Discover wholesale clubs

The wholesale club industry has evolved into a common oligopoly just as other major industries have. The “big three” of this industry are CostCo, Sam’s Club, and BJ’s. A five forces analysis will be examined in regards to the wholesale club industry.

            By examining force one, barriers to entry; the three companies are at an advantage because of the difficulty of new firms entering the industry. They accomplish economies of scale and scope due to the size and volume of their sales by buying and selling more goods on a larger scale with lower costs. It would take a considerable amount of time for a new entrant to achieve the benefits of economies of scale. The capital requirements are large due to the construction of buildings and acquisition of land and licenses. Finally, only companies with an established distribution network would have a fair chance of entering the industry. There would be few companies with the ability to enter this industry. For example, Target Corp. could navigate towards converting some of their current stores into wholesale clubs. They would also have an easier trasition because they already have distribution centers around the country. In fact, Target made an attempt to sell certain items in bulk in some of their stores to “test the market” of possible entry into the market (White, 2010).

            Force two, the threat of substitutes, is not a factor because the service they offer is not offered by other outside competitors. Force three, the bargaining power of buyers, is the strongest force working in the favor of the industry. This is so because buyers cannot negotiate the price. The main reason customers come to wholesale clubs is they are attracted by the already low prices and value of buying in bulk. This is not an industry like the automobile industry where it would seem every purchase is a negotiation and most buyers go into purchase situation with a price haggling mind-set. The prices are set as they are and the buyers accept the prices.

            Force four, the bargaining power of suppliers could come into play if a more favorable opportunity presents itself in the general retail industry. Wholesale clubs offer only a percentage of the products (ranging from 4000-8000 SKUs) that a general retailer does (100,000+ SKUs). For example, if Proctor & Gamble (P&G), the makers of Crest toothpaste, decides that it is not beneficial to their company to sell Crest wholesale, they could apply pressure to the clubs by pulling their product. A key strategy of CostCo is aimed squarely at selling top-quality merchandise at prices consistently below what other wholesalers or retailers charge (Thompson, 2010). To not carry a popular product such as Crest could cause sales to decline especially if numerous suppliers apply the same pressure. The clubs would lose credibility of carrying top-quality merchandise.