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Essay: Costco analysis – external and internal

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PESTEL

Political

From a political perspective, Costco faces regulatory complications in other countries. In the US, Costco is able to flourish with relatively few applicable regulations and a strong economic environment.

One domestic political issue Costco faces is the uncertainty regarding tariffs imposed on goods that Costco sources from abroad. These tariffs have the potential to increase costs because the increased importation costs will trickle down from suppliers to Costco.

Abroad, Costco faces political issues relating to regulations and the stability of markets. Costco currently has 235 locations in 10 countries outside the US. Fortunately for Costco, all locations abroad are located in countries with very stable and established markets and economies. Costco does not have any locations in emerging markets or markets subject to shaky government statuses. If in the future Costco expands into emerging markets and countries, they will likely face greater political uncertainty. Regulations and market stability may become an increasingly difficult factor for Costco to contend with.

Economic:

From an economic perspective, Costco is currently able to thrive due to relatively strong economic conditions. As unemployment is low and consumers have adequate capacity to spend and consume, Costco is able to maintain a high level of. These memberships are the primary source of revenue for Costco and Costco performance is dependent quite heavily on membership acquisition and retention. In addition to membership prospects, the strong economy and employment seen today enables Costco to sell a great deal of merchandise which further indicates a healthy economic

In addition to solid domestic economic conditions, Costco is also able to take advantage of profitable exchange rates. Because Costco merchandise consists of a large portion of items produced abroad, Costco is able to realize improved buying power based on the current strong dollar.

The economic external influence on Costco could change dramatically if economic conditions change in the future. If unemployment were to rise and consumer spending decreases, Costco will likely face reduced memberships as well as reduced sales volume.

Social:

Socially, Costco is currently in good standing. Costco has a strong reputation for taking good care of its employees. In comparison to similar retail locations, Costco pays wages which are extremely competitive and often times significantly higher wages than similar positions are paid at other retail locations. In addition, Costco offers a comprehensive benefits package comprised of affordable health care for both full and part-time employees. In addition, Costco claims that,

“Men and women who perform substantially similar work are paid within 99.9% of each other after adjusting for key factors such as job, company seniority and hours worked. We examined each component of compensation including base pay, bonus and equity.” [1]

This treatment and compensation of employees can be deemed more than adequate by overall society due to the improved working conditions Costco employees enjoy relative to other retail businesses.

Two of Costco’s largest competitors are Wal-Mart and Amazon. Both of these firms have been accused of treating workers poorly with regards to wages, benefits, and other treatments on the job. For example, many consumers voiced their opinion that Wal-Mart pays its employees too low of a wage. In addition, consumers viewed Amazon poorly for the harsh working conditions and low wages the employees are subject too. Costco seems to be an outlier when compared with competitors due to the higher wages and benefits, and thus gains a positive social reputation of treating employees fairly.

In the future, Costco seems to have established a strategy which will be able to meet social expectations when it comes to employee treatment.

Technological:

When analyzing Costco, it can be concluded that Costco is working to improve their technology, however, they do lag behind competitors such as Amazon and Walmart.

Costco maintains a web presence through the use of its e-commerce system. This system allows consumers to view and purchase merchandise through the Costco website. In addition, Costco has introduced a grocery purchase and delivery program on their website. This system allows consumers to browse the grocery selection, choose items, and select a delivery method. The grocery program now enables consumers to receive groceries on the same day using Instacart. Instacart is a third-party delivery service which Costco has contracted with to handle same day delivery.

Costco grocery delivery and e-commerce are one way that Costco is able to remain technologically competitive with Amazon and Walmart, however, Costco does lag behind both competitors when it comes to the seamless use of web and mobile applications. When browsing around the websites of these three companies, Costco seems to have the lowest level of refinement as well as the most minimal opportunities for consumers to take advantage of. One example of this is Amazon and Walmart’s use of third-party vendors. While Costco only markets merchandise distributed by Costco, Amazon and Walmart are able to provide a much wider selection of offerings to the consumer. This fact allows both Amazon and Walmart to appeal to greater customer demand as well as generate greater revenues from operating a marketplace for both in house goods as well as third-party goods.

In the future, more and more importance will be placed on e-commerce and web and mobile usage. In order for Costco to maintain a competitive edge, they will likely need to ramp up their capabilities in e-commerce and web and mobile presence.

Environmental:

Environmentally, Costco works hard to ensure that they capitalize on initiatives which help to reduce environmental impact. These initiatives have the side effect of reducing Costco’s exposure to the risks associated with increasing global temperatures and momentum towards reducing fossil fuel use. One example of these initiatives is the use of electric plug-in shore power. According to Costco’s website,

“Costco Business Delivery Centers also have implemented procedures to use electric plug-in shore power, tying into the grid to allow our refrigerated trucks to maintain temperature while being loaded and stored. This eliminates the previous practice of running the diesel reefer engine, thereby saving fuel and eliminating carbon emissions by over 70 percent for each truck that uses shore power.” [2]

In essence, by using plug-in shore power for logistics, Costco is able to reduce both the effect the trucks cause on the environment, while also hedging against rising oil prices and increased regulation regarding emissions.

Costco explains that they are astutely aware of the effect of climate change on their business. Their website claims that,

“Increased U.S. and foreign government and agency regulations to limit carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs that could materially affect our profitability. In addition, climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience.” [2]

Costco aims to reduce the negative effects of climate change and related regulations by reducing energy use and employing renewable energy in both warehouse operations as well as transportation.

Costco is also able to maintain a positive reputation as relatively environmentally friendly through the use of their green initiatives.

Legal:

Costco has relatively few legal issues and threats to contend with in comparison to other industries such as banking and financial services. One of the greatest legal issues applicable to Costco is regulations regarding energy use. As explained in the environmental section, Costco is actively pursuing initiatives and opportunities in order to prepare for upcoming laws and regulations. By performing these initiatives now, Costco is able to proactively ensure compliance with expected upcoming legal requirements.

In addition to energy use, Costco must follow employment law requirements. Costco has a strong reputation for treating employees fairly and has superior employment treatment and compensation in comparison to competitors. This fact helps to ensure that Costco is able to abide by any employment law requirements.

In the future, there is a strong possibility for minimum wages to be increased, as a result, Costco is already positioned in a way that they will likely meet or exceed an increasing minimum wage.

Internal Analysis

Resources:

One of Costco’s greatest tangible resources is its membership fees and subsequent revenue. Membership revenues bring in a relatively steady stream of cash which Costco can use to its advantage. This advantage allows Costco to continue steady operations as well as its ability to be used for capital expenditures such as opening new locations domestically as well as abroad.

Another great resource at Costco’s disposal is the strong in-house brand Kirkland Signature. Kirkland Signature has a loyal following among consumers and a reputation for high-quality merchandise at a low price. Consumers have come to trust this reputation and Costco is able to leverage consumer sentiment in order to sell a large volume of Kirkland Signature merchandise.

In my opinion, Costco’s greatest intangible resource is the Costco culture that has been refined and cultivated. The culture emphasizes strong relationships which apply to both employees and customers. According to “The Magic in The Warehouse” by Neal Gabler,

“Costco profit margins are a whisper-thin 2%—a figure that has caused grumbling on Wall Street in the past. Most retailers, needless to say, aim to expand margins. “Our culture is counterintuitive,” says Richard Liebenson, who came to Costco from Price Club and is now a member of the board, “paying people the highest wages possible and the best benefits in a business where you’re working on a very low margin and you’re trying to sell merchandise for as little as you can.” But that’s because Sinegal always felt if you satisfied customers and employees, you would eventually satisfy investors too.” [3]

From a VRIO perspective, these resources can be classified as valuable, rare, costly to imitate, and organized in a way to capture value. It would undoubtedly be difficult for an upcoming competitor to generate and capture the value of the resources that Costco succeeds with.

Capabilities:

Costco’s greatest capability is its lean operating strategy. By operating as lean as possible, Costco is able to financially flourish while offering extremely competitive prices for merchandise sold. According to “The Magic in The Warehouse” by Neal Gabler,

“Costco is a lean company. The company’s spending on basic overhead—the selling, general, and administrative category—is only 10% of revenues, compared, for example, with about 20% at Walmart. Among Costco’s efficiencies are the fact that it doesn’t advertise; it has a limited selection—only 3,700 products compared with 140,000 at a Walmart superstore and half a billion at Amazon. That allows Costco to drive hard bargains with suppliers. And it has created a distribution system that, according to Galanti, fills 95% of its freight capacity, an unheard-of number.” [3]

As referenced above, Costco is able to use lean operations to reduce costs as much as possible. Minimizing advertising expense, low overhead costs, and efficient logistics enables Costco to maintain profitability while realizing slim margins. This effect is passed along to the customer by offering extremely competitive low costs.

From a VRIO perspective, this capability can be classified as valuable, rare, and organized in a way to capture value. The exception to this is the fact that imitating a lean operation would not necessarily be costly. This is due to the fact that any firm deciding to pursue lean operations will likely be able to recoup any reorganizing and strategic costs associated with running lean.

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