An Analysis of Costco Overseas

A Great American Company in Southeast Asia

In the spring of 2023, I wrote an analysis essay on Costco Wholesale Corporation utilizing the CAGE framework. The CAGE framework seeks to understand the cultural, administrative, geographic, and economic factors concerning an international business. This means of analysis can help investors understand the big-picture risks of a global company.

Since I invested in Costco a few years ago, it has been one of my most successful investments, with an incredibly high ROI, beating the S&P500. The company relishes in great reputation, a loyal customer base, and a proven model that works. As the company expands overseas, specifically in China, I felt it was important to briefly but better understand Costco’s global expansion.

Here is my short and updated analysis:

CAGE Framework: 

Further expansion in China requires an evaluation along the four CAGE dimensions. First, Chinese culture varies from American. The Chinese consumer is focused more on long-term orientation, as demonstrated by the high savings rate. The Chinese are more collectivist compared to individualist Americans. Also, China has a high score on the power distance index, 80, indicating a higher acceptance of unequal power distribution (ClearlyCultural). 

Second, the Chinese administrative and political foundation has come under strain from America over the past several years. The Chinese government, run by the Chinese communist party, has increasingly intervened in the economy by attempting to pick industrial winners and losers. Accusations of intellectual property theft and spying on American organizations have caused harm between the two countries. Currently, the United States has a trade deficit with China as both countries have imposed trade tariffs on specific items (Census). Additionally, there is significant political tension over Taiwan’s sovereignty, and its microchip market resulting in fears of a potential for war against AUKUS and ASEATO. 

Third, geographically, China and America are divided by the Pacific Ocean. There are extensive transportation costs to cross an ocean with goods. However, Costco has several stores in China with proper infrastructure to maintain and grow its foothold. Most of China’s largely urban population, is on its eastern side, near the ocean in major cities like Wuhan and Beijing. China borders more countries than any other nation on Earth. The United States and China are similar in geographic size. China’s natural resources include abundant coal, natural gas, rare earth minerals, and iron (Investopedia). 

Finally, China and the U.S. are the two leading economies in the world. China’s economy in the first half of 2024, grew 5% year over year, according to the World Bank. Consumers are roaring back to the market to buy according to the consulting firm, McKinsey. Given Costco’s infrastructure and brand reputation already in China, the company can flow with China’s economic expansion as a leading economy. 

Integration Responsiveness Framework: 

As it stands, Costco has combined several aspects of the integration responsiveness framework. It has passed globalization stage 1; an international strategy focused on selling the same items in China as in the United States because of its sustained infrastructure in China. The fundamental business model of selling memberships and various products remains a Costco staple in China and America. Costco Wholesale has entered stage 2, a multi-domestic strategy. Costco began selling Chinese brand products and appealing to local populations. Costco has yet to achieve economies of scale and low costs globally, as exemplified by stage 3, the global standardization strategy. This strategy, finding efficiency and becoming a cost leader globally, can boost Costco’s image, profits, and competitive advantage. 

Conclusion: 

Despite many complexities, Costco has succeeded in expanding into the Chinese market and achieved a competitive advantage. Given the numerous frameworks and means of evaluation, taking a position remains limited in providing a wholly accurate assessment of Costco’s expansion. Alternative points of view might suggest looking at Costco’s business model internally and its financial statements. Costco can look forward to economies of scale to achieve cost leadership, excellent brand reputation, and a growing consumer demand.