Costco Wholesale Corporation

In 1997 Protects changed its name to Cost Companies Inc. And then again to Cost Wholesale Corporation after their relocation to Washington. Strategy Cost was planned using a strategic vision of providing affordable high-quality products with a quick turnover rate while participating in responsible and sincere 1 OFF selection, and a treasure-hunt shopping experience (Gamble & Thompson Jar. , 2009, p. 217). Cost remains competitive by offering low prices to their members and by provide good pay and an excellent work environment to their employees.

Cost is able to offer lower prices and better values by eliminating all the frills and costs satirically associated with the conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing, and accounts receivable. Senegal was quoted saying that, “We [Cost] run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members (Gamble & Thompson Jar. , 2009, p. 221). Cost’s pricing strategy has allowed them to develop a cost-based advantage over their competitors.

Using a low-cost provider strategy, Cost was able to achieve lower overall costs than their rivals and appeal to a broad spectrum of customers (Gamble & Thompson Jar. , 2009, p. 36). This strategy in line with limited selection enabled Cost to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and superstructures. Part of Cost’s strategy was to provide only a limited selection to their members; about 4,000 items. Although the number of items where limited, the store carried a broad range of products from steaks to caskets to fine Jewelry.

Cost is known for selling in bulk or large quantities. By doing this Cost is able to lower their business sots and keep lower sales prices on their products. Cost’s merchandise buyers remained on the lookout to make one-time purchases of items that would appeal to the company’s clientele and that would sell out quickly. (Gamble & Thompson Jar. , 2009, p. 220) With the ever changing inventory, Cost customers are encouraged to make purchases that day, because the next time they visit, the item may not be in stock. This strategy helps increase sales as well as continues to bring customers back in to the store.

Analysis Cost’s strategy has proven to be successful allowing them to rise above their imitators in terms of stores, sales volumes, and members. Cost has had steady growth in sales and earnings going as far back as 1995 as shown in Cost’s financial reports published on their corporate website. Also, Cost’s stock had substantial growth between 1995 and 200 and has shown steady growth trends since them (Yahoo Finance, 2013). Their member renewal rate was approximately 89. 7% in the U. S. And Canada, and approximately 86. 4% on a worldwide basis in 2012, consistent with recent years (Cost, 2012, p. 11).

Cost’s strong financial performance, stock rice trends, and customer retention are all indicators that their strategy is in line with their visions and objectives. Many of Cost’s strengths are held with their low prices, limited selection, and their employees. Cost prefers to hire from within and focused on career longevity and development for their employees. It was company policy to fill at least 86 percent of its higher-level openings buy promotions from within; in actuality, the percentage ran close to 98 percent, which meant that the majority of Cost’s management team members were home grown (Gamble & Thompson Jar. 009, p. 226). Even with their many strengths, Cost still had some weaknesses. Their warehouses appeared to be very industrial, with concrete floors and merchandise displayed on wooden pallets. Cost also relied heavily on word-of- mouth advertisement, which saved the company money in terms of marketing, but during peak shopping periods are also a deterrent for new member or renewals. Some members may not see the benefit to saving in bulk if they have to wait in extremely long checkout lines.

Cost has a specific member demographic in mind and normally attract more affluent customers. The average member had an income of nearly $75,000 a year. This provides Cost with the opportunity to have more revenue by catering to those with a higher disposable income. In similar terms, they are missing out on an entire customer base, in the lower income earning families, because they are often not able to pay the membership fees or afford to pay “bulk” prices in order to save money.

Cost’s biggest threat has proven to be their competitors. In their 2012 Annual Report Cost states that, “our inability to respond effectively to competitive pressures, changes in the retail markets and member expectations could result in lost market share and negatively affect our financial results. Some competitors may have greater financial resources, better access to merchandise and greater market penetration than we do (p. 14).

Conclusion According to Cost’s 2012 Annual Report, net sales totaled almost $97 billion over 600 stores worldwide, for the year (p. 25). Their membership fees increased more than and Cost has about 26. 7 million households and 6. 4 million businesses that have paid memberships with the company (Cost, 2012, p. 11). Cost’s strategic equines and management plans have allowed them become one of the largest wholesale giants in the industry and it is these strategies that set them apart from their competitors.

Costco wholesale corporation

Foundations of Financial Management Learning Objectives Identify the goal of the firm. Understand the five basic principles of finance and business. The consequences of forgetting those basic principles of finance, and the importance of ethics and trust in business. Describe the role of finance in business. Distinguish between the different legal forms of business. Explain what has led to the era of the multinational corporation. Slide Contents 1. The Goal of the Firm 2. Legal Forms of Business Organization 3.

Role of Financial Manager In a Corporation . Income Taxation 5. Ten Principles of Finance Finance and Multinational Firm 6. The goal of the firm is to create value for the firm’s legal owners (that is, its shareholders). Thus the goal of the firm is to “maximize shareholder wealth” by maximizing the price of the existing common stock. 2. Five Foundational Principles of Finance Cash flow is what matters Money has a time value Risk requires a reward Market prices are generally right Conflicts of Interest cause agency problems Five Principles “… Hill it is not necessary to understand balance in order to understand these reminisces, it is necessary to understand these principles in order to understand finance. ” Principle 1: Cash flow is what matters Accounting profits are not equal to cash flows. It is possible for a firm to generate accounting profits but not have cash or to generate cash flows but not report accounting profits in the books. Cash flow, and not profits, drive the value of a business. We must determine Incremental cash flows when making financial decisions.

Incremental cash flow Is the difference between the projected cash flows If the project Is selected, versus what they will be, If the project Is not selected. Principle 2: Money has a time value can earn interest on money received today, it is better to receive money earlier rather than later. Principle 3: Risk requires a Reward We won’t take on additional risk unless we expect to be compensated with additional reward or return. Investors expect to be compensated for “delaying consumption” and “taking on risk”.

Thus investors expect a return when they put their savings in a bank (I. E. Delay consumption) and they expect to earn a higher rate of return on stocks relative to bank savings account (I. E. Taking on risk) Figure 1-1 Principle 4: Market Prices are generally Right In an efficient market, the prices of all traded assets (such as stocks and bonds) at any instant in time fully reflect all available information. Thus stock prices are a useful indicator of the value of the firm. Prices changes reflect changes in expected future cash flows.

Good decisions will tend to increase the stock prices and vice versa. Note there are inefficiencies in the market that may distort the prices. Principle 5: Conflicts of interest cause agency problems The separation of management and the ownership of the firm creates an agency problem. Managers may make decisions that are not consistent with the goal of maximizing shareholder wealth. Agency conflict is reduced through monitoring (ex. Annual reports), compensation schemes (ex. Stock options), and market mechanisms (ex.

Takeovers) Ethics and business Ethical behavior is doing the right thing! But what is the right thing? Ethical dilemma – Each person has his or her own set of values, which forms the basis for personal Judgments about what is the right thing. Sound ethical standards are important for business and personal success. Unethical decisions can destroy shareholder wealth (ex. Enron Scandal) . The Role of Finance in Business Three broad issues addressed by the study of finance: Where to Invest? (Capital budgeting decision) How to raise money to fund the investment? Capital structure decision) How to manage cash flows from daily operations? (Working capital decision) The Role of Business in Finance (count. ) Knowledge of financial tools is relevant for decision making in all areas of business (be it marketing, production etc. ). Decisions involve an element of time and uncertainty financial tools help adjust for time and risk. Decisions taken in business should be financially feasible financial LOL help determine the financial viability of decisions. The Role of a Financial Manager in a Firm 4.

The Legal Forms of Business Organization Business owned by an individual Owner maintains title to assets and profits Unlimited liability Termination occurs on owner’s death or by owner’s choice Partnerships Two or more persons come together as co-owners General Partnership: All partners are fully responsible for liabilities incurred by the partnership. Limited Partnerships: One or more partners can have limited liability, restricted to the amount of capital invested in the partnership. There must be at east one general partner with unlimited liability.

Limited partners cannot participate in the management of the business and their names cannot appear in the name of the firm. Corporation Legally functions separate and apart from its owners Corporation can sue, be sued, purchase, sell, and own property Owners (shareholders) dictate direction and policies of the corporation, oftentimes through elected board of directors. Shareholder’s liability is restricted to amount of investment in company Life of corporation does not depend on the owners corporation continues to exist through easy transfer of ownership Taxed separately

The trade-offs: Corporate Form Benefits: Limited liability, Easy to transfer ownership, Easier to raise capital, Unlimited life (unless the firm goes through corporate restructuring such as mergers and bankruptcies) Drawbacks: No secrecy of information, maybe delays in decision making, Greater regulation, double taxation. Double Taxation example Assume earnings before tax = $1,000 Federal Tax = $250 After tax Income available for distribution to shareholders= $750 Examine the tax effects, if the company chooses to distribute the after-tax profits to shareholders as dividends.

Shareholders will be taxed again. Assume dividends are taxed @15% = of $750 = $112. 50 tax = 250 + 112. 5 = $362. 5 or 36. 25% Hybrid Organizations: S-Type Corporation and Limited liability Companies (LLC) S- Type Corporations Benefits Limited liability Taxed as partnership (no double taxation like corporations) Limitations Owners must be people so cannot be used for Joint ventures between two corporations Hybrid Organizations: S-Type Corporation and Limited liability Companies (LLC) (count. ) Limited Liability Companies (LLC) Taxed like a partnership Qualifications vary from state to state

Cannot appear like a corporation otherwise it will be taxed like one 5. Finance and the Multinational Firm: The New Role U. S. Corporations are looking to international expansion to discover profits For example, Coca-Cola earns over 80% of its profits from overseas sales In addition to US firms going abroad, we have also witnessed many foreign firms making their mark in the United States (ex. Domination of auto industry by Honda, Toyota, and Ionians) Internationalization of business has been spurred by: a. Collapse of communism b. Acceptance of free market system c. Technology d. Improved transportation

Why do companies go abroad? To increase revenues To reduce expenses (land, labor, capital, raw material, taxes) To lower governmental regulation standards (ex. Environmental, labor) To increase global exposure Risks/challenges Country risk (changes in government regulations, unstable government, economic changes in foreign country) Currency risk (fluctuations in exchange rates) Cultural risk (differences in language, traditions, ethical standards etc. ) Review: Key Terms Agency problem Efficient market General partnership Incremental cash flow LLC Limited Partnership Partnership Sole proprietorship S-type corporation