Ryerson University BUS800: Costco Wholesale Finance Report Analysis

This finance report provides a comprehensive external analysis of Costco Wholesale, utilizing the PESTEL framework to assess political, economic, social, technological, environmental, and legal factors impacting the company. The report delves into the significance of each factor, offering strategic implications for Costco's operations and profitability. It examines the economic trends, social shifts, and technological advancements affecting the retail industry, including Costco's adoption of e-commerce and AI. Furthermore, the analysis covers environmental and legal considerations, highlighting how these factors influence Costco's business strategies and market standing. The report aims to provide a detailed overview of the challenges and opportunities facing Costco Wholesale in a dynamic market environment, supported by the provided case study and assignment brief.

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Finance
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Author’s Note

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Appendix
Company External Analysis
1.0 PESTEL Analysis
PESTEL Analysis can be considered as an effective tool to conduct the macro
economic analysis or analysis of external factors of any organization. The main factors on the
basis of which this external analysis is done are: Political factors, Economic factors, Social
factors, Technological factors, Environmental factors and Legal factors. PESTEL Analysis is
considered as an integral part of the macro economic analysis where it provides minute
details about the operating challenges that Costco Wholesale might face while operating the
macroeconomic environment in near future. The PESTEL Analysis of Costco Wholesale are
as follows:
1.1 Political factors
Political factors are one of the key factors in the PESTEL Analysis that plays a
significant role in ascertaining the political environment that might impact the profitability of
Costco Wholesale in the long run relating to its operation in a specific market or country.
Costco Wholesale operates in more than a dozen countries and owing to is diversified
operation and selling products at a discount and through a number of other stores are exposed
to numerous political environments and system risks (C-25). The management of Costco
Wholesale should consider the following factors while thinking of spreading its business even
further.
 Political stability of the country.
 Importance of variety stores and discount structure in the country.
 Probable risk of invasion of military.

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 Level of bureaucracy prevalent in the country that might impact the business of the
Costco Wholesale.
 The prevalent level of corruption in the country.
 Laws for protection of Intellectual properties in the country.
 Laws relating to contract enforcement.
 Tariffs and prevalent trade regulations.
 Prevalent Anti-trust laws.
 Taxation policies.
 Favorable trading partner of the country.
 Regulations concerning pricing strategy.
 Legal framework for wages.
 Any prevalent employee benefits that are mandatory to follow and many others.
1.1.1. In the present context, Costco Wholesale has it presence in more than 200 stores
outside the national boundary of the US. It has its presence in more than 494 stores all
across 43 states in the USA and Puerto Rico. Owing to its presence in these Lsified
political environment, it is exposed to different system related risks and above all, the
political disruptions, turmoil and political instability hugely affects its business
thereby hampering its profitability. A stable government without any political
disruptions could boost its sales, operation and most importantly improve its
profitability.
1.1.2. There are other two important implications of that the current political environment in
USA could impose on Costco Wholesale Corporation. The current political scenario
in USA under the present leadership is stable and business friendly as well as the
trade agreement named NAFTA would benefit the organization especially in terms of
removal of tariff between the North American countries of USA, Canada and Mexico.
However, one political scenario of US – China tradeoff could impose certain
restrictions on it and may hamper its business as well as portability.
1.2 Economic factors
Economic factors are those factors which are of utmost importance to a firm as it
relates to its growth, market standing, profitability and future expansion. This analysis of
outside economic factors identifies the aggregate demand for its produced goods, it’s much
needed investment to effectively produce and supply the effective quantity to meet the market

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demand and at the same time reduce wastage. The economic environmental factor also
identifies market competition so that the management could formulate an effective strategy to
combat such competition and gain a competitive advantage for the firm. There are numerous
economic factors, however, the ones which are of utmost importance to Costco Wholesale
and the management must consider the factors while expanding its business are as follows:
 Type of prevailing economic system in the country.
 Stability of the economic system.
 Government intervention possibility in the free market operation of demand and
supply.
 Efficacy of the financial markets prevailing in the country.
 Stability of exchange rates in the country especially the rates of exchange with the
most favorable trading partner.
 Level of existing infrastructure in the country.
 Mandatory provisions that needs to be followed while fixation of price or framing
discount policies.
 Competitive and comparative advantages that Costco Wholesale could gain operating
in the market.
 Level of education and existing skill set of the labor force.
 Economic growth rate.
 Present business cycle.
 Unemployment rate.
 Rate of inflation.
 Prevalent rates of Interest.
1.2.1 In the present context, post the recession period, different industries have reduced the
prices of the goods and have started to give discounts to its clients especially the people who

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bought goods in a bulk and retail industry including Costco Wholesale was no exception.
They too started to follow the same economic trend. Owing to its huge operation level and
market standing, did not suffered much loss and soon brought the majority of the market
share under its belt.
1.2.2 This changing economic trend was a blessing in disguise. The overall retail sector
where Costco is a major shareholder has generated a total volume of $20 trillion as of 2015
and is expected to grow even further to $28 trillion by 2020..
1.2.3 The increasing trade agreements of the Government of USA with other countries will
open up new avenues for Costco Wholesale to enter and gain a competitive and comparative
edge over all other firms operating in the retail industry. These can be considered as positive
and promising signs for Costco Wholesale for the years to come.
1.3 Social factors
Social factors are equally important like all other factors that forms the part of the
PESTEL Analysis. It helps the organization to identify and understand how the society thinks
their ways of doing things which may impact the business, productivity and most importantly
the profitability of the organization. It also helps the management to identify and understand
how well the organization and its business strategies appeals as well as how far it is
acceptable to the members of the society. The following social factors are of utmost
importance for the management of Costco Wholesale to be considered before formulating
strategies for expanding its business:
 Demographic structure of the country.
 Level of education and skill set of the labor force.
 Interest of common people.
 Existing culture within the society.

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 Structure of social class and hierarchy.
 Attitudes of common people towards health and environmental hazards and many
more.
1.3.1 A business cannot stand alone in the market. It has to carefully examine all the present
socio cultural environment in which it operates or thinking to expand its business in. The
socio cultural and demographic trends have changed in the recent times where people have
become busier in their day to day lives. Modern people are no longer able to visit the stores to
shop and more or less depends on E-commerce websites.
1.3.2 Costco have identified such changes in social patterns and have taken many steps like
introduction of e-commerce websites and mobile applications to list all its products online at
the most competitive price and deliver the goods bought by its customer’s right at their
doorsteps. This has enhanced its sales and profit manifold in recent times.
1.3.3 The management have considered all the above mentioned social factors for
formulating more strategies that would enhance its present sales and profitability and at the
same time would enable it to easily expand its business within the country and abroad.
1.4 Technological factors
There has been a rapid change and development in the field of technology over the
years. The disruption rate in the fields of technology has been tremendous post the
globalization era, especially over the last decade. The technology which is considered best in
class at present becomes obsolete tomorrow with the invention of newer technologies and
rapid development in this field. Today a technological analysis of the market and industry has
been very necessary to keep alive in the market. It is not only the technological analysis that
keeps the firm alive in the market but also the speed at which new technologies are replacing
the previous best have become essential for a firm to know. Technological factors are of

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material importance to a firm and forms an integral part of PESTEL Analysis as it has a deep
impact on the working and profitability of a firm. The following technological factors are of
material importance for the management of Costco Wholesale to analyze before formulating
any plans for expansion of business.
 Recent development in technology in the retail industry.
 Adoption of new technologies by any of its competitors.
 Impact of new technology on the cost structure of its products.
 Impact of new technology in its structure of value chain.
 Technological diffusion rate.
1.4.1. Technology is the essence of every business in this 21st Century. No business can
prosper without the support of potential technology to support it. Adoption of a new
technology may shorten its production or selling process, achieve efficiency in supply chain,
thereby saving it time and money. It may also gain a competitive and comparative edge
through adoption of a new technology and removal of an obsolete technology.
1.4.2 In today’s scenario where every firm including its rivals like Walmart and others are in
the race of adoption of the right and the best in class technology to defeat its rivals and gain a
competitive edge in the market. Costco Wholesale Corporation is not lagging behind either.
1.4.3 It has introduced AI or Artificial technologies in its newly adopted technological
enhancement idea of E-commerce. This has helped it immensely in terms of enhancement of
sales, profit and most importantly, brought customer satisfaction thereby helping it to achieve
a competitive edge and better market standing than its competitors especially its fierce rival,
Walmart.
1.5 Environmental factor

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The profitability and market standing of a business entity can be greatly impacted or
hampered by certain norms that must be followed by it according to the prevalent
environmental standards of that particular area or any such rules enforced by the state or
country. So studying the prevalent environmental factors are a must for all business entities
that wants to operate at the same level in a market or wants to spread its petals to a new
market or country. The environmental factors that must be considered by the management of
Costco Wholesale before expanding its business are as follows:
 Weather pattern of the country.
 Climate change patterns.
 Environmental pollution laws.
 Laws relating to waste management.
 Recycling requirements.
 Directorate to enforce “green” products.
 Prevalent support towards renewable sources of energy and many more.
1.5.1 All the governments especially the government of the United States have stressed on
using of environmental friendly and sustainable practices in business. Every company
operating in every sectors and industry have started to adopt such necessary measures to
comply with the government norms and do something for the mother nature, Costco
Wholesale Corporation is no exception.
1.5.2 It has adopted various measures like the use of sustainable packaging, reduction in
wastage and using of renewable energy in its business to support the initiative and do
something for the environment.
1.5.3 Apart from the above mentioned ones, there are some other steps as well that it has
adopted like maintenance of low carbon footprint, installation of systems in its warehouses to

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increase management of energy, developing new waste stream and recycling management
systems. Taking all these initiatives towards environment has enhanced its respect and brand
image in the minds of common people thereby having a positive reflection on its sales,
profitability and market standing.
1.6 Legal factors
Legal factors plays an important role behind the success of every business entity. It is
an integral part of the PESTEL Analysis as it has great impact on the operation and
profitability of any organization. The management of Costco Wholesale should consider the
following factors before formulating any plans for expansion of its business:
 Laws relating to Patents, Copyrights and Intellectual properties prevalent in the
country.
 Anti-trust laws especially relating to Discount and aggressive pricing strategies.
 Discrimination law.
 Laws relating to consumer protection.
 E-commerce laws.
 Laws on data protection.
 Laws on employment prevalent in the country.
 Health and safety laws prevalent in the country and many more.
1.6.1 All the laws have become stringent than before and have enforced greater protection not
only for the common people but also for the business entities as well (C-42). The labor laws,
consumer protection, e-commerce laws all have become stricter than before. However, amidst
all, Costco have maintained a clean image in terms of compliance with the available
regulations and statutes.

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1.6.2 It has a clean HR image as well as complies with all kinds of major laws like the labor,
E-commerce or consumer protection laws. So, it has to face very few or negligible legal
consequences than all other rivals especially its fierce rival, Walmart.
2.0 Dominant Economic features analysis
2.1 Industry
2.1.1. The industry in which the Costco Wholesale Corporation is an integral part is known as
“retail industry” or “warehouse clubs and supercenters industry.” This industry is
characterized by selling consumer products or services through a supply chain thereby
generating profit for the business (C-42).
2.1.2. The sale a wide range of goods that comprises the daily essentials ranging from food
and beverages to other consumer durables like wellness products, furniture and home
appliances.
2.2 Market size and growth rate
2.2.1. The market size of this industry is spread over every continent except Antarctica.
Costco has its business spread over 12 countries with 546 warehouses in the USA and Puerto
Rico, 39 in Mexico, 100 in Canada, 16 in South Korea, 29 in United Kingdom, 14 in Taiwan,
26 in Japan, 11 in Australia, one each in France, Iceland and China and two in Spain (C-30).
2.2.2. It has planned to open a ware house in New Zealand as well by 2021. Costco has a
brilliant growth rate over the years. It have grown from zero to $3 billion sales in just 6 years.
As of 2019, it achieved annual revenue of $152.703 billion and has grown by more than 7.5%
over the last fiscal cycle and is projected to grow by 4% annually by 2022.
2.3 Capital requirements

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2.3.1 Costco Wholesale is a huge firm that requires enormous volume of capital each cycle to
support its massive business operations. It has a requirement of $22695 million of working
capital as of 2020 to meet of its current liabilities (C-38).
2.4. Technology/ R&D
2.4.1. Costco operates in the retail sector which is characterized by rapid enhancement of
technology. It has not lagged behind its competitors either. It had stepped into E-commerce
services recently and have introduced “Artificial Intelligence” in such E-commerce
operations (C-36).
2.4.2. This has greatly impressed its customers and enhanced their satisfaction levels which
can be seen reflected in its financials over the years and recently it has surpassed its fierce
competitor Walmart in this E-commerce business and delivering goods right at customer’s
doorsteps.
2.5 Economies of scale
2.5.1. Economies of Scale or saving in cost owing to enhanced level of production go side by
side with Costco. As of 2012, its sales was around $97.062 billion with $1.709 of Net Profit
and over the years its business have enhanced manifold where it is estimated that it will grow
4% every year till 2022 (C-20).
2.5.2. Its present sales as of 2019 have crossed $ 152.703. So, it can be said that Costco have
achieved Economies of scale owing to different factors where the above mentioned
technological developments are an integral part (C-20).
2.6 Absolute cost advantages
2.6.1. Absolute cost advantages signify a situation when a company can produce and sell
more of its goods as compared to its competitors keeping the quantities of resources constant.

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As discussed above, recently it has introduced itself in the online or e-commerce platform.
Above introducing itself online, it has brought new technological improvements in its online
business by introducing “Artificial Intelligence” where it automatically suggests the best
products to the customers by studying their search history, buying patterns or through
surveys.
2.6.2. It has reduced the grievances of the customers and provides quick resolutions to their
issues. This has enhanced the level of customer satisfaction and as a whole allowed it to gain
better market standing and absolute cost advantage.
2.7 Buyer needs and price sensitivity
2.7.1. The buyer needs are the absolute priority of Costco along with price sensitivity. Buyer
needs are well identified through their search history and buying patterns along with periodic
survey through its AI software. While on the other hand, price sensitivity refers to how far the
price of its goods affects the Purchasing behaviours of its customers (C-22).
2.7.2 It have a dedicated team employed to study the market along with daily price quotation
by its competitors. It maintains a competitive pricing policy. However, if some of its products
are found to be a bit highly quote than its competitors or product substitutes, then in such
cases it tries reimburse through a discount policy to win back the confidence of its customers
in this harshly competitive business environment.
3.0 Porter’s Five Forces Model
3.1 Threat of New Entrant:
3.1.1 The threat of the new entrant is high since, Canada and USA is a good place for
business and the country encourages new innovation and technology in the market. The retail
industry is also on the boom in the market with companies like Walmart and Target