Business assignment

COMPANY PROFILE

Costco Wholesale Corporation

REFERENCE CODE: 7EE0FB19-6C6E-4865-AFD1-D601275DC508 PUBLICATION DATE: 13 Jan 2020 www.marketline.com COPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED

A Progressive Digital Media business

Costco Wholesale Corporation SWOT Analysis

Costco Wholesale Corporation © MarketLine

Page 22

SWOT Analysis

SWOT ANALYSIS

Costco operates an international chain of membership warehouses. Market position, growth in revenue and high inventory turnover ratio are the major strengths of the company, whereas, liquidity position remains a cause for concern. Consumer spending in the US, expansion of stores and positive outlook for e-retail industry in the US are likely to provide growth opportunities. However, foreign exchange rate fluctuations, intense competition and increasing labor costs in the US could affect its business operations.

Strength

Market position Growth in revenue High inventory turnover ratio

Weakness

Liquidity position

Opportunity

Consumer spending in the US Expansion of stores Positive outlook for e-retail industry in the US

Threat

Increasing labor costs in the US Foreign exchange rate fluctuations Intense competition

Strength

Market position

Costco positioned itself as a price leader to acquire market share. According to the industry sources, the company maintains a maximum markup of 16% for branded and private label products. Private label items offer a significant amount of savings compared to the leading national brand. Offering attractive value proposition to the customers acts as a competitive advantage for the company. Value price positioning enables Costco to drive customer traffic and generate strong membership renewals. The company's membership renewal rate was 91% in Canada and the US and, and 88% worldwide in FY2019. The penetration of executive membership offered by Costco apart from its other membership programs has also been increasing. The executive membership program offers an additional 2% (up to a maximum of approximately USD1,000 per year) discount to the members on qualified purchases that can be redeemed at Costco warehouses. At the end of FY2019, executive members represented 39% of eligible cardholders. Executive members generally spend more than other members, and the percentage of Costco's net sales attributable to these members continues to increase. Shift in consumer preference for value products and the attractive price proposition of Costco will enable the company to attract a large customer base. Additionally, the customer loyalty the company enjoys will enable it to retain customers in a highly competitive market. In the recent past, there has been an increase in the price sensitive customer base and industry reports suggest the increase in demand for value products at low price points. In the economy characterized by cautious consumer spending, value retailers and warehouse retailers are expected to fare well. Thus, shift in consumer preference for value products and the attractive price proposition of Costco will enable

Costco Wholesale Corporation SWOT Analysis

Costco Wholesale Corporation © MarketLine

Page 23

the company to attract a large customer base. Additionally, the customer loyalty the company enjoys will enable it to retain customers in a highly competitive market.

Growth in revenue

Costco reported steady revenue growth during the review year. In FY2019, the company generated revenue of US$152,703 million as against US$141,576 million in FY2018, with an annual growth of 7.9%, which grew at a CAGR of 7.1% during 2015-2019. This growth in annual revenue was due to increase in membership sales and comparable sales by 7% and 6% respectively. It was also due to increase in sales at new warehouses in FY 2019 and FY2018.

High inventory turnover ratio

The company’s inventory turnover ratio improved in FY2019, leading to lower inventory turnover days, which signify that the company incurs low inventory carrying costs, enabling it to improve its operating performance. In FY2019, Costco reported an inventory turnover ratio of 11.8. This was above the retailing industry average inventory turnover ratio of 8.91 times for the same year. High inventory turnover ratio indicates the higher demand for its products, which could have been driven by better product campaign, promotional activities, among others. Its inventory turnover ratio was also higher than that of its major competitors, Walmart Inc and Kohl's Corporation which reported inventory turnover ratios of 8.8 and 3.5, respectively. Higher inventory turnover than competitors indicates that the company takes fewer days to clear its inventory. With the given turnover ratio, the company takes 31 days to sell its inventory as compared to 41 days taken by Walmart Inc and 104 days taken by Kohl’s Corporation.

Weakness

Liquidity position

Costco recorded a decline in its current ratio in the review year. Low liquidity may place Costco at a disadvantage, while it funds any potential opportunities arising in the market. At the end of FY2019, the current ratio of the company was 1. This was lesser than the retailing industry average current ratio of 1.43. The below average current ratio indicates that the company may find it difficult in fulfilling its payout obligations.This was due to increase in its current liabilities from US$19,926 million in FY2018 to US$23,237 million in FY2019, which shows an increase of 16.6%, resulting from 6.9% increase in accrued expenses. The company's current ratio was below that of its competitors such as Best Buy Co Inc and Kohl's Corporation, which reported current ratio of 1.2 and 1.8, respectively.

Opportunity

Consumer spending in the US

The company could benefit from the increase in spending by consumers in the US. Growing personal income, disposable personal income and personal consumption expenditure indicate improvement in consumer spending in the US, which could increase the purchase of the company’s products and

Costco Wholesale Corporation SWOT Analysis

Costco Wholesale Corporation © MarketLine

Page 24

enhance its performance. According to the US Bureau of Economic Analysis (BEA), in May 2019, the personal income (PI) in the US increased 0.5% or US$88.6 billion; disposable personal income (DPI) increased 0.5% or US$72.6 billion and personal consumption expenditure increased 0.4% over that in the previous month to reach US$59.7 billion. In May 2019, the real DPI increased 0.3% and real personal consumption expenditure (PCE) increased 0.2% over that in the previous month.

Expansion of stores

Costco’s future expansion goals and plans enables it to expand its business operations in various emerging and potential markets which in turn enables it to provide adequate returns to its shareholders and also helps it to attract new and potential investors. In August 2019, Costco opened its first store in Shanghai, China. In the same month, Costo announced its plans to open a 14,000 sqm store at Perth Airport in Australia. In June 2019, Costco announced its plans to open its first store in Westgate, Auckland, New Zealand. These expansions help the company to meet the consumer needs, growing demands and widen its international presence.

Positive outlook for e-retail industry in the US

The company stands to benefit from the growing online retailing in the US, which provides consumers the convenience of shopping from home. With the increase in interactive methods and limitless content, the retail e-commerce is growing at a faster rate. According to in-house research, online retail sector in the US is forecast to grow at a CAGR of 8.5% during 2017-22 to reach US$447.4 billion from US$297.8 billion in 2017. Multi-channel retail was the leading mode of sale in the US retail sector in 2017, accounting for a 58.2% share, while online pureplay accounted for the remaining 41.8%. The US accounts for about 32% of the global online retail sector value. The retailing of electrical and electronic goods was the largest segment in the sector in 2017, which accounted for 35.7% of the total value, followed by apparel retail (22.6%), home and garden products (12.1%), food and grocery retail (11.6%), furniture and floor coverings (4.2%), and footwear (3.5%). Other category accounted for 10.3% of the value. Costco operates its online business through its website www.costco.com.

Threat

Increasing labor costs in the US

Increasing labor costs in the US could have unfavorable effects on company’s margin. As of FY2019, Costco employed 254,000 part-time and full-time employees. The federal minimum Labor costs are rising significantly in the US. Tight labor markets, increased overtime, government mandated increases in minimum wages and a higher proportion of full-time employees have resulted in an increase in labor costs for many of the employers. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). As of January 2019, the minimum wage rate in the US was US$7.2 per hour. The minimum wage rate is more than the federal rate in District of Columbia and 29 states. These wages range from US$ 13.2 in District of Columbia, US$12 in Washington and Massachusetts and, US$11 in Arizona US$11.1 in Colorado, US$10.8 in Vermont, , US$8.5 in Florida, US$9.9 in Arkansas, US$8.2 per hour in Illinois. The minimum wage in the District of Columbia is US$13.3 per hour.

Costco Wholesale Corporation SWOT Analysis

Costco Wholesale Corporation © MarketLine

Page 25

Foreign exchange rate fluctuations

Though Costco's widespread geographic presence has its benefits, it also exposes the company to foreign exchange rate fluctuations. Costco has operations in the US, Puerto Rico, Canada, the UK, Korea, Taiwan, Japan, Mexico, Spain and Australia. Thus, the company generates revenue in many other currencies besides its domestic currency which is the US dollar. In FY2019, countries other than the US accounted for 27.8% of the company's overall revenue. Therefore, the company's revenues are subject to fluctuations in foreign exchange rates of all applicable currencies. While a strong US dollar decreases the revenues of the company, the weakening currency would have the reverse effect. Therefore, the revenues of the company are exposed to high risk due to the fluctuations in all applicable foreign exchange rates.

Intense competition

Costco operates in a highly competitive industry, where players primarily compete on the basis of price, merchandise quality and selection, location and customer service. Costco competes with warehouse club operations across the US and Mexico (primarily Wal-Mart's Sam's Club and BJ's Wholesale Club). It also competes with global, national and regional wholesalers and retailers, including supermarkets, supercenters, department and specialty stores, gasoline stations, and internet retailers across the world. Costco's competitors in the general merchandise retail category include Wal-Mart, Target, Kroger and Amazon.com. The company also competes with operators selling a single category or narrow range of merchandise, such as Lowe's, Home Depot, Office Depot, PetSmart, Staples, Kohl’s, Trader Joe's, Whole Foods, CVS, Walgreens, and Best Buy. Some of these competitors may have greater financial resources, better access to merchandise and greater market penetration than the company. Also, the evolution of retailing in online and mobile channels has improved customers' ability to compare similar products with different digital devices, further intensifying competition. Thus, such intense competition could have a negative impact on Costco's market share.

Costco Wholesale Corporation Top Competitors

Costco Wholesale Corporation © MarketLine

Page 26

Top Competitors

TOP COMPETITORS

The following companies are the major competitors of Costco Wholesale Corporation

Amazon.com, Inc. Best Buy Co Inc CVS Health Corporation Kohl's Corporation Lowe's Companies, Inc. Office Depot Inc PetSmart, Inc. Staples, Inc. Target Corp The Home Depot Inc The Kroger Co Trader Joe's Company Walgreens Boots Alliance Inc Walmart Inc

Costco Wholesale Corporation Company View

Costco Wholesale Corporation © MarketLine

Page 27

Company View

COMPANY VIEW

A statement by Mr. Craig Jelinek is the Chief Executive Officer and President of Costco Wholesale Crop. The statement is taken from the company’s annual report in FY2019.

Dear Shareholders: Since we opened our doors in 1983, the world and the retail landscape have changed. The same might be said of our business, which as of the end of fiscal 2019 had grown to 782 locations, extending across multiple international borders, 254,000 employees, and 99 million Costco cardholders. With the many successes we have realized over these past 36 years, one thing has remained constant. We have remained true to our core values of doing the right thing, operating efficiently, and providing great, quality goods and services at very low prices. Our commitment to these tenets resulted in another strong year. In fiscal 2019, net sales for the 52-week year totaled $149 billion, an increase of 8%, with a comparable sales increase of 6%. Net income was $3.66 billion, or $8.26 per share, an increase of 17%. Revenue from membership fees increased 7% to $3.35 billion.

In the United States and Canada, our membership renewal rate reached a record high of 91%, while worldwide our renewal rate was 88%. This year, we opened our first Costco in China (West Shanghai). With over 139,000 membership sign-ups by opening day, the reception was exceptional, and we look forward to future China openings. Additional warehouse openings in 2019 included 16 in the United States, one in the United Kingdom, one in Australia and one in Korea. We will continue to explore opportunities to grow worldwide. We also believe continued investment in logistics and vertical integration will reap benefits for our members, our business, and our shareholders. We expanded our depot operations and rolled out the first of several planned e-commerce fulfillment automation operations. Our poultry complex in Nebraska recently opened, and a joint partnership to develop a greenhouse will yield fresh organic lettuce out of California in fiscal 2020. We continue to improve our members’ experiences, the successes of which have been validated by solid comparable sales results, shopping frequency, and membership renewals. Our expansion of self-checkout in the U.S. and Canada has benefited our warehouse operations and members by providing a more rapid and autonomous option for completing purchases, and we will continue expanding this program. Pickup lockers, which allow members to purchase certain merchandise online to be picked up at the warehouse, have been introduced at various locations and will also be expanded. We remain focused on the continued growth of our Kirkland Signature brand through the development of new items, while also seeking to establish new relationships with premium brands.

In fiscal 2019, this included the addition and/or expansion of quality offerings from Apple, Columbia Sportswear, Sony and Weber (among others). To complement and support our core warehouse business, we continue to improve our e-commerce activities. New merchandise selections have driven traffic to the site, and new technology has improved delivery times. Same-day grocery delivery is now available to members within a 20-minute drive of 99% of our U.S. locations. We continue to improve the Costco App for easier functionality, including new features such as the Digital Membership Card in the U.S. and Canada, Costco Pharmacy order placement and pick-up notifications, and an option to navigate directly to member savings events. Costco Travel introduced the option of bundling hotel accommodations with airfare, which provides added value and flexibility.

In fiscal 2020, we are launching e-commerce operations in Australia and Japan. Our employees are

Costco Wholesale Corporation Company View

Costco Wholesale Corporation © MarketLine

Page 28

fundamental to all of our achievements. We acknowledge their importance by providing great wages and health benefits, emphasizing inclusion and diversity, providing resources to enrich and inspire, supporting leadership training, and promoting from within. From entry-level employees to senior executives, we all have a responsibility for our success. I again extend my sincere thanks to all members and employees who help make Costco one of the world’s most highly regarded companies. May the year ahead bring you and your families good health, happiness, peace, and prosperity.