Costco Wholesale Corporation

2. What are the chief elements of Costco’s strategy?

Chief elements of Costco’s strategy were low prices, limited selection, and a treasure-hunt shopping environment. The ultra-low pricing strategy includes a mark-up capped at 14% and Kirkland, a Costco brand designed to be of equal or better quality than national brands. Product Selection is limited to 4,000 items within a wide variety of categories. Costco does however include ancillary businesses to increase member alternatives. The loss of sales from customers who refuse to purchase large amounts is considered “Intelligent loss of sales.” Treasure-Hunt Merchandising consists of a constantly changing selection of 1,000 luxury items on the floor enticing shoppers to spend more than they might otherwise by offering irresistible deals. To make Treasure-Hunt shopping profitable, Costco’s buyers purchase these items from the grey market such as wholesalers, or distressed retailers rather than manufacturers.

How good is the strategy?

Costco’s strategy is very good.

4. How well is Costco performing from a financial perspective?

Costco is doing very well financially. Though some of the financial ratios may look good from a traditional point-of-view, Costco is not a traditional company.

Do some number-crunching using the data in case Exhibit 1 to support your answer. Use the financial ratios presented in Table 4.1 of Chapter 4 (pages 98-99) to help you diagnose Costco’s financial performance.

Short term solvency ratios are where they should be. A current ratio of 1:05 shows that Costco should be able to meet its current liabilities. The acid test of .47 could be better to ensure that Costco would be able to convert assets into cash more quickly - again to pay off liabilities. This is probably low due to the amount of real estate that Costco owns.

Profit is increased by not having to store inventory. The Asset turnover of 11.54 shows that consistent with what was described by the case study, Costco holds onto inventory for under 12 days.

Utilizing profitability measures, Costco is doing well financially. A 2% profit margin illustrates Costco’s pricing policies and the ability to offer ultra-low prices. The 6% Return on Assets percentage shows that Costco’s assets are being well-used to generating revenue. The ROE demonstrates $0.13 of profit for every dollar of net assets.

6. Does the data in case Exhibit 2 indicate that Costco’s expansion outside the U.S. is financially