a comparative study of target corporation and costco wholesale

Naser Alshakhoori et al., International Journal of Research in Management, Economics and Commerce,

ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, Page 27-40

Page 27

Business Strategies of Discount Retailers: A

Comparative Study of Target Corporation

and Costco Wholesale Corporation

Naser Alshakhoori1, Ahmed Alkenaizi

2, Nadeem Ebrahim

3, and

Dr. Shaju George4

1, 2, 3(MBA Student, University of Bahrain, Kingdom of Bahrain)

4(Assistant Professor, Department of Management & Marketing, College of Business Administration, University of

Bahrain, Kingdom of Bahrain, email: [email protected])

Abstract: The purpose of this study is to identify and compare the Business strategies and Business models adopted

by two big discount retailers in the United States which are Target Corporation (“Target”) and Costco Wholesale

Corporation (“Costco”). The study also examines the characteristic of the competitive environment in which both

companies operate in. The SWOT analysis shows that the discount retail industry is highly competitive and is

affected by key strategic factors as Technology improvement, innovation in product design and promotion, employee

welfare, internet, multi-channel distribution and communication. Target follows an Integrated Cost Leadership and

Differentiation strategy expressed in its promise of “Expect More, Pay Less”. It provides high quality, trend -

forward merchandize with lower margin. Target achieves its strategies with core competencies and resource such as

superior guest experience, corporate culture, systems, strong supply chain, technology infrastructure, innovation,

and disciplined management approaches. On the other hand, Costco adopts a Cost Leadership strategy. It uses

economies of scale to buy in bulk at low cost and pass the discount to the customer. Costco achieves its strategy with

core resource and competencies that include efficient supply chain management, pleasant shopping experience ,

strong bargaining power, motivated highly paid employees.

Keywords: Strategy, Business Model, Environmental analysis, Innovation, Discount Retailers

I.INTRODUCTION Businesses of all kinds are facing tough, uncertain environment characterized by rapid ch anges, fierce

global competition, open market and continuous technology breakthrough and advancement. In order to survive and

succeed, businesses need to be in good fit with such environment by carefully designing and adapting critical

aspects of the business of which strategy and business model are key success factor(Khan & Khalique, 2014).

Strategy is seen as a mult idimensional concept that relates many important aspects of an organization

which dictates the latter‘s long term direction and purpose and enables the organization to adapt to the changing

environment (Hax & Majlu f, 1986).A well-defined strategy should integrate an organization‘s major aspects such as

plans, objectives, policies, and programs to ensure one corporate-wide direction(Dobson, Starkey, & Richards,

2004).

Business Strategy serve different purposes and provide various benefits including: providing direct ion and

guidance, developing and maintain ing competit ive advantage, efficiently managing business resources, planning and

managing business expansion, and responding to the environment challenges, threat and opportunities (Olsen, 2016;

Albu Consulting, 2016; Ghaly, 2009).

Mainly there are three types of strategies in Businesses; each one is concerned with certain level of

organizational matters. The first type is Corporate-level strategy, which deals with the overall direct ion and scope of

an organization and how value will be added to the different business units of the organization. The second type of

level of strategy is the Business-level strategy, which deals with the improvement of the competit ive position of

particular product or service in a specific market segment served by a business unit. The third type of strategy is the

Functional strategy, which is concerned with developing a distinctive competence to provide a company or business

unit with a competit ive advantage (Johnson & Scholes, 2005).

A related concept to Strategy is the Strategic Management, which is considered as a science and art that

include environment analysis , strategy formulat ion, strategy implementation, and strategy evaluation (Daft, 2008;

Wikipedia, 2016). Researchers argued that strategic planning generates information, promotes long -term p lanning,

forces the firm to adapt to its environment, provides a s ystem a tic way for identifying and evaluating strategic


ISSN 2250-057X, Impact Factor: 6.384, Volume 06 Issue 06, June 2016, 7-40

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opportunities, stimulates new ideas, increases motivation and commitment, and reduces focus on operational details,

all of which improve firm performance(Hopkins & Hopkins, 1997).

Wheelen & Hunger (2012) suggested four approaches for strategic decision making; Entrepreneurial

approach where strategy is made by one powerful individual and it focuses on opportunities, Adaptive approach

which is reactive in nature and seeks to provide solutions to existing problems, Planning approach which is

characterized by systematic gathering of information to analysis the situation and to generate alternative feasible

solutions, and finally Logical incremental approach which is a mix of the other approaches and is fo rmed as a result

of debates and experimentations.

II. REVIEW OF LITERATURE

Business Strategy According to Nickols (2016), the concept of strategy was firstly used in the military field then it was

adapted and use in Business. He suggested that strategy is about bridging the gap between means (e.g. programs,

tactics and policies) and ends (e.g. mission and goals). Nickols (2016) summarized the definitions of strategy of

other researchers as ―a complex web of thoughts, ideas, insights, experiences, goals, expert ise, memories,

perceptions, and expectations that provides general guidance for specific actions in pursuit of particu lar ends‖.

Johnson, Scholes, & Whittington (2008) defined strategy in a comprehensive term as ―the direction and

scope of an organization over the long term, which achieves advantage in a changing environment through its

configuration of resources and competences with the aim of fulfilling stakeholder expectations‖. This advantage is

referred to as Competitive advantage which includes all the moves and approaches taken to gain an edge over

rivals(Porter, 1996; Porter, 1980).

Mintzberg (1994) suggested that strategy can be defined in multiple ways such as plan to reach targets, a

pattern of actions over time, a product positioning in part icular market and as a perspective that set the direction of

the organization. Porter (1996) argued that strategy is also about creating strategic fit among a company‘s activities,

which will complement one another which make it very difficult for rivals to imitate as they have to match the

whole system. On this context, matching a competitor‘s strategy is harder if we put into consideration that a fit

between a company‘s activities is usually coupled with a series of operational effectiveness programs.

In a competitive environment, firms follow a number of generic strategies which include cost leadership,

differentiation, and market focus strategy. A firm will be performing lower than its competitors if it does not adopt

any of the generic strategies (Porter, 1980).

Daft (2008) defined Strategic Management as ―the set of decisions and actions used to formulate and

implement strategies that will provide a competitively superior fit between the organization and its environment so

as to achieve organizational goals‖. It is a process that includes identifying external opportunities and thread and

internal strengths and weaknesses, setting the organization mission and objectives, formulat ing strategies and

policies, developing operational plans, setting budget and procedures, evaluating the end results and making

correction based on the dynamic feedback between the all components of the strategy management (Wheelen &

Hunger, 2012).

Johnson et al (2008) suggested a model of three main elements that constitute the strategic management.

The first element is about understanding the strategic position which includes identifying the key environmental

impacts on the organization and the organization‘s resources and core competencies. The second element of the

model is the strategic Choices which involve understanding the bases of the competitive advantage and future

strategy. The third element of the strategic management is about putting strategy into action and make sure it is

working as indented.

Stevenson (2014) suggested a number of guidelines to ensure successful strategy execution and translate

the strategies into great performance; first, formulate and communicate clear, focus strategy. Second, align strategy

with the current market demands. Third, make sure strategy is matching and supported by the organization culture.

Forth, ensure the behaviors of both executives and middle management are in line with the strategy. Fifth, align

hiring, train ing, rewards, and the individual and operational goals with the company strategy(Stevenson, 2014).

Business Model Casadesus-Masanell & Ricart (2010) attributed the origin of the Business Model to Peter Drucker. The

terms ―Strategy‖ and ―Business Model‖ are used interchangeably in art icles and literature and therefore confusio n

may arise between the two interrelated concepts because of the wide use of the term business model in many crit ical

areas of the business such as business purpose, processes, offerings, customers, segments, structure, policies and

culture(Wikipedia, 2016). Therefore, Strategy and Business Model may look similar; however, they are distinct



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concepts. Business Model refers to the business logic of the organization and the way it operates and creates value

for its stakeholders, whereas, Strategy includes choosing a business model that fit the organization situation. Thus,

business model is part of the firm overall strategy and is considered a direct result of the chosen strategy(Casadesus -

Masanell & Ricart, 2010) and it should embodied the management‘s hypothesis about customers demand and the

management philosophy about the organization‘s design and structure that will translate demands into values for all

stakeholders(Teece, 2010).

Amit & Zott (2006) stated that ―a business model depicts the content, structu re, and governance of

transactions designed so as to create value through the explo itation of business opportunities‖. .Casadesus -Masanell

and Ricart (2010) suggested that business model can be exemplified with a machine which is configured and

programmed to operate in certain way (logic) to create a value for its user.

Drucker (1954) argued that a successful business model should provide answers to two strategic questions;

―Who is the customer and what does the costumer value?‘ and ‗What is the underlying economic logic that explains

how we can deliver value to customers at an appropriate cost?‘. Moreover, a well -designed business model can leads

to a sustainable competitive advantage especially if it is designed with high differentiation, innovative ideas and

technological competencies. Such model will be d ifficult to be imitated by the competitors (Teece, 2010).

Osterwalder, Pigneur, &Tucci (2005) identified nine important building blocks of any business model;

Product‘s Value Proposition, Target Customers, Distribution Channel, Customer Relationship, Resources

Configurat ion, Core Competencies, Network with Partners, Cost Structure, and Revenue Model.

Today‘s diverse and dynamic environment requires both business strategies and business models to be

monitored and evaluated continually and adjusted as and when necessary, what used to be an advantage may turns to

be a disadvantage and the firm become the v ictim of its model or and strategy (Mourdoukoutas, 2016).

III. OBJECTIVES OF THE STUDY

1. To identify the business strategies and business model adopted by Target Corporation and Costco

Wholesale Corporation.

2. To examine the characteristic of the competitive environment in which Target Corporation and Costco

Wholesale Corporation operate in.

3. To compare the business strategy and business model of both Target Corporation and Costco Wholesale

Corporation.

IV. METHODOLOGY A comparative case study was conducted which relied on collecting, comparing and analyzing secondary

data about Target Corporation and Costco Wholesale Corporation. The analysis aims to identify the similarit ies,

differences and patterns in the business strategies and business models of the companies.

All data were sourced from published journal articles, books, online articles, case studies, an d companies‘

specific published contents including annual reports, marketing materials, profiles, news and the web sites of the two

organizations.

Background of the companies

Target Corporation Today Target Corporation (―Target‖) is considered the second-largest discount retailers in the United

States. Founded by George Dayton as Good fellow Dry Goods in 1902 in Miineapolis, Minnesota, the company was

renamed several times and became Target Corporation in 2000. The first Target discount store was es tablished in

1962 as subsidiary of Dayton Dry Goods Company. The name ―Target‖ was chosen to distinguish the discount store

from the department stores(Wikipedia, 2016).

As of 2015, Target operates in more than 1790 stores across the United States with aro und 347,000 fu ll and

part time team members(Target, 2016). On January 2011, Target started expanding internationally in Canada

through purchasing the leaseholds of the 220 Canadian retail chain stores ―Zellers‖. However, the expansion plan to

Canada was not successful due to several problems including the supply chain issues. As a result, the company

recorded net losses from the Canadian store since then until all stores in Canada have been closed by April

2015(Wikipedia, 2016).

A wide range of products are offered to customers in stores and online, Target offers clothing, accessories,

toys and games, home appliances and furniture, electronics, health and beauty products, movies and books, sport and

fitness product, school and office supplies, garden products and more other products.



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Target stated their purpose and beliefs as ―We fulfill the needs and fuel the potential of our guests. That

means making Target their preferred shopping destination by delivering outstanding value, continuous innovation

and an exceptional guest experience—consistently fulfilling our Expect More. Pay Less.® brand promise‖(Target,

2016).

Costco Wholesale Corporation Costco Wholesale Corporation (―Costco‖) is considered the largest membership -only warehouse club in the

United States. The company was established in 1983 in Seattle by James Sinegal and Jeffrey Brotman. In 1993,

Costco and Price Club merged to form PriceCostco which was renamed to Costco Wholesale Corporation in 1997

(Wikipedia, 2016).

Costco has nearly 700stores and a workforce of 117,000 employees. In 2015, Costco was ranked as the

18th largest firm in the Fortune 500 with a market capitalization of $66 b illion and sales revenue of $116.2 b illion

(Soni, 2016). Costco was also ranked as the third largest retailer in the United States in 2015(National Retail

Federation, 2015). In stores and online, Costco offer a wide selection of merchandise which includes home

appliances, auto and tires, toys, computers and printers, electronics, furniture, grocery, health and beauty, jewelry

and watches, office supplies, fitness products and more other categories.

Costco claims their mission to ―provide our members with quality goods and services at the lowest possible

prices‖(Costco, 2016). The philosophy is to keep the costs down and pass the savings on to members.

Competitive environment of the companies The discount retailing industry in the United States is dominated by few large companies which include

both Target and Costco. The rivalry is so strong between competitors who offer wide range of products and services

through online and physical channels. Competitive advantage is maintained and sustained through consistent low

price offering, differentiation, innovation, supply chain efficiency and superior shopping experience. The profitable

track record o f Target and Costco since their inception is a testament to the successful business strategy and business

model adopted by the both companies which have capitalized on certain internal strengths and external

opportunities. However, beside their success also come the challenges, SWOT matrix is demonstrated below for

both companies to analyze the important environmental factors for both businesses (US Top 100 retailers, 2015).

Target Corporation Target‘s main strength over the competition is the capability of appealing to younger generation customers.

This is due to the innovative approach that the company follows in delivering a fun and creat ive experience to its

shoppers. Unlike competitors such as Wal-Mart and Costco, Target displays a creative and fashionable ambience,

which appeals to middle class customers who look down on cheap discount stores. (Lee, 2013)

On the other side, being a retail chain, the company faces high competition from small stores in convenient

locations at smaller neighborhoods. The company has far less locations when compared with the biggest

competitors. Although many customers would prefer Target for their retail shopping, many would choose a closer

alternative if the nearest store was hard to reach (Wahba, 2015). Further, Target Corp. expansion into the internal

market has not been successful.

Being one of the leaders in the retail industry, Target faces many external challenges that need to be

addressed and mitigated in order to assure successful business continuity. The company faces intense competition

both physically and online. Although Target offers e-commerce facilit ies, it is not as strong and reputable as

Amazon, which offers online shopping solutions to the customer‘s doorstep. Additionally, the lack of many physical

stores affects the ability of Target to capture a strong market share. (Garcia, 2015)

On the other hand, the company explo its some opportunities such as growing of the business in the US by

exploring the possibilities of adding more locations and catering to a wider audience. Further, g lobalization can be

studied and the company can explore tapping into other potential markets since the brand already enjoys preference

and excellent reputation. (Hahn, Kwak, & Palys, 2005)

Target Corp. SWOT matrix (SWOT analysis of Target Corporation, 2015)

Strengths

Well-established and a recognized brand that is

highly respected by consumers as middle class,

exclusive deals with high profile designers.

more appealing to young customers

Weaknesses

Business model based on supercenters and

many shoppers prefer convenient neighborhood

stores

Slow expansion. Target planned to open 8



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Partnership with h igh profile designer

Innovative product designs and store

atmosphere.

Use of analytical tools to create personalized

digital experience, loyalty programs, and

promotions

small Target stores while competitors such as

Wal-Mart opened over 270 locations within the

same time frame

Online shopping experience not on par with

market leaders

Opportunities

Globalization through physical expansion or by

offering better e-commerce shopping

Declining incomes in the country can increase

Target‘s customer base as they are more likely

to shop at discount stores

Providing improved or additional services such

as offering same day delivery option

Threats

Increased minimum wage of employees can

affect the company‘s profits as majority of the

workforce are hired for low income jobs

Intense competition by both large retailers and

small stores that can offer superior service or

better locations

Costco Wholesale Corporation

Costco is main ly known for its low pricing and all-in-one shopping. This concept has proven successful over the

past as the retail chain offer many daily consumables at low profit marg ins to attract the customers t o their

warehouses and profit on higher margin products. This approach has led to a huge customer loyalty base which head

to Costco for the purpose of a no-frill shopping, an approach used by the company to remove unwanted expenses of

designing and unnecessary additions that are usually factored in the pricing of other retailers. (Logan & Beyman,

2012)

On the other hand, most of the loyal customers of Costco are old and tend to spend less compared to the

younger generation. The basic concept of warehouse selling has been followed by number of retailers worldwide but

do not currently pose a threat to Costco‘s operations. The company profits are mainly limited to North America

(87% of sales) and this limitation expose the company to changes within that region.(Ryan, 2014)

Like Target, Costco also faces online shopping threats such as Amazon, which started to offer a fu ll

shopping experience (including groceries within selected areas of the US), which allows the customers to shop at

their comfort from home. The competition is also increased by threats from other retail giants such as Wal-Mart,

which has over 3,000 locations in the US and is more accessible in many areas of the US. (Why Costco Needs To

Watch Out For Amazon, 2014)

The opportunities lie within the capability of the company to attract youngsters by creating a more

innovative experience and offering discounts on products that appeal to the young generation. Moreover,

globalization is now an opportunity for most of the successful companies around the wo rld and this approach has

already proven successful by many companies in the past. (Dalavagas, 2015)

Costco SWOT matrix (Dalavagas, 2015)

Strengths

Established a pricing authority, wherein the

customers believe that the cheapest products

are available at Costco

Low profit marg ins on many products, which

drives high volumes and help sell higher

margin products

Costco has an extremely loyal customer base

due to offering great value at competitive prices

Highly paid motivated employees

Weaknesses

Geographic dependence on North American

market and particu larly Californ ia, which

represent over 30% of the company‘s sales

Customer base are generally g rown-ups, which

tend to be rational at spending compared to the

younger generation

Online shopping experience not on par with

market leaders

Limited variety of the same product

Opportunities

Attracting younger generation; the company

already started offering services such as Google

Express &InstaCart. Also, the company started

offering healthy products, which appeal to the

young health conscious customers

Globalization and expansion to more markets

Threats

Online grocery shopping; companies such as

Amazon already started offering sale of similar

products at the convenience of shopping at

home while offering affo rdable shipping

options

Intense competition from top retailers and



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as the concept of low priced products will

likely be successful in many countries wholesale stores. There are several brands that

also started the concept of warehouse shopping

V. STRATEGIES AND BUSINESS MODELS OF THE COMPANIES

Target Corporation Target evaluated three generic business strategies; either to focus on certain markets, to be low-cost leader,

or to be differentiated from other discount retailers. Target believed that the first option will h inder its future growth,

and the second option could not be achieved as Wal-Mart was already a low-cost producer and they did not want to

compete head to head with them, therefore, a differentiat ion strategy was the option that Target opted. Targe t

follows what is called ―Cheap-chic‖ strategy which associates three important aspects; style, quality, and price

competitiveness (Barwise & Meehan, 2004).

Target stated its business model as ―to offer customer everyday essentials and fashionable, differentiated

merchandise at discounted prices‖. Target ability to deliver preferred shopping experience is supported by their

strong supply chain management, technology infrastructure, continued innovation, disciplined management

approaches, and investment in future growth (Target Corporation, 2014).

Target differentiates itself from competitors by offering high quality, trend -forward merchandize at lower

margins. Therefore, Target offers slightly higher-priced product but inexpensive and greater in value compared with

those offered by other retailers (Raheja, 2013).

As a result, Target‘s customers tend to be younger, richer, and better educated. Target‘s referral to its

customers as ―guests‖ is part of its strategy to show that customers are a top priority and to show commitment to

establish beneficial relationship with them(W ikipedia, 2016).

In addition to the value for money promise ―Expect More, Pay less‖, Target focus on customers‘ full

experience to differentiate itself and to gain a competitive advantage over other retailers, therefore, Target

emphasize on the design of both store and products to achieve the desired differentiat ion strategy(Tongue,

McDonald, Doutkevitch, Midgley, & Munro, 2012).

Target designs its stores and environment to ensure cheerful, attractive shopping experience by

emphasizing certain dimensions including; clean, well maintained stores, fun shopping atmosphere, short waiting

time to pay, easy to shop layout, convenient locations. Target greatly relies on two important branding functions;

design partnership and creative advertising (Barwise & Meehan, 2004).

Target has exclusive deals with high profile designer across different lines of product. For example, Target

partners include Michael Graves (architect); Converse (athletic wear company); Fiorucci (Italian fashion label); Liz

Lange (fashion designers), Mossimo Giannulli, and Isaac Mizrahi. Target also enters into deals with designer to

create Target‘s own upscale fashion product(Wikipedia, 2016).

As a strategy to grow, Target emphasizes on specific differentiation areas; prioritizat ion, innovation, and

guests. Target relied on cost saving to feed its growth initiatives and profitability plans. Cost saving are achieved

from operations and technology improvements; supply chain management and corporate restructuring. Target

enforced the differentiation by stronger merchandizing power and shopping experience characterized by easy

shopping and innovation(Target, 2015).

Target focused on providing mult i-shopping channels so guest can shop on stores, online and on mobile

with the aim to have mobile as the new front door. Target also utilizes data analytical tools to create personalized

digital experience, loyalty programs, and promotions. Target believes continued enhancement in technolog y and

supply chain management would result in attractive shopping experience(Heller, 2015).

Target is refocusing its investment on certain products it used to be known for namely; Style, Baby, Kids,

and Wellness. The emphasis is on providing the newest product and on differentiat ion. Target is creating a more

―guest-centric‖ experience by tailoring the product mixture, product offering, store layout and advertising with the

demographics, culture, climate, location and other guest-led factors affecting the guest shopping decision. Target is

also opening new, more flexib le format o f stores such as Target Express and City Target to reach guests living in

crowded urban areas(Wikipedia, 2016; Target, 2015).

Target has a number of resources and competencies that are inimitable, rare and extremely valuable

elements in their business model and are considered to be the sources of Target‘s competitive advantage. Key

resources include; employees (‗team members‖), store atmosphere, offering, campaign design and charity

contributions. Target‘s main competencies can be summarized into three broad areas; superior guest experience,

corporate culture, and systems which involve many resources, processes and analytical tools (Golberg, Mereck,

Hardy, Hoeft, & Noetzel, 2005).



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Costco Wholesale Corporation Costco is following a cost leadership generic strategy. The strategy is to offer very low priced products that

entice customers and encourage them to be a loyal member/customer in Costco‘s stores.

Costco adopts a membership-only warehouse club business model where members pay an annual fee of

$55 to gain access to the low priced products available at Costco stores. Costco utilize its economies of scale to buy

in bulk at low prices and pass on the discount to the customers. Costco also focus on achieving low operating cost

by increasing the supply chain efficiency and inventory turnover in order to pass on such saving to the members.

Costco adopts three specific strategies; Low capped markup, Limited items selection and a ―Treasure-hunt‖

shopping experience (Thompson, 2009; Gregory, 2015).

First, Costcohas a strategy to place a cap on the markup of brand -name products at 14% which is

considered very low compared to that of other retailers (20-50% markups). Suchcap on markup results in very low

prices that are just above the breakeven point, such prices lead to high sale volume and very short inventory to cash

cycle (Rombang, 2008).However Costco also sells top-quality brands at prices that are predominantly below

wholesale or retail average prices. To achieve cost leadership, the company stocks only the items that in fact can be

sold at a bargain prices which provides a significant cost saving for Costco's members. The same holds true for

items that are repeatedly requested by the customers. Costco's sells it own high quality private brand - named

"Kirkland" signature –which is charged higher markups however still remain lower than comparab le items.

(Thompson, 2009).

Second, Costco follows a strategy to limit the number of selectable items at its stores. Items offered to

members cover a broad spectrum of products however the selection is deliberately limited to those models that sell

fast, with the more appealing sizes and colors. This strategy is aimed at ensuring that Costco's members visiting

more frequently since they would view Costco as a one-stop shopping arena (Rombang, 2008).These limited

selection offered span a wide variety of areas which allows Costco to manage its costs at significantly lower price

levels. This is assured given the smaller number of orders which lead to reduction in delivery costs and on -site

handling costs of these high volumes albeit limited types of merchandise (Roegiers, 2011).

Third, Costco implements a strategy called Treasure-hunt Shopping experience. W ith the objective to

increase the number of its customers' visits to its warehouses, Costco provides a "treasure-hunt" experience to its

customers which is a technique to offer high-end product ranges at significantly/shockingly low prices . (Roegiers,

2011).The treasure hunt experience encourages customers to spend more than what they would usually spend with

the aim to achieving a bargain. In order to keep its roster fresh, the list of treasure-hunt items is consistently changed

in order to have customers returning to discover the new bargains which could be achieved (Rombang, 2008).

Costco's low prices and the aforementioned treasure-hunt have reduced the market ing initiat ives and

therefore the marketing cost. Marketing is consequently limited to advertisement in direct mail that is being sent to

existing Costco members, the mail to prospect members, and special advertisement for new expansions of Costco.

Once a customer base is established, any new additions to the members‘ base are genera lly limited to word of mouth

and direct mail marketing. Costco's marketing strategies are therefore limited due to the business model of the

company which led to lower costs than comparable retailers, discounters and hypermarkets (Thompson, 2009).

Costco also utilizes employee retention as pivotal strategy to drive down costs. While this is usually

achieved through controlling the costs of Costco's employees, Costco approaches it differently by increasing the

salaries of its employees. The rationale is that Costco through increasing the salaries of its employees has incredible

cost savings due to reduction of employee turnover. Having highly paid motivated employees would create a

pleasant environment and shopping experience for the members who will be encou raged to return for shopping

(Investopedia, 2015).

Costco has historically opened 20 to 25 new locations on an annual basis, mostly being in the United

States, however with an international focus as well. Towards this international expansion, Costco had e ntered into

joint venture arrangements in which it owns close to 50% of the opened warehouses. With growth being a general

strategy of the company to increase its sales, the same is achieved through the increasing of new warehouses.

Comparison of Strategies and Business Model of the companies While Costco focus on Cost Leadership through supply chain and operations efficiencies to drive cost

down and pass on saving to customers in the form of the low priced product, Target adopts Target an integrated Cost

Leadership and Differentiation strategy. Therefore, Target offers slightly higher-priced product but inexpensive and

greater in value compared with those offered by other retailers



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Target offers a wider variety of high quality, trend-forward merchandize with lower margin, whereas

Costco limited selection of products to reduce the operational cost and increase the sales volume. Both retailers offer

branded and private-label product, however, Target has more exclusive deals with high profile partner and

designers.

Pleasant shopping experience in Costco stores is main ly achieved through consistently providing low price

product and retaining motivated employees, whereas, in Target, shopping experience is carefully looked for from a

much more holistic view where many factors are taken into consideration such as; clean, well maintained stores, fun

shopping atmosphere, employee welfare, short waiting time to pay, easy to shop layout, convenient locations,

innovation, product design and offers.

While both retailers emphasize on the supply chain management efficiency to drive cost down, it is clear

that Target invest much more in technology improvements, systems, innovations, advertising.

Target and Costco have some common core competencies and resources such as pleas ant shopping

experience, supply chain management, and employees. However, each company has additional unique

competencies, for example Costco has strong bargaining power, while Target has innovative culture and design,

system improvements, and disciplined management approaches. The following table summarized a number of

similarities and differences between Target and Costco.

Target Costco

Generic Strategy Integrated Cost Leadership and

Differentiation. ―Expect More, Pay Less‖.

Cost Leadership. Use economies of scale to

buy in bulk at low cost and pass the discount

to the customer.

Business Model To offer customer everyday essentials and

fashionable differentiated merchandise at

discounted prices.

Membership warehouse club, consumers pay

membership fee to gain access to low cost

products offered at Costco stores.

Objectives -Provide superior customer experience.

-Retain and increase employees‘ welfare.

-Provide quality products.

-Maintain and promote Target brand

awareness.

-Provide customers with quality goods at low

price.

-Provide p leasant shopping experience.

-Retain highlight motivated employees to

attract and keep customers.

Product Wide variety of high quality, trend-forward

merchandize with lower margin.

Limited selection of products to reduce the

operational cost and increase the sales

volume

Customer Referred to as Guest, tend to be younger,

richer and more educated.

Referred to as Members, tend to be mature

and rational. With 85% retention rate

Distribution

Channel

In-store and online. In-store and online.

Brand Well-established and a recognized brand

and logo. It offers also other well-known

high quality brands.

Branded and private-label product.

Core Competencies Superior guest experience, corporate

culture, systems, strong supply chain,

technology infrastructure, innovation,

disciplined management approaches

Efficient supply chain management, pleasant

shopping experience, strong bargaining

power, motivated highly paid employees.

VI. RESEARCH FINDINGS AND COMMENTS Business success and survival is highly dependent on vigilant strategy design, creative strategy formulat ion,

careful implementation and continuous monitoring and adaptation. It is crucial for a successful strategy to be in

good fit with the company‘s internal and external environment, cu lture, and technology. There is no single format of

strategy, business can follow one of three generic business strategies; Cost Leadership, Differentiat ion, and Focused

strategy. Companies may develop different programs and business model to implement one generic strategy. Despite

the type of the strategy chosen, it has to provide a sustainable competitive advantage which will allow the company

to survive and succeed in highly competitive environment. Target and Costco, as discount retailers, have adopted

different strategies and business models and both companies proved to be successful. Recent trends to achieve



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competitive advantages in today‘s turbulent environment include; personalized, d istinctive marketing and offering to

gain long term loyal customers, creative product design and advertising, innovative attractive shopping that consider

many aspects including store layout and employee welfare, partnerships and cooperative strategies, multi -channel

distribution and communication and technology improvement and innovation.

Financial Data of the companies Financial comparison is conducted to demonstrate the difference between both retailers. Overall, the

findings indicate Target Corp. was outperforming Costco prior to 2014. However, due to significant changes and

economic downturns, Costco remarkable g rowth has reached Target Corp. levels. Key financial data fo r both Costco

& Target were as follows:

Amounts in USD millions Costco Target Corp

12 Month Period Ending * Aug 31,

2015

Aug 31,

2014

Aug 31,

2013

Jan 31,

2016

Jan 31,

2015

Jan 31,

2014

Income Statement

Total Revenue 116,199 112,640 105,156 73,785 72,618 71,279

Gross Profit 15,134 14,182 13,208 21,788 21,340 21,240

Operating Income or Loss 3,624 3,220 3,053 4,910 4,535 4,779

Net Income 2,377 2,058 2,039 3,363 -1,636 1,971

* Costco‘s fiscal year end is Aug 31 while Target‘s fiscal year end is Jan 31

Balance Sheet Costco Target Corp

Current Assets 17,299 17,588 15,840 14,130 13,624 11,573

of which Cash & Equivalents are 4,801 5,738 4,644 4,046 2,210 670

Non-current Assets 16,141 15,436 14,443 26,132 27,548 32,980

Total Assets 33,440 33,024 30,283 40,262 41,172 44,553

Total Current Liab ilit ies 16,540 14,412 13,257 12,622 11,736 12,777

of which ST Debt is 1,283 -- -- 815 91 1,143

Non-current Liab ilities 6,283 6,309 6,193 14,683 15,439 15,545

of which LT Debt is 4,864 5,093 4,998 11,945 12,634 11,429

Total Liab ilities 22,823 20,721 19,450 27,305 27,175 28,322

of which total debt is 6,147 5,093 4,998 12,760 12,725 12,572

Total Stockholder Equity 10,617 12,303 10,833 12,957 13,997 16,231

Ket Financial Ratios

Gross Margin 13.0% 12.6% 12.6% 29.5% 29.4% 29.8%

Operating Margin 3.1% 2.9% 2.9% 6.7% 6.2% 6.7%

Net Margin 2.0% 1.8% 1.9% 4.6% -2.3% 2.8%

Current Ratio 1.05x 1.22x 1.19x 1.12x 1.16x 0.91x

Net Gearing

[(Total Debt - Cash) / Equity]

0.13x -ve 0.03x 0.67x 0.75x 0.73x

Leverage

[Total Liabilit ies / Equity]

2.15x 1.68x 1.80x 2.11x 1.94x 1.74x

Source: http://finance.yahoo.com

http://finance.yahoo.com/



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- As can be seen above, Costco outperforms Target Corp. in total revenue and growth. Revenue of Target

remained almost at the same level for the past 4 years, whereas Costco has shown a growth from $ 99

billion in 2012 to $ 116 billion in 2015, i.e. CAGR of 29%.

- Out of the two retailers, Target Corp. en joys a better operating margin than Costco. Although Costco shows

ongoing growth, the low-cost strategy compromises the margin potential in comparison with their

competitors.



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- Stock performance of both retailers was head to head from 2012 to mid -2013; however, despite few

downturns, Costco showed more stable growth in comparison with Target Corp. During 2014, Target Corp.

discontinued their operations in Canada due to failure of penetrating the Canadian market. This effect is

clear from the declining stock prices in 2014.

- Costco earnings per share demonstrate a steady growth in comparison with Target Corp. This is due to

reporting of net losses from the Candian operations expansion of Target Corp.

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a comparative study of target corporation and costco wholesale

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