beginning to form solid alliances in South Korea, although it has stressed the importance of working with South Korean enterprises to make its store a success. In China, too, local partnerships and advertising are being used to drum up enthusiasm for the chain, which will launch a Shanghai store – the first, somewhat prophetically, to appear in urban China. The message for companies pricing to go global is clear: disinfect risk with understanding. Understanding local cultural and legal idiosyncrasies goes a long way toward helping global retailers get in the black. For many, ignorance isn’t bliss. It’s just costly.
Supply Chain and Logistics Challenges
One of the biggest difficulties presented by a global expansion of this nature is a transformation in the focus on supply chain and logistics management. As firms expand into territories different from their home country, there are varying levels of that region’s infrastructure. In developed countries, the transportation infrastructure may be elusive, dilapidated, and in need of constant repair. Also, infrastructure reliability in many international locations is never as different as what is found in the United States.
The key challenge central to the successful supply chain and logistics management at Costco in this stage of international expansion is maintaining a cost-effective product that is preferred by American-based customers. Many of the products that Costco currently sells and those we are forecasting in the future are available globally, but there are varying standards for production and quality assurance. It is the responsibility of the purchaser to find products that meet wholesale quality with an international consumer brand name. Along each leg of the trip, there is the prospect for a logistical hiccup that would cause a shipping delay. As previously stated, our business model requires that we deliver the right product to the right place at the right time, and if this is not available, there is significant potential for lost sales and product spoilage. Disruptions at the destination are even more problematic because it delays the customer to whom the product is going to be delivered. The alternative is to maintain high levels of inventory at the destination warehouse, which would require warehouse space that often is not readily available or cost-effective to rent. Another issue is the possible need for changes in packaging, labeling, and processing of meats, fruits, and vegetables in order to be able to sell these products for commercial use in that country.
Premium products sold in the United States are not always acceptable in other countries. Consumption and product preferences can be different, which can require different handling and processing of products. Although this was known to Costco, the biggest challenge that Costco faces is maintaining inventory in all its warehouses. To be as cost-effective as possible, the company tries to keep the inventory level as low as possible. Each location has a demand-based forecast model which can predict what types of pallets the store expects in the upcoming weeks. However, the ability of countries such as Taiwan and the United Kingdom to predict their demand is different due to different economies and people. To help forecast accuracy, Costco tries to keep the pallet types consistent within a warehouse. A further strategy implemented as a result of the challenges in international business is supply chain strategy. With supply chain management, the environment and local implications are more of a dimension of the management rather than a strategy. Generally, the management has the overall authority to modify the local characteristics at a certain point. However, when a firm enters multiple countries, especially at the pace Costco is, a supply chain strategy becomes crucial to complete the business goals, enabling the business to figure out how many products should be produced for each and every country to suit the needs of the consumer. There are certain operations management changes that are key components in a successful global supply chain strategy.
International Markets
In markets around the world, Costco faces a competitive environment that is different from that in the United States. Most of the countries are home to a large, established retailer that is a significant competitor to Costco. Many of these local retailers are affiliated with multinational retail organizations, and some of them are multi-format retailers. Some sell in club, wholesale, and retail formats. Costco does not control consumers' everyday retail expenses. Other retailers command four to five times the market share in the countries in which Costco operates. A few large hypermarkets, or even small retail networks, focus more on low prices and attract a different segment of the market, in contrast with the demographics of the more affluent members that Costco serves in its markets. Costco believes that there are substantial numbers of consumers in the countries where it operates who have enough disposable income and buy enough in aggregate quantities to justify its annual membership fee at either the Gold Star or Business level.
There are also substantial barriers to entry for multi-format or hypermarket retailers. Establishing a brand position and establishing trust with local consumers takes time. Before entering any market, Costco engages in plenty of on-the-ground research to get to know its competition, since it prefers to be familiar with the competitive system and social norms in each country. In some international markets, established competitors set the pricing levels for goods to some extent—more so than in the U.S. Developing countries with a lower price profile simply will not support the higher labor costs that are part of Costco's expense structure. Also, groceries display local tastes. For these, it is difficult and takes longer to develop a supply chain as the brand becomes more recognizable because there is no equivalent U.S. item that directly matches the item being developed. At the same time, due to high costs and low potential for disturbance in commodities, some countries are not consuming. Either situation can mean a lower country volume.
Overcoming Global Expansion Challenges
No matter which international expansions Costco decides to make, if any, here are six steps the megachain can take to overcome the challenges of going global: 1. Local Adaptation This primarily involves understanding customers in each new market and adapting product offerings to their unique tastes. Many retailers will adjust product offerings to align with local preferences. Starbucks has been so successful at local adaptation that some customers think it's a local brand. "The basic idea is that you should adapt to the customer," said an expert. "You should not expect the customer to come to you." Retailers can make these changes at all price points, though it becomes more important as the price point goes up. 2. Local Partners An important part of operations in any country is building relationships with suppliers, landlords, or others that can help the company run more smoothly. But some companies choose to rely even more significantly on local partners, like competitors. The two both chose to enter a new market by partnering with a local online conglomerate. This has been where Costco has failed in the past, according to some analysts. "It's the location and the partnership," said a management professor. "There are procurement issues. There are employment issues. There are cultural issues in terms of engaging the kinds of labor that they want. It's basically everything you could think. It ties in transportation, locations, networks."
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