Business Analysis Part II
R. Butler
MGT/521
October 22, 2012
Melany Felton

Business Analysis Part II

The company chosen to research was Costco Wholesale, looking at the financial health of Costco Wholesale I had to determine their cash flow and how they fair with other similar organizations in the industry.
When reviewing Costco Wholesale’s income statement/balanced sheets they showed a total net income of 609,000 from continuing operations and liabilities for the quarter, according to assets quarterly data for the period ending 8/2012. The cash equivalents, marketable securities, accounts receivables, other inventories and, current deferred income taxes accounting for other earnings. Costco had total current assets of 13,526,000 for this quarter. The income balance sheet for the period was 609,000 with the total revenues year to date of 1,709,000 (www.costcowholsale.html.com).
A review of Wal-Mart/Sam’s club, Costco’s number one competitor, showed a quarterly balance for operating income after depreciation for the same period was 6,698,000 and income total revenue of 114,296,000 for the quarter (Wal-Mart, NYSE.WMT). A review of Target’s finance and total revenue is compared to Costco and Sams Club/Wal-Mart; however, Target does not operate the same type of warehouse store as its other competitors, but they do operate something similar in Target Super Stores. Target has over stores 1700 stores in 49 states and more than 240 Super Target stores. Balance sheets and income statement had a net income for continuing operations for the quarterly period of 704, 4000 (Target, NYSE.TGT) and a total net income that was the same.
In reviewing these organizations balance/income statements for the third quarter these company’s appear to be profitable. The economic and industry analysis will help investors narrow their choices of company’s as good candidates for further investigation before making any investment decisions.
There is no information in any of the statements that would be of concern; however, all three organizations have healthy financial earning and balance sheets for the quarter. By analyzing a company’s performance over time it will determine if it should be considered a good investment. Liquidity is a determining factor in a company’s financial health. In the United States and Canada, Costco’s financial and operational performance is highly dependent on sales. The total sales for the United States and Canada are composed of 89% liquidity and another 83% of Costco’s net sales (www.costcowholsale.html.com). As a characteristic of “asset liquidity” an asset is able to be converted into cash it, also determines that company’s “short-term liquid assets. It will have an effect on how well Costco will be able to make employee payments to include, interest and payments to its vendors and suppliers. If Costco has a bad month and has no supply of liquid assets that are immediately available, like a money market account with funds, then they could not make the necessary payments or meet its payroll. This type of information manager will able to move the organization forward (Costco Whole Sale Annual Report 2011).
Costco Wholesale compared to its competitors, such as Wal-Mart, Target, Kohl’s and Amazon.com, along with other general retailers, have remain strong in providing many lower prices during today’s economic challenges. The economic challenges that Costco had to overcome are factors such as merchandise, quality of goods, warehouse locations, and member services that are a large part of the company’s financial health. In 2011 Costco Wholesale had solid results worldwide that demonstrated the strength and resilience of Costco. They had recorded back to back years of record sales and earning even with weak economic conditions in the United States and other parts of the world in which they operate their sales have remain strong. Some of the technological advantages of Costco Wholesale is it, has become the seventh largest retail organization to accept electronic food stamps benefits chain wide. Costco Wholesale has been able to reduce its energy consumption in most warehouses worldwide by installing skylights and solar panels on the roofs of its warehouses. The solar panels used by Costco Wholesale cost approximately 745,000 per store according to Jim Singal, CEO of Costco. The company doesn’t expect to make a profitable return on that money for at least three to five years. “We recognize like all large businesses, that we must continue to conserve and save the planet” (Jim, Sinegal, CEO, The Seattle Times, February 3, 2008). Jim Sinegal added “Costco is doing other things to further reduce its drain on natural resources, for instance, switching from round to rectangular tubs of cashews. The rectangular tubs mean 400 fewer truckloads shipped to warehouses annually because they can be stacked more efficiently than the round ones”. “Also Costco is expanding sales of fruits and vegetables grown in a clean pesticide-free environment and is the largest club warehouse to sell wine in the world. They are trying to increase organic food offerings under the Kirkland signature banner which is Costco’s brand”. “This is not something that’s nice to do anymore” he said “it’s imperative” (Jim, Sinegal, CEO, The Seattle Times, February 3, 2008). Costco has encountered many challenging issues with technological advantages by developing new technology to grab a bigger share of the worldwide market. Costco Wholesale is now the fifth largest membership warehouse club in the United States as of July 2012, and has moved from seventh worldwide (www.costcowholsale.html.com). Globalization has affected Costco Wholesale strategies with customers making purchases with Costco cash cards it does not require a membership to make purchases. The United States and Canadian Costco warehouse locations are the only ones that accept pin-based debit cards, Costco credit cards, and electronic benefit transfer (EBT) cards. Costco websites also accepts Bill Me Later accounts along with pay-pal accounts. Costco accepts American Express cards in the United States, Canada and Japan, because Costco Wholesale is charged a low interchange fee at these locations, as there margins are lower when compared to their other competitors (www.costcowholsale.html.com).
Costco Wholesale looks at globalization as much more than the expansion of trade and investments. It has given Costco and its competitor’s greater interdependence causing the increased free flow of goods, services, money, and ideas across national and international borders. Ancillary businesses comprising of Costco’s food courts, mini-photo labs, optical, hearing and pharmacy, and gas stations have been a key component in there success world wide and has increased sales as much as 24%. Costco is constantly monitoring the unique qualities of each of its warehouse worldwide by capitalizing on opportunities, adjusting and adding new products to meet the needs of its customers globally. Costco Wholesale is a 42.5 billion dollar company that operates wholesale stores in about seven different countries which, they can increase leverage to keep a strong customer base in those countries.
“Costco has plans to expand and start Europe’s membership warehouse store in France or Spain and has been discussing this idea for about two years” (Jeffrey Brotman, chairman, July 1991). A key consideration to expanding into the European market is to determine what Costco Wholesale will bring to the market is different from the cash and carry stores already operating there. Costco with its American membership warehouse format includes a “twist” not found in Europe, to include greater merchandising of high quality wine, art, tires, fresh produce and fresh bakery goods in the same store, something that cash and carry stores in Europe do not offer. A larger focus will be on non-food items such as services like pharmacy and prescriptions (Jim Sinegal CEO, The Seattle Times February 3, 2008). Costco Wholesale has been striving to be the first American club membership store in Europe, so it can bet its’ competitors who are also trying to expand into the European theater. Benchmarking an organization compares its cost, cycle time, practices, process and, product quality against other more successful companies to see if they could learn from their success. However with the success of Costco Wholesale a benchmark analysis will only stand to help them improve on their operations, and procedures, and, their most of all their customer services, compared to their competitors. A benchmarking analysis of Costco Wholesale compared to its competitors in the reduced cost, cycle time reduction, reduce waste enhanced goal setting, improved customer service and satisfaction, productivity improvements, and changes in the organizational structure.
Costco did reduce cost by not using bags customer bring in their own bags or carrying out item in the vendors boxes. This also reduced waste along with becoming a green store by making items biodegradable and recyclable. In cycle time reduction Costco was able to reduce the time in different areas of their operation which in turn improved the speed and productivity of its employees and increased the company’s effectiveness. Enhanced goal setting and improved customer service, Costco’s main goal has and still is to make the customer shopping experience the best it can be by having access to the products, at the lowest prices possible to keep the customer base worldwide retuning. Costco has improved customer service far ahead of others in the industry. The shortest wait times when calling the company, the return policy that is one of the best in the country, anything can be returned at anytime if the customer is not satisfied. Satisfaction is one of Costco’s enhanced goals. Costco Wholesale productivity improvements have shown they remain a profitable company, although they are not as large as Wal-Mart/Sam’s Club is by far the largest retailer in the United States. Costco has built more warehouses outside the country and they are larger in the size of their warehouses. Changes in the organizational structure, Costco was compared with other companies that had changed their structure, Costco changed by having a rapid turnover rate replacing regular items sold in a shorter time and, by rotating its products every 30 days. Other companies within in same industry did not have a turnover of products as fast.
Costco Wholesale also capped their markup of items at a percentage so that they could keep the prices lower which also improved customer satisfaction. One area Costco used benchmarking is that they looked at why Wal-Mart and Target’s human resources management was more successful because, they were having problems in that area. Costco reviewed the two other companies and found both had knowledgeable personnel that knew the company and, was promoted from within the company and the employees, whereas most of Costco’s personnel were new to the company, and had brought their ideas from other jobs these ideas, didn’t work at Costco Wholesale. Costco’s best practices are in, their highly rated customer service, the product service areas.
The cost of benchmarking to the company is valuable because it helps the company compare other company’s in the same industry. The questions that the company conducting the benchmarking analysis will always want to know is, what can be done to get on the right track, if they are not? What are we doing to stay competitive with others in the industry? What does our company do better than the others?
The answers were found in the benchmarking analysis conducted. The changes made in Costco’s organizational structure were easy changes because many of the changes were already in effect when compared to other organizations in the same industry.

References www.costcowholesale.html.com Wal-Mart, NYSE.WMT, Target, NYSE.TGT
Costco Wholesale Annual Report 2011
Jeffrey, Brotman, Chairman, July 1991
Jim, Sinegal, CEO, the Seattle Times Feb 3, 2008