costco wholesale corporation financial statement analysis Case Solution
Margarita Torres had bought shares of Costco Wholesale Corporation in 1997 as asliceforher personal stockcollection. She further took to her holdings in the company, fromtime to time, when the company sold stock between the years 1997 and 2002, which she figuredwas a reasonable estimate.She hadn’t sold any of her shares, till that time.
She has been watching Costco grow from 265 warehouses to 365 worldwide, and showinga steady growth in sales revenue,from $21.8 billion to $34.1 billion, she wanted to know the factors directed to such satisfactoryprogress. She also sought to determine whether or not those factors would hold steady while the company moves forward.
At thattime, the company was a particulartype of retailers called wholesale clubs. Dissimilarto other retailers, wholesale clubs required customersto take out annual memberships to shop at their stores. Costco functioned as a chain of warehouses that effectively sold food and general merchandise at large range of discounts to member customers. The company had a capacity to upholdsmallmargins by selling items in a large amount, continuing with minimizing operating expenses and rotating inventory over speedily.
Costco’s nearbyrivals were SAM’S Club (a division of Wal-Mart) and BJ’s Wholesale, which both worked as wholesale clubs. Otheropponents included general discounters (such as Wal-Mart), country global of retailers (such as Sears), grocery stores (such as Safeway) and specialty discounters (such as Best Buy).
Torreswantedto invest and her priorityfor investmentwas Costco, as she was already a member of the company. She was impressedwith the company’s low prices and observed that her local Costco was always full of people.
She took a decision to research about the company from its annual reports. She concluded on the basis of her research that the company had marvelous potential forprogress, strong operational efficiency, a devoted team and a reasonably priced stock.
In July 2002, she gotwell-earned money from her investment and decided it was time to up-date her analysis toevaluate whether the company was still operating efficiently and steadily as pertheprevious graph.
Background of the Company:
Costco Wholesale Corporation was established in 1975 and ran its operation of wholesale clubs at California,United States of America. Their first club opened in San Diego and was named Price Club, operating on a membership basis. The club sold merchandises in bulk to small business owners such as beverages and tobacco products for resale in their stores. The club alsosold tocustomers who purchased products for their personal use.
After appreciable working of the Price Club, the club exhausted rapidly all over California and the West, along with other locationsin Canada and Mexico. After these extraordinary results, the company compounded with Costco in 1993. Efficiently performing the operations of the same business model as Price Club, Costco Wholesale was establishedin 1983 byJames Sinegaland Jeffrey Brotman.
The company was introduced publicly in 1985 and comfortably continued to makeinvestmentsfor expansion in the Pacific Northwest and Canada. In 1985, stock sales were $336 million and membership fees was just over $4 million.
Even though the company achieved immesely through their concept of wholesale clubs, serious antagonism was still following the company. Nevertheless, Wal-Mart came into the industry by creating SAM’S Club, Kmart opened Pace Clubs and BJ’s Wholesale initiated functions in the Northeast.
At the beginning of the 1990’s decade, the industry had a range of players who gave quite a challenge to the company. In 1993, a flood of consolidation took place, as SAM’S acquired Pace Club and Costco purchased Price Club (creating Price/Costco, which later shortened its name to just Costco). This two primary wholesaler, Costco and SAM’S, took positive control of 85 percent of the market.
Costco Strategy for Operations:
Costco was one of the leading wholesale clubs in the entire wholesale industry, having a sale volume of $34 billion in the year 2001. The variance of Costco and SAM’S is that Costcotargetswealthier customers, small business owners and middle-class shoppers. Nevertheless, Costco had 365 warehouses, which was lesser than SAM’S 528 stores.
Costco has a key pointis its history with Price Club. Costco took great pride in having invented and developed the club storage concept. The companyhas a valuable policy to charge for its products, which is not more than 14 percent of the distributor’s price. Incomparison, theretailer habitually charges 25 to 40 percent on thesame product.The management has mainly focused on supplying their product on lowest per unit price which means selling in bulk amount for running many operations efficiently. For example, a 100 fl. ounce container of Tide liquid detergent was sold at a traditional retailer for $8.99, or $0.0899 per fly.Costco offers the same detergent in a 300 ft. ounce bottle at thecost of $17.99 to customers or $0.06 Per fl. ounce. Costco was capableof selling at such a low per unit cost precisely because of its bulk packaging................................................
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