Business Analysis
The PESTEL Analysis is a strategic framework designed to analyze the external macro environment of an organization. PESTEL strategic framework stands for Political, Economic, Socio-cultural, Technological, Environmental and Legal. However, in this paper, only the five strategic factors will be analyzed.
Political
Legal issues and government regulations are the two essential factors to determine how an organization will operate in an industry. Costco is the largest membership warehouse club chain in the USA. Regulations applicable to the Warehouse Clubs and Supercenters are primarily related to size and pricing. For example, as per the requirements of some state laws, minimum markups need to be added to the selling prices by the operators for some specific merchandise such as alcoholic beverages, tobacco products and gasoline. Depending on how the individual states within the USA enact these laws, the effect on Costco varies. Besides, the warehouse club industry is also affected by the laws practiced in individual states. For instance, Texas is the only state in the whole of USA to prohibit publicly traded companies from selling liquor in their stores. Since alcohol is a big revenue earner, the Texas Alcoholic Beverage Code, which restrains public companies from selling alcoholic beverages in the state and allows only private companies to sell liquor, makes an impact on the bottom-line not only of Costco, but also on other retailers such as Wal-Mart and Kroger (Halkias, 2015). Because of similar law practiced in Oklahoma State prohibiting large warehouse retailers like Costco from selling wine in their stores, Costco has refused to open a store in the Oklahoma state.
The warehouse club industry is also affected by a slew of environmental regulations that require the leading players in the market to adopt measures to ensure the safety of the environment from the potential harm caused by any of the products sold by these chains and its business conduct. Failure to comply with the environmental regulations mars the image of the organization in terms of its corporate social responsibility. Recently, Costco has been found guilty of violating the Clean Air Act. As part of the corporate social responsibility, Costco needs to cut down on its emissions of greenhouse and ozone-depleting gas chemicals from the refrigeration equipment at over half of its stores across the USA. However, owing to the inefficiency of the refrigeration equipments, Costco is found to be in violation of the Environmental Protect Agency's (EPA) refrigerant gas requirements and consequently, the company has been fined $335,000 as civil penalty and has been told to improve its refrigeration management that will cost the company a whopping $2 million over the next three years (EPA, 2014). In a similar manner, rules and regulations applicable to warehouse club industry in other countries around the world in which Costco operates make an impact on its business.
Economic
The economic factors refer to factors that affect the economy of a country and in turn, the wholesale business. General economic factors such as energy costs, interest rates, inflation, healthcare costs, unemployment, unsettled financial markets, recession and other economic factors can make an adverse impact on the products and services of a business. Costco is no exception. Since the prices of some products such as gasoline and food are susceptible to the fluctuations issuing from supply and demand changes, competition, labor costs, government regulations, and market speculation in both the domestic and international markets, any drastic change in these commodity prices may affect the profit margins and sales of Costco (Ramadhani, 2014). All these factors also add to the hike of merchandise costs, selling price, administrative and general expenses and therefore, may adversely affect the operations of Costco.
One of the major factors that influence the economy is disposable income. Disposable income refers to the money available for spending after paying all regular expenses and taxes. It is an extremely good measure of the health of a country’s economy. High disposable income increases the overall spending of a household and strengthens the overall growth in goods and services in an economy. The amount of disposable income in the economy was stagnant between 2008 and 2012, but since 2012, the disposable income is growing at a moderate rate. In fact, in 2014, it is estimated that the disposable income has gone up by an average 5% from the previous year (Ramadhani, 2014). As the disposable income has gone up, it poses an opportunity for all industries, including Costco. The increase in disposable income not only means more customers for Costco, but also means an increase in the money spent per trip to the Costco stores (Ramadhani, 2014).
The warehouse club industry is also growing at a decent rate. The small retail stores are not seeing a decline across the USA, whereas the warehouse club industry is witnessing a 5.5% growth year on year. It is projected that this growth rate will continue for at least some time in the future. As customers become more cost sensitive, the popularity of warehouse shopping will only grow. This provides a huge opportunity for Costco to increase its existing customer base. Even if Costco is unable to lure away Sam’s club customers, it will grow if it is able to attract new customers. The overall warehouse club market is projected to grow from the current level of $512 billion to over $600 billion by 2019 (Sangaris, 2013). As this market is dominated by only three players with Costco being one of them, Costco has a huge advantage over small players in this growing market. Apart from Costco’s grocery business, Costco will also see an increase in revenue in its gas segments. Because of its wholesale pricing of gas, Costco is able to offer gas at a price lower than other gas stations. As gas prices are close to $3 or over per gallon, Costco’s wholesale pricing and cheaper gas will increase the number of memberships that will add to the company’s revenue (Sangaris, 2013).
Another factor that will help Costco is its recent strategy of diversification. Costco has expanded its business to other countries such as Canada, the UK, Taiwan, Korea, Japan, and Mexico (Costco, 2015). As some of these countries are developed and others are developing, this helps minimize the overall country specific risks.
Socio-cultural
Socio-cultural factor is an important strategic parameter for understanding an industry. Any organization operating in an industry efficiently should have the basic understanding of the general set of beliefs and assumptions existing among the customers in that industry segment. The general set of beliefs and assumptions originates from the socio-cultural environment. Therefore, it is important to understand the social aspect of an industry. Efficient trade practice is one of the major parameters that help improve the social impact of any industry. Historically, Costco has followed efficient trade practices not only in the USA, but also in other countries in which it operates (Sangaris, 2013). This has helped the company improve its relation with the customers, employees, and the government.
Costco has slowly started moving into other international markets. Although 90% of its stores are currently located in the US and Canada, this situation may change in the coming years (Costco, 2015). The US and Canada have similar social structure, but other markets where Costco is planning to expand its operation have social and cultural structure different from that of the US and Canada. Therefore, Costco should review its strategy and way of operation in those countries as maintaining the same type of social strategy may not work equally everywhere. Two other social factors setting Costco apart from its competitors are 1) employee remuneration and 2) respect for female workers. Costco pays almost 25% more to its employees than its competitors and women employees are given more opportunity for growth within the company (Costco, 2015). These two factors have created a good brand name for the company among its employees and customers. This enhanced brand image is helping Costco gain new customers and is also helping reduce the employee turnover rate.
Technology
Often many analysts do not even think that technological parameter is important in the warehouse club industry as most of the products are standard products. There is no way for a company to differentiate its products from that of its competitors through the use of technology. However, this is not entirely true. In this industry, there are many technological aspects that influence customer reach and the operational efficiency of the company. For instance, Costco presently has poor online presence and reach of its pharmaceutical offerings, whereas almost all of its competitors including Sam’s club have already implemented efficient ecommerce system to facilitate the online buying experience of the customers (Ramadhani, 2014)Costco needs to immediately address this issue as pharmacy can become a high revenue earner for the company if it can come up with good software integrated with its stores.
Another technological factor to influence the profitability of the company is the efficiency of the fleet operation, which can be achieved through effective truck scheduling and reduction of the total miles travelled by Costco delivery trucks. By efficiently scheduling the trucks through the use of state of the art technology for tracking and forecasting, truck utilization will go up and the number of deliveries will come down (Ramadhani, 2014). Both these will help increase the total profit of the company. Apart from this, effective truck scheduling will also help reduce the total number of miles travelled by trucks, which will again decrease the total amount of gas consumed, thereby reducing the operational costs (Ramadhani, 2014). Finally, like its major competitor Wal-Mart, Costco can also think of slowly introducing more energy efficient engines in its delivery vehicles, which will reduce the overall gas consumption.
Costco is in the process of expanding its product portfolio. In order to accurately forecast the demand of the newer items, the implementation of more sophisticated analytical tools will help increase the accuracy of delivery and reduce the total store inventory (Costco, 2015). Costco has already started investing heavily on the technological infrastructure, which will help the company forecast and dispatch products from its warehouses to its stores on a real time basis.
Environmental
Environmental factor was not an important parameter even 30 years back for most of the industries. However, with an increased awareness of environmental impact among customers, employees, and the government, environmentally sustainable business model is gaining momentum in every passing year. Companies with a stellar environmental track record are able to improve their brand image drastically that helps them increase their revenue and profitability. On the other hand, companies that acted irresponsibly and adversely affected the environment faced severe damage to their brand image, which resulted in substantial revenue loss. Costco is one of the few companies in the warehouse club industry to take extremely positive steps to protect the environment and reduce the environmental damage caused by its business operations. Recently, Costco has installed solar panels in all of its stores in Hawaii and California for providing light inside the store and also to the parking space (Costco, 2015). This has helped the company reduce its fossil fuel consumption by over 5% in those two states (Costco, 2015). If Costco can replicate this model in its other stores, then every year, it can reduce the total damage caused by the use of fossil fuels for its operation. This action shows that Costco is not only a company that cares for making a profit, but also cares for the environment and sustainable business model.
Costco is undertaking many other environment-friendly initiatives. One of the first initiatives is to reduce plastic clamshell packaging of its products during delivery and storage. As plastic is not environment-friendly, the company is trying to use paper boards instead of plastic containers. Costco is also recycling 100% of its pallets, plastic stretch wrap, cardboard boxes, and light bulbs (Costco, 2015). For undertaking all these initiatives, Costco is incurring some initial investment costs, but in the long run, it will be able to get back the money through sustainable business practices. Costco has also recently redesigned its tubs. Historically, Costco used to use round shape tubs that were not always efficient in product storage and often a lot of space remained unutilized. In recent years, the company has shifted to using square tubs that have increased the overall utilization of each tub and has also reduce the overall number of tubs required by the company, thereby reducing the overall material costs (Ramadhani, 2014). Costco is also vigorously trying to expand its organic food brand Kirkland through marketing efforts. As the demand for organic food is growing in the market and the consumption and production of organic food are more environment-friendly than that of inorganic foods, this practice of Costco will give the company leverage in the coming days. Costco is not only expanding the recycling program within the company, but also is expanding among the customers. Costco now accepts old electronic items and light bulbs from its customers and recycles them at no cost (Costco, 2015). Electronic items are adverse to the environment, and by recycling many electronic parts, Costco is improving its green image.
Apart from the direct environmental factors, legal environmental standards also influence the business strategy of an industry. For example, a company may be following some pollution standards in its manufacturing plants in China, but if the same company wants to expand in Europe, then it has to improve its operation to meet the higher level of environmental standards maintained in the European Union or else the company may encounter serious legal implications, leading to a huge penalty or even shutdown. Costco does not change its environmental standard country wise. It follows its own environmental standard, which is more stringent than the standard followed in the countries of its operation (Costco, 2015). This helps the company avoid adverse environmental related legal implications.
References
U. S. Environmental Protection Agency (EPA). (2014). Costco Wholesale Corporation Clean Air Act Settlement. Retrieved on 24th July, 2015 from <http://www2.epa.gov/enforcement/costco-wholesale-corporation-clean-air-act-settlement>
Halkias, M. (2015). Costco joins Kroger and Wal-Mart in efforts to change liquor laws. The Dallas Morning News. Retrieved on 24th July, 2015 from <http://bizbeatblog.dallasnews.com/2015/03/costco-joins-kroger-and-wal-mart-in-efforts-to-change-liquor-laws.html/>
Costco Annual Statement- 2014. (2015). Costco Wholesale Corporation. Retrieved on 24th July, 2015 from < http://investor.costco.com/phoenix.zhtml?c=83830&p=irol-reportsannual>
Environmental Leader.(2014). Costco Settlement to Cut GHG Refrigerant Emissions. Retrieved on 24th July, 2015 from < http://www.environmentalleader.com/2014/09/04/costco-settlement-to-cut-ghg-refrigerant-emissions/>
Sangaris, M. (2013). Investing the Socially Responsible Way. The Motley Fool. Retrieved on 24th July, 2015 from < http://www.fool.com/investing/general/2013/12/31/investing-the-socially-responsible-way.aspx>
Ramadhani, U. (2014). Strategic Management : Costco Mission, Business Model and Strategy. Slideshare. Retrieved on 24th July, 2015 from <http://www.slideshare.net/untarifebrianramadhani/strategic-management-costco-mission-business-model-and-strategy?related=1>
