Costco Case Analysis
Costco was established in 1983 by Jim Sinegal and Jeff Brotman. Together they established Costco as the leading wholesale company in the United States and have moved its operations into the international market. Just like many successful companies they established a strategy that has allowed them to obtain an advantage over their competitors and gained a market share which includes but does not limit them to a more affluent clientele. In this review, Costco’s strategy, mission, objectives and external environment will be reviewed. A financial analysis of the companies financial statements will be presented and compared to its biggest competitor, Sam’s Club to illustrate that Costco has captured a large market share and gained a competitive advantage over its competitor through the company’s unique strategy which includes “low prices, a limited product line and limited selection and a “treasure hunt” shopping environment” (Thompson, pg C-35). Mission and Business Model
According to (Thompson, pg C-35) Costco’s mission is “To continually provide our members with quality goods and services at the lowest possible prices.” Thompson further points out that the “company’s business model was 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.” Costco stores provide fewer choices, 4000 compared to Wal-Mart or Target that have as many as 150,000 items. Costco will also offer high priced items at a significant price reduction for what they refer to as Treasure-Hunt Merchandising with price tags of $50,000 to $250,000. They obtain the higher priced merchandise from “wholesalers or distressed retailers” that want to move their product or get rid of it, so they are willing to sell it to Costco at a huge discount which Costco then turns around and sells it to their customers at a huge discount (Thompson, pg. 37). Costco combines proficient distribution, with self-service no-frills philosophy to provide the lowest cost to it’s customers. CEO Jim Sinegal is not opposed to offering a name brand product at a significant price reduction to entice customers to continue shopping at his store. He strives to create what he refers to as a “gulf between ourselves and the competition….he likes to create a riot” (Thompson, pg 35). Financial Analysis
Sales have increased from $32 billion in 2000 to $72 billion in 2008 which represents an increase of 125% in an eight year period. Costco’s net income after taxes increased from $631 million to over $1 billion in 2008 which represents an increase in profit of 103% over an eight year period. They are also enjoying a healthy cash reserve with cash and cash equivalents increasing from $525 million in 2000 to $2,619 billion in 2008, although their long term debt has increased from $790 million in 2000 to $2,206 billion in 2008, an increase of 179%. Stockholders equity has increased from $4,240 million to $9,192 million in 2008. Dividends per share have increased from $0 in 2000 to .61 in 2008.
In order to perform an industry analysis for Costco, current data was used from www.moneycentral.msn.com. Growth rates indicate that Costco is outselling the industry by a small percentage, but Costco is underperforming in comparison to the Industry for Net Income and earnings which indicates a possible higher cost of producing goods than the industry. Growth Rates| Company| Industry|
Sales (5-Year Annual Avg.)| 8.04| 7.52|
Net Income (5-Year Annual Avg.)| 4.15| 6.48|
Dividends (5-Year Annual Avg.)| 12.36| 14.16|
Their price to earnings ratio is better then the industry average as is their Price/cash Flow Ratio which is 15.1% compared to the Industry of 9.5%
Price Ratios| Company| Industry|
Current P/E Ratio| 24.9| 15.6|
Price/Sales Ratio| 0.41| 0.51|
Price/Book Value| 2.94| 3.02|...