Costco Internal Assessment: Strategy and Financial Analysis

Company Overview

Costco traces its origins to 1976, when Sol Price — a pioneer of warehouse club retailing — opened the first retail warehouse club in San Diego. That original location, called Price Club, primarily served small enterprises and was housed in a converted airplane hangar (Costco, 2019). It was not until 1983 that the first Costco warehouse opened, founded by James D. Sinegal and Jeffrey H. Brotman in Seattle. In 1993, the two companies merged to form Price/Costco, and six years later the corporation adopted its current name.

Today, Costco is headquartered in Issaquah, Washington, and operates not only in the United States but also in Spain, Australia, the United Kingdom, and Mexico. The corporation's business model centers on operating membership warehouses through its various subsidiaries (Yahoo Finance, 2019). Its merchandise includes dry and packaged foods, groceries, snack foods, candies, alcoholic and nonalcoholic beverages, cleaning supplies, appliances, electronics, health and beauty aids, hardware, garden and patio products, meat, bakery, deli and produce items, as well as apparel and small appliances (Yahoo Finance, 2019). Beyond retail, the company also operates pharmacies, gas stations, food courts, optical dispensing centers, and a travel business.

Craig Jelinek serves as Costco's CEO and president, while Hamilton E. James serves as its Chairman. The company's mission statement is "to continually provide our members with quality goods and services at the lowest possible prices" (Costco, 2019). The corporation does not maintain an official vision statement.

With regard to corporate values, Costco seeks to operate within established legal parameters, ensure its employees are well cared for, serve customers in the best possible way, build meaningful and mutually beneficial relationships with suppliers, and protect the interests of shareholders (Costco, 2019). In essence, the company's objectives revolve around keeping its operations relevant, resilient, and responsible — all in line with its code of ethics and mission statement. The company's full-time workforce numbers approximately 143,000 employees (Yahoo Finance, 2019). For the fiscal year ended September 2018, Costco reported total revenue of $141.5 billion and net income of $3.1 billion. Key competitors include Walmart and Home Depot.

Resources, Capabilities, and Core Competencies

Costco's tangible resources include both current and fixed assets. As reported in the fiscal year 2018 financial statements, the company's fixed assets consisted of land ($6.193 billion), buildings and improvements ($16.1 billion), equipment and fixtures ($7.2 billion), and construction in progress ($1.1 billion). Inventory was valued at $11 billion.

Costco's intangible resources comprise assets without physical substance. Notably, the company does not list common intangible assets such as trademarks, goodwill, copyrights, or patents. However, its organizational culture and leadership quality represent significant intangible assets. A strong corporate culture can enhance productivity and competitive effectiveness, while the skills and capabilities of senior leaders are critical to achieving organizational goals. All of Costco's top executives are accomplished professionals in their respective fields. CEO Craig Jelinek, for instance, has spent nearly his entire career at Costco, rising through the ranks over many years. His deep familiarity with the company's operations and its market environment makes him a particularly valuable asset to the organization.

Costco's capabilities and core competencies lie in its low and consistent pricing, economies of scale, fast inventory turnover, and a highly competitive employee compensation structure (Daft, 2017). On pricing, Costco maintains a policy of limiting product markups to no more than 15%. The company achieves fast inventory turnover by deliberately stocking a limited selection of items. With respect to economies of scale, Costco actively seeks quantity discounts through bulk purchasing. Finally, the company has long committed to a fair and competitive employee compensation system. As Cain (2018) notes, Costco has repeatedly appeared on Glassdoor's list of best places to work, with employees citing pay and benefits as a primary reason for joining and staying with the company.

Business Model, Strategic Intent, and Long-Term Objectives

Costco operates a subscription-based business model in which more than 60 million members pay an annual fee to shop at its warehouses. Individual membership is currently priced at $60, while business membership — which carries additional benefits — is priced at $120. This model has served the company well: membership fee revenues effectively offset the costs associated with offering goods at significantly reduced prices. The structure also enables Costco to leverage economies of scale through bulk purchasing at lower per-unit costs. As noted above, the company simultaneously pursues legal compliance, employee welfare, customer service excellence, and shareholder value (Costco, 2019).

From a consulting perspective, the most productive strategic path for Costco would be to further advance its low-cost strategy by optimizing internal processes to reduce costs and by streamlining its distribution network.

The company's long-term objective should focus on gradually expanding its limited product assortment. Compared to competitors such as Walmart, Costco stocks far fewer product lines. While limiting selection is an intentional strategy to drive inventory turnover, it may also place a ceiling on revenue growth over time.

Costco continues to advance its low-cost strategy while ensuring it does not compromise on the quality of goods and services provided to customers. Pricing remains one of the most critical levers the company uses to maintain market share and sustain its growth trajectory.

Sales and Profitability Data

The following tables summarize Costco's sales, gross profit, and net income for fiscal years 2016 through 2018. All figures are in thousands of dollars.

2016: $118,719,000 | 2017: $129,025,000 | 2018: $141,576,000

Gross Profit — 2016: $15,818,000 | 2017: $17,143,000 | 2018: $18,424,000

Net Income — 2016: $2,350,000 | 2017: $2,679,000 | 2018: $3,134,000

References

Cain, A. (2018). Costco employees share the 7 best parts of working at the retail chain with a cult-like following. Retrieved from https://www.businessinsider.com/costco-jobs-best-part-2018-4?IR=T

Costco. (2019). About us. Retrieved from https://www.costco.com/about.html

Daft, R. L. (2017). Management (13th ed.). Mason, OH: Cengage Learning.

Waygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. Hoboken, NJ: John Wiley & Sons.

Yahoo Finance. (2019). Costco Wholesale Corporation (COST). Retrieved from