PEST Analysis of Costco: Strategic Growth Opportunities

Introduction

Although Walmart continues to dominate the warehouse club sector, Costco is fast becoming a major player as well. In fact, Costco has expanded its operations into a growing number of countries in recent years, and current signs indicate the company is well situated to continue this growth in the future. Nevertheless, Costco is confronted with significant challenges as it applies its business model to other cultures where consumer tastes vary widely and legal requirements differ.

In this environment, identifying potential threats as well as opportunities for growth represents a timely and valuable enterprise. To this end, this paper reviews the relevant literature to provide an overview of Costco and the sector in which it competes, an analysis of political/legal, economic, social, and technological issues facing the company today, followed by an analysis of the strategic alternatives available to Costco to grow its market share. A summary of the research, important findings, and their implications for Costco are provided in the conclusion.

According to Costco Wholesale Corporation's latest quarterly report (November 2011), the company operates a chain of membership warehouses that feature bargain prices. The company keeps its prices low by restricting its selection to a limited number of nationally branded and select private-label products, while offering a wide range of merchandise categories in what it describes as its "no-frills, self-service facilities" (Form 10-Q, 2011, p. 4).

Company Overview

According to analysts at Zacks Investment Research, "Costco continues to be a dominant retail wholesaler based on the breadth and quality of merchandise it offers. The company's strategy to sell products at heavily discounted prices has helped it to remain on a positive growth track amid beleaguered economic conditions, as cash-strapped customers continue to see it as a viable option for low-cost necessities" (Costco exits 2012 with strength, 2012, para. 3). This strategy has clearly paid off, and at the end of 2011, the company operated almost 600 warehouse facilities worldwide, as shown in Table 1 below.

Table 1: Breakdown of Costco Worldwide Membership Warehouse Facilities

United States: 433 (forty states and Puerto Rico)
Canada: 82 (nine Canadian provinces)
Mexico: 32
United Kingdom: 22
Japan: 9
Taiwan: 8
South Korea: 7
Australia: 3

Source: Form 10-Q (2011, November 20)

As can be discerned from the data above, the company's operations are primarily in North America, but it has a substantial presence in Mexico and, increasingly, Asia as well. These far-flung operations mean that the company faces profound political and legal factors, discussed further below.

Many of the countries in which Costco operates, especially the United States, have been adversely affected by the lingering effects of the global economic downturn. In some cases, these countries have adopted pro-business policies — including tax incentives and credit initiatives — that are especially advantageous for Costco at present (Starr, 2008). Nevertheless, the company also competes in politically volatile regions of the world, and the potential for shifts in political ideologies is always a possibility (Form 10-Q, 2011).

In reality, the company faces a bewildering array of legal issues ranging from its human resource practices and accounting methods to the regulatory requirements governing food and beverage products sold in different countries. Moreover, controlling laws are in constant flux, making this area a particularly challenging one for the company. Despite these challenges, people always need groceries and Costco is positioned to deliver — and the company must navigate these legal complexities as it does so.

PEST Analysis: Political, Legal, and Economic Factors

Although Costco enjoys a healthy share of its market, the company has not been immune to the effects of the Great Recession of 2008, as reflected in its historical stock performance. Despite that temporary downturn, the company has regained its momentum and has exceeded its pre-recession performance levels.

While Costco is continuing to grow, the dominant player in the department and specialty retail store sector remains Walmart, with Costco trailing at a distant second and followed closely by Target Corporation, as shown in Table 2 below.

Table 2: Costco Competitors — Respective Market Caps (Department/Specialty Retail Stores)

Walmart: $207,913,354,870
Costco: $35,371,251,300
Target Corporation: $33,613,429,850
Dollar General Corporation: $14,405,891,760

Source: Costco Wholesale Corporation (COST) Competitors, 2012

A recent analysis by Zacks Equity Research indicates that Costco ended 2011 well situated to continue its pattern of growth into the foreseeable future. According to these market analysts, "Costco has battled through a tough economy and exited 2011 boldly. The U.S. economy has been reeling under the ongoing financial crisis, whose rippling effects gradually engulfed the global market. Amid this turbulent environment, Costco has almost been able to overcome the hurdles keeping an upbeat note, and we believe it to continue with its momentum in 2012" (Costco exits 2012 with strength, 2012, para. 4).

Conclusion

The research showed that Costco Wholesale Corporation competes in the department/specialty retail store sector where it trails industry giant Walmart and maintains a close lead over its next biggest competitor, Target Corporation. The research also showed that the company operates almost 600 membership warehouses in North America, Mexico, the United Kingdom, Japan, Taiwan, South Korea, and Australia, specializing in providing national and private brands at discounted prices.