The PESTLE analysis of Costco provides an analysis of the retail industry environment and its effect on the company’s operations and revenue.
Introduction & Background
Costco is a multinational corporation that operates a chain of membership-based warehouse clubs. The company was founded in 1976 as Price Club in San Diego, California, by James Sinegal and Jeffrey Brotman. In 1983, the first Costco warehouse location was opened in Seattle, Washington.
Costco operates on a membership model, where customers must pay an annual membership fee to access the company’s stores and take advantage of its low prices on a wide variety of merchandise, including groceries, electronics, appliances, furniture, clothing, and many other items. Costco’s business model is based on selling products at low prices in large quantities, which allows the company to pass on cost savings to its members.
Costco is one of the largest retailers in the world, with over 800 warehouse club locations in 12 countries, including the United States, Canada, Mexico, the United Kingdom, Japan, Korea, Taiwan, Australia, Spain, Iceland, France, and China. The company employs over 300,000 people worldwide and reported revenue of over $166 billion in 2020. Costco has also become known for its commitment to ethical business practices, including fair treatment of employees, sustainable sourcing, and community involvement.
Political Factors
The political situation in the US is predominantly stable, with minimal disruption from large scale violent conflict. Costco has been able to gain steady growth in the US due to the overall stable political climate. There have been very few instances of conflict among the customers in the company stores which led to violence; however, it had a short-term impact (Bey, 2019).
Tax related decisions of the government affect the pricing offered by the company. The increasing tariff in the US is also a factor that has made Costco profitability challenging. The retail industry positions its organizations as low-cost product providers, and increasing prices due to the high tariff counters this business image.
Another factor that is affected due to the political climate is trading and the regulations pertaining to import and export. When trading is supported by favorable regulations and policies, organizations flourish. The presence of positive trading regulations allows Costco to have suppliers from different countries, but mainly the procurement is from China.
In addition, international conflict has the potential to cause disturbance in the supply chain of the company. For example, Ukraine and Russian war has caused a shift in the purchase decisions of Costco as the company has decided to get supplier contract from other companies instead of continuing with the Russian seafood suppliers (Thomas, 2022).
Economic Factors
The effect of inflation on retail industry is evident in the form of surge in the prices of different items. Costco has been negatively affected by the rising prices of packaging material such as aluminum and also a higher price of food items such as meat. Along with that, the transportation costs have increased as the containers have increased the freight charges (Cox, 2021).
Declining economic environment can lead to higher prices of merchandise, while the increasing unemployment and lower income put additional burden on the consumer buying power. The surges in freight and labor costs have impacted the profit margin that the company was able to achieve.
Declining profits coupled with high price of energy and mounting transportation cost due to raised fuel prices are some of the financial challenges that the company is facing. These issues have arisen out of the disturbed economy which is connected to volatile oil prices and inflation. Moreover, the changing currency rate poses an issue for the company (Maidenberg, 2021).
Social Factors
The consumer buying trends change from time to time, indicating the need to adapt with the shift in consumer buying patterns. Pandemic has increased demand of certain products such as those related to cleaning and hygiene. Besides these items, people were also purchasing bulk quantities for items like water filtration and certain food products.
Households had to adjust their budget according to the economic constraints as pandemic had resulted in layoff of workers, leading to loss of income. People focused on the purchase of necessities to keep the expenditure under control. The category of patio furniture gained higher sales during the pandemic as people spent more time indoors.
The shift in purchase required the need to balance the demand and supply, thus management had to impose limitation on the number of items that can be purchased from specific categories. This step was motivated by the need to maintain availability of stock for the store visitors (Cheng, 2020).
Some of the aspects of Costco had to be changed due to COVID and the need for social distancing. For instance, lockdown necessitated the need to close the food sample option. After the social distancing restrictions were relaxed, the company was able to reinstate the food sample offer, thus showing the impact of social factors on the company’s decisions.
Technological Factors
Retailers such as Costco require a robust IT system to carry out different business operations. For example, effective inventory management requires the use of technology to maintain supply process without disruption. Machine learning is one domain that supports the bakery segment of Costco in understanding the consumer demand patterns and to plan the supply accordingly (Costco Wholesale, 2022).
The implementation of omnichannel strategy is another area where technology helps Costco. The company has invested in the development of its online presence through website and mobile app. Along with that, social media constitutes a significant part of marketing endeavors as the rising number of digital users offers an opportunity for the retailer.
Legal Factors
Costco has to follow employment law in terms of adhering to working hour’s limit, wage of employees, hiring of temporary and seasonal staff. The hiring of the workers need to be done in accordance to the equal employment regulations and any discrimination in the process can lead to legal issues. The consumer law is also applicable as product quality needs to be maintained.
In addition, animal welfare laws hold significance as the supply of meat needs to be sourced from suppliers that are considerate of animal wellbeing. Costco had to face legal issues when its chicken supplier was switched from a renowned name to a low-cost firm where animal neglect was a common practice (Rodriguez, 2022).
Environmental Factors
Costco is required to adopt proper waste management strategy and ensure that the harmful content is processed according to environmental regulations. For instance, waste from food processing has to be handled in an eco-friendly manner. Furthermore, the climate action plan of the company signifies the focus on management on guidelines of environment protection agency.
The management has also made efforts to reduce the plastic waste by curtailing the plastic-based packaging and replacing it with more environmentally viable options (Costco Wholesale, 2022). Decreasing emissions and use of renewable energy sources are also included in the sustainability goals of the company.
Conclusion
Costco has been able to maintain a strong position in the US retail industry, despite the economic and pandemic related challenges. Technology is playing a supportive role in maintaining efficient business operations. Environmental regulations have motivated the management to adopt more eco-friendly behavior such as climate action plan.
References
Bey, J. (2019). 1 dead, 2 injured in shooting at Costco in California. CBS News. Retrieved from: https://www.cbsnews.com/news/corona-costco-shooting-deadly-suspected-gunman-injured-not-identified-2019-06-15/
Cheng, A. (2020). Coronavirus May Be Hurting Business Around The World, But It’s Driving Shoppers To Costco. Forbes. Retrieved from: https://www.forbes.com/sites/andriacheng/2020/03/05/this-is-what-coronavirus-fears-have-done-to-costcos-business/?sh=111020be58d9
Costco Wholesale (2022). Annual Report. Retrieved from: https://s201.q4cdn.com/287523651/files/doc_financials/2022/ar/Costco-2022-Annual-Report.pdf
Cox, J. (2021). Costco is seeing inflation abound, impacting a slew of consumer products. CNBC. Retrieved from: https://www.cnbc.com/2021/05/28/costco-is-seeing-inflation-abound-impacting-a-slew-of-consumer-products.html
Maidenberg, M. (2021). Costco’s Sales Are Rising but So Are Its Costs. The Wall Street Journal. Retrieved from: https://www.wsj.com/articles/costco-reports-stronger-sales-as-u-s-economy-gains-steam-11622148504
Rodriguez, K. (2022). Costco is violating animal welfare laws to sell $4.99 rotisserie chicken, lawsuit claims. NJ. Retrieved from: https://www.nj.com/food/2022/06/costco-sued-for-reportedly-violating-animal-welfare-laws-to-sell-499-rotisserie-chicken.html
Thomas, N. (2022). Russia-Ukraine Conflict Reportedly Causing Seafood Disruptions, With Companies Rushing To Fill The Gap. Benzinga. Retrieved from: https://www.benzinga.com/markets/penny-stocks/22/04/26585055/russia-ukraine-conflict-reportedly-causing-seafood-disruptions-with-companies-rushing-to-fil