Category: Costco

Introduction to Costco Wholesale Corporation

In 1983, Costco Wholesale Corporation began its operations in Seattle, Washington. It is an industry that puts its focus on the operation of membership warehouses that sell high-quality merchandise at low costs to its members. Costco offers various merchandise that includes food, sundries, hardlines, softlines, and ancillaries. They also provide online services that are not found in any of its warehouses such as e-commerce, business delivery, travel and various others that are in certain countries (Mergent Online). Due to a high volume of competition in the retail industry, Costco has to compete with companies worldwide. Some of its general merchandise retail competitors includes Target, Kroger, and Amazon; however, its main competitors for warehouse club operations are Walmart, Sam’s Club, and BJ’s Wholesale Club.

Overview of Business and Operating Risks

Though Costco may be doing well in its operations, risks in any company are inevitable. The risks that Costco disclosed in its 10-K describe risks that can materially and adversely affect its business. There are three categories for risks: business and operating risks, market and other external risks, and legal and regulatory risks. These risks associated with Costco’s industry, in fact, may affect the auditor’s assessments of the risk of material misstatement and client business risk. A risk of material misstatement is Costco’s reliance on information technology. The process of transactions and managing of its business are dependent on the system. If Costco fails to properly monitor or update the system when needed, it can affect the financial and operational conditions and cause errors by employees. Any material disruption in these systems could lead to understatements and overstatements of its financial statements. Another risk of material misstatement that Costco faces are payment-related risks. Due to the numerous forms of payment, this increases the possibility of fraudulent activities. The payment methods that are accepted includes cash, checks, credit and debit cards, and proprietary cash cards which can lead to a higher fraud loss. Relying on third parties to provide transactions processing services can cause an issue if these companies become hesitant and unable to offer these services to us. Also, having their internal system breached can lead to a failure to accept payments, which can adversely affect the corporation. However, as they offer new payments options to its members, additional rules and regulations need to be implemented to reduce fraud (Costco Annual Report, 2018).

Market and External Risks Facing Costco

Costco also faces client business risks. One is the economic factor, domestically and internationally that may adversely affect its business. Higher energy and gasoline costs, inflation, unsettled financial markets, levels of unemployment, and other economic factors could affect the demand of its products and services. These factors could increase its merchandising costs and selling and general and administrative expenses. Costco is required to comply with federal, state, regional, local, and international laws and regulations and failure to do so could impact its financial and operating conditions. This is another risk that it face regarding client business risks. These laws and regulations includes the use, storage, discharge, and disposal of hazardous waste and materials and other environmental matters. If Costco do not abide by the laws, it can bring forth harm to its environment and will have to pay penalties. Another risk that is associated with client business risks is the vendors. The company face vendors being unable to supply merchandise in a timely manner at competitive prices. This results in decline in sales and profit margins. Its inability to acquire satisfactory merchandise on acceptable terms or the loss of key vendors will negatively affect the company. Costco may have problems with the suppliers that can possibly delay or prevent delivery of merchandise. This risk could lead to tarnishing the reputation and the impact on the company (Costco Annual Report, 2018).

Understanding Costco’s Business for Effective Auditing

It is vital for an auditor to know its company thoroughly. This will help the auditor to properly do the audit by understanding Costco’s business and industry. By management being held responsible for establishing and maintaining adequate internal control over financial statements, they can ensure that it is in accordance with GAAP. In addition, understanding its business operations and processes can be effective information in doing the audit. Gathering as much information about the company as possible can help the auditor to analyze the operations well.

Costco’s Global Operations and Membership Model

Costco is headquartered in Issaquah, Washington but holds different operations in numerous countries. As of September 2, 2018, Costco operated 762 warehouses worldwide, including 527 in the United States, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in Korea, 13 in Taiwan, 10 in Australia, two in Spain, one in Iceland, and one in France (NetAdvantage). Also, the company operates e-commerce sites in the United States, Canada, the United Kingdom, Korea, Taiwan, and Mexico. Costco attempts to make up for its revenue by charging an annual membership fee of $55 for business, business add-on membership and executive membership of $110, offering products which the groceries account for more than half of its revenues, and doing operations domestically accounts for about 55% of it total revenues (Nasdaq). In the Stock Analysis on Net report, it showed the significant asset: cash and cash equivalents- $6,055,00; merchandise inventories- $11,040,000; and net property and equipment- $19,861,00. The key suppliers that are important to Costco are the food processing, office supplies, and furniture and fixtures industries (CISMarket). Within the Form 10-K, some forms of external financing are long-term debt and short-term borrowing that helps to sustain the needs of the company. Costco is a big corporation that is continuously evolving. It has several subsidiaries- Costco Wholesale Korea, Costco Wholesale Membership, Inc., NW Re Ltd, Costco Costco Wholesale Canada, Ltd., and Costco Wholesale Taiwan, Ltd. This means they control companies by owning 50% or more of their voting stocks.

Executive Compensation and Governance

Costco is a company that has beneficial programs that motivates its employees to participate in its growth and development. The President and Chief Executive Officer of the company is W. Craig Jelinek. At the end of the fiscal year for 2018, Mr. Jelinek earned a cash bonus of $97,000. During the duration of the year, the total compensation is $7,408,513. His salary for that year totaled to be $800,000; however, the most significant component of his compensation is stock awards with the amount of $6,295,829. Stock awards represents the grant-date fair value of performance-based RBUs. The Executive Vice President and the Chief Financial Officer of Costco is Richard A. Galanti. He received a bonus of $59,040. Mr. Galanti’s compensation totaled to be $4,286,893. At the end of the fiscal year, his salary totaled to be $740,000; however, his most significant compensation is also the stock awards of $3,150,444. Both, Jelinek and Galanti attained the performance criteria that allowed each of them to execute their duties well (Costco Proxy Statement, 2018).

Auditor’s Perspective on Costco’s Financial Health

The auditor must know who is in control or the company in which they are auditing to ensure there is not any material misstatements. The auditor also must be able and willing to perform a preliminary analytical procedures to better understand Costco’s business and industry and to assess client business risk. The auditor must compare Costco’s ratios to the industry to provide insight on how the company is performing. Compared to the industry, the company is doing well. This is represented well in the probability ratios. The return of assets (ROA) is 7.3% while the industry is 4.0%. For return on equity, the Costco is twice as high as the industry which it increased by 16.4%. They are performing well because they are making some sort of profit. There is significant changes in some of the ratios; however for some, there is little to no changes from years. While ratios such as the current ration and quick ratio would not affect the auditor’s assessment. That is because it had no change from the previous to the current year. Costco’s account receivable turnover is 91.3 which is higher than the industry ration of 31.7x. This demonstrates that the company is faster at converting its accounts receivable into cash. From analyzing the ratios, it is evident that Costco is more liquid in earning cash and it has the ability to meet its long-term liabilities. Lastly, the industry’s 23.9% of gross profit is greater than the company’s ration of 13%. Financially, Costco did not do so bad considering the previous year, as well as, the industry (NetAdvantage). These differences results in a good chance of affecting the assessment of the auditor on risk of material misstatements.

An auditor must understand a client’s financial statements such as the balance sheet and income statement. For instance, last year’s total assets and liabilities were $36,347,000 while this year’s total is $40,830,000 which signifies an 11% increase. This increase on this account can materially affect the financial statement. The auditor should be cautious when it comes to these occurrences because they often involve manipulation in accounts. Also, a high risk of material misstatement can be considered since there was a significant change in cash and equivalents of 33%. From this, it can be implied that the company might have a problem in converting accounts receivable into cash. As for the income statement, the significant changes can be found in the expenses and net sales. These accounts are the ones that reflect the financial condition of the company. They both increased by 10% so it is fair to assume a medium risk of material misstatement.

After completing the audit for Costco and having a complete understanding of the industry, as well as, the financial health of the company, Costco could have a low acceptable audit risk and a low risk of material misstatement. Though it is a very large company, its financial statements are presented fairly in all material aspects. The accounts were carefully analyzed and confirmed by higher managers. The realizable value of inventory, however, can be looked as a higher risk because the company is worldwide. Costco is selling a variety of high-quality products for a low price.

The auditor will have to perform numerous steps in performing the audit. As stated, gaining an understanding of the company is vital to learning how the company runs. However, all procedures must be done with cautious to thoroughly investigate and analyze the fluctuations on different accounts. Costco will need to implement the audit 1 evidence mix- extensive amount of testing controls and substantive analytical procedures and small substantive tests of transactions and tests of details of balances. By doing this audit plan procedure, its financial report will be accurate and contain the appropriate information.

The article basically discusses the financial statements’ analysis of three companies, Walmart, Target, and Costco; though, the main focus is laid on Walmart. In the article, one would find the discussion of the types of queries that are bolster the management of any firm to gain confidence for the revelation of the financial information. Moreover, the four stages for analyzing the financial statements are also elaborated, following the analyses of the above mentioned firms through the typical financial indicators including profitability and turnover.

First, the six kinds of questions for the management regarding the financial statements are; “recall, comprehension, application, analysis, synthesis, and evaluation”. Of these six, the last three can assist the executives to identify the quality of the financial info disclosed.

Questions relating to ‘analysis’ relates to the firm’s risk and return metrics, ‘synthesis’ relates to facts and perspectives of the firm, and ‘evaluation’ relates to the resolving of the dissimilarities of opinions the firm faces. In addition, the author states that the expectation of excellent queries can really help the company prepare the reports easily and honestly. Walmart has been selected as an example to demonstrate the overall financial statements approach; which has been performing outstandingly since 2002, and Costco and Target are used as yardsticks for the comparison.

The analysis of the financial statements is done through four stages:

1. – Data adjustments stage in which the measurement errors are curtailed by the use of accounting rules, knowing the off-balance sheet entries and useful or un-useful assets. Further, financing and operating activities and effects are differentiated along with the adjustments done for the capitalization of operating leases and R&D costs.
2. – Ratio analysis stage revolves around the usage of the market-based numbers and the rations of financial statements in order to determine and compare the companies in terms of profitability, debt, risk, efficiency, etc. The benefit for using the ratios is their simplicity and ability to generate crucial queries, because these ratios are segregated into different categories such as, return, profitability of sales, turnover, and risk.
3. – Accounting Quality Analysis stage determines how effectively the company passes on its financial standing and performance to investors through accounting reports. It is to be ensured that the information in the financial statements is based on truth and fairness. Quality can be determined through both qualitative and quantitative methods, of which qualitative method deals with assigning scores to the company based on its activities regarding accounting failures.
4. – The last step is of Valuation, in which the previous stages determine the value approximation; moreover, the differences between the management and investors are determined by the gap between the actual values and market values. The smaller the gap, the better for both the investors and the company; otherwise, investors could bear the loss and may take some action against the company.

The authors mentioned the points regarding the valuable questions incurring within the organization that help it to develop confidence when disclosing the financial statements information. I totally agree with this, the reason being that the questions relating to different kinds such as analysis, synthesis, and evaluation, they all give an overview of how the organization is coping with the financial data; moreover, it respectively provides certain key questions and reminders that might be missing and might be overcome by the management for the sake of disclosure without any mistake and blunder. And this is true that when the organizations consider all these important queries and reminders, they also manage to provide the financial information honestly, fairly, and truthfully that becomes reliable and helpful for the investors.

As far as the steps for making financial statements are concerned, the first stage provides the company with a platform to reduce the ambiguity and errors that might occur, and for that the organizations must abide by the accounting rules and regulations. For instance, off-balance sheet activities – if going fine – may be mentioned in the reports for good impression, but when the company is bearing a loss and threat, it might adjust some things as to leverage the effects of benefit and loss. There is nod doubt that ratio analysis provide quick and simple information regarding the company’s financial standing; moreover, comparisons and changes over certain period of time can also be determined. But they might fail sometimes especially in case of prediction for the upcoming information, it is because of the varying changes that occur internally and as well as externally.

Since, the investors seek for the accounting quality and proper accounting practices by the company, so having a sound accounting quality can really put and organization ahead of others; moreover, this criteria keeps the company on its toes to abide by the fair rules and practices. Finally, valuation is very important aspect for the companies because the differences between the firm’s actual figures and market figures can put the company on the beneficial or harmful size, based on the intensity of the gap. This stage is very crucial and hence compels the firms to ensure the fair and honest accounting practices within it and to carry on the first three stages effectively.

Now let’s review and analyze the financial standing and changes that took place at Walmart and compare them with its competitors – Target and Costco. Walmart has been performing outstandingly since 1995 till 2008, due to its USP (unique selling proposition) of ‘always low prices’, along with the sensible and handy investments. Walmart’s sales kept on increasing along with the average of 13% rise in revenues from 1998 till 2007, its sales in 1998 were 2.4 times more than the combined sales of Target and Costco, but amazingly the stock prices were not rising, and one reason for this is the poor performance by the stock markets which fell down greatly.

It means that the investment by the investors in purchasing, shares and other stocks of the company was stagnant and kept and a lower level. The company’s ROE (return on equity) was in the low 20’s due to the ineffective investment by the investors in the stocks. ROA was declined from 1998 to 2007 due to the low profit margin (as compared to Target) that incurred due to lower income and increased investment in the total assets, and also because of the declining trend in the turnover ratio.

Increasing and positive trend is seen in the profitability part of Walmart, and that was due to the efficiency brought in by reducing the cost of goods sold and selling, general and administrative expenses. Where as, Target’s profit margin increased sharply due to the decline in SG&A expenses and the total operating costs. If we see the overall changes that occurred at Walmart from 1998 to 2007, the financial indicators are more or less the same, with an increase in profit margin due to increased sales, but reduction in Assets turnover due to the inefficient utilization of assets and making the most of them. Walmart mainly focused on keeping the overall costs down, as to increase the productivity level; it reduced the sales costs and SG&A costs to a great extent that bolstered it to achieve the higher income level. Not only this, low costs relating to insurance, marketing, and global sourcing done by Walmart also helped.

Walmart’s sales increased by 238%, which is much more that Target’s 130% and Costco’s 194%; hence capital investments were required. But since the company wasn’t getting enough investment, it cut down the asset turnover rate. The productivity at Walmart was low due to the increase in new stores that were being located in different areas as an act of spreading the firm and gain more market share, along with the low skilled personnel. The international investment, no doubt, boosted the performance and productivity from 2000 to 2007; but at the same time, it reduced domestic store’s profitability and turnover.

Moreover, the depreciation rate has been increasing in the domestic stores and clubs, and same is the trend with international market of Walmart. Talking about the Accounting quality, we can determine, from the financial indicators, that all three companies were not violating accounting rules and were not manipulating them from the period of 1999 to 2007. Walmart’s common stock improved due to the sustainable trend in the ROA, which also enabled faster growth.

After reading and analyzing the article, we can say that the authors have emphasized on the importance of questions regarding the accounting rules, standards, practices, and financial information disclosure that actually boosts up the confidence level of the management of the firm and keep them on track by ensuring the financial and accounting practices in a true and honest way. The authors argue that the development of software tools and questions must be assigned to the specialists, so that no compromise is done on the cost of accounting quality.

Moreover, authors also elaborated on the individual role and importance that is played by the four steps in creating the financial statements; of which the last one of ‘valuation’ is very important that can decide the company’s and investor’s benefits or losses. In addition, each step depends on the other one, hence letting the firm to perform each step carefully and to the fullest. Walmart, which was ranked the top company of the world in 2002 till 2005, and in 2007, has adopted the strategy to lower down its costs and increase sales, hence resulting in the increase in profitability and productivity.

References

De Mello-e-Souza. C. A. and Awasthi. V. N. (n.d.) Probing Financial Statements, In a Post-Sarbanes-Oxley World. Strategic Finance.

Introduction

This paper seeks to compare Apple and Costco to decide which of the two companies is better to acquire for investment purposes. The financial statements for the last two years will be used to compute their profitability ratios and operating costs in relation to revenues and assets as basis for making a decision

Analysis and Discussion

Comparative profitability of Apple and Costco

Based on their profitable ratios, Apple is more profitable than Costco. Apple has a return on equity (ROE) of 23% in 2008 and 20% in 2009, or a slight decrease from the preceding year. Costco, on the other hand, has an ROE of 14% in 2008 and this also decreased to 11% in 2009. Thus, it could be assumed that the decrease in profitability of the retail industry is external in a cause. In other words, the global financial crisis has affected the retail industry because of the lower purchasing power of customers for the company’s products and services in 2009 as compared to 2008. See Figure 1.

The average return on equity (ROE) is higher for Apple than for Costco for the past two years. In fact, the difference is almost doubled in favor of Apple. It may be noted that return on equity uses the formula where net profit is divided by the total stockholders’ equity. When compared to an average rate of 0.25%, if money is invested in a bank, Apple’s present average ROE of 12% still makes it to more than twenty times as against Costco and therefore investors have reason to acquire the company or stay with the company.

Although Costco’s average ROE is still high at 6%, which is more than 20 times over that risk-free rate, it is more profitable to view Apple as it has higher ROE. The 0.25% benchmark is the US base rate of the Federal Reserve Bank that could represent the risk-free rate investment in the US (Housepricecrash.co.uk, 2009). The same could be used as an estimate of the opportunity cost of a company making an investment by acquisition or otherwise.

Comparative operating Cost of Apple and Costco

The operating costs of the two companies are also important in determining their profitability. The accounting concept provides that net income is computed by deducting the cost and expenses from revenues. Thus, the higher the operating cost in relation to revenues and all other things being held constant in relation to sales, the less would be the profitability of a company. Impliedly, between the two, Apple has better operating cost in relation to revenues than Costco because the former has higher profitability ratio. Relating operating cost to revenues in terms would have the same purpose as relating net income to revenues.

Another way of viewing also the relationship of cost to revenues is to relate costs or net income, to the total assets employed by the company in arriving at the net income of the companies. As stated earlier, Apple has a higher ROA than Costco and therefore necessarily, Apple should have less operating cost in relation to total assets as compared to Costco. In other words, Apple is more effective.

Conclusion

Between Apple and Costco, the first one should be chosen, as the same is more profitable as measured in terms of both ROA and ROE for the last two years. But for purposes of acquisition, what is profitable is not necessarily the better one to acquire without other information on the acquisition prices of the two companies. Thus, the more profitable may turn out to cost more, thus the decision should be compared with the acquisition cost or price so that the net advantage or net gain should be compared before one decides which of the two companies to acquire.

Reference

Apple (2010) 10-K Annual Report. Web.

Costco Whole Sale (2010) EC Filings 10-K Annual Report. Web.

Housepricecrash. (2010). US Federal Reserved Base Rate. Web.

The Costco Lenders

At the end of fiscal year 2009, Issaquah (Washington state)-based Costco Wholesale Corp. operated 567 membership warehouse-type retail stores all across North America, Mexico, the UK, and northeast Asia, besides having a solitary foothold in Australia. It stands to reason, therefore, that requirements for trade credit tend to be dispersed rather than centralized. That fiscal year, the company had sixteen letter of credit, revolving credit and commercial paper facilities with as many financial intermediaries in seven countries (Costco Wholesale, 2009, pp. 70-71). Within the limits of this short paper, we cover the Royal Bank of Canada and an undisclosed Japanese investor as two examples of lenders.

The Stock Issuer and Transfer Agent Financial Intermediary

Mellon Investor Services is the investment bank affiliate that issues Costco stock. Mellon Bank (2004), through subsidiary Mellon Investor Services (MIS), issues, sells and otherwise administers shares of Costco for investors wishing to acquire as little as $250 worth of shares and as much as $250,000.

The Role of Costco Financial Intermediaries

The Royal Bank of Canada (2003) agreed to provide the 77-outlet Costco Canada a C$60 million credit facility that could be drawn as advances by Canadian stores, U.S. stores, guarantee letters, letters of credit and bankers; acceptances. Interest accrued from day to day while advances were outstanding; Costco (2009) reported cost of Canadian credit lines at 1.76 percent per annum, towards the lower end of the 0.64%-3.05% range for facilities arranged elsewhere in North America, Japan and in the UK. Royal Bank of Canada agreed to deposit advances directly to Costco at the designated branch of account on notice of formal intention to take an advance.

Lead time depended on whether the advance requested was at least $100,000 (and multiples thereof) or $10 million (and multiples). Defaults incurred a penalty of Prime Rate plus 2%. Further, the facility protected the bank from exchange rate fluctuations vis-à-vis the U.S. dollar with a provision that Costco would pay on demand any amount exceeding the principal if the excessive drawdown was caused by currency movements.

The Japanese example was a case of the wholly-owned subsidiary in the country issuing several promissory notes via a private placement in October of 2007. A private placement usually means that the lender was an individual, family or fund that did not wish to be identified. The total placement amounted to $69 million, with an eight-year term (and therefore maturing in 2017). Costco Japan bore costs of 2.695% per annum in order to retire “…2.07% Promissory Notes in October 2007 and for general corporate purposes…” (Costco, 2009, p. 40). Given that the new promissory notes cost more, the company evidently needed working capital more than it needed to retire the 2.07% Promissory Notes.

At Mellon, a concessionary purchase scheme permits depositors of the bank to reach the minimum dollar value by committing to have ten monthly payments automatically debited from their accounts each month. MIS also accommodates those who already own some stock by accepting orders for new holdings in one-tenth increments of the intended value, again via automatic deduction or by sending in a check or money order.

Other small shareholder services include reinvesting dividends, recordkeeping and facilitating the transfer of some or all shares to another person who opens an account with the administrator. Where Costco is concerned, MIS is an intermediary that effectively broadens the stockholder base with “retail” transactions of as little as 50,000 shares (assuming the par value of $0.005).

References

Costco Wholesale. (2009). Annual report 2009: Year ended 2009. Issaquah, WA: Costco Wholesale Corp.

Mellon Bank N.A. (2004). The investor services program for shareholders of Costco Wholesale Corporation. Web.

Royal Bank of Canada. (2003). Revolving credit agreement between Costco Wholesale Canada Ltd. and Royal Bank of Canada. Montreal: Royal Bank of Canada. Web.

For a corporation to succeed, the management needs to have sufficient knowledge on financial concepts. Companies that apply these concepts manage to outdo their competitors as illustrated by Costco Corporation. Costco Wholesale Corporation runs 592 warehouses across the globe (Brigham & Houston, 2009).

They sell various product brands together with the company’s own Kirkland Signature brand, which they sell at a discount to some individuals and businesses. It is the biggest and the most financially successful corporation in the industry.

It success is attributable to proper management since it carries its operations in large economic scales. Costco possesses a reasonable market share among its competitors because it implements the right accounting concepts, which include appropriate financial ratios, proper management of cash flows, and effective capital budgeting techniques.

Costco uses all the accounting ratios that help in evaluating the performance of the company for a specific period and those that compare its performance against their competitors. Efficiency ratios are used to determine the effectiveness in using company assets and management of liabilities. Currently, Costco efficiency ratio is at 1. 05 which is positive rate for meeting current liabilities.

Liquidity ratios determine the ability of a company to meet the obligations within set deadline. Costco’s liquidity ratio as given by Acid test ratio stands at 0.47. Although this ratio indicates the ability to convert asset into cash, it needs improvement to be proportionate to real estate possessed. Leverage ratios relate to debts of the company that is reflected in the balance sheet.

Profitability ratios measure on the effectiveness of business operations by determining how the company is running ascertaining whether it is improving or declining as compared to other forms in the industry. These ratios are given by comparing the sales and anticipated profits calculated using margin and mark-up. The company’s mark-up is at 15%, which facilitates low cost of the products thus increased sales and profitability.

Costco management controls the movement of fund in and out of the business accordingly. To achieve this, they ensure that there are more funds moving in the business through sales and debtors than the funding moving out of the business through purchases and creditors. They develop means of speeding up receipts from receivable and suggest ways to access payment through banks at customer’s authorization.

They also tighten credit requirement to discourage credit sale, and advertise aggressively to increase sales. The management analyzes and manages cash flows at reasonable intervals. This analysis facilitates the company to have enough cash in the current period to cover financial obligations for the next period (Brigham & Houston, 2009).

They utilize accounting software packages and other websites offering free templates that help in producing cash flow statement. This is essential for the company to understand the amounts flowing in and out of the business and make necessary provisions to cover for deficits.

Capital budgeting is a process that helps the management choose between alternative investment opportunities and allocate available resources to the most viable projects. Businesses have alternatives for investing the scare resources. The managers have the responsibility to choose the most viable investment that will increase the shareholders’ wealth.

They should invest in projects that will have higher returns on capital in future. To make decision on the most appropriate investment, the management must evaluate the future value of investment and spend on the project with potential to increase shareholders funds (Ross & Westerfield, 2010). The IRR method analyzes the return on the investment by comparing expected return of the investor from different projects.

Costco uses various method to analyze and determine future value of a project. Net present value (NPV), payback period, and internal rate of return (IRR) are the main options available. The net present value estimates the current value of the future expected cash flows. The management chooses the investment with the highest NPV.

“The IRR method calculates the return on the investment and compares to what the investors get in future” (Ross & Westerfield, 2010). The payback period calculates future returns by determining the amount of time taken before the company recovers the amount spent on investment in the project (Ross & Westerfield, 2010).

The company restricts debts and equity, but the management ensures that these variables are maintained at the most economic level. Restrictions are in terms of creditors instituted by the tight debt requirement and adoption of appropriate capital budgeting technique that limits the management to invest in projects that will give hire returns.

References

Brigham, E. F., & Houston, J. F. (2009). Fundamentals of financial management. Mason, OH: South-Western Cengage Learning.

Ross, S. A., & Westerfield, R. W. (2010).Fundamentals of corporate finance (9. ed.). New York, N.Y.: McGraw-Hill/Irwin.

Introduction

The retail business sector showed its flexibility regardless of hard economic times, enhanced rivalry and repositioning goes ahead of its key competitors last year. Monetary outcome was a blend of desirable and undesirable, but the warehouse industry continues to grow. The article reviews the formula used by Costco in order to remain the leader in the retail sector.

From the article it is vivid that Costco’s sales increased by 2%, but the financial analysis section needs farther discussion because the information provided is uncertain, and the model applied by Costco is perplexing (Debbie 2). Basically, this paper presents summary of the article, additional research on Costco’s operations, relevance, contribution to knowledge and lastly presents issues that the author could have discussed so as to farther reinforce his analysis.

Summary

After a decade of growing into emerging markets originally dominated by industry competitors, Costco appears to be operating keenly in spite of the ongoing headship as the retail business generating the largest revenue. Of the 27 warehouse outlets organized in 2011, approximately 45% were based on emerging markets, different from the average of 65% during 2010 and 80% during 2009. The economic slowdown and instituted rivalry have resulted to decreasing revenue for Costco in emerging markets (“Costco Keeps” 1).

The author asserts that Costco is still broadening its share and drawing nearer to Sam stores in number of outlets, with 423 outlets globally currently, of which 315 are based in the U.S. Also, revenue from sales rose by 8% to $414,200 million. Costco’s winning method is proving hard for Sam and BJ stores in regions where the competitors continuously overlap (Debbie 2).

With total warehouse revenue the largest within the retail sector, at $114,000 thousand in the U.S compared to $57,000 thousand at Sam stores and $40,000 thousand for BJ stores, Costco struggles towards fine-tuning a good formula established by providing goods at low price with a prominence on prime products. In foodstuff, this is evident as this offering is provided as pure wine (“Costco Keeps” 2).

Background

Costco’s equivalent-unit sales volume increased, shifting to 6 percent from 4 percent. For both BJ’s and Sam’s stores, sales volume was at 2% and discouraging, the two wholesale stores experienced a decrease from 2010 outcomes. The disappointing situation encouraged BJ and Sam stores to adopt emerging formulas to increase revenue from sales and minimize operational costs, a setback evident also in Costco due to its high expenses.

Consequently, growth efforts declined a bit last year, with increased attention to expanding current outlets and merchandise. On average each of the two stores added 19 fresh outlets in the U.S in 2010, while Costco added more than 27 stores. Sam stores started 21 units whereas BJ stores introduced 17, including merchandise presence in Atlanta (Debbie 3).

In 2010, the three stores had approximately 964 local stores in operation producing $70,000 million in sales. At approximately 1,050 units, the problem of concentration emerged, yet all retailers were able to successfully increase revenue and membership, regardless of many players in the retail industry.

With shifts toward warehouse outlets increasing to the disadvantage of conventional supermarket stores, it seems warehouses will keep on growing food market and membership share. Costco management has opened stores in regions with about 120,000 people, a lesser population for the approach than initially held (Debbie 4).

Discussion

Costco has changed from “generating low revenues” to “making large cash” in cities. Its business and marketing strategy has proved hard for competitors especially in emerging markets. As Costco penetrates market that has been dominated by Sam and BJ stores, it is going to reduce their business share because of Costco’s excellent products (“Costco Keeps” 1).

Fresh foodstuffs remain one of the highest-functioning sectors for Costco group, with revenues amounting to 9% in 2010 and 9.5% in 2011, particularly from meat and meat products. Foodstuff sundries led to the ultimate margin of 6.2%, whereas soft drinks have declined recently. Approximately 60% of Costco revenue is from supermarket-based goods and Costco benefits from cost-sensitive client’s retail stores as a substitute formula (Debbie 2).

Personally the author is well versed with the winning formula applied by Costco. From the article, private labeling technique has been successfully applied in foodstuff to increase revenues at Costco and has also earned client trust especially for the Kirkland products. The concepts presented in the article regarding selection of an appealing formula in the retail industry are great addition to literature.

The marketing model utilized by Costco locks out other rivalries from the limited market and when applied nicely can open up great opportunities for retail businesses still struggling to break through. Ideally, the article is relevant since it has effectively explained the previous, current and expected future position of Costco in the retail sector, with high emphasis on market segmentation (“Costco Keeps” 2).

In conclusion, even with increased focus on merchandise needs, foodstuffs continue as major portion of the mix. Foodstuff and sundry represent about 60% of revenue.

Works Cited

“Costco Keeps Formula as It Expands.” Retail Features. Print, 30 January 2012: 1-2.

Debbie, Howell. “Clubs Expand Despite each other: Major players push Differentiation – Special Report – warehouse clubs.” DSN Retailing Today. Web. 1-5.

Situation Analysis and Industry Analysis of Costco

Costco is the largest discount warehouse in America, with several overseas branches in Canada, and Europe. It also has interests in the discount warehouse business in Mexico where it has a fifty percent stake in the Mexican Costco. Discount warehouses are a special kind of retail business where customers buy an annual membership in order to enjoy special discounts on all products.

Most of them operate on volume basis hence they generate income based on the sale of high volumes of the products in stock. Costco, unlike many retail outlets such as superstores and supermarkets, keeps a small inventory to simplify its business system, which requires high levels of efficiency in order to work as planned.

The existence and growth of the discount warehouses in the retail segment shows that it is a business model that is able to weather the storms of economic downturns such as those that the world has dealt with in the last five years. The trend that the segment possesses shows that there is still a huge potential for its growth, not just in North America, but also in the entire world.

The normal trend for businesses is to diversify in order to have a strong portfolio and to keep abreast with changing patterns as a way of assuring long-term profitability. The three key players in the segment each has its own competitive advantage and it should not be surprising if more players with experience in the retail segment jump in to cash in on the discount warehouse segment as part of their diversification strategy.

Problem Statement and Strategy Analysis

There are several lessons to learn from Costco’s business strategy. In order to decipher the elements of its business strategy, there is a need to look at its operational and management models. These two parameters will provide the basis for understanding the company’s strategy.

Efficiency is the critical component behind Costco’s operations. The business seeks to provide its members with the best prices based on low operating costs achieved by efficient operations.

The company sets its markup at about fourteen percent, compared to other wholesalers and retailers who set theirs at between twenty to fifty percent. This nature of pricing requires the stocking of products that the company can sell at significant discounts. As a strategic consequence, Costco can only stock a limited range of products, which meet this criterion.

The third element of Costco’s pricing is treasure hunt merchandising, which is the short term stocking of unique goods when available. This strategy serves to increase the urgency with which shoppers approach purchasing of the products at Costco because if they miss the opportunity to get those products, then they may never get the opportunity to get them at those prices.

The strategies employed by Costco make direct mail advertising the best way to reach its target customers with new product offerings and discounts available since all its members register before they can enjoy services of the company. This means that the company does not spend as much money on advertising as other retailers. This further helps to reduce operational overheads.

A key part of Costco’s strategy is its warehouse management processes. Costco fully embraces strategies that reduce its overheads such as locating the warehouses in locations with lower real estate value as compared to other retail stores. It also avoids using fancy branding and product placement methods. These measures, among others, make it possible for Costco to keep its prices down.

The management strategy of Costco aims at retaining organizational history and facilitating the development of local talent to ensure that the company retains the best talent within. The company has a strong history of promoting its employees to the highest positions internally. This policy makes the company attractive for the employees because they can plan their careers based on a certain level of assurance that if they perform well, they will get ahead in their jobs.

The company is pursuing various growth strategies to expand its operations. This includes opening new stores and expanding the floor space in existing facilities. There are new opportunities opening up for Costco in South America, Europe, and Asia where the company is developing new businesses.

Alternatives and Recommendation

In order to improve its business, Costco has two opportunities. One of them is to leverage its position in America and ensure it keeps ahead of the competition. So far, the company’s chief advantage is its historical position because it has been in the market longer than all the competitors have.

This means that it has been able to develop a strong knowledge of the market. However, if the company does not pursue aggressive market retention strategies, competition may edge it out. Both Sam’s Club and BJ’s Wholesale Club have come into the discount warehouse business with unique competitive advantages, which can upset Costco’s leadership position.

Costco needs to develop stronger loyalty programs to rope in its long time customers to ensure that the competition does not take them away. One potential area is the payment of the annual membership fees. The company could consider special waivers for members who have been part of the company for say ten years, and special waivers for those rejoining the company after some time without active membership.

The second option to pursue is to develop overseas business and to use the profits from there to shore up any shortfalls that may arise in the American market in the longer term. This option assumes that the company cannot do much to counter the emergence of competition, or it may be more expensive to try to keep ahead of the competition than the profits such efforts will bring in.

Since the company cannot use options such as the expansion of its product range, or a change in the locations of the warehouses without fundamentally altering its business model, it seems that geographical expansion coupled with a strong online business model holds the key to future profits for Costco.

Conclusion

In conclusion, Costco has had a brilliant run in its operations so far. This is commendable. However, it can no longer sit and enjoy its exploits because it will be dealing with stronger competition in the near future. This calls for a change in business strategy.

The most sensible thing to do is to leverage its current position in America by taking advantage of its long history and to pursue an aggressive overseas expansion strategy. There are many business opportunities opening up in Asia and South America alongside Europe that have the potential of assuring Costco’s of long-term profits.

Introduction

Costco is a club with enrolled members with different specialized units that offer different but well-known products to its members in one convenient locality. The aim of Costco is to offer its members the lowest prices possible on quality goods. All the goods offered by Costco are guaranteed and of the best quality possible (Costco.com.au, 2013).

History of Costco

The exclusive membership club, Costco, came into existence in 1976 when Sol and Robert Price solicited for funds from well-wishers and raised 2.5 million US dollars. In the same year, they put up Price Club, which was the first establishment (Costco.com.au, 2013).

Price Club accommodated the commercial clientele only and initially operated in a refurbished airplane garage along Morena Boulevard in California (Costco.com.au, 2013). The business did not do so well in the first year of operation but picked in 1979 by acquiring two locations and realizing over one million US dollars in profits (Costco.com.au, 2013).

The Price establishment offered its stock to the public on 12 July 1980 and two years later, a meeting brought together Jeff Brotman and Jim Sinegal that saw the drawing up of plans to set up a fresh wholesale establishment (Costco.com.au, 2013).

In 1983, Costco establishment came into being in Seattle, Washington and saw an increase of two more locations in Portland and Spokane in the same year (Costco.com.au, 2013). In 1984, the fourth Costco establishment opened in Salt Lake City in Utah with the establishment hitting the one billion dollar mark in sales the same year. By this time, the company operated in five states of America (Costco.com.au, 2013).

In 1985, Costco offered its shares to the public. As the Price establishment celebrated a decade in operation, Forbes Magazine declared it the ‘Best Managed Company’ in 1986 (Costco.com.au, 2013). In the same year, the first pharmacy opened in Portland, Oregon as the Tukwila, WA establishment housed the first fresh meat unit (Costco.com.au, 2013).

A year later, Costco set up its first produce and bakery units as both establishments opened their initial optical laboratories. The year 1988 witnessed the winding up of Mid West Division with shift of focus to East and West Coast sales (Costco.com.au, 2013).

By 1989, Costco had over 46 establishments, as Price Club became the third most lucrative firm in the United States of America. During the same year, the first one-hour photo studio opened in Chula Vista house. In 1992, Costco opened its 100^th establishment, located in Miami Lakes in Florida State (Costco.com.au, 2013).

The year 1993 marked a decade since Costco opened and as the celebrations went on, the shareholders of Price and Costco companies approved a merger of the two companies to form PriceCostco Company (Costco.com.au, 2013). The name changed to Costco in 1999 and initiated the two percent reward program, which saw the increase in Executive membership the following year as it started its travel enterprise and opened up two units in Texas (Costco.com.au, 2013).

The company marked its 25^th anniversary in 2001 with the shifting of its Canadian business to a regional office in Ottawa. In 2002, Costco set shop in Kansas and Indiana and marked the 36^th state of its service in the United States of America. As at 2011, Costco had 592 warehouses all over the world (Costco.com.au, 2013).

Costco Today and Its Location

The company has set up warehouses outside the United States of America namely in Mexico, United Kingdom, Taiwan, Korea, Japan and Australia. The company serves a membership of 131 million people in its various locations with over 155, 000 staff members distributed in its various warehouses. (Costco.com.au, 2013)

References

Costco.com.au (2013) Costco History. Web.

An invoice payment refers to a situation in which a business provides its services or conducts its transactions on credit. The seller mainly sells the goods but receives payment at a later date.

Whenever invoice payment guidelines are appropriately set, the customers make their payments on time and in accordance with the set guidelines. In a situation where a customer fails to stick to the required terms, essential measures are taken to ensure he or she checks on his or her payment discipline.

In this case study, we are taking a consideration of the business activities between company A and Costco Company. The major transactions made involve the selling of DVDs and games. However, it has been noted that the payment procedures are not appropriately followed by both the companies. In order to solve this problem, proper strategies need to be employed.

To begin with, company A will have to track the credit limit. This will involve an analysis of the outstanding credit before delivering the next sales. The findings will be presented to the company’s management staff who will take the necessary action.

A notification sent to the staff ensures a review of the procedures initially set and corrects any uncertainties that may arise. This will avoid future problems in invoice payment. Furthermore, this will enable a review of the invoice payments and correction on the outstanding credit.

Additionally, procedures that will provide a way forward on handling of delayed payment on invoices should be laid down. The staff should come up with procedures that will prevent customers from delaying delivery of payment on purchases made. This will enable the customer to prepare payment in advance in order to avoid consequences arising from late payments.

The company can also evaluate its partner’s financial condition. If institutions are facing challenges in implementing their mandates, it goes without question that they will have problems paying for their transactions. Evaluation of the financial situation of the partners will thus enable the company to establish the financial situation and set required measures to be undertaken in order to enable them honor their payments.

Negotiations on new payment terms may be another strategy to be considered. By reviewing the payments made and comparing them with the conditions initially set, the company can know if there may be need to renegotiate for new terms. The customers may be finding it hard to bear with the existing terms as a result of financial crisis. To avoid losses, new terms of transacting business can be negotiated.

The new terms will enable both parties to enjoy a comfortable position. Company A may also consider strategies that enable the customer to deliver payment with ease. This may include an earlier preparation of the invoices. For example, the company may decide to be sending the invoices together with the goods on delivery.

Organizing a payment plan for the customer may also be another effective way of ensuring proper payment of the invoices. This will enable the customers to establish outlined ways of paying for the goods sold to them.

For example, a plan can be laid out whereby the other company pays for the goods in installments in cases of financial constraints. This will serve as a motivating factor due to the fact they will have a chance to re-establish their business while conducting a business transaction at the same time. The client will be encouraged to organize a proper payment procedure of the invoices in order to sustain the business relationship.

Costco

Costco is a wholesale corporation with headquarters in Washington. It was founded by Brotman and Sinegal in 1983 under the name Price Club. It is the second largest retail store in the world after the Wal-Mart stores. Before becoming an independent company, it had partnerships with two different corporations namely Wal-Mart and the Club Price.

In 1997, the founders saw the need of working alone so as to get an opportunity to think strategically on how best to expand their business. This followed the confusion which had characterized its mergers with other partners (Costco Wholesale Corporation, 2013).

One of its unique features is that it is one of the few companies which have experienced an uninterpreted growth since their formation. For a period of six years, the company saw its assets grow to hit the $ 3 billion mark in 2003. In the last financial year, the company’s total sales were valued at $97 billion.

Its main competitors in the warehouse business are the BJs and the Sam’s clubs. It currently employs over 170, 000 employees both in part time and full time basis. Its key business development strategy is selling large volumes of goods in low prices. It usually targets large businesses and families due to their ability to purchase goods and services in bulk (Annual reports, 2013).

Even though the company initially specialized on products which were boxed, it diversified and started selling other products such as clothes, food stuffs, computer software, books, flowers, tires, electronic goods, drinks and furnitures among others. It also offers services such as photograph processing, medical services and gas filling services.

Amazon.com

Amazon is a multinational electronic commerce company based in the United States with headquarters in Seattle. It is the largest online retailer in the world with its total assets valued at $ 32 billion. It was founded by Jeff Bezos in 1994 under the name Cadabra. When founding the company, Bezos was trying to minimize his regrets for not expanding soon to take advantage of the internet business boom of the mid 1990s.

His main aim therefore was to market products online by taking advantage of the advancement in information and communication technology at that time. Apart from online services, the company also sells DVDs, videos, software, furniture, jewelery and consumer electronics (Crunchbase, 2013).

In late 1990s, the world witnessed what was described as the dot-com-bubble, which crippled many e-companies. However, Amazon survived the effects of the dot-com-bubble and grew to become a key player in the online sales and services industry. In fact, the company had not made remarkable profits for four consecutive years since its formation.

It was after the survival of the dot-com- bubble burst in 2001 that it made remarkable revenues of $5million. This restored investors’ confidence which had dwindled following the slow pace of growth.

The picking up of the business made many skeptics and critics of Bezos’ business model stop their criticism. His business model gained popularity and made Bezos to be named as the person of the year by the time magazine in 1999 (Amazon, 2013).

Currently, the company has made several mergers and acquisitions. It has also managed to establish businesses in various continents such as Europe, North America, Asia and Africa. To increase access to its services, it has established websites for all the countries where it has operations.

Topic selected for research

The topic of research for this term project is application of mass customization techniques in either manufacturing or services businesses. The purpose of the research is to explore the design, operations and improvement activities which companies are applying in their development and expansion strategies (Dummies, 2013).

The research aims to achieve its objectives by analyzing the two companies discussed above. The reason why the two were selected is because they are among the leading companies in the world in terms of total assets. They are also among the few companies in the world which have experienced a steady growth since their inception.

References

Amazon. (2013). About amazon. Web.

Annual reports. (2013). Costco Wholesale Corporation. Web.

Costco Wholesale Corporation. (2013). Investor relations. Web.

Crunchbase. (2013). Amazon. Web.

Dummies. (2013). Defining your business model. Web.