Table of Contents
INTERNAL ANALYSYS:
* About Costco
* Mission Statement
* Corporate Governance & Stakeholder Management
* Locations
* Strategic Objective
* Primary Activities
* Support Activities
* Costco Membership
* Financial
* Net Income
* Net Sales
* Membership Fees
* Gross Margin
* Selling, General & Administrative Expenses
* Cash Flows
* Expansion Plans
* Conclusion
EXTERNAL ANALYSIS
* Demographics
* Socio-cultural
* Political/Legal
* Technological
* Economic
* Global
* Environmental Scanning
* Environmental Monitoring
* Competitive Intelligence
* Environmental Forecasting
* Competitive Environment
* Porters Five Forces
* Threat of New Entrants
* The Bargaining Power of Buyers
* The Bargaining Power of Suppliers
* The Threat of Substitute Products and Services
* Intensity of Rivalry
* Value Net
* Strategic Groups Within an Industry
Appendix A
Financial Reports, Financial Highlights & Company Time Line
Map of Locations & Photos
Internal Analysis
About Costco
Costco Wholesale Corporation operates an international chain of membership warehouses,
mainly under the “Costco Wholesale” name, that carry quality, brand name merchandise at
substantially lower prices than the merchandise typically found at conventional wholesale
or retail sources. The warehouses are designed to help small-to-medium-sized businesses
reduce costs in purchasing for resale and for everyday business use. Individualconsumers
may also purchase for their personal needs.
Costcos warehouses present one of the largest and most exclusive product category
selections to be found under a single roof. Categories include groceries, candy, appliances,
television and media, automotive supplies, tires, toys, hardware, sporting goods, jewelry,
watches, cameras, books, house wares, apparel, health and beauty aids, tobacco, furniture,
office supplies and office equipment. Costco is known for carrying top quality national and
regional brands, with 100% satisfaction guaranteed, at prices consistently below traditional
wholesale or retail outlets.
Members can also shop for private label Kirkland Signature products, designed to be of
equal or better quality than national brands, including juice, cookies, coffee, tires, house
wares, luggage, appliances, clothing and detergent. The Company also operates
self-service gasoline stations at a number of its U.S. and Canadian locations. Additionally,
Costco Wholesale Industries, a division of the Company, operates manufacturing
businesses, including special food packaging, optical laboratories, meat processing and
jewelry distribution. These businesses have a common goal of providing members with
high quality products at substantially lower prices.
According to Jim Sinegal, the Companys President and Chief Executive Officer, “Costco is
able to offer lower prices and better values by eliminating virtually all the frills and costs
historically associated withconventional wholesalers and retailers, including salespeople,
fancy buildings, delivery, billing and accounts receivable. We run a tight operation with
extremely low overhead which enables us to pass on dramatic savings to our members.”
(7)
Costco Mission Statement
To continually provide our members with quality goods and services at the lowest possible
prices.
In order to achieve the mission they conduct business with the following Code of Ethics in
mind:
1. Obey the law.
2. Take care of their members.
3. Take care of their employees.
4. Respect their suppliers.
Costco believes that if they do these four things throughout the organization, then they will
achieve their ultimate goal, which is to:
5. Reward the shareholders (8)
Corporate Governance & Stakeholder Management
There are 13 Directors and Officers, 34 Executive and Senior Officers and 80 Vice
Presidents in Costcos corporate management. (9)
Costco Locations
As of December 2005, Costco operated a chain of 471 warehouses in 37 states and Puerto
Rico (346 Locations), nine Canadian providences (66 locations), the United Kingdom (17
locations), Korea (5 locations), Taiwan (4 locations), Japan (5 locations), and 28
warehouses in Mexico.
Strategic Objective
The strategic objective of Costco is based on the concept of offering members very low
prices on a limited selection of nationally branded and selected private label products in a
wide range of merchandise categories while producing high sales
volumes and rapid inventory turnover. This rapid inventory turnover, when combined with
the operating efficiencies achieved by volume purchasing, efficient distribution and
reduced handling of merchandise in no-frills, self service warehouse facilities, enables
Costco to operate profitably at significantly lower gross margins than traditional
wholesalers, discount retailers and supermarkets. (1)
Primary Activities
Costco buys the majority of its merchandise directly from manufacturers for shipment
either directly to Costcos selling warehouses or to a consolidation point where various
shipments are combined so as to minimize freight and handling costs. As a result, Costco
eliminates many of the costs associated with multiple step distribution channels, which
include purchasing from distributors as opposed to manufacturers, use of central receiving,
storing and distributing warehouses, and storage of merchandise in locations off the sales
floors. (1)
Merchandise is generally stored on racks above required for handling and stocking. In
addition, sales are processed through centralized, automated check-out stands. Most items
are not individually price marked: rather, each item is bar coded so it can be scanned into
electronic cash registers. This allows price changes without remarking merchandise.
Substantially all manufacturers provide merchandise pre-marked with the item numbers
and bar codes and many provide special, larger package sizes. Costco seeks to limit
specific itemsin each product line to fast selling models, sizes, and colors. Therefore, the
company carries an average of approximately 4,000 active SKUs per warehouse in its core
warehouse business, as opposed to discount retailers and supermarkets that normally stock
40,000 to 60,000 SKUs or more. Many consumable products are offered for sale in case,
carton or multiple-pack quantities only. Appliances, equipment and tools often feature
commercial and professional models.
One of Costcos cardinal rules is that no branded item can be marked up by more than 14
percent, and no private-label item by more than 15 percent. In contrast, supermarkets
generally mark up merchandise by 25 percent and department stores by 50 percent or
more. (6) Costco saves 2 percent a year in costs because it rarely spends money on
mass-media advertising. Marketing and promotional expenses are usually limited to new
warehouse openings. Costco effectively targets small business owners as its primary target
audience. Operating largely under the radar of the general public, Costco has many
marketing representatives who are attached to each store and whose continual task is to
network with business owners. (2)
Costco has direct buying relationships with many producers of national brand name
merchandise. No significant portion of merchandise is obtained by Costco from any one of
these or any other single supplier. Costco has not experienced difficulty in obtaining
sufficient quantities of merchandise, and believesthat if any of its current sources of supply
became unavailable, it would be able to obtain alternative sources without experiencing a
substantial disruption of its business. (1)
At the end of 2005, Costcos warehouses contained over 59 million square feet of operating
floor space; 46 million in the United States, 8.4 million in Canada and 4.2 million in other
international locations. Costcos typical warehouse format averages approximately 139,000
square feet. Floor plans are designed for economy and efficiency in the use of selling
space, in the handling of merchandise and in control of inventory. Costco believes that
shoppers are attracted principally by the availability of low prices on brand name and
selected private label goods, hence, Costcos warehouses need not be located on prime
commercial real estate sites or have elaborate facilities. (1)
Costcos ancillary business continues to draw members into their warehouses for more
frequent shops, generating increasing revenue for the company. Warehouse ancillary sales
increased by more than 20% in 2005 to more than $6.5 million. Costcos pharmacies have
been featured in primetime news programs in nearly every major U.S. market where they
operate, showcasing that Costcos prices on generic prescription drugs are on an average 80
percent to 90 percent less than other stores. With 331 pharmacy locations, Costco filled 21
million prescriptions in 2005. Costco sold 25 million rotisserie chickens (500,000 chickens
a week)in the U.S. in 2005. Costco also sold over 1 million legendary $1.50 hot dog/soda
combos weekly. With 225 gas stations Costco boasted the lowest priced gas in nearly every
market where they operated and had sales of $3 billion in 2005 which was a 32 percent
increase from 2004. Costco also offers a one-hour photo lab, hearing aid, optometry and
print shop services. (1)
Support Activities
Costco considers their employees to be their best asset and therefore offer their employees
competitive wages and great benefits. Labor costs account for 70 percent of the companys
total cost of operations. Costcos average pay is $16 an hour, 42 percent higher than its
fiercest rival. (6) Costcos health-care benefits are available to most of its employees.
Costco covers about 92 percent of health care costs, and is considered generous by
industry standards. (4) Due to its great wages and benefits, Costco has extremely low rates
of turnover at 23 percent, while the industry average for full-time sales staff is 66.1
percent, according to the national Retail Federation. (4) Costco can pay its employees
more and therefore save on turnover costs and maintain an experienced staff because its
operations are efficient. Costco employs approximately 118,000 people. Approximately 45
percent of the employee base is part-time. (1)
Costco utilizes SPS hosted internet service to conduct electronic commerce with its
nationwide network of suppliers. SPS Commerce allows Costco to place orders
electronicallywith their suppliers. Costco and their suppliers gain maximum administrative
efficiency, reduce shared expenses and improve system accountability from using SPS
commerce technology. (3) In 2005 Costco spent a considerable amount of time and effort
evaluating and upgrading their internal controls to be in compliance with regulations such
