Costco Due Diligence Report

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COSTCO WHOLESALE

DUE DILIGENCE REPORT

Prepared by:
Prepared for:
Course:
Date: April 23, 2011

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Table of Contents

Executive Summary…………………………………………………………………. 4

Industry Overview…………………………………………………………………... 5

Corporate Overview………………………………………………………………… 6

SWOT Analysis…………………………………………………………………….. 12

Culture………………………………………………………………………………. 16

Organization and General Corporate Issues………………………………………… 18

Performance Measurement…………………………………………………………. 28

Financial Overview………………………………………………………………… 36

Asset……………………………………………………………………………….. . 38

Liability…………………………………………………………………………….. 42

Treasury…………………………………………………………………………….. 45

Employee Compensation and Benefits Overview………………………………….. 51

Employee…………………………………………………………………………… 52

Human Resources…………………………………………………………………… 56

2010 Revenue………………………………………………………………………. 59

YTD Revenue………………………………………………………………………. 63

Complexity…………………………………………………………………………. 64

Internet……………………………………………………………………………… 66

Software and Development…………………………………………………………. 67

Marketing…………………………………………………………………………… 69

Sales………………………………………………………………………………… 72

Research and Development………………………………………………………… 74

Patents and Trademarks…………………………………………………………… 75

Bibliography………………………………………………………………………… 76

Executive Summary

Costco’s mission has always been focused on bringing high quality goods and services to its customers at the lowest possible price daily. The US warehouse industry is highly competitive. The superstore industry includes about 20 companies; however the major competitors that Costco faces are Sam's Club (owned by Wal-Mart), BJ’s Wholesale Club, and Meijer. The club superstore industry is so competitive that these four companies alone hold over 90 percent of sales. These superstores are able to offer competitive pricing because as large companies they can offer a wide selection of products and have purchasing, distribution, marketing, and financing advantages. Due to low margins, the profitability of these individual superstore companies depends on high volume sales and efficient operations. This is where Costco has been able to succeed and set itself aside from the competitors.

Costco has always highlighted the fact that it offers national brands at affordable prices; however Kirkland Signature, Costco’s own brand is increasing its importance in revenue and customer loyalty. Kirkland Signature was introduced in 1992, and today it represents 15% of the items sold in the stores and 20% of sales.

Costco is able to offer its customers its low prices because of their high inventory turnover. The volume at which they are able to sell inventory before they are required to pay. They are able to take advantage of their merchandise vendors who offer early payment discounts. To the extent that sales increase and inventory turnover becomes more rapid, a greater percentage of inventory is financed through payment terms provided by suppliers rather than by working capital; which in turns creates more cash flow to purchase more items or invest to build more stores.

Sales growth for the past year, especially during this uncertain time, illustrates the need to open new warehouses and relocating existing warehouses to larger facilities. As warehouse base grows and available and desirable potential sites become more difficult to secure, square footage growth becomes a comparatively less substantial component of growth, but the negative aspects of such are ameliorated. In 2010 alone, 14 new warehouses opened. It is significantly less than the 20 stores that opened in 2009; but during an economic downturn, opening more warehouses makes a strong statement that Costco can still...
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