...manufactures and then sells them in bulk in a warehouse. Consumers must become a member of Costco, which requires the payment of an annual fee, to gain access into the warehouse and to be able to purchase its merchandise. Costco’s intent is to create an environment where both small business and personal needs can be met at the lowest possible price. The company’s dedication to customer satisfaction and price guarantee place Costco at the very top of the variety/discount stores industry and has allowed the company to expand well beyond the United States into international markets. Costco’s top competition is Sam’s Club. While Sam’s Club may have more warehouse stores, Costco has a larger customer base, giving it the edge in the discount/variety stores industry. Analysis: Current Ratio: Costco 2011 - 1.14 Industry Average - 1.18 The current ratio describes a company’s ability to meet short-term, or current, liabilities. Costco’s current ratio is greater than one and thus it is clear the company has enough current assets to cover its current liabilities. Because Costco’s current ratio falls just short of the industry average, Costco may encounter slight disadvantages such as higher interest rates on new loans or difficulty buying on credit. The fact that Costco’s current ratio is barely over one may alarm management. However, the industry average is just over one as well making this fact less of an issue than it would be otherwise. Quick Ratio: Costco 2011: 0.59 Industry Average:...
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...portfolio. The common-size financial statements evaluating the period 1997-2001 (exhibit 9) reveal valuable information regarding Costco. Torres noticed that there were two revenue lines: net sale of goods and membership fees. She decided to use net sales of goods as the point of comparison and express other line items, including membership fees, as a percentage of net sales in order to allow for a clearer reflection of gross and operating margins. This format enabled her to analyze the profit and asset structures of Costco over time. To begin, Margarita Torres’ common-size financial statements for Costco demonstrate a rise in membership fees and other sources of revenue from 1.82% in 1997 to 1.93% in 2001. This is supported by Costco’s trend to increase membership fees over time and also gain new members. For example fees cost $25 in 1986 and rose as high as $45 in 2002. But why were customers willing to pay a fee to shop at Costco when they could go to discount stores for free? Costco created value for the customer by only purchasing a handful of SKUs from its vendors, by selling goods at such a...
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...Wholesale Corporation 1. Describe Costco’s Business Model. Description must identify and describe model components. Costco’s business model was to generate high sales volumes and rapid inventory turnover by offering its members low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories. The components that stick out to me in this model are the low prices, brand names/select private label, and membership. A) Discuss how each component impacts profit generation. The principle business components that allow their business to generate revenues sufficient to cover costs are as follows: * Low Prices support rapid inventory turnover and high sales volumes. The higher sales volumes they generate then the better means they have when negotiating pricing with their vendors, and the potential to reach higher gross profit by the mass quantities they sell. Volume pricing, efficient distribution, and reduced handling of merchandise add to their overall effectiveness. * Brand names and select private-labeled products help to draw customers in because they know the brand names and understand what they are paying for. Discount pricing on top of this, even if it is still cheaper than the local grocer, will still make the shopper feel as if they are getting a deal. When a shopper gets a deal, they are often inclined to spend more and shop there again…both adding to Costco’s ability to generate sufficient revenues...
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...marketing and became particularly adept at understanding what was working and what wasn’t at stores, which was something that Price was also very good at. Noticing these burgeoning skills, Price made him the manager of the original store. It was here that Sinegal learned the craft at the hands of his mentor, a task he did so with such skill that he decided to leave the proverbial nest and team up with Seattle-based entrepreneur Jeff Brotman, with whom he founded Costco. Singelar and Brotman shared the joint vision of continually proving their members with quality products and services at the lowest plausible prices. They sought to accomplish this by adopting a business model where they would attempt to generate high sales volume and rapid inventory turnover by offering members very low prices on a...
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...Overview Margarita Torres Costco member and shareholder Evaluating Costco’s financial performance Evaluation methods Common-size statements Sustainable growth model Benchmarking ratios Retail Industry $1.6 trillion in retail and wholesale trade (2001) 15% of GDP (1960) 16% of GDP (2001) Department stores Customer service premium Many SKUs Discount stores Low prices No frills Retail Industry Wholesale clubs Membership only Volume discounts Limited SKUs Online stores Convenience Low overhead Sears, Roebuck, & Company Founded 1893 First retail store opened in 1925 $41 billion in sales (2001) 2,185 stores Wal-Mart / SAM’S Club Founded 1962 First SAM’S Club opened in 1983 $218 billion in sales (2001) 4, 189 stores 528 SAM’S Clubs 39 million members (SAM’S Club) Concentrated in the South BJ’s Wholesale Founded 1984 $5 billion in sales (2001) 130 stores 6.7 million members Concentrated in the Northeast Costco Wholesale Corporation Founded in 1983 Merged with Price Club in 1993 $34 billion in sales (2001) 365 stores 17.1 million members Concentrated in the West Costco Wholesale Corporation Target markets Middle class customers Small businesses Mark up limited to 14% Kirkland Signature store brand Brand name quality at discount prices Efficient operations Common-size Statements Absolute amounts vs. relative ratios / percentages Trends Where are funds allocated? How efficient is the business? Benchmarking Comparisons between businesses Sustainable Growth Model Step 1: Profitability and...
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...online retail giants like Amazon.com. 1. Company Background Costco is a multi-billion dollar warehouse company that operates on a global scale. Consumers can frequent Costco to find merchandise including but not limited to groceries, electronics, furniture and home goods, pharmaceuticals and gasoline. Costco specializes in purchasing its merchandise wholesale and re-selling to consumers. Consumers who frequent the warehouse club are required to pay annual membership fees; a membership not only grant a consumer the ability to purchase products within the store but is also required for him/her to enter inside. The benefit of a membership lies in access to Costco’s highly rated product lines such as Kirkland Signature. The strength of the brand lies in particular selections that boast high demand and quality. Costco’s dedication to quality...
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...and Price Club. In 1993, Costco merged with Price Club. Costco’s business model and size were similar to those of Price Club. In 1997, PriceCostco changed their name to Costco Wholesale and all the Price Club locations were rebranded to Costco. Costco was the first company in the industry to grow from zero to $3 billion in sales in less than six years. Costco use the competitive strategy the best-cost provider in the wholesale club membership category. Costco has the purchasing power, high sales volumes, quick inventory turnover, and excellent customer service. The chief elements of Costco strategy are pricing, limited product selection and what the company calls “treasure-hunt merchandising, this is high end product that is acquired in the gray market from other wholesalers or distressed retailers looking to get rid of excess or slow-selling inventory. 1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? The business model that Costco employs is that they are able to provide quality goods and services at the lowest possible prices. This business model is appealing as it firstly, allows Costco to generate high sales volume and rapid inventory turnover by offering members very low prices and select private-label products in a wide range of merchandise categories. Second, Costco’s high sales volume and rapid cash turnover generally allowed it to sell and receive cash for inventory before it has to pay many of its merchandise vendors,...
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...1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? Costco business model is meant to maximize efficiency by depending on a high sales tied with quick inventory earnings. Costco’s concept is base on offering members the lowest price on a limited selection of national brands, the warehouse format maintain a low cost rate as they buy and sell items in bulk. Costco memberships keep customers loyal, because it accumulate most of its profit from membership fees, they’re able to sale their goods at a very low markup price. Overall Costco’s business model is very appealing, while being positioned to grow its business for the foreseeable future, it has many benefits. Example, efficiency inventory combine with quicker inventory turnover will reduce Costco cots of selling goods. High sales volumes combine with quick inventory allows Costco to sell and receive cash for goods before it has to pay for any of its merchandise, which allows Costco to finance a large percentage of its inventory through the payment terms provided by its vendor rather than having to maintain a sizable working capital to pay for its merchandise. It’s high end target product result in bringing in high-end consumer into its stores which is another reason it’s appealing. 2. What are the chief elements of Costco’s strategy? How good is the strategy? Chief elements of Costco’s strategy consist...
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...prices, limited product selection, a “treasure hunt” shopping experience, low operating costs, and geographic expansion. The rapid inventory turnover, vendor financing, low operating costs, and self service facilities enabled Costco to operate at a significantly lower gross margin and to pass on those savings to members through lower prices and higher quality goods. By charging members a prepaid fee, which supplemented overall profitability, it provided shareholders with an acceptable return. Those strategies could make Costco Wholesale as the third largest retailer in the United States and the seventh largest retailer in the world, also being the clear leader of the discount warehouse and wholesale club segment of the North American retailing industry. Began its operation in 1983 until January 2012, Costco had a total of 598 warehouses in 40 states and Puerto Rico, 9 Canadian provinces, United Kingdom, Korea, Taiwan, Japan, Australia, and Mexico. In 2011 Costco reached a record high total revenues of $88.9 billion and net income was $1.46 billion. Costco’s Mission, Business Model, and Strategy According to Thompson, et all (2014), the managerial process of crafting and executing a company’s strategy consists of five interrelated and integrated phases. Those are: * Developing a strategic vision and mission of where the company needs to head. Costco’s...
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...1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? Costco’s main goal is to continually provide customers with quality goods and services at the lowest possible prices. The company’s business model is to generate high sales volumes and rapid inventory turnover by offering members very low prices on a limited selection of nationally branded and select private-label products in a wide range of merchandise categories (p.C-35). The business model is appealing because of its unique set of practices and its great management. One of reason for its business success is its high sales volume and rapid inventory turnover, which helped the company to receive cash for inventory before it had to make a payment to its vendors (p. C-35). The company generated $71 billion at 544 warehouses in 40 states, Puerto Rico, Canada, the UK, Taiwan, Japan, Korea and Mexico. Its annual sales per store averaged $130 million whereas it’s closest competition; Sam’s club averaged $75 million per store. (p. C32-C33) 2. What are the chief elements of Costco’s strategy? How good is the strategy? The chief elements of Costco’s strategy are low prices, a limited product line and limited selection, and a “treasure hunt” shopping environment (p. C-35). The company’s strategy is appealing because they entice with low prices to attract more customers. Similarly the company is also based on the limited product or product selection as more products mean more confusion...
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...1. What is Costco’s business model? Is the company’s business model appealing? Why or why not? - Costco’s business model is all about generating high sales and rapid inventory turnover by offering the customers that pay fees to have attractively low prices on many products that have a big named brand labels on them spreading through a wide variety of merchandise categories. A second element of their business model allowed it to sell and receive cash for their inventory all before having to pay most of its merchandise venders. - I feel that the company’s business model is very appealing to many customers seeing the fact that in January of 2012, they had a total of 598 warehouses spread out across the world. They also recorded record high revenues of $88.9 billion and a net income of $1.46 billion. The fact that people can go in and see very familiar products at a lower price makes them want to buy it there over other places. Society is all for trying to find the lowest priced goods. 2. What are the chief elements of Costco’s strategy? How good is the strategy? - The main strategy for Costco were their ultra-low prices, a selection of nationally branded and private-label products, a “treasure hunt” shopping environment, strong emphasis on low operating costs, and geographic expansion. - I think the strategy is perfect for a company like this because society is about saving money and finding the lowest priced goods. Their products range from all types of food...
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...Performance Analysis of Costco Wholesale Corporation xxxx Strayer University FIN 534: Financial Management Professor: xxxx June 11, 2012 Costco Wholesale Corporation Higher interest rates, levels of unemployment, consumer debt levels, and unsettled financial markets are general economic factors that can adversely affect the company’s financial performance. These key elements play an important role in how a company chooses to move forward operationally and financially. Therefore, it’s imperative that we as investors understand a company’s business strategy as well as have a general knowledge of issues which may impact their decisions. Prior to investing, we should review a company’s operations, stock price, and their ratios to decide if a firm a financially stable to meet their obligations. Company Overview Costco Wholesale Corporation and its subsidiaries (Costco) began operations on September 15, 1983 in Seattle, Washington. James Sinegal and Jeffery Brotman founded it. In October 1993, Costco merged with The Price Company, which established the membership warehouse model, to form Price/Costco, Inc. In January1997, the company changed its name to Costco Wholesale and all Price Club locations were rebranded as Costco Companies, Inc. August 30, 1999, the company was reincorporated and its name was changed to Costco Wholesale Corporation. To date, the company has grown to become the largest warehouse club retailer and the second largest general retailer...
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...Costco Wholesale Corporation | Table of Contents The Problem and Assumptions 2 The Problem 2 Assumptions 2 Qualitative Analysis 2 Quantitative Analysis 3 Industry Trends 3 Costco Strategy Expansion 3 Income Statement Industry/Competitor Comparison 3 Balance Sheet Competitor/Industry Comparison 5 Common-Size Analysis 6 Ratio Analysis 6 Statement of Cash Flow 9 Preferred Action Plan with Alternative Actions 11 The Problem and Assumptions The Problem Margarita Torres purchased shares in Costco Wholesale Corporation in 1997 and now it is 2002. She has decided to analyze her investment to see if Costco will continue to be profitable at a sustainable growth rate. The main question she needs to answer is how the company had been affected by growth. Had its operational efficiency changed? And how had it financed the growth and how its capital structure evolved? Assumptions For the year 2001 a recession occurred. This occurrence is considered when reviewing the financial numbers and statistics during this year. Qualitative Analysis The first step in analyzing Costco Wholesale Corporation is analyzing the relative qualitative data. Based on the data provided within the case the points below summarize how Costco is performing: * Industry: Wholesale clubs grew 12-15% in the 1990s and Costco is currently the largest wholesale club in the industry. * Strategy: Costco targets wealthier clientele of small business owners and middle...
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...Membership Industry Analysis Using the Porter’s Five Forces Model Costco’s Company Background Costco is the third largest retailer in the U.S. as well as the seventh largest retailer in the world. It is leading the discount warehouse and wholesale club segment of the North American retailing industry. As of 2012, Costco had a total of 598 warehouses internationally. Costco’s fiscal 2011 total revenue was $88.9 billion and net income was $1.46 billion. Additionally Costco had $1.9 billion of membership fees revenue acquired from 25 million households and 6.4 million businesses making it the leader in the wholesale, membership industry. The annual sales for one of Costco’s competitors, Sam’s Club, averaged $146 million with a $78 million average per store. Costco’s business model aims to generate high sales volumes and rapid inventory turnover by offering fee-paying members attractively low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise category. Rapid inventory turnover, low operating costs through purchasing high volumes, efficient distribution, and reduced merchandise handling costs are the major factors that make Costco profitable with relatively lower gross margins than other wholesale competitors. Also, the membership fee required from customers is a major revenue source thataccounts for approximately 70 percent of its total revenue annually. Additionally, Costco has direct buying relationships...
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...Elements Of Costcos Strategy, Management1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?2. What are the chief elements of Costco’s strategy? How good is the strategy?Posted by Alena | Posted Date: 8/7/2011 12:03:45 PM | 1. What is Costco’s business model? Is the company’s business model appealing? Why or why not?Business Model is used to exemplify the methods and ways which we used to generate planned revenue. The Costco’s business model is to generate high sales volume and rapid inventory turnover by offering low prices on limited selection of national branded and select private-label products in wide range of merchandise categories. Costco’s offers these products to their members who are of two types’ business members and gold star members.This business model is tempting because it gives a test to Costco’s management to continue to devise strategies and methods through which they can keep hold of existing members and catch the attention of new members. Otherwise they will suffer failure because there will be a risk that discontented members will not renew their membership. This business model takes company towards total quality management.2. What are the chief elements of Costco’s strategy? How good is the strategy?Strategy is the organization’s pre selected means or approach to gaining its goals or objectives, while keeping in view current and future external conditions. Costco’s strategy’s elements are:• Low prices• Limited product...
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