Business Policy Case Analysis

Management 485: Business Policy and Strategy
Written Case Analysis
Alexander Ramsey
Charles Ausherman
Tenille Williams
Tyler Willmore
Quentin McSwain
Table of Contents
Problem Statement .......................................................................................................................... 1
Executive Summary ........................................................................................................................ 2
Vision Statement ............................................................................................................................. 3
Existing Mission Statement ............................................................................................................ 4
Analysis of Existing Mission Statement ......................................................................................... 5
Revised Comprehensive Mission Statement................................................................................... 6
Analysis of Revised Comprehensive Mission Statement ............................................................... 7
Internal Environmental Analysis .................................................................................................... 8
Operations ................................................................................................................................... 8
Research and Development....................................................................................................... 11
Human Resources ..................................................................................................................... 13
Marketing .................................................................................................................................. 17
Porters Industry Analysis .......................................................................................................... 19
Threat of New Entrants (Positive) (Low) ............................................................................. 19
Competition within the Industry (Negative) (High) ............................................................. 19
Bargaining Power of Consumers (Negative) (High) ............................................................ 19
Bargaining Power of Suppliers (Positive) (Low).................................................................. 19
Threat of Substitute Products (Negative) (Low) ................................................................... 20
Porters Five Forces and Characteristics Chart ...................................................................... 21
Porters Analysis Conclusion ................................................................................................. 22
Finances .................................................................................................................................... 23
Financial Ratios ................................................................................................................... 24
Liquidity Ratios .................................................................................................................... 27
Leverage Ratios .................................................................................................................... 27
Activity Ratios ...................................................................................................................... 27
Profitability Ratios ................................................................................................................ 28
Growth Ratios ....................................................................................................................... 28
Conclusion ............................................................................................................................ 29
External Environmental Analysis ................................................................................................. 31
History....................................................................................................................................... 31
Political/Legal ........................................................................................................................... 32
Social/Cultural .......................................................................................................................... 34
Demographic ............................................................................................................................. 36
Technological ............................................................................................................................ 38
Competitive Analysis ................................................................................................................ 40
Economic .................................................................................................................................. 43
SWOT Analysis ............................................................................................................................ 47
Internal Factor Evaluation (IFE) ................................................................................................... 49
Internal Factor Evaluation (IFE) Conclusion ............................................................................ 50
Key Strengths ........................................................................................................................ 51
Key Weaknesses ................................................................................................................... 51
Strategic Direction .................................................................................................................... 52
Rationale of High Weights (Strengths) ..................................................................................... 53
Rationale of High Weights (Weaknesses) ................................................................................ 53
Rationale of Low Weights (Strengths) ..................................................................................... 54
Rationale of Low Weights (Weaknesses) ................................................................................. 55
Rationale of 4 Ratings (Strengths) ............................................................................................ 55
Rationale of Low Ratings (Weaknesses) .................................................................................. 56
External Factor Evaluation (EFE) ................................................................................................. 58
External Factor Evaluation (EFE) Conclusion ......................................................................... 60
Key Opportunities ................................................................................................................. 60
Key Threats ........................................................................................................................... 60
Rationale of High Weights (Opportunities) .............................................................................. 61
Rationale of High Weights (Threats) ........................................................................................ 62
Rationale of Low Weights (Opportunities)............................................................................... 63
Rationale of Low Weights (Threats)......................................................................................... 63
Rationale of 4 Ratings (Opportunities) ..................................................................................... 64
Rationale of Low Ratings (Threats) .......................................................................................... 64
Competitive Profile Matrix (CPM) ............................................................................................... 65
Competitive Profile Matrix (CPM) Conclusion and Rationales for Weights ........................... 66
Rationale of Costco Wholesale Key Strengths ......................................................................... 67
Rationale of Costco Wholesale Key Weaknesses ..................................................................... 68
Rationale of Wal-Mart Stores Key Strengths ........................................................................... 68
Rationale of Wal-Mart Stores Key Weaknesses ....................................................................... 69
Rationale of Target Stores Key Strengths ................................................................................. 70
Rationale of Target Stores Key Weaknesses ............................................................................ 70
TOWS Matrix ............................................................................................................................... 72
Strategic Actions ........................................................................................................................... 74
SPACE Matrix .............................................................................................................................. 75
Graphical Matrix: ...................................................................................................................... 80
SPACE Matrix Conclusion ........................................................................................................... 81
Boston Consulting Group (BCG) Matrix ...................................................................................... 82
Boston Consulting Group (BCG) Chart ........................................................................................ 83
Strategies for Costco USA ............................................................................................................ 84
Strategies for Costco International................................................................................................ 84
Decision Stage .............................................................................................................................. 85
Rationales for Decision Stage ....................................................................................................... 88
Gain Control of Rocky Mountain Chocolate Factory ............................................................... 88
Expand in Brazil ....................................................................................................................... 89
Discounted dry cleaning services for card members ................................................................ 92
Restructure long-term debt with better finance offers .............................................................. 93
Seek top level executives from competitors to bring fresh new ideas ...................................... 94
Cost/Revenue Analysis for Implementation ................................................................................. 95
EPS/EBIT Analysis and Pro Forma Analysis for Recommended Strategies ............................. 104
EPS/EBIT Options Graph ....................................................................................................... 107
EPS/EBIT Conclusion ............................................................................................................ 108
Pro Forma Balance Sheet ........................................................................................................ 109
Pro Forma Balance Sheet Description .................................................................................... 111
Pro Forma Income Statement.................................................................................................. 113
Pro Forma Income Statement Description .............................................................................. 115

Pro Forma Financial Ratios .................................................................................................... 116
Pro Forma Financial Ratios Description ................................................................................. 117
McKinsey 7S Framework ........................................................................................................... 118
Current Company Snapshot for Costco Wholesale, Inc.: ....................................................... 118
Backward Integration: Gain Control of Rocky Mountain Chocolate Factory ........................ 119
Market Development: Expand in Brazil ................................................................................. 121
Unrelated Diversification: Provide discounted dry cleaning services for card members ....... 122
Retrenchment: Restructure long-term debt with better finance offers.................................... 123
Other: Seek top level executives from competitors to bring fresh new ideas ......................... 124
Questions for Strategy Evaluation .............................................................................................. 125
Contingency Plans ...................................................................................................................... 127
Conclusion .................................................................................................................................. 129
References ................................................................................................................................... 130
Appendices .................................................................................................................................. 136
Appendix 1: Calculations for Financials................................................................................. 137
Appendix 2: Pro Forma Ratio Calculations ............................................................................ 141
Problem Statement
Despite increasing net income of 19.31% compared to competitor Wal-Mart (with an
increase in net income of 8.28%), Costcos problems lie in their operating profit margin of
2.97% (compared to Walmarts 5.52%), their top-heavy debt, and their ability to capitalize on a
recovering but still stagnant U.S. economy. Overall, analysts have consistently projected upward
growth in the company, due to continually increasing EPS. Its important that companies in the
big-box retail industry take advantage of economic and retail growth trends. In this case, the
recent trend for international countries to have high GDP growth rates, including China and
Brazil, provides an opportunity for Costco to expand their international retail segment. On top of
capitalizing on fast growing markets, Costco must maintain and expand their brand awareness
and brand equity, for long-term success and continued consumer support.
Executive Summary
Costco Wholesale Corporation is an international warehouse club store founded in 1983.
Costco Wholesale operates primarily within the United States, with 461 of their 634 stores
within 43 states and Puerto Rico. Costco employs 185,207 people worldwide. Costco currently
has 1.76% total market share domestically and .29% total market share globally. It operates in a
highly competitive industry where Wal-Mart is the market leader within both categories.
In order to maintain and strengthen Costcos presence in the industry, the company must
continually implement strategies to improve itself in the consumers eye and increase market
share. Some strategies that will stimulate growth and help Costco acquire a competitive
advantage would be to seek top level executives from competitors to stimulate new ideas, reform
the finance structure and long term debt with competitive finance offers, provide discounted dry
cleaning services for card members, expand into growing foreign markets like Brazil, and to gain
control of the Rocky Mountain Chocolate Factory for sale of additional high-quality Kirkland
branded chocolate items.
Vision Statement
Currently Costco Wholesale Corporation does not have a vision statement. They
incorporate some of their visions for the company within their code of ethics. Costcos code of
ethics includes obeying the law, taking care of their members, taking care of their employees,
and respecting their suppliers.1
Our Proposed Vision Statement:

To become the worldwide leader in discount stores. We will constantly develop new
ideas to ensure that we reach this goal. We will always be loyal to our members and provide
them with the best quality products that can be offered for an affordable price.
Costco Wholesale, Inc. (2014). Costco Mission Statement and Code of Ethics. Accessed on February 25, 2014.
Retrieved from http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9NDAwMDR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
Existing Mission Statement

To continually provide our members with quality goods and services at
the lowest possible prices.2
Costco Wholesale, Inc. (2014) Costco Mission Statement and Code of Ethics. op cit.
Analysis of Existing Mission Statement

1.
Customers: Our members
2.
Products and Services: Missing component
3.
Markets: Missing component
4.
Technology: Missing component
5.
Concern for survival, growth and profitability: Missing component
6.
Philosophy: Missing component
7.
Self-concept: Missing component
8.
Concern for public image: Missing component
9.
Concern for employers: Missing component
Revised Comprehensive Mission Statement

At Costco, we believe our goal is to continuously provide the most
authentic products and services that our members have trusted us to provide within
communities around the world where we do business, at the lowest prices. With the
trust that they have instilled in us and our partners, it is our duty to promote and
uphold an environment that provides the best customer service and quality
consumer goods in the retail industry, in an ethical manner. We have zero
tolerance for actions or beliefs that are deemed unethical. We must also uphold
cordial partnership with our counterparts and stockholders for the mutual growth
and advancement of everyone.
In order to achieve our goals, we must constantly develop new ideas,
programs and facilities to enjoy an establishment that is both efficiently and
effectively operated. Much care and attention must be administered to employees,
who are the core future of our establishment, through equal, rewarding, and
challenging opportunities to continuously lead our organization into the right
direction and to give back to our communities.
Analysis of Revised Comprehensive Mission Statement

1.
Customers: Our members have trusted us to provide; provides the best

customer service
2.
Products and Services: provide the most authentic products and services; quality
consumer goods
3.
Markets: Within communities around the world where we do business
4.
Technology: Develop new ideas, programs and facilities
5.
Concern for survival, growth and profitability: For the mutual growth and
advancement of everyone.
6.
Philosophy: We believe our goal is to continuously provide the most authentic

products and services that our members have trusted us to provide
7.
Self-concept: We have zero tolerance for actions or beliefs that are deemed
unethical.
8.
Concern for public image: Give back to our communities.
9.
Concern for employers: Much care and attention must be administered to

employees, who are the core future of our establishment
Strategy Formulation
Internal Environmental Analysis
Operations
Costco Wholesale Corporation is one of the leading international warehouse club stores.
They operate primarily within the United States, with 461 of their 648 stores within 43 states and
Puerto Rico.3 They currently have less locations than big box competitor Wal-Mart, who has
11,000 worldwide retail units in more than 27 countries. Wal-Mart also operates Sams club, a
warehouse club format that has more than 700 locations worldwide. In addition, warehouse club
competitor BJs has over 200 locations within the United States.4 Costco also has stores in
Canada, the United Kingdom, Taiwan, Korea, Japan, Australia, and Mexico. The warehouses
range from about 73,000 square feet to 205,000 square feet with an average of the warehouses
being about 143,000 square feet.5 The sizes of these warehouses also determines what is sold
within the store. Some products sold in these stores may include groceries, appliances,
technology items, apparel, furniture, and others. They attempt to provide their members with all
of their necessities while providing other amenities. Costco employs 185,207 employees. WalMart stores employees more than 2.2 Million people worldwide, 110,000 of which are Sams
Club employees. Warehouse club BJs Warehouse Club employs over 10,000 people.6
Costco Wholesale, Inc. (2014) Costco FY 2013 Annual Report. , Pg. 6. Accessed February 25, 2014. Retrieved
from http://phx.corporateir.net/External.File?t=1&item=UGFyZW50SUQ9NTI4MzE0fENoaWxkSUQ9MjE1NjQzfFR5cGU9MQ==
4
Sams Club Corporation. About Us. Accessed February 25, 2014. Retrieved from
http://www3.samsclub.com/NewsRoom/AboutUs/ExecutiveTeam/
5
Costco Wholesale, Inc., Costco FY2013 Annual Report op cit, Pg. 9.
6
Sams Club Corporation. i bid.
Costco not only participates in the retail business, but the manufacturing business also.
They operate within specialty food packaging, optical laboratories, meat processing, and jewelry
distribution. These businesses have a common goal of providing members with high quality
products at substantially lower prices. This aligns with Costcos mission statement of providing
members with quality goods and services at the lowest possible prices. Jim Sinegal said this in
reference to Costcos low prices, Costco is able to offer lower prices and better values by
eliminating virtually all the frills and costs historically associated with conventional wholesalers
and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable.
We run a tight operation with extremely low overhead which enables us to pass on dramatic
savings to our members.7
Costco prides themselves on providing for their members. They have developed three
levels of membership to ensure this. The first level of membership is labeled as the business
level. This level is for those people who operate a business. They pay an annual to shop for items
to resale, business items, or for personal use. They are allowed up to six additional membership
cards at this level. The next level of membership is labeled as the gold star level. Gold star
membership is designed for the individual shopper. This level grants these customers access to
Costco warehouses. The last level of membership is labeled as the executive membership level.
In addition to offering all of the usual benefits, it allows members to purchase a variety of
discounted consumer services like auto insurance and health insurance at substantially reduced
rates. Executive Members also receive a 2% annual reward (up to $750 beginning January 1,
2012) on most of their warehouse purchases.8 These members pay double the amount for this
membership as compared to the business and gold level memberships. Revenue from
7
Costco Wholesale, Inc. Company Profile. Accessed on March 5, 2014. Retrieved from http://phx.corporateir.net/phoenix.zhtml?c=83830&p=irol-homeprofile
8
Costco Wholesale, Inc. Costco 2013 Annual Report. op cit, Pg. 10.
membership fees for Costco totals $2.2 Billion9, Wal-Marts total revenue from membership fees
amounts to $1.1 Billion10.
Costco Wholesale Corporation trades on the Nasdaq ticker. In the Fiscal year 2013, they
generated $105.2 billion from 71.2 million card holders.11 Their stock declined from November
1, 2013 to February 28, 2014 from $125.43 to $116.80.12
Strengths
Simplicity of warehouse format allows Costco to deliver products efficiently

and at a low overhead of 14%.
Costco Wholesale has 400 more locations than competitor BJs Wholesale
Club
Costco Wholesale has nearly double the membership revenue of Wal-Mart.
Weaknesses
Wal-Mart has a larger employee base, at 2.2 Million, compared to Costco.
Costco Wholesale, Inc. 2013 Annual Report op cit, Pg. 26.

Wal-Mart Stores, Inc. 2013 Annual Report op cit. Pg. 38.
11
ibid.
12
Yahoo Finance. Costco Wholesale Corporation Historical Prices. Accessed on February 24, 2014. Retrieved
from http://finance.yahoo.com/q/hp?s=COST+Historical+Prices
10
10
Research and Development

Costco Wholesale Corporation does not focus strictly on their research and development
department because they are a retail store. Most research performed is based on seeking quality
products, for example, wine connoisseurs hired by Costco travel to vineyards and taste test
products before ordering larger quantities.13 Costco owns their own brand called Kirkland
Signature, which sells a variety of items from baby products to apparel. This brand requires
Costco to exhert energy towards their research and development. There are limited costs
associated with this research and development.14
13
CNBC. Costco Craze: Inside the Warehouse Giant. Video. Online. Retrieved from
http://www.youtube.com/watch?v=wOwJ4PXt3GM
14
Trulaske College of Business. Costco Wholesale, Inc. Investment Highlights. Retrieved from
http://business.missouri.edu/ifmprogram/reports/2005FS/Costco.doc
11
Strengths
Costco Wholesale Corporation does not have a significant amount of

expenses associated with research and development
12
Human Resources
Costco operates more than 648 warehouse locations, employing approximately 184,000
employees in the United States, Canada, Australia, Japan, South Korea, Taiwan, the United
Kingdom, and Mexico.15 A major portion of these employees are store specific associates who
receive wages that greatly exceed minimum wage law requirements.16 Costco has separated
themselves from the norm of penny pinching human resources practices in mega-retail. By
paying their employees significantly higher than industry averages, Costco has achieved the
ability to seek, retain, and benefit from a higher quality labor pool; providing a key competitive
advantage against competitors Sams Club and BJs Wholesale Club.17 In addition to strong
wages, Costco provides benefits to employees who stick around, including 401k matching
programs, full healthcare coverage, and bonus checkseven for part time employees.
Costco has a strong company culture of providing value to its consumers, while
remaining ethically, legally, and sustainably conscious in all of its efforts to do so. The executive
employees of the company also earn significantly less when compared to their Fortune 500
competition, despite making massive financial headway in the midst of the greatest economic
downturn since the Great Depression.18 Often named as a Best Place to Work by many
business columnists including Forbes, Costco has taken the center stage in recent news
surrounding the federal minimum wage debate in the United States. On January 29, 2014,
President Obama spoke at a Maryland Costco as a follow up to his State of the Union address,
regarding income inequality and the minimum wage in the United States. Obama praised
15
Costco Wholesale, Inc. Costco FY 2013 Annual Report. op cit, Pg. 7.

Brad Stone. (June 6, 2013) Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World.
Accessed February 24, 2014. Retrieved from http://www.businessweek.com/articles/2013-06-06/costco-ceo-craigjelinek-leads-the-cheapest-happiest-company-in-the-world
17
Steven Greenhouse. (July 17, 2005). How Costco Became the Anti-Wal-Mart. Accessed on February 26, 2014.
Retrieved from http://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?pagewanted=all&_r=0
18
ibid.
16
13
Costcos philosophy of long term prosperity and proposed an executive order the day before,
during his State of the Union speech, requiring federal contractors to pay their workers at least
$10.10. 19
Current chief executive officer of Costco, W. Craig Jelinek, has often stated his opinion
addressing the minimum wage in the United States. Jelineck expressed in a recent interview,
Instead of minimizing wages, we know its a lot more profitable in the long term to minimize
employee turnover and maximize employee productivity, commitment and loyalty.20 Former
chief executive officer, Jim Sinegal passed on much of these practices and values to Jelinek, the
newly appointed chief executive.
In 2012, Jelinek received base salary of $650,000, less than half of his counterpart at
Walmart, Mike Duke, who earned a base salary of $1.3 Million. Sinegal, Costcos former chief
executive, earned even less, just $325,000 a year base salary.21 In addition to executive salaries,
Costcos corporate headquarters, located in Issaquah, Washington, have been described by
BusinessWeeks Brad Stone as having, faded blue carpetsix faux-wood tables-which
would look at home in a public school teachers lounge[and] badly staged photographs of the
companys board of directors. The offices reflect the bare-bones nature of their warehouse
stores, reinforcing the value oriented culture that is ingrained in the companies employees.
The starting salary of Costco employees is $11.50, with opportunities for increased
salaries that can exceed $20 an hour, with work experience. The average salary of Costco
19
Angel Gonzalez. (January 30, 2014). In store visit, Obama touts the Costco way with pay. Accessed on
February 24, 2014. Retrieved from
http://seattletimes.com/html/businesstechnology/2022782763_costcoobamaxml.html
20
Puget Sound Business Journal. (March 5, 2013). Costco back in the forefront of minimum wage debate.
Accessed February 24, 2014. Retrieved from http://www.bizjournals.com/seattle/news/2013/03/05/costco-back-inthe-forefront-of.html
21
Brad Stone. (June 6, 2013). op cit.
14
employees is $20.89, as compared to the average Walmart employee salary of $12.67 an hour. 22
Eighty eight percent of employees also take advantage of health insurance benefits and pay less
than 10% on the premiums of their total coverage costs.23 In addition to providing benefits for
employees, Costco has a reputation for recognizing employee unions. The Teamsters Union
accounts for approximately 15,000 employees at Costco and provides that each employee is
guaranteed 25 hour work weeks and a majority of full time employees at participating
warehouses.24 Guarantees like these are exactly what Costcos human resources policies reflect,
stability and long term savings through lower turnover. Among part time employees, Costco has
reflected a 10% turnover. Full time employee turnover is approximately 6%, and 5% among
employees who have been there for more than a year.25 Executive positions reflect this trend as
well, which may be troubling , exclaims Vice President of Human Resources John Matthews,
[its] awfully inbred.26 These figures are well below industry averages, as evidenced by a report
from the Hay Group on the retail-industry, turnover rates of 67% for part time staffers and 24%
for full-timers.27
22

Eleanor Bloxham. (June 11, 2013). How Costco saves taxpayers money. Accessed on February 24, 2014.
Retrieved from http://management.fortune.cnn.com/2013/06/11/costco/
24
Teamsters Union. Costco workers stand together. Accessed February 26, 2014. Retrieved from
http://teamster.org/content/costco-workers-stand-together
25
Eleanor Bloxham, op cit.
26
27
Eleanor Bloxham. op cit.
23
15
Strengths
10% part time and 6% full time employee turnover allows Costco to
maintain a high quality, dedicated workforce due to competitive wages and
fair working environment. Reduced long term hiring costs due to low
turnover.
Strong company culture of ethically delivering value to the consumer is
present at all levels of the business.
Weaknesses
Executive level turnover is low, reducing the possibility for fresh talent and
new ideas at the management level.
16
Marketing
Costco Wholesale retains more than 71 million members worldwide, accounting for
nearly all of their operating costs each year without collecting revenues from the sales of
merchandise.28 A multi-billion dollar worldwide company, Costco has no marketing budget or
public relations director.29 The format of their warehouse stores attracts consumers due to its
simplicity in selection of merchandise. Concrete floors, pallets, and heavy duty shelving line the
bare-bones style stores. Price labels are the only form of product identification and display for
the consumer. Costco saves money by taking advantage of natural lighting, no bags for their
merchandise, and a lack of complex displays to restock.
Offering consumers limited bulk sized choices allows for higher margins on items that
include their own private label brand Kirkland Signature.30 Markup on products across the board
is maintained within a 14% limit set by the executives of the company.31 Membership fees have
not been a barrier to retention of customers, as evidenced by the 90% retention rate of
membership.32 More than one third of all members are executive level, opting to spend $105 a
year in membership fees, with the incentive of receiving 2% cash back each year on purchases
made.33 The memberships also create an incentive for the consumer to spend more at the
warehouse clubs due to the presence of an initial investment.
28
Costco Wholesale, Inc. Annual Report. op cit, Pg. 5

Steven Greenhouse, op cit.
30
Brad Stone, op cit.
31
ibid.
32
Logan and Beyman. (April 25, 2012). Costco: Breaking all the retail rules. Accessed on February 26, 2014.
Retrieved from http://www.cnbc.com/id/47175492
33
ibid.
29
17
Strengths
Strong value proposition for the consumer surrounds the nature of

merchandising of the business.
No marketing cost allows Costco to keep markup as low as 14%.
Kirkland Signature private label has strong reputation and high profit
margin.
Weaknesses
Brand awareness can be adversely affected by the marketing efforts and

existence of marketing by competing firms.
18
Porters Industry Analysis

Threat of New Entrants (Positive) (Low)
Planners are involved in decision making about how land use will impact the fiscal situation in
communities (for a 100,000 square foot big box store in Barnstable, Massachusetts, the store cost
$4680 more than the store generates in revenue through city taxes).34
Competition within the Industry (Negative) (High)
The number of Walmart supercenters has continually gone up over the past decade and is now
sitting above 3000. 35
Competition for urbanized big box retail stores is fierce, with the majority of sales in these areas
going to big box retail giants Walmart and Target, with Walmart generating half of their sales
from groceries alone.36
Bargaining Power of Consumers (Negative) (High)
Tech-enabled millenials are threatening the retail industry with demands of non-store based
retail, The biggest challenge for big boxes is increasing consumer confidence in making online
purchases.37
More and more, traditional brick and mortar retailers are feeling pressure to match the prices of
online shops like Amazon.com in order to keep customer traffic flowing.38
Bargaining Power of Suppliers (Positive) (Low)
Some companies, like Walmart have distribution centers, but Costco, which recently settled a
deal with Brandsource in 2012, receives some of their supplies from a third-party, so the
bargaining power of suppliers is diminished.39
Selling a single item to a big-box retailer can represent an enormous growth opportunity for a
supplier. In addition, many large retailers are negotiating exclusive arrangements with their
suppliers.40
34
Jennifer S. Evans-Cowley, Thinking Outside the Big Box: Municipal and Retailer
Innovations in Large-scale Retail, Journal of Urban Design, Vol. 13. No. 3, 329344, October 2008. Pg. 333.
35
Jared Harding Press. (2013) Dr. StrangeBox or: How I learned to stop worrying and love urban bix box retail.
Pg. 43.
36
Jennifer S. Evans-Cowley, ibid.
37
Welch, Burritt, Coleman-Lochner. (2012) The Era of Big Box Retail Dominance Is Coming to an End. Accessed
on February 25, 2014. Retrieved from http://www.bloomberg.com/news/2012-03-30/the-era-of-big-box-retaildominance-is-coming-to-an-end.html
38
ValueLine. (Jan 31. 2014) Retail Store Industry.
39
Alan Wolf. This Week in Consumer Electronics. (March 12, 2012). BrandSource Focused on Dealer Growth,
Profitability.
40
Growing Power of the Big-Box Retailers," Secured Lender, 62, no. 6 (2006): 20-24,
19
Threat of Substitute Products (Negative) (Low)

With a big-box retail store which specializes in hardline and softline products, its obvious that
substitute products, both hardline and softline, will be an inevitability.
20
Porters Five Forces and Characteristics Chart
Threat of New Entrants
Bargaining Power of Customers
Planners are involved in decision making about
how land use will impact the fiscal situation in

communities (for a 100,000 square foot big box
store in Barnstable, Massachusetts, the store
cost $4680 more than the store generates in
revenue through city taxes
Tech-enabled millenials are threatening the

retail industry with demands of non-store
based retail The biggest challenge for big
boxes is increasing consumer confidence in
making online purchases
More and more, traditional brick and mortar
retailers are feeling pressure to match the
prices of online shops like Amazon.com in
order to keep customer traffic flowing.
Competition within the Industry
The number of Walmart supercenters has
continually gone up over the past decade and is

now sitting above 3000
Competition for urbanized big box retail stores
is fierce, with the majority of sales in these
areas going to big box retail giants Walmart
and Target, with Walmart generating half of
their sales from groceries alone.
Bargaining Power of Suppliers
Threat of Substitute Products
Some companies, like Walmart have
With a big-box retail store which
distribution centers, but Costco, which recently

settled a deal with Brandsource in 2012,
receives some of their supplies from a thirdparty, so the bargaining power of suppliers is
diminished
specializes in hardline and softline

products, its obvious that substitute
products, both hardline and softline,
will be an inevitability.
21
Porters Analysis Conclusion

Its fairly apparent that the big-box retail industry is on its way to monopolization,
considering one of the largest competitors (Wal-Mart) annually introduces 3000 new
supercenters in America a year, and has not really ceased this pertinacious affront to the big-box
retail industry. Not only this, but Wal-Mart and Target seize most of the revenue in urban areas
so most lower-market share competitors like Costco do their best business in suburban areas.
Despite all the competition, Costco still manages to triumph in terms of what they offer
though. An example of this would be the fact that since Costco does not directly manufacture
their products, they have opted to purchase their inventory from a third-party, rather than from
the manufacturer themselves, thereby reducing the inefficiency of bulk shipping, resulting in
better utilization of JIT-inventory practices. This mitigates the bargaining power of suppliers by
a healthy amount.
Indeed, in such a developed and mass-production oriented industry, the threat of new
entrants is not very extant. In fact, most community planning communities do oppose new bigbox retail stores in their area because it stifles the competition and hurts the local economy in
general. With such litigious requirements, not even mentioning the vast amount of technological
and capital investment to smoothly operate the JIT inventory and logistics, it is safe to say the
industry is fairly secure from new entrants, short of full-blown market penetration.
Overall, while the competition seems rather oligarchic, it is because the industry has
moved from a state of pure competition more towards monopolistic tendencies. This is partly
because of the large barriers to entry and the intense price competition being pressured on the
industry from online competitors. Overall though, as the financial statements show, Costco is a
very profitable company in spite of all this.
22
Finances
Costco Wholesale Corporation compared to competitors has had fair results. Over the
past few years Costco has continued to improve over the past three years as they have seen an
increase in sales, operating margin, and net income. Sales growth is significantly higher than the
industry average and while it still is not well above top competitor Walmarts the sales growth
percentage is still higher. Sales were negatively impacted by the change from some foreign
currencies to U.S Dollars and still increased 6%.41 Cash has increased from $1.1 billion to $4.6
billion which a majority is generated from increasing worldwide operations.42 The increase in
cash has made Costco a more liquid company, the current ratio of 1.20 is well over the industry
average of .89 and Walmart at .84. Warehouses in the United States generate 72% of total
revenue with Canada generating 16% and the remaining 12% coming from other International
operations. Dividends per share of $8.17 were significantly higher than previous years due to the
special dividends that was declared in November.43 As of February 21, 2014, the stock price is
$113.90, compared to the fiscal year closing price for 2012 of $97.87.44
41
Costco Wholesale, Inc. Costco FY 2013 Annual Report. op cit, Pg. 36.
ibid, Pg. 2.
43
ibid, Pg. 72.
44
Yahoo Finance. Costco Wholesale Corporation Historical Prices. Accessed on February 24, 2014. Retrieved
from http://finance.yahoo.com/q/hp?s=COST+Historical+Prices
42
23
Financial Ratios45 46
Liquidity Ratio
Current Ratio
Quick Ratio
Leverage Ratio (%)
Debt to Total Asset Ratio
Debt to Equity Ratio
Long-Term Debt to Equity
Times Interest Earned Ratio
Ratio Activity Ratio
Inventory Ratio
Fixed Asset Turnover
Total Asset Turnover
Accounts Receivable Turnover
Average Collection Period
Profitability Ratios (%)
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Return on Total Assets
Return on Stockholders Equity
Earnings Per Share
Price-Earnings Ratio
Growth Ratios (%)
Sales
Net Income
Earnings Per Share
Dividends Per Share
Compared to Industry
Costco
Costco
2013
2012
1.20
1.10
.60
.53
Costco
Costco
2013
2012
63.64
53.88
175.00
116.81
54.61
18.87
30.84
29.04
Costco
Costco
2013
2012
7.58
7.65
3.47
3.65
Costco
Costco
2013
2012
12.56
12.42
2.90
2.78
1.94
1.72
6.73
6.30
18.52
13.65
$4.68
$3.94
24.19
24.82
Costco
Costco
2013
2012
6.07
11.50
19.31
16.89
18.78
17.61
693.20
15.73
Costco
2011
1.14
.52
Costco
2011
53.02
112.85
17.01
21.03
Costco
2011
7.15
3.32
Costco
2011
12.57
2.74
1.64
5.46
11.63
$3.35
24.52
Costco
2011
14.07
12.20
12.80
15.58
Industry
201347
.89
.20
Industry
2013
61.00
12.55
Industry
2013
Industry
2013
24.56
5.37
3.55
8.13
22.89
16.29
Industry
2013
2.26
5.75
S/W/N
2013
S
S
S/W/N
2013
W
S
S/W/N
2013
S/W/N
2013
W
W
N
N
W
W
S/W/N
2013
S
S
45
Costco Wholesale, Inc. Costco FY 2013 Annual Report. op cit.

Costco Wholesale, Inc. Issaquah, Washington. FY 2012 Form 10-K, Securities and Exchange Commission
Filing.
47
MSN Money Report. Costco Wholesale, Key Ratios. Accessed on February 21, 2014. Retrieved from
http://investing.money.msn.com/investments/key-ratios?symbol=COST
46
24
Liquidity Ratio
Current Ratio
Quick Ratio
Leverage Ratio (%)
Debt to Total Asset
Ratio
Long-Term
Debt to
Equity Ratio
Times Interest Earned
Ratio
Activity Ratio
Inventory Ratio
Accounts Receivable
Turnover
Average Collection
Period
Gross Profit Margin
Operating Profit
Net Profit Margin
Margin on Total Assets
Return
Return on Stockholders
Equity
Earnings Per Share
Growth Ratios (%)
Sales
Net Income
Earnings Per Share
Dividends Per Share
Costco
2013
1.20
.60
Costco
2013
63.64
175.00
54.61
Compared to Walmart48 49
Costco
Costco Walmart
2012
2011
2013
1.10
1.14
.84
.53
.52
.23
Costco
Costco Walmart
2012
2011
2013
53.88
53.02
59.76
116.81
112.85
148.48
18.87
17.01
60.62
Walmart
2012
.88
.23
Walmart
2012
60.83
155.28
73.05
Walmart
2011
.89
.27
Walmart
2011
60.59
153.74
71.49
S/W/N
2013
S
S
S/W/N
2013
S
W
S
30.84
29.04
21.03
37.41
40.39
45.88
Costco
2013
7.58
3.47
-
Costco
2012
7.65
3.65
-
Costco
2011
7.15
3.32
-
Walmart
2013
3.27
2.31
-
Walmart
2012
3.23
2.31
-
Walmart
2011
3.28
2.33
-
S/W/N
2013
S
S
-
Costco
2013
12.56
2.90
1.94
6.73
18.52
Costco
2012
12.42
2.78
1.72
6.30
13.65
Costco
2011
12.57
2.74
1.64
5.46
11.63
Walmart
2013
24.87
5.49
3.62
8.37
20.80
Walmart
2012
25.02
5.46
3.51
8.11
20.72
Walmart
2011
25.34
5.58
3.89
9.07
23.00
S/W/N
2013
W
W
N
N
N
$4.68
24.19
Costco
2013
6.07
19.31
18.78
693.20
$3.94
24.82
Costco
2012
11.50
16.89
17.61
15.73
$3.35
24.52
Costco
2011
14.07
12.20
12.80
15.58
$5.04
14.57
Walmart
2013
4.97
8.28
11.01
8.72
$4.54
13.61
Walmart
2012
5.95
-4.21
1.34
20.66
$4.48
12.52
Walmart
2011
3.37
14.05
20.34
11.01
W
W
S/W/N
2013
N
S
S
S
48
Wal-Mart Stores, Inc. Bentonville, Arkansas. FY 2012 Form 10-K, Securities and Exchange Commission
Filing.
49
Filing.
25
Liquidity Ratio
Current Ratio
Quick Ratio
Leverage Ratio (%)
Debt to Total Asset
Ratio
Long-Term
Debt to
Equity Ratio
Times Interest Earned
Ratio
Activity Ratio
Inventory Ratio
Accounts Receivable
Turnover
Average Collection
Period
Gross Profit Margin
Operating Profit
Net Profit Margin
Margin on Total Assets
Return
Return on Stockholders
Equity
Earnings Per Share
Growth Ratios (%)
Sales
Net Income
Earnings Per Share
Dividends Per Share
50
Costco
2013
1.20
.60
Costco
2013
63.64
175.00
54.61
Compared to Target50
Costco
Costco
Target
2012
2011
2013
1.10
1.14
.53
.52
Costco
Costco
Target
2012
2011
2013
53.88
53.02
116.81
112.85
18.87
17.01
-
Target
2012
1.17
.61
Target
2012
65.62
190.87
106.14
Target
2011
1.15
.60
Target
2011
66.07
194.73
104.43
S/W/N
2012
N
N
S/W/N
2012
S
S
S
30.84
29.04
21.03
7.05
6.15
Costco
2013
7.58
3.47
-
Costco
2012
7.65
3.65
-
Costco
2011
7.15
3.32
-
Target
2013
-
Target
2012
2.27
1.49
-
Target
2011
2.27
1.47
-
S/W/N
2012
S
S
-
Costco
2013
12.56
2.90
1.94
6.73
18.52
Costco
2012
12.42
2.78
1.72
6.30
13.65
Costco
2011
12.57
2.74
1.64
5.46
11.63
Target
2013
-
Target
2012
29.73
7.46
4.17
6.23
18.11
Target
2011
30.09
7.77
4.28
6.28
18.51
S/W/N
2012
W
W
W
N
W
$4.68
24.19
Costco
2013
6.07
19.31
18.78
693.20
$3.94
24.82
Costco
2012
11.50
16.89
17.61
15.73
$3.35
24.52
Costco
2011
14.07
12.20
12.80
15.58
Target
2013
-
4.57
13.35
Target
2012
5.10
2.39
6.03
20.00
4.31
12.10
Target
2011
4.07
.31
6.95
25.00
W
W
S/W/N
2012
S
S
S
S
Target Stores, Inc. Minneapolis, Minnesota. FY 2012 Form 10-K, Securities and Exchange Commission Filing.
26
Liquidity Ratios
Liquidity ratios (Current ratio and Quick Ratio) measure a firms ability to meet
upcoming short-term obligations. Costcos liquidity ratios have been fairly consistent over the
past three years. The current ratio for the past three year ranges from 1.14 in 2011 to 1.20 in
2013 and the quick ratio ranges from .52 in 2011 to .60 in 2013. Both are higher than the
industry average and top competitor Walmart. Over the last year cash has increased by over $3.5
billion from foreign operations which leads to higher liquidity ratios.
Leverage Ratios
Leverage Ratios measure the extent to which a firm has been financed by debt.
Compared to Walmart, Costco was significantly weaker when it comes to the Debt to Equity
ratio as in 2013 it was about 30% higher. This means that Costco is funded more by debt than
owners. Costcos long-term debt increase by more than 35% and is partially because of an
obligation signed in Japan. The times-interest earned ratio was great compared to the industry
which means earnings can fall a large amount and the company will still be able to meet its
annual interest costs.
Activity Ratios
Activity Ratios measures how efficiently the company is using its resources. In this case
only two of the ratios were available for calculation, those two ratios are fixed asset turnover and
total asset turnover. Both of these ratios were higher than Walmarts and the industry average
was not available. The total asset turnover means Costco is getting a large number of sales
compared to the investments that the company has made.
27
Profitability Ratios
Profitability ratios measure managements effectiveness as shown by the returns
generated on sales and investments. Costco didnt do as well as you wouldve hoped but they
are showing improvement from the past three years. The operating profit margin was
significantly lower than the industry average and Walmart which means they have less profit to
cover taxes and interest payments. After taxes the net profit margin is calculated and while it
still is lower than the industry average and Walmart it is close enough to stay competitive.
Growth Ratios
Growth ratios measure the percentage of growth your sales, net income, earnings per
share, and dividends per share have increased or decreased compared to the prior fiscal year.
Sales with have increased by about 6% and net income has increased by nearly 20% which is
about 11% higher than Walmart. Dividends per share have increase significantly because of the
special $7 dividend distributed in the 2013 fiscal year.
28
Net Profit Margin 2011-2013

25
Profit Margin Percentage
20
15
Costco
10
Walmart
5
Target
0
2011
2012
2013
-5
-10
No information for Target in 2013
Conclusion
For Costco, 2013 continued to show growth like past years have. Gross profit margin,
operating margin, and net profit margin all keep increasing. Sales have increased by 6 percent in
the last year; while that is not nearly the amount of growth we have seen the last two years it is
still very good. Even with sales not increasing as much as it has the last two years net income
has still managed to increase from 16.89 percent to 19.31 percent. This means they have
possibly cut their operating expense to increase this net income percentage. Costco is managing
to compete with Walmart and Target but are not overwhelming the competition while they are
doing significantly better than the industry average.
29
Strengths
Net income has increased by 19.31% and Walmart only increased by 8.28%.
Increase in cash makes Costcos current and quick ratio higher which makes them
more liquid than the industry.
Weaknesses
In 2013, gross profit margin was 12.56% with membership fees, in comparison to
the industry of 24.56% and Walmart at 24.87%.
The debt-to- equity ratio was 175% in 2013 while the industry average was only
61%.
Operating profit margin was 2.97% compared to Walmarts 5.52% in 2013.
30
External Environmental Analysis

History
The first change to the growth in grocery retail was the rise of chain stores in the early
1900s. The second was the introduction and diffusion of the supermarket in the middle of the
century. The third was the "adoption of technology-intensive distribution systems in the 1980s
and 1990s". A trend accelerated in the 1990s: expansion by big-box discounters and wholesalers
like Walmart, Costco, and Target into the grocery business.51
51
Courtemanche, Charles, and Art Carden. 2014. "Competing with Costco and Sam's Club: Warehouse Club Entry
and Grocery Prices." Southern Economic Journal 80, no. 3: 565-585. Business Source Complete, EBSCOhost.
Accessed on February 26, 2014.
31
Political/Legal
With Costco being an international discount wholesaler it brings along more risk legally
that the company has to be aware of. With facilities all over the country and world Costco has to
follow all of the local laws and pay close attention to the zone that the facility is located.
Depending on the location there are laws of the products that wholesale companies can
provide to the consumer. For example, some locations will not allow companies to sell alcohol
at the wholesale companies and at gas stations like Washington, D.C. Both of these products a
majority of wholesale companies have available to the consumer which is a reason the location
have a large role in the legal process. To keep a competitive advantage Costco must find a way
to provide all the products and services they have available to every location. In Washington,
D.C where it is illegal to sell alcohol and gas in the same location, Costco came up with a plan to
split the construction site into two and provide both products with a wholly owned subsidiary.52
The sale of Tobacco to minors in the United States is illegal. On April 4, 2013, a Costco
establishment illegally sold Tobacco products to a minor during an FDA enforcement
inspection.53
Federal minimum wage requirements may change to favor an increase in the United
States, causing retailers to spend more on labor costs, potentially increasing overhead.54
There are several factors that can affect our company when trying to increase
international sales. For example, exchange rates, adverse tax consequences, and the difficulty in
52
Chris Morran. (December 2, 2013). Costcos Clever Plan to Sell Both Gas & Liquor in D.C. Results in Death
Threats. Accessed on February 26, 2014. Retrieved at http://consumerist.com/2013/12/02/costcos-clever-plan-tosell-both-gas-liquor-in-d-c-results-in-death-threats/
53
U.S. Food and Drug Administration. (April 25, 2013). FDA Warning Letter Regarding Tobacco Retailer
Inspection Violation. Accessed on March 5, 2014. Retrieved from
http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/Tobacco/ucm353751.htm
54
Kenneth Quinnell (March 7, 2013).Costco CEO Supports Fair Minimum Wage Act Accessed on March 5,
2014. Retrieved from http://www.aflcio.org/Blog/Political-Action-Legislation/Costco-CEO-Supports-FairMinimum-Wage-Act
32
enforcing intellectual property rights.55 It is harder to enforce intellectual property rights for
signature brands because the trademark registrations vary from country to country. 56 With a
company being just based in the U.S or international there are still strict laws regarding the
privacy information of the members of the company and the vendors that the corporation must
abide could be exposed to legal liability.57
Threats:
Must abide to and ensure continued enforcement of Tobacco laws, including the
prevention of sale to minors in the United States.
Increase in federal minimum wage requirements would force retailers to pay
employees higher wages
Maintaining privacy and security information with the laws constantly changing
55
Costco Wholesale, Inc. Costco FY 2013 Annual Report op cit, Pg. 19.
57
56
33
Social/Cultural
Consumers are paying more attention to their health, personal identity, and stimulation of
their senses. 58 They expect products that fulfill a set of complex internal requirements and
brands that they can personally relate to. These trends are caused by the integration of
technology in consumers lives, allowing them to shop their beliefs and desires. 59
Consumers are seeking products that are environmentally responsible, socially
responsible, and naturally sourced. These trends have emerged primarily in the food segment, but
have also raised overall awareness for other categories of products. Consumers expect these
fulfillments to be met among name-brands and private-brands.60
The convergence of digital and the real world has caused consumers to expect the same
level of service across multiple platforms and in-store. Well executed integration of digital
technology is now a determining factor in whether firms are successful or not.61
The emergence of Generation Y consumers presents a major cultural and marketing shift
for brick and mortar retailers. Generation Y consumers are skeptical, pragmatic, and valuesoriented and have an eye for authenticity.62 Capturing their attention and dedication to brands
requires the engagement of their beliefs and dedication by brands to continuous improvement.
58
Hazel Barkworth. (February 4, 2014). Six Trends That Will Shape Consumer Behavior This Year. Accessed on
February 26, 2014. Retrieved from http://www.forbes.com/sites/onmarketing/2014/02/04/six-trends-that-will-shapeconsumer-behavior-this-year/
59
Brush, Marc. 2013. "Consumer trends that matter: Personalization." Functional Ingredients no. 131: 14. Business
Source Complete, EBSCOhost. Accessed on February 26, 2014.
60
Peckenpaugh, Douglas J. 2013. "The Top 10 Trends in Private Label." Private Label Buyer 27, no. 11: 2330. Business Source Complete, EBSCOhost. Accessed on February 26, 2014.
61
Steven Sparrow. (January 7, 2014). 5 Retail Trends To Look For In 2014. Accessed on February 26, 2014.
Retrieved from http://www.forbes.com/sites/sap/2014/01/07/5-retail-trends-to-look-for-in-2014/
62
Dwyer, Nate. 2013. "The Secret Door To Brick And Mortar: Succeeding With Millennials." Chain Store Age 89,
no. 8: 20-21. Business Source Complete, EBSCOhost. Accessed on February 26, 2014.
34
Opportunities
Emerging health and natural trends for consumer products.
Threats
Increased competition in cross-platform retail sales will present a make-or-break

for retailers and brick and mortar stores.
Private label brands will require significant research, development, and quality
assurance to maintain consumers choice over competitive name brands, presenting
the possibility for additional overhead.
35
Demographic
Emerging middle class segments in China represent an opportunity for the expansion of
the retail segment. Increases in disposable income are allowing these emerging segments of
consumers to have more buying power, expanding the luxury goods segment. Chen ZhiHeng earns about $36,000 a year working as a doctor in Changsha, a city in south-central China.
Even though she earns far above average, she doesn't consider herself well-off enough to be
middle classWith roughly $800 free each month to spend on discretionary items, she owns a
$4,700 Gucci watch, a $1,600 Burberry coat and a $320 Hermes silk scarf.63
Indias middle class is expected to expand, growing to over half a billion people by the
year 2025, according to the McKinsey Global Institute. World Bank projections place the middle
class segment closer to one billion by 2025. Despite these projections, there are major concerns
regarding the structural instability of the economy in India. Spending power of the lower class
ranges from $2-$4 per day, a segment comprised of more than 220 million people. This class is
vulnerable to economic downturn and represents a potentially unstable segment of the economy.
The expansion of a strong middle class in India may not be a sure bet for retail industry
investment and expansion.64
The middle class in America is shrinking; increased healthcare costs, education expenses,
energy expenses, and relatively unchanged median incomes since the late 1980s are contributing
factors. This class represents a major segment of spenders in the retail segment.65
63
Annalyn Censky. (June 26, 2012). Chinas middle-class boom. Accessed on February 27, 2014. Retrieved from
http://money.cnn.com/2012/06/26/news/economy/china-middle-class/
64
Sambuddha Mitra Mustafi. (May 13, 2013). Indias Middle Class: Growth Engine or Loose Wheel?. Accessed
on February 27, 2014. Retrieved from http://india.blogs.nytimes.com/2013/05/13/indias-middle-class-growthengine-or-loose-wheel/?_php=true&_type=blogs&_r=0
65
Eduardo Porter. (September 18, 2013) Americas Sinking Middle Class. Accessed on February 27, 2014.
Retrieved from http://www.nytimes.com/2013/09/19/business/americas-sinking-middle-class.html
36
Opportunities
Expanding middle class segments in international markets, with higher disposable

income, present a large market for the retail segment.
Threats
The American middle class is feeling continued pressure by increasing expenses,

reducing buying power and disposable income.
37
Technological
Big data, the latest term referring to the convergence of cloud server solutions and a
multitude of data points, presents a new segment of cross platform retail sales and promotion.
Engaging the consumer by utilizing shopping habits, sensory input, point-of-sale data, and many
other data points is the predicted future of successful retailers. Buying into this technology and
applying it successfully to a retailers brand would present a strong competitive advantage.66
Companies that produce ERP (enterprise resource planning) software are competing
heavily to produce the most efficient & effective, integrated, big data solutions. Wal-Mart Stores
has established a strong working relationship with SAP, a major provider of ERP software, to
gain a competitive advantage in their financials and distribution management divisions.
Integration of their software was completed in 2010, allowing Wal-Mart to focus on customer
integration for the future.67
66
Steven Sparrow, op cit.

SAP AG. (2007). Wal-Mart Selects SAP. Accessed on February 27, 2014. Retrieved from
http://global.sap.com/press.epx?pressid=8440
67
38
Opportunities
Connecting with the consumer through branding and the use of big data
successfully would produce a dominant player in the retail segment.
Threats
Consumers are now expecting better mobile phone and technology experiences,
which cost significantly to implement.
39
Competitive Analysis
The discount stores industry is highly competitive. Costco Wholesale Corporation
directly competes with Wal-Mart Stores and its subsidiary Sams Club, Target Stores, BJ's
Wholesale Club, and indirectly competes with internet-based business, Amazon.com. Wal-Mart
Stores is an American company that was founded in 1945. It operates in many countries
worldwide through Wal-Mart U.S., Wal-Mart International, and Sam's Club.68 Target
Corporation is also an American company which was founded in 1902 in Minneapolis,
Minnesota.69 It operates general merchandise stores in the United States and Canada. BJs
Warehouse Club is a privately owned company that operates within only 15 American states.70
These stores compete against each other to offer thousands of products that include a
variety of food, beverages, household essentials, outdoor products, beauty, health, baby,
pharmaceutical, sporting, automobile products, apparel, electronics, appliances, furniture, and
entertainment devices at competitive pricing.
One of Costcos strengths is that it is one of the biggest discount warehouse stores with
its revenue growing at an average annual rate of 8% in the past few years.71 However, it
indirectly competes with Amazon.com, which is a rapidly growing internet-based company that
offers price comparison, so consumers can get the best deals using any computer or mobile
68
Yahoo Finance. Company Profile WMT Wal-Mart Stores. Accessed on March 10, 2014. Retrieved from
http://finance.yahoo.com/q/pr?s=WMT+Profile
69
Yahoo Finance. Company Profile TGT Target Stores. Accessed on March 10, 2014. Retrieved from
http://finance.yahoo.com/q/pr?s=TGT+Profile
70
Livia Gershon. (February 10, 2013). After Sale, BJ's Sticking With Proven Strategy. Accessed on March 10,
2014. Retrieved from http://www.wbjournal.com/article/20130210/METROWEST02/302079996/after-sale-bjssticking-with-proven-strategy
71
Trefis Team. (July 31, 2013). Accessed on March 10, 2014. Retrieved from
http://www.trefis.com/stock/cost/articles/196736/costcos-biggest-threats-are-amazon-sams-club/2013-07-31
40
device. Amazons $79 per year Prime membership provides customers with free two-day
shipping and access to a growing assortment of household goods.72
Wal-Mart, the largest retailer in the industry, offers consumers low prices on a large
assortment of goods. Wal-Mart has more than two million employees globally. Their product
mix is tailored to the cultures in which they operate their businesses, offering consumers choice
in what they buy. Wal-Mart has developed a reputation for the mistreatment of their employees;
this has negatively impacted their public relations and corporate image. Sams Club, a subsidiary
of Wal-Mart, offers customers a $40 per year membership; while Costcos competing
membership costs start at $55 per year. Sams Club operates 620 stores within 47 states in
America and Puerto Rico. Sams Club is the only warehouse club that offers Apple products and
has low membership costs.73
BJs Warehouse Club offers a membership price of $50. BJs differentiates themselves
from Costco Wholesale and Sams Club by offering differentiated packaging sizes, and twice the
number of products as a typical Costco or Sams Club. BJs offers a family-focused atmosphere,
attracting buyers who may not fit within the small business oriented atmosphere of competitor
Sams Club and Target. BJs has begun to offer organic products at lower prices than
competitors, capitalizing on the growing demand for organic products by consumers.74
Competitor Target Stores has also begun to offer organic and fresh foods in stores, in a new
grocery concept called PFresh.75 In addition to organic foods, Target has started offering high
end products into its mix, attracting high end consumers.
72
Kelli Grant. (March 1, 2014). Which membership pays off faster: AAA or Amazon? Accessed on March 10,
2014. Retrieved from http://www.cnbc.com/id/101452608
73
Trefis Team, op cit.
74
Rennee Morad. (January 6, 2013). Best Warehouse Store: BJs, Costco, or Sams Club? Accessed on March 10,
2014. Retrieved from http://finance.yahoo.com/news/best-warehouse-store-bj-costco-104106736.html
75
Tanzina Vega. (December 16, 2010). Shopping at Target? Now You Can Pick Up a Dozen Eggs. Accessed on
March 10, 2014. Retrieved from http://www.nytimes.com/2010/12/17/business/media/17adco.html?_r=0
41
Opportunities
Warehouse clubs and supercenters industry is growing internationally.
Threats
BJs Warehouse Club offers organic products at a lower price than major
competitors.
Wal-Mart Stores has major market control, with more than two million employees.
Wal-Mart subsidiary, Sams Club offers the lowest membership pricing, at $40 per
year.
Risk of territorial encroachment by high-end attracting retailers like Target.
42
Economic
In America today, there are many factors which can help us determine if an economy is
healthy or not. Mostly by Gallup and The Economist, these factors are a large determinant in the
health of an industry. And while it is true that most contemporary economic factors point to
negative trends in the well-being of the industry, there are always good signs to be found.
Rampant unemployment, underemployment, stagnant wages, and lowering labor-force
participation rates are just a few reasons why America might be in trouble. However, an
increasing GDP at an increasing rate and the fact that Americas stock markets are recovering is
cause for hope indeed. Currency rates are another thing that may need to be looked at.
Unemployment and underemployment are measurements of the quality of work that
exists for Americans. If too many people are filing for unemployment or consider themselves
underemployed, clearly they do not have the discretionary income to be buying too many things.
Unemployment is currently sitting at 8.4% according to Gallup. While this is much better than
the 2011 rate of almost 10%, it still leaves much to be desired. Unemployment as calculated by
the Bureau of labor statistics points to 6.7%, however. Regardless, China and Japan are sitting at
unemployment rates of 4.1% and 3.7%, respectively. Underemployment, as defined by Gallup as
respondents [that] are employed part time, but want to work full time, or they are
unemployed, is currently sitting at 18.1%. This is worrying as well, considering this is almost as
much as one-fifth of the country.
Stagnant wages is another problem. More and more people are becoming unhappy with
the wage gains and the median income level is at its lowest point since 1998. Not only this but in
2012, according to Al-Jazeera, 67. 1 percent of workers earned less than the average, up from
43
66.6 percent in 2011 and 65.9 percent in 2000.76 This points to a threat showing that Americans
might just not be so willing to spend money even more.
Yet one more disturbing factor has to be analyzed. Early in February, The Economist
published an article indicating that the labor-force participation rate is less than 63% now,
lowered from the 66% it was at in 2007, pre-housing crisis recession. Yet again this just shows
that another source indicates that about 37% of Americans in the labor force arent working. This
isnt even mentioning the Gallup statistic of payroll-to-population of 42.7%.
The Economist also reported some optimistic statistics as well, however. The real GDP in
America has gone from increasing by 1.9% last February to 2.9% this February, a growth rate
change of almost 50% in a positive direction! This is important because GDP is an indicator of
all sales within a country, and retail has a large share of the countrys revenue pie.
Next up are the stock market indices. The DJIA is up by 17.8% since the end of 2012,
and the S&P500 and NAScomp are up 22.8% and 32.9% respectively. What this means of
course, is that the stock market is thriving. This isnt a huge surprise, considering we are still
recovering from a recession; however it is a beneficial factor to look at in regards to the health of
our industry. Now if these gains could be transferred a little more to the lower wages, they would
be benevolent to not only our industry (big-box retail) but also the entire economy as well.
The final thing to consider is the value of the U.S. dollar opposed to the other currencies.
The Chinese Yuan and the British pound have both increased against the dollar by 225 basis
points and 469 basis points, respectively. This being said, however, the Japanese Yen and the
Canadian dollar both decreased in value against the dollar by 8.14% and 11%, respectively. This
76
David Cay Johnston. (November 4, 2013). Median wage falls to lowest level since 1998. Accessed on March 5,
2014. Retrieved from http://america.aljazeera.com/articles/2013/11/4/median-wage-stagnationincomeinequality.html
44
shows that, while some currencies have gained in value against the dollar, their net gain amongst
consolidated power players is still high.
45
Opportunities
Gross domestic product of the United States is increasing, indicating recovery from
the 2008 recession.
Decreasing United States Unemployment rate (2011, 10% to 2014, 8.4%) positively
affects consumer confidence.
Threats
Fluctuation of the U.S. Dollar makes it difficult for American firms to consistently
compete in international markets.
46
SWOT Analysis
Strengths:
Simplicity of warehouse format allows Costco to deliver products efficiently

and at a low overhead of 14%.
Costco has 400 more locations than competitor BJs Wholesale Club
Costco has nearly double the membership revenue of Wal-Mart/Sams Club
Costco does not have a significant amount of expenses associated with
research and development
10% part time and 6% full time employee turnover allows Costco to
maintain a high quality, dedicated workforce due to competitive wages and
fair working environment. Reduced long term hiring costs due to low
turnover.
Strong company culture of ethically delivering value to the consumer is
present at all levels of the business.
Strong value proposition for the consumer surrounds the nature of
No marketing cost allows Costco to keep markup as low as 14%.
Kirkland Signature private label has strong reputation and high profit
margin.
Net income has increased by 19.31% and Walmart only increased by 8.28%.
Increase in cash makes Costcos current and quick ratio higher which makes
them more liquid than the industry.
Weaknesses:
Executive level turnover is low, reducing the possibility for fresh talent and
new ideas at the management level.
Brand awareness can be adversely affected by the marketing efforts and
In 2013, gross profit margin was 12.56% with membership fees, in
comparison to the industry of 24.56% and Walmart at 24.87%.
The debt-to- equity ratio was 175% in 2013 while the industry average was
only 61%.
Operating profit margin was 2.97% compared to Walmarts 5.52% in 2013.
47
Opportunities:
Emerging health and natural trends for consumer products.

Expanding middle class segments in international markets, with higher
disposable income, present a large market for the retail segment.
Connecting with the consumer through branding and the use of big data
Gross domestic product of the United States is increasing, indicating recovery
from the 2008 recession.
Decreasing United States Unemployment rate (2011, 10% to 2014, 8.4%)
positively affects consumer confidence.
Consumers are now expecting better mobile phone and technology experiences
Warehouse clubs and supercenters industry is growing internationally.
Threats:
Must abide to and ensure continued enforcement of Tobacco laws, including the
Increase in federal minimum wage requirements would force retailers to pay
Maintaining privacy and security information with the laws constantly changing
Increased competition in cross-platform retail sales will present a make-or
break for retailers and brick and mortar stores.

Private label brands will require significant research, development, and quality
assurance to maintain consumers choice over competitive name brands,
presenting the possibility for additional overhead.
The American middle class is feeling continued pressure by increasing expenses,
Wal-Mart has a larger employee base, at 2.2 Million
BJs Warehouse Club offers organic products at a lower price than major
competitors.
Wal-Mart Stores has major market control, with more than two million
employees.
Wal-Mart subsidiary, Sams Club offers the lowest membership pricing, at $40
per year.
Risk of territorial encroachment by high-end attracting retailers like Target.
48
Internal Factor Evaluation (IFE)

Strengths
Weights Rating
7.5%
4
1 Simplicity of warehouse format allows Costco to deliver
products efficiently and at low overhead of 14%
2.5%
3
2 Costco has 400 more locations than competitor BJs
Wholesale Club
5%
4
3 Costco has nearly double the membership revenue of
Walmart/ Sams Club
2.5%
3
4 Costco does not have a significant amount of expenses
associated with research and development
5%
3
5 10% part time and 6% full time employees turnover
allows Costco to maintain a high quality, dedicated
workforce due to competitive wages and fair working
environment. Reduced long term hiring costs due to
low turnover.
5%
3
6 Strong company culture of ethically adding value to the
consumer is present at all levels of the business
5%
3
7 Strong value proposition for the consumer surrounds the
nature of merchandising of the business
10%
4
8 No marketing cost allows Costco to keep markup at
14%
5%
3
9 Kirkland Signature private label has strong reputation
and high profit margin
10%
4
10 Net income has increased by 19.31% and Walmart only
increased by 8.28%
5%
3
11 Increase in cash makes Costcos current and quick ratio
higher which makes them more liquid than the industry
Weaknesses
Weights Rating
7.5%
1
1 Executive level turnover is low, reducing the possibility
for fresh talent and new ideas at the management level
5%
2
2 Brand awareness can be adversely affected by the
marketing efforts and existence of marketing by
competing firms.
10%
1
3 In 2013, gross profit margin was 12.56% with
membership fees, in comparison to the industry of
24.56% and Walmart at 24.87%
10%
1
4 The debt-to-equity ratio was 175% in 2013 while the
industry average was only 61%.
5%
2
5 Operating profit margin was 2.97% compared to
Walmarts 5.52% in 2013.
100%
Wtd. Score
.30
.075
.20
.075
.15
.15
.15
.4
.15
.4
.15
Wtd. Score
.10
.10
.10
.10
.10
2.70
49
Internal Factor Evaluation (IFE) Conclusion

Costcos total weighted score on the Internal Factor Evaluation (IFE) is 2.70, which is
above the industry average score of 2.50. This means that Costco is capitalizing on their
strengths and has a strong internal position which transcends into a competitive advantage over
most companies within the industry. Their membership revenue nearly doubles that of some of
their competitors and their lack of mark ups, along with other factors have allowed them to
increase net income by 19.31% just in the past year. Financially, however, Costco is having
trouble maintaining or surpassing their competitors. 77
Some key factors that could have lowered Costcos total weighted score are the fact that
they are heavily financed by debt compared to the industry, along with a low executive level
turnover. 78 They are not stimulating fresh talent and new innovative ideas and which are needed
for the survival of a company, especially operating in an industry where such strong
competitiveness exists, where they have risks of territorial encroachment by high-end attracting
retailers like Target.
77
78

50
Key Strengths
Net Income has increased by 19.31% and Walmart only increased by 8.28%.7980
Costco has nearly double the membership revenue than Walmart.81
Simplicity of warehouse format allows Costco to deliver products efficiently and at

low overhead of 14%
No marketing cost allows Costco to keep markup at 14%82
Key Weaknesses
Executive level turnover low, reducing the possibility for fresh talent and new ideas
at management level.83
The debt-to-equity ratio was 175% in 2013 while the industry average was 61%84
In 2013, gross profit margin was 12.56% with membership fees in comparison to the
industry of 24.56% and Walmart 24.87%8586
79

Filing.
81
82
Brad Stone, op cit.
83
84
85
ibid
86
ibid
80
51
Strategic Direction
With Costco getting an average total weighted score of 2.70 it shows that Costco still has
some work to do to become more profitable. Overall, Costco has been average when compared
to industry competitors such as Wal-Mart, Target, and BJs warehouse. In order to become a
more profitable company, Costco has to take advantage of the strengths that they already have.
A strength they have is the amount of money they produce from membership fees which is about
$2.2 billion, compared to Wal-Mart which was only about $1billion87. This revenue goes a long
way in compensating for some of the weaknesses Costco has.
Costcos employee turnover rate is low which allows Costco to maintain a highly
dedicated workforce due to competitive wages within the industry and fair working conditions.
Competitive wages make minimum wage laws less relevant to Costcos workforce. To gain a
competitive advantage Costco could get some new employees in the executive level to stimulate
new insight and ideas.
87
88
88

52
Rationale of High Weights (Strengths)

No marketing cost allows Costco to keep markup at 14%:
With Costco having no marketing cost, they are able to maintain low markups on
products, at just 14%.89 The lack of expenses within this this department allows for a higher
operating and net income which, in turn, increases market share within the industry. This factor
was given a weight of 10% because of the significant increase this markup has on our net income
given there are no expenses, which allows us to compete with other companies.
Net income has increased by 19.31% and Wal-Mart only increased by 8.28%:
The weight that was given for this strength is 10%. The past three years Costco has
increased net income. This year they increased by 19.31% while Wal-Mart only increased by
8.28%. The industry is heavily driven by financial performance; the fulfillment of such financial
goals is expected by company shareholders and could adversely affect company equity. Almost
doubling the increase of net income of other companies in the industry allows for a competitive
advantage within the industry.
Rationale of High Weights (Weaknesses)

The Debt-to-Equity ratio was 175% in 2013 while the industry average was 61%:
Costco was heavily financed by debt in 2013. The rationale for the 10% percent weight
is due to the interest expense that comes with the debt. This debt to equity ratio is alarmingly
almost tripled the amount in the industry which can have adverse impacts on Costco as well as
the industry. With this interest expense and the amount of debt that is owed to the creditors this
lowers operating income and also net income.
89
Brad Stone, op cit.
53
Executive level turnover low, reducing the possibility for fresh new talent and new ideas at
management level:
With the low level turnover of executives, the weight this weakness received is 7.5%.
With the low turnover there are not many opportunities for fresh new talent and new ideas.
Fresh new talent stimulates a more diverse and innovative set of ideas which is needed to
maintain healthy competition within an industry. It allows companies to constantly keep up with
current trends in the market which helps increase the effectiveness of the industry as a whole.
With such a low turnover this is just not possible.
In 2013, gross profit margin was 12.56% with membership fees, in comparison to the
industry of 24.56%
In 2013 the industrys gross profit margin was nearly double the amount of Costco. This
weakness received a weight of 10% because of the level of significance. This indicates that even
though Costco has increased sales by almost 20%, they are not competing at a good enough level
in order to keep up with competitors within the industry because most of them are experiencing
greater profits.
Rationale of Low Weights (Strengths)

Costco has 400 more locations than competitor BJs wholesale Club:
This strength received a weight of 2.5%. It helps Costco acquire more assess to customers
and gain a more loyal customer base but it is still not as significant as the other strengths. Costco
gains a majority of its competitive advantage from customer loyalty and simplicity of design in
there stores which is vital in this industry.
54
Costco does not have a significant amount of expenses associated with research and
development:
The only research and development really associated with Costco is the development of
their Kirklands Signature brand. Research and development is important to constantly help
assure that the industry is performing at its best but since Costco has already established their
brand, they currently see no need for their research and development in this industry. With this
being said this strength received a 2.5% because it saves them capital from not having the
expense while it is a major expense in the industry.
Rationale of Low Weights (Weaknesses)

Operating profit margin was 2.97% compared to Industrys 5.37% in 2013:
This weakness received a lower weight of 5% because while the operating profit margin
is lower than that of the industry, there is room for improvement. Their sales are increasing every
year and they are saving capital through other competitive factors which will soon allow them to
increase in operating profit margin as well.
Rationale of 4 Ratings (Strengths)

Net income has increased by 19.31% and Walmart only increased by 8.28%:
This is a major strength for Costco to see their net income to increase by 16.31% while
one of their top competitors is significantly lower. This net income makes the company look
more desirable to stockholders. It has also been increasing in the past few years which is
important to both Costco and the industry.
55
Costco has nearly double the membership revenue than Walmart:

Cost has more than $1 billion more membership revenue than Walmart.90 This creates
customer and brand loyalty which generates higher revenues and may explain why net income
has increased so much throughout the years. This customer loyalty can be a competitive
advantage because it gives them more revenue to cover your operating expenses and be more
profitable.
Simplicity of warehouse format allows Costco to deliver products efficiently and at low
overhead of 14%:
With its simplicity of the warehouse it helps lower the operating cost. For example, the
use of more natural light throughout the store decreases the need of using more light and cutting
the fixed cost. This is a competitive advantage and will help Costco in the long run become more
profitable.
No marketing cost allows Costco to keep markup at 14%:
With Costco having no marketing cost it allows them to have a higher markup. This has
a big impact with sales rising the past three years combined with this markup should lead to
higher sales. This makes a company more desirable for stockholders and also more profitable
the past few years.
Rationale of Low Ratings (Weaknesses)

Executive turnover low, reducing the possibility for fresh talent and new ideas at the
management level:
This is a major weakness because there are no new ideas to help the company gain a
competitive advantage. New ideas could lead to high profits if the company puts time into
90
56
finding new ideas. Costcos executive turnover rate is well below the industry average and could
hurt the company in the long run.91
The debt-to-equity ratio was 175% in 2013 while the industry average was 61%:
This is a major weakness because of the liability that comes with being heavily financed
by debt. Almost tripling the industry average is alarming for almost every financial ratio and
debt is not what a company wants. With this high debt percentage decreases the chances of
being profitable and is not good for the future.92
In 2013, gross profit margin was 12.56 with membership fees, in comparison to the
industry of 24.56% and Walmart 24.87%:
With a lower gross profit comes less money to cover your other obligations like operating
expenses which is why this is a major weakness. It is very alarming that their gross profit margin
is almost half of the industry and other main competitors because it is indicative of a company
that is not operating at its best. It is even more alarming because sales increased, which should
have should have competitively increase their gross profit also.93
91
Eleanor Bloxham. op cit.

93
ibid
92
57
External Factor Evaluation (EFE)

Opportunities
Weights
Rating
8%
Weighted
Score
0.3
10%
0.3
3 Connecting with the consumer through branding and

the use of big data successfully would produce a
dominant player in the retail segment.
10%
0.3
4 Gross domestic product of the United States is

increasing, indicating recovery from the 2008
recession.
5 Decreasing United States Unemployment rate (2011,
10% to 2014, 8.4%) positively affects consumer
confidence.
6 Consumers are now expecting better mobile phone
and technology experiences
7 Warehouse clubs and supercenters industry is
growing internationally.
Threats
8%
0.225
5%
0.15
5%
0.15
10%
0.4
Weights
Rating
1 Must abide to and ensure continued enforcement of

Tobacco laws, including the prevention of sale to
minors in the United States.
2%
Weighted
Score
0.03
2 Increase in federal minimum wage requirements

would force retailers to pay employees higher wages
2%
0.03
3 Maintaining privacy and security information with

the laws constantly changing
4 Increased competition in cross-platform retail sales
will present a make-or-break for retailers and brick
and mortar stores.
2%
0.015
10%
0.1
1 Emerging health and natural trends for consumer

products.
2 Expanding middle class segments in international
markets, with higher disposable income, present a
large market for the retail segment.
58
5 Private label brands will require significant research,

development, and quality assurance to maintain
consumers choice over competitive name brands,
8%
0.15
6 The American middle class is feeling continued

pressure by increasing expenses, reducing buying
power and disposable income.
8 BJs Warehouse Club offers organic products at a
lower price than major competitors.
9 Wal-Mart Stores has major market control, with
more than two million employees.
1 Wal-Mart subsidiary, Sams Club offers the lowest
0 membership pricing, at $40 per year.
1 Risk of territorial encroachment by high-end
1 attracting retailers like Target.
5%
0.1
3%
0.05
10%
0.2
3%
0.05
3%
0.06
2.61
59
External Factor Evaluation (EFE) Conclusion

Costcos weighted score on the External Factor Evaluation (EFE) totaled 2.61. This is
above the average score of 2.50. This shows that Costco is capitalizing on their opportunities
while avoiding threats. We did identify that there are more key threats than there are weaknesses.
They did score a 2.61 but there are still things Costco can do to increase their score. They can
capitalize on areas such as expanding to the middle class segments in the international market
and strengthen their connection with consumers through branding. They should also find ways to
avoid areas such as increased competition in cross-platform retail sales and the fact Wal-Mart
Stores has majority of market control.
Key Opportunities
Expanding middle class segments in international markets, with higher disposable income,
present a large market for the retail segment
Connecting with the consumer through branding and use of big data successfully would produce
a dominant player in the retail segment
Warehouse clubs and supercenters industry is growing internationally
Key Threats
Increased competition in cross-platform retail sales will present a make-or-break for retailers and
brick and mortar stores
Private label brands will require significant research, development, and quality assurance to
maintain consumers choice over competitive name brands, presenting the possibility for
additional overhead
The American middle class is feeling continued pressure by increasing expenses, reducing
buying power and disposable income
Wal-Mart Stores has majority market control, with more than two million employees
60
Strategic Direction
Costco scored a total weighted score of 2.61 indicating that they are capitalizing on their
opportunities and avoiding threats. Costco must take advantage of areas like the emerging health
and natural trends for consumer products. They must offer these products in their warehouses to
increase their growth. They must also take advantage of the expanding middle class segments in
international markets, with higher disposable income, presenting a large market for the retail
segment. They must grow internationally to attract and profit from this lightly tapped segment.
Connecting with the consumer through branding and use of big data successfully would produce
a dominant player in the retail segment. Costco must use the data they have to grow their brand
awareness. They also must begin to grow and expand now because the warehouse clubs and
supercenters industry is growing internationally.
Rationale of High Weights (Opportunities)

Our weight of .10 for the expanding middle class segments in international markets, with
higher disposable income, present a large market for the retail segment indicated that this is a
major opportunity for Costco. The entire warehouse clubs and supercenters industry can grow
from this opportunity. This is an important opportunity because the middle-class families in the
world drive the economy which will generate revenue for the company. When middle-class
families can no longer afford to buy the goods and services that businesses are selling, it drags
down the entire economy from top to bottom94. If this current market is expanding Costco must
take advantage of this.
94
Madland, David. (December 7, 2011). Middle Class Series: The Middle Class Grows the Economy, Not the
Rich. Accessed on March 10, 2014. Retrieved from
61
Our weight of .10 for connecting with the consumer through branding and use of big data
successfully would produce a dominant player in the retail segment indicates this is an important
opportunity for the industry. Databases indicate almost everything a company needs to know
about the consumer and their buying habits. If interpreted properly Costco can use this to
increase profit. There may be seasonal trends that the data indicates where Costco can release
certain products at certain times instead of consistently occupying shelf space with these
products.
Our weight of .10 indicated that the opportunity of warehouse clubs and supercenters
industry growing internationally is important to take advantage of. The Warehouse Clubs and
Supercenters industry has been one of the fastest-growing industries in the retail sector.
IBISWorld estimates that revenue will rise at an annualized rate of 4.5% to total $438.2 billion in
the five years to 2013.95 The industry shows a significant opportunity for growth.
Rationale of High Weights (Threats)

We assigned a .10 weight to the increased competition in cross-platform retail sales will
present a make-or-break for retailers and brick and mortar stores. This is an important threat
because Costcos mainly operates from a physical location. If this threat becomes more
significant, this will effect Costcos profits.
We assigned a .10 weight to the threat of Wal-Mart Stores having majority market
control, with more than two million employees because this takes away from Costcos potential
market control.
http://www.americanprogress.org/issues/economy/news/2011/12/07/10773/the-middle-class-grows-the-economynot-the-rich-2/
95
Smith, Gavin. (June 30, 2013). Warehouse Clubs & Supercenters in the US Industry Market Research Report
from IBISWorld has Been Updated Accessed on March 10, 2014. Retrieved from
http://www.prweb.com/releases/2013/6/prweb10884297.htm
62
Rationale of Low Weights (Opportunities)

We only assigned a .05 weight to the decreasing United States unemployment rate
positively affects consumer confidence because we did not feel it would affect the industry as
much. Consumers will still need to satisfy their needs whether they are employed or
unemployed. Yes this will create more people in the workforce indicating more disposable
income but we did not see this as an important factor.
We only assigned a .05 weight to the opportunity that consumers are now expecting
better mobile phone and technology experiences. Costco mainly operates from a physical
location so expanding to this market would not be as beneficial as some other opportunities
identified.
Rationale of Low Weights (Threats)

We assigned a .02 weight to the threat of abiding by and ensuring continued enforcement
of Tobacco laws, including the prevention of sale to minors in the United States because Costco
avoids this situation. They require identification before the purchase of tobacco to prevent this
threat from occurring.
We assigned a .02 weight to the increase in federal minimum wage requirements forcing
retailers to pay employees higher wages because we thought this was a minor threat. This will
increase our costs in the labor department, but the steady increase of the industry indicates that
Costco will be able to afford and avoid this threat.
We also assigned a .02 weight to maintaining privacy and security information with the
laws constantly changing. We do see this as an important threat, but Costco has avoided this by
not releasing customers personal information.
63
Rationale of 4 Ratings (Opportunities)

We gave emerging health and natural trends for consumer products a 4 rating because we
believe this is a major opportunity for Costco. They can take advantage of this opportunity
through providing their customers with more of these products.
Warehouse clubs and supercenters industry is growing internationally received a 4 rating
because this is the industry Costco is in. When the industry indicates steady growth, this is
always a major opportunity because when the industry experiences growth, Costco will
experience an increase in revenue. In 2013, revenue is expected to jump 6.7% due to rising
consumer disposable income. 96
Rationale of Low Ratings (Threats)

We identified maintaining privacy and security information with the laws constantly
changing as a major threat because even though they received a low weight in this category, the
consequences for violating these laws would be severe. This is why they received a 1 rating.
The increase of competition in cross-platform retail sales presenting a make-or-break for
retailers and brick and mortar stores also was identified as a major threat because if crossplatform retail options continue to increase, we may see a significant decrease in the revenue
generated from physical stores. Currently, we do not see this trend in effect but it is still a
potentially major threat.
96
Smith, Gavin. (June 30, 2013). Warehouse Clubs & Supercenters in the US Industry Market Research Report
from IBISWorld has Been Updated Accessed on March 10, 2014. Retrieved from
http://www.prweb.com/releases/2013/6/prweb10884297.htm
64
Competitive Profile Matrix (CPM)

Costco
Wholesale, Inc.
Wal-Mart
Stores, Inc.
Critical Success Factors
Weights
Financial Strength
Market Share
Customer Loyalty
Public Relations and
Marketing
Value Proposition for
Consumer
Private Label Brand
Equity
Technology and ERP
Integration
0.20
0.15
0.15
4
3
3
0.8
0.45
0.45
3
2
2
0.15
0.3
0.05
0.10
0.20
Total
1.00
Rating
Score
Score
BJ's Wholesale
Clubs
Rating
Score
0.6
0.3
0.3
3
2
3
0.6
0.3
0.45
2
2
2
0.4
0.3
0.3
0.3
0.3
0.3
0.15
0.15
0.1
0.15
0.4
0.3
0.3
0.2
0.6
0.8
0.4
0.4
3.15
Rating
Target
Stores, Inc.
2.75
2.45
Rating
Score
2.05
65
Competitive Profile Matrix (CPM) Conclusion and Rationales for Weights

Our competitive profile matrix focuses on key aspects of the warehouse clubs and
supercenters industry which have been often shown to weigh the success or failure of key players
in the industry. We have cited the key opportunities, threats, and rationales for each factor.
Factors assigned a weight of 0.20 include Financial Strength and Technology & ERP
Integration. These factors were assigned dominant weights due to their importance in
maintaining a modern and stable organization. Strong financial performance allows retailers to
continue to make investments, while leveraging assets to expand into key markets. The use of
enterprise resource planning software, distribution tracking systems, and automation of systems
(in general) provide retail businesses the ability to manage products, customers, and a variety of
key business functions. Automation of business functions is an essential aspect to the continued
growth and success of companies in the retail industry.
Factors assigned a weight of 0.15 include Market Share, Customer Loyalty, and Public
Relations and Marketing. Expanding and maintaining market share is an important aspect for the
continued success of a brands overall dominance in an industry. Maintaining the loyalty of
customers is essential for repeat business and applies heavily to companies in the warehouse
clubs industry, who must competitively attract and keep fee-paying members. Awareness of the
business, whether positive, negative, or neutral, is an additional aspect for the continued success
of warehouse clubs and supercenters due to conscious and educated consumers.
Factors assigned a weight of 0.10 or lower include Private Label Brand Equity and Value
Proposition for the Consumer. These factors, although important, represent a smaller weight in
the overall success of warehouse clubs and supercenters. Maintaining quality private label
branded products allows differentiation in the marketplace. Ensuring a strong value proposition
66
will attract and maintain a strong consumer foundation, particularly with the use of bulk, selected
product mixes.
Costco Wholesale ranks 3.15 out of 4.0 overall in our analysis. Wal-Mart ranks shortly
behind, at 2.75 out of 4.0. Target ranks at 2.45 out of 4.0. BJs cannot be accurately represented
due to limited information on financials and essential business functions. BJs is a privately
owned company.
Rationale of Costco Wholesale Key Strengths

1. 4.0 - Financial Strength: The recession of 2008-2010 caused consumer confidence to
plummet to its lowest level indicated in four decades. Many retailers felt the pressure of
increased competition, forcing deeper price cuts and losses.97 During this period, Costco
experienced increases in member visits; pushing net income up 19% ($1.09 Billion in
2009, $1.3 Billion in 2010) in 2010 from 2009.98
2. 4.0 - Private Label Brand Equity: Marketing research has suggested that brand names no
longer provide as much sway in the buying decisions of price-conscious consumers.
Fewer people assume that brand names are an indicator of quality, In 2010, 57% of
consumers agreed with the statement Brand names are not better quality. More
recently, the figure inched up to 64%.99 Costco has successfully differentiated and
established a solid reputation for its Kirkland Signature private label brand, with more
97
Ben Rooney. (October 28, 2008). Consumer confidence at all-time low. Accessed on March 10, 2014. Retrieved
from http://money.cnn.com/2008/10/28/news/economy/consumer_confidence/
98
The Associated Press. (October 6, 2010). Costcos profit rose 16% in Quarter. Accessed on Marc h 10, 2014.
Retrieved from http://www.nytimes.com/2010/10/07/business/07costco.html?_r=0
99
Brad Tuttle. (November 1, 2012). Brand Names Just Dont Mean as Much Anymore. Accessed on March 10,
2014. Retrieved from http://business.time.com/2012/11/01/brand-names-just-dont-mean-as-much-anymore/
67
than 24% of its sales attributed to the label. Consumers have shown that they are more
than pleased with purchasing Kirkland Signature branded products, including something
as risky as a whole new line of high end wine and liquors.100 101
Rationale of Costco Wholesale Key Weaknesses

1. 2.0 - Public Relations and Marketing: Wal-Mart and Target each spend more than $1
Billion on advertising per year.102 Despite Costcos success in competing with Wal-Mart
and Target on a domestic level, Costco may have trouble competing in markets that are
largely unfamiliar with the brand and its concept. Expanding and maintaining brand
awareness may prove to be difficult against companies who have the largest advertising
budgets in the United States.
Rationale of Wal-Mart Stores Key Strengths

1. 4.0 Technology and ERP Integration: The successful implementation of SAP Financial
tools in 2010 has allowed Wal-Mart to improve its overall tracking and analytics of
inventory. This implementation of key technology has given Wal-Mart a strong
competitive advantage.103 Wal-Mart utilized foreign markets including the United
Kingdom to test the initial implementation of the software, with the goal of final
implementation at United States stores. The system is designed around the concept that
100
Lettie Teague. (December 28, 2012). Costco wine suprises: If you see it, buy it. Accessed on March 10, 2014.
Retrieved from http://www.marketwatch.com/story/costco-wine-surprises-if-you-see-it-buy-it-2012-12-24
101
Store Brands Decisions. (June 1, 2010). Costco to expand Kirkland Signature Consumables. Accessed on
March 10, 2014. Retrieved from http://www.storebrandsdecisions.com/news/2010/06/01/costco-to-expand-kirklandsignature-consumables
102
Christina Austin. (November 11, 2012). Only 36 Companies Have $1,000 Million-Plus Ad Budgets. Accessed
on March 10, 2014. Retrieved from http://www.businessinsider.com/the-35-companies-that-spent-1-billion-on-adsin-2011-2012-11?op=1
103
Anh Ngyuen. (August 23, 2010). Walmart pushes ahead with SAP rollout after Asda pilot success. Accessed
on March 10, 2014. Retrieved from http://www.computerworlduk.com/news/it-business/3236348/walmart-pushesahead-with-sap-rollout-after-asda-pilot-success/
68
Wal-Mart and SAP coin as, Global Controllership. This comprehensive software
design will provide oversight across many business functions including: Financial
reporting, tax accounting, inventory tracking, logistics, and general compliance. These
business functions will operate and be managed by software, allowing for management
resources to focus on the information they need to be strategic and remain competitive in
the marketplace.104 105
Rationale of Wal-Mart Stores Key Weaknesses

1. 2.0 - Market Share: New evidence suggests that Wal-Mart may not continue to dominate
the market utilizing their original scorched earth method of driving market share. In
2010, Wal-Marts market share dropped from 13.9% to 13.4%. Although a marginal
decrease, it is the first time their market share has decreased after nearly a decade of
continual growth and market dominance. Wal-Mart will need to find new ways to
differentiate itself from other retailers and expand market share into more urban areas.106
2. 2.0 Public Relations and Marketing: Despite massive amounts of corporate influence
and lobbying power, Wal-Mart was unsuccessful in opening their first store in New York
City in 2013. Community opposition remains strong and many consumers are very vocal
in their fight against the company, citing its mismanagement of employees and lack of
adequate pay and benefits. An example of such mismanagement came in 2010, when the
largest gender discrimination class action lawsuit in U.S. history was launched against
Wal-Mart. As many as one million women employees of Wal-Mart were eligible to
104
Lindsay Shelton and Solomon Watne, SAP Insider. (2013) Case Study: How Walmart Leverages SAP Process
Control to Support Its Global Controllership Function. Accessed on March 10, 2014. Retrieved from
http://wpc.0b0c.edgecastcdn.net/000B0C/Presentations/GRC2013_Shelton_Watne_Casestudyhowwalmart.pdf
105
SAP AG, op cit.
106
John Melloy. (March 3, 2011). Wal-Mart Effect Over? First Market Share Loss in Decade. Accessed on March
10, 2014. Retrieved from http://www.cnbc.com/id/41892621
69
proceed with the lawsuit. Wal-Mart remains one of the top companies in advertising
expenditures in the United States.107 108
Rationale of Target Stores Key Strengths

1. 3.0 Customer Loyalty: Despite a recent breach in credit card information, many
consumers have been noted as remaining loyal to the Target brand. The brand has a large
fanbase.109
Rationale of Target Stores Key Weaknesses

1. 2.0 Market Share: Target operates just 124 stores outside the United States, in Canada.
Competitors including Costco have already expanded their operations globally, beating
Target to the punch. Their recent expansion into Canada has not occurred smoothly;
inventory seems different to the Canadian consumer, some shelves have often become
empty, and an overall operating loss of nearly $900 million was recorded.110
107
Steven Greenhouse, Stephanie Clifford. (March 6, 2013). A Respite in Efforts by Wal-Mart in New York.
Accessed on March 10, 2014. Retrieved from http://www.nytimes.com/2013/03/07/business/a-respite-in-efforts-bywal-mart-in-new-york.html?pagewanted=all&_r=0
108
David Goldman. (April 28, 2010). Wal-Marts bad PR comes at a bad time Accessed on March 10, 2014.
Retrieved from http://money.cnn.com/2010/04/28/news/companies/walmart/
109
Shelby Capacio. (December 19, 2013). Metro Target customers loyal despite data breach. Accessed on March
10, 2014. Retrieved from http://www.myfoxtwincities.com/story/24268318/metro-target-customers-loyal-despitebreach
110
Ian Austen. (February 24, 2014). Target push into Canada Stumbles. Accessed on March 10, 2014. Retrieved
from http://www.nytimes.com/2014/02/25/business/international/target-struggles-to-compete-in-canada.html
70
Strategic Direction
To remain competitive as a globally expanding business, Costco should ensure future
strength in financials, technology implementation, and marketing/PR efforts. We recommend the
following strategic actions based on the Competitive Profile Matrix:
Integrate latest technology: improve business functions and retail/online experience
Expand marketing efforts: continue to target high end consumer and small businesses,
cite ethical business practices to differentiate
Private label brand equity: capitalize on success of Kirkland brand and expand product
offerings
71
TOWS Matrix
Strengths:
1. Simplicity of warehouse format allows Costco to deliver products efficiently and
at a low overhead of 14%.
2. Costco has 400 more locations than competitor BJs Wholesale Club
3. Costco has nearly double the membership revenue of Wal-Mart/Sams Club
4. Costco does not have a significant amount of expenses associated with research
and development
5. 10% part time and 6% full time employee turnover allows Costco to maintain a
high quality, dedicated workforce due to competitive wages and fair working
environment. Reduced long term hiring costs due to low turnover.
6. Strong company culture of ethically delivering value to the consumer is present
at all levels of the business.
7. Strong value proposition for the consumer surrounds the nature of
8. No marketing cost allows Costco to keep markup as low as 14%.
9. Kirkland Signature private label has strong reputation and high profit margin.
10. Net income has increased by 19.31% and Walmart only increased by 8.28%.
11. Increase in cash makes Costcos current and quick ratio higher which makes
them more liquid than the industry.
Weaknesses:
1. Executive level turnover is low, reducing the possibility for fresh talent and new
ideas at the management level.
2. Brand awareness can be adversely affected by the marketing efforts and
3. In 2013, gross profit margin was 12.56% with membership fees, in comparison
to the industry of 24.56% and Walmart at 24.87%.
4. The debt-to- equity ratio was 175% in 2013 while the industry average was only
61%.
5. Operating profit margin was 2.97% compared to Walmarts 5.52% in 2013.
72
Opportunities:
1. Emerging health and natural trends for consumer products.
2. Expanding middle class segments in international markets, with higher
disposable income, present a large market for the retail segment.
3. Connecting with the consumer through branding and the use of big data
4. Gross domestic product of the United States is increasing, indicating recovery
from the 2008 recession.
5. Decreasing United States Unemployment rate (2011, 10% to 2014, 8.4%)
positively affects consumer confidence.
6. Consumers are now expecting better mobile phone and technology experiences
7. Warehouse clubs and supercenters industry is growing internationally.
Threats:
1. Must abide to and ensure continued enforcement of Tobacco laws, including the
2. Increase in federal minimum wage requirements would force retailers to pay
3. Maintaining privacy and security information with the laws constantly changing
4. Increased competition in cross-platform retail sales will present a make-orbreak for retailers and brick and mortar stores.
5. Private label brands will require significant research, development, and quality
assurance to maintain consumers choice over competitive name brands,
6. The American middle class is feeling continued pressure by increasing expenses,
7. Wal-Mart has a larger employee base, at 2.2 Million
8. BJs Warehouse Club offers organic products at a lower price than major
competitors.
9. Wal-Mart subsidiary, Sams Club offers the lowest membership pricing, at $40
per year.
10. Risk of territorial encroachment by high-end attracting retailers like Target.
73
Strategic Actions
SO:
1. Produce more health trending and natural products through the Kirkland Signature brand
(S9, O1; Product Development)
2. Expand into Brazil (S11, O2, O7; Market Development)
3. Expand mobile app by adding price checking tool for better shopping experience (S4,
S11, O6; Product Development)
ST:
1. Provide discounted dry cleaning services for card members (S3, T6; Unrelated
Diversification)
WO:
1. Increase marketing on social networks Facebook, Twitter, and growing networks like
Tumblr (W2, O6; Market Penetration)
2. Restructure our long-term debt through better finance offers (W4, O4, O5; Retrenchment)
WT:
1. Seek top level executives from competitors to bring in fresh new ideas (W1, T7; Other)
2. Increase marketing through commercials, billboards, radio, social networks, etc. where
competitors have a larger role (W2, T4, T7; Market Penetration)
3. Enter a joint venture with Amazon to increase brand awareness (W2, T4;Forward
Integration)
4. Increase membership fees (W3, W5, T9; Other)
5. Provide additional membership packages (W3, W5,T9; Product Development)
74
SPACE Matrix
Financial Strength Factors (FS): 4.20
Financial Ratios
1. Liquidity
2. Leverage
3. Activity
4. Profitability
5. Growth
S/W/N
S
N
S
W
S
Space Rating
6
3
5
1
6
21/5= 4.20
Financial Strength Ratings and Rationales:

Liquidity Ratios (6): Costcos liquidity ratios are a major strength for them compared to the
industry and competitors. These ratios show how easy it would be for the company to cover its
short-term obligations. Costcos current ratio and quick ratio were both well above the industry
average and their competitors for the past several years.
Leverage Ratio (3): Costco had a times interest earned ratio well above the industry average
but the debt-to-equity ratio was much higher than the industry average which means they are
financed more by debt than equity. This category was neutral but received a 3 rating because of
the debt-to-equity meaning it is closer to a weakness.
Activity Ratio (5): Costcos activity ratios are a minor strength which is why they received a
rating of 5. For the activity ratios there were not any industry averages to be compared to.
Compared to their top competitors it showed that Costco is using their resources more
efficiently.
75
Profitability Ratios (1): Costcos profitability ratios were a major weakness for the company;
this is why they received a rating of 1. A majority of the profitability ratios were well below the
industry average and competitors. In some cases Costcos ratios were about half of the industry.
Growth Ratios (6): Costcos growth ratios looked very promising which is why they received a
rating of 6. These ratios compare how the company is doing based on the prior years. Sales
have increased by about 6 percent in 2013, this is almost triple the amount of the industry. Also,
net income has increased nearly 20 percent which is well above the growth of top competitors
Wal-Mart and Target.
76
Competitive Position Factors (CA): -2.36

Strengths
1 Simplicity of warehouse format allows Costco to deliver products
efficiently and at low overhead of 14%
Rating Space
Rating
4
-1
2 Costco has 400 more locations than competitor BJs Wholesale Club
-2
3 Costco has nearly double the membership revenue of Walmart/ Sams

Club
-1
4 Costco does not have a significant amount of expenses associated with

research and development
-2
5 10% part time and 6% full time employees turnover allows Costco to
maintain a high quality, dedicated workforce due to competitive wages
and fair working environment. Reduced long term hiring costs due to
low turnover.
6 Strong company culture of ethically adding value to the consumer is
present at all levels of the business
-2
-2
7 Strong value proposition for the consumer surrounds the nature of

merchandising of the business
-2
8 No marketing cost allows Costco to keep markup at 14%
-1
9 Kirkland Signature private label has strong reputation and high profit
margin
-2
Weaknesses
1 Executive level turnover is low, reducing the possibility for fresh talent
and new ideas at the management level
2 Brand awareness can be adversely affected by the marketing efforts and
Rating Space
Rating
1
-6
-5
-26/11
-2.36
77
Industry Position Factors (IP): 2.42

Opportunities
1 Emerging health and natural trends for consumer products.
Space
Rating
6
2 Connecting with the consumer through branding and the use of big data
3 Warehouse clubs and supercenters industry is growing internationally.
4 Expanding middle class segments in international markets, with higher

disposable income, present a large market for the retail segment
Rating
Threats
Rating
1 Must abide to and ensure continued enforcement of Tobacco laws,

including the prevention of sale to minors in the United States.
Space
Rating
2
2 Increased competition in cross-platform retail sales will present a makeor-break for retailers and brick and mortar stores.
3 BJs Warehouse Club offers organic products at a lower price than

major competitors.
4 Wal-Mart Stores has major market control, with more than two million
employees.
5 Wal-Mart subsidiary, Sams Club offers the lowest membership pricing,

at $40 per year.
6 Risk of territorial encroachment by high-end attracting retailers like

Target.
7 Increase in federal minimum wage requirements would force retailers to

pay employees higher wages
8 Private label brands will require significant research, development, and

quality assurance to maintain consumers choice over competitive name
brands, presenting the possibility for additional overhead
37/12
3.08
78
Environmental Stability Factors (ES): 2.40

Opportunities
Rating Space
Rating
1 Gross domestic product of the United States is increasing, indicating

recovery from the 2008 recession.
-2
2 Decreasing United States Unemployment rate (2011, 10% to 2014,

8.4%) positively affects consumer confidence.
-2
3 Consumers are now expecting better mobile phone and technology

experiences
-2
Threats
Rating Space
Rating
1 Maintaining privacy and security information with the laws constantly

changing
-6
2 The American middle class is feeling continued pressure by increasing

expenses, reducing buying power and disposable income.
-5
-17/5
-3.40
79
Graphical Matrix:
6
Conservative
Aggressive
5
4
3
2
1
(0.72, 0.80)
0
-6
-5
-4
-3
-2
-1
-1
-2
-3
-4
-5
Defensive
Competitive
-6
SPACE
X Coordinate = CA + IS = [(2.36) + 3.08] = 0.72

Y Coordinate = FS + ES = [4.20 + (3.40)] = 0.80
80
SPACE Matrix Conclusion

Costcos coordinates for the Space Matrix were (.72, .80) this places them in the aggressive
quadrant. Since they are in the aggressive quadrant there are nine strategies that could be
implemented. These nine strategies are forward integration, backward integration, horizontal
integration, market penetration, market development, product development, related
diversification, unrelated diversification and horizontal diversification.
Generic Strategies
Forward Integration
Backward Integration
Horizontal Integration
Market Penetration
Market Development
Product Development
Related Diversification
Unrelated Diversification
Horizontal Diversification
Specific Strategies
Enter a joint venture with Amazon to increase brand
awareness.
Gain control of Rocky Mountain Chocolate Factory
Acquire BJs Wholesale
Increase marketing on social networks Facebook, Twitter and
growing networks like Tumblr.
Expand into Brazil.
Expand mobile app by adding price checking tool for better
shopping experience.
Offer Assembly of products for hardline items
Provide discounted dry cleaning services for card members.
Expand sun dries segment and include pay by the pound.
81
Boston Consulting Group (BCG) Matrix

Division
Market
Share111
Market Share
Competitor114 115
Industry
Growth
Rate117
5.2%
Revenue
Profits
118
119
9.18
Relative
Market
Share
22.98
112 113
116
Costco, USA
2.11
72%
60%
Costco,
International
.29120
1.41121
20.57
6%
28%
40%
Costco Revenue = 105,156,000,000

US Industry Revenue = 3,576,967,654,000
US Wal-Mart Revenue = 328,413,400,000
Int. Wal-Mart Revenue = 140,748,600,000
Int. Industry Revenue = 10,000,000,000,000
111

National Retail Federation. "NRF Forecasts 4.1% Increase In Retail Sales For 2014." N.p., n.d. Web. 11 Apr.
2014. <http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=1766>.
113
U.S. Census Bureau "Monthly & Annual Retail Trade." Main Page. N.p., n.d. Web. 11 Apr.
2014.<http://www.census.gov/retail/>
114
Filing.
115
National Retail Federation. "NRF Forecasts 4.1% Increase In Retail Sales For 2014." N.p., n.d. Web. 11 Apr.
2014. <http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=1766>.
116
ibid
117
ibid
118
119
ibid
120
"U.S. Retail Scene In Shake-Up As Costco (COST) Gains On Competitors: Deloitte." International Business
Times. N.p., n.d. Web. 11 Apr. 2014. <http://www.ibtimes.com/us-retail-scene-shake-costco-cost-gainscompetitors-deloitte-1537432>.
121
ibid
112
82
Boston Consulting Group (BCG) Chart

Relative Market Share
1.0
Industry Growth Rate
+6
0.5
0.0
INTL
40%
USA
60%
0
-6
II. Stars
III. Cash Cows
I. Question Marks
IV. Dogs
83
Strategies for Costco USA

Market Penetration
Target urbanized areas with a new store format focused on providing for local small business
Market Development
Expand photo centers to include automated kiosks
Expand financial services to include personal and business banking services
Product Development
Produce more health trending and natural products through the Kirkland Signature brand
Expand mobile app by adding price checking tool for better shopping experience
Divestiture
Remove analog photo centers from store locations to adapt for shift in prominence of digital
prints market
Strategies for Costco International

Market Penetration
Expand global marketing efforts to target entrances into new markets, particularly in Europe,
based on the success of UK locations
Market Development
Capitalize on growing Chinese middle class by conservatively expanding store locations in
China
Continue expansion in the UK to more urban segments of the market with a smaller format store
Product Development
Develop internationally branded Kirkland Signature products across all stores
84
Decision Stage
Integrative Strategies:
Horizontal Integration:
Acquire BJs Wholesale
Forward Integration:
Enter a joint venture with Amazon to increase brand awareness.
Backward Integration:
Gain control of Rocky Mountain Chocolate Factory
Intensive Strategies:
Market Penetration:
Increase marketing on social networks Facebook, Twitter, and
growing networks like Tumblr
Target urbanized areas with a new store format focused on
providing for local small business
Expand global marketing efforts to target entrances into new
markets, particularly in Europe, based on success of UK
Locations
Increase Marketing through television commercials, billboard
advertising, radio advertising, social network targeting, and
where competitors have a larger role; developed on the
company wide platform and quality private brand.
Market Development:
Expand photo centers to include automated kiosks
Expand financial services to include personal and business
banking services
Capitalize on growing Chinese middle class by conservatively
expanding store locations in China
85
Continue expansion in the UK to more urban segments of the

market with smaller format store
Expand in Brazil
Product Development:
Product more health trending and natural products through the
Kirkland signature brand
Expand mobile app by adding price checking tool for better
shopping experience
Provide additional membership packages
Diversification:
Unrelated:
Provide discounted dry cleaning services for card members
Related:
Offer assembly for purchased products
Horizontal:
Expand sun dries segment and include pay by the pound
Defensive:
Retrenchment:
Restructure long-term debt with better finance offers
Divestiture:
Remove analog photo centers from store locations to adapt for
shift in prominence of digital prints market
86
Other:
Seek top level executives from competitors to bring fresh
new ideas
Increase membership fees
87
Rationales for Decision Stage

Gain Control of Rocky Mountain Chocolate Factory
Rocky Mountain Chocolate Factory is one of the main suppliers of chocolate for Costco.
This is a fairly small company as they generate $30 million in annual sales.122 The acquirement
of this company would benefit both businesses. Rocky Mountain is struggling to build brand
recognition. Costco is also paying Rocky Mountain 6% royalty on the sales from the chocolate.
Costco can eliminate this royalty cost through acquisition of Rocky Mountain Chocolate Factory.
Rocky Mountain will gain the recognition they are pursuing and Costco will eliminate their
royalty fees.
Acquiring BJ's Wholesale Club was one of our alternative strategies. We decided not to
choose this option because this company is not publically traded. It would be difficult to
correctly estimate the value of the company.
One final alternative within the integrative strategies was to enter into a joint venture with
Amazon to increase brand awareness. Brand awareness is an issue we think Costco needs to
improve on and felt we could increase awareness with this deal with Amazon because of their
dominant online presence. We did not choose this strategy because we felt Rocky Mountain
Chocolate Factory acquisition was a better choice for us.
122
Linecker, A. (2005, June 22). ROCKY MOUNTAIN CHOCOLATE FACTORY Durango, Colorado; Chocolate
Lovers Would Climb A Mountain For Its Sweet Treats. Investors.com. Retrieved from
http://news.investors.com/business-the-new-america/062205-409030-rocky-mountain-chocolate-factory-durangocolorado-chocolate-lovers-would-climb-a-mountain-for-its-sweet-treats.htm
88
Expand in Brazil
Expand in Brazil was the strategy that we decided to choose. The Brazilian market is
consistently expanding. They have shown a steady increase in GDP over the past few years and
it is projected to continue on this pattern. We decided to take advantage of this growing market
and gain more international presence through this expansion. This also aligns with our vision
statement for Costco which says that we want to become the worldwide leaders in the industry.
Expanding to Brazil will help us achieve this.
Wal-Marts brand awareness is very high partially because of their marketing advertising.
They have billboards, commercials, radio advertisements, and are present on many social
networks. Currently Costco does not spend a lot on their marketing efforts. In order to increase
their market share, Costco must increase their brand awareness. Simple advertisements like
consistent updates on social networks will help increase this awareness and convert to customers.
This is a low cost way to advertise. Statistics show two important numbers that relate to this
effort. The first is that social media is now the number one activity on the web currently, and the
second is that 93% of marketers use social media for businesses123. These two are important
because this shows how much traffic is on social networks and it also shows that advertising this
way is becoming more popular. Other marketing efforts like commercials and radio
advertisements will reach a mass amount of potential consumers at one point in time, and
billboards will help to influence traffic to the stores location ultimately resulting in the increase
of sales. This was an alternative strategy that we developed and could possibly implement later.
123
Cooper, B. (2013, November 22). 10 Surprising Social Media Statistics That Might Make You Rethink Your
Social Strategy. The Huffington Post. Retrieved from http://www.huffingtonpost.com/belle-beth-cooper/10surprising-social-medi_b_4325088.html
89
An alternative to this strategy would be to increase marketing on social networks like

Facebook, Twitter, and growing networks like Tumblr. We decided not to make this the main
strategy because we felt this was simple. We can include this strategy as an add-on marketing
strategy to the current strategy we developed.
Another alternative to this strategy we developed was to target urbanized areas with a
new store format focused on providing for local small business. This method would have been
expensive and we did not believe it would have worth the cost. Target did something similar to
this and it cost them $1 billion124. We did not want to spend this amount of money on our
strategy.
Another alternative strategy was to expand global marketing efforts to target entrances
into new markets, particularly in Europe, based on success of UK locations. 80% of the $2.6
billion that Costco generated from the overseas market was from their UK locations125. The
reason for this success was that Costco was exempt to the zoning laws in the U.K. We did not
choose this alternative because we believe that this was just a loop hole in the international
market which Wal-Mart dominates. We were not confident that spreading internationally would
yield us as big of a revenue as we expected.
Expanding the photo centers to include automated kiosks was another alternative we
explored. Technology today includes cameras in smart phones. More people are using their smart
phones to take photographs instead of the traditional film cameras. They upload their pictures
124
Cardona, M. (2012, January 21). Target to Spend $1 Billion on Remodeling Stores, Testing Small Urban Shops.
Daily Finance. Retrieved from http://www.dailyfinance.com/2010/01/21/target-to-spend-1-billion-on-remodelingstores-testing-small-u/
125
Couch, B. (2005, March 9). Costco is Humming in the UK, Thanks to Quirk in Zoning Laws. Bloomberg News.
Retrieved from http://www.seattlepi.com/business/article/Costco-is-humming-in-the-U-K-thanks-to-quirk-in1168218.php
90
directly to their other devices. The automated kiosks would help with print-outs of pictures but
we did not feel the market was large enough for us to make this our strategy.
Expanding financial services to include personal and business banking services was also
an alternative. This would have provided another unique service that discount stores do not offer.
We chose a marketing issue because this was one of our major weaknesses that we wanted to fix.
One other alternative we developed was to capitalize on the growing Chinese middle
class by conservatively expanding store locations in China. We decided against this also because
of Wal-Mart's dominant international presence. We believe that this is still a feasible option but
we should increase our brand awareness before we decide to implement this strategy.
Continued expansion in the UK to more urban segments of the market with smaller
format store was another alternative. This parallels our other strategy involving expansion into
the UK. The same reasoning we did not choose the other strategy applies here that Wal-Mart still
has a dominant presence and we want to increase our brand awareness.
Another alternative was to produce more health trending and natural products through the
Kirkland signature brand. We saw the increase of the healthy eating trends and felt we should
capitalize on this trend through our own brand. Our brand awareness is still low so we were
unsure if customers would choose our less popular brand over our competition.
Expanding the mobile application by adding a price checking tool for a better shopping
experience was one alternative. The mobile application field is growing and we believe that our
customers would appreciate this expansion. We did not feel we would be able to generate a high
amount of revenue from this application so we decided against this option.
91
The last alternative we developed was to provide additional membership packages. This
would have hopefully increased our membership loyalty and possibly generated new members.
This strategy was a strategy targeted to our current members and we decided we wanted to gain
more membership through the strategy we chose which would focus on non-members.
Discounted dry cleaning services for card members

By implementing this strategy, Costco will be able to improve customer satisfaction
through the addition of a service like discounted dry cleaning. This is a service that not many
other places offer and will differentiate Costco from their competition. Members will see how
valuable and useful a membership with Costco would be. This will move the company to more
of a one-stop shop store and hopefully influence more people to subscribe to a membership
with Costco. If offered at one of the higher level membership plans, this will ultimately result in
more revenue for the company.
One alternative for our diversification strategy was to expand the sun dries segment of the
store and include a pay by the pound option. We felt that this would have generated a good
amount of revenue for the individual store. Stores like Wegmans have implemented this strategy.
We felt that offering a more unique service would draw more members.
Offering assembly of our products after purchase was another alternative developed. We
decided against this because of the potential legal issues we could have encountered. One of our
employees may be accused of harassment of many other charges that would reflect negatively on
the company.
92
Restructure long-term debt with better finance offers

Costco should release more stock into the NASDAQ. This will easily generate more
money for the company. This is a simple strategy, but it is proven to be successful.
Our alternative strategy for this category was to remove the analog photo centers from
store locations to adapt for the ship in the prominence of the digital print market. An analysis on
cameras in Britain shows that traditional film in cameras is used by just 8% of all Brits. This is
because of the increase in the technology. All smart phones in today's market are equipped with
camera's. These cameras can be uploaded directly to your computer files. This strategy would
remove this seemingly unnecessary service that Costco offers. We did not implement this
strategy because we feel that we are able to support this section with the increase of cash. There
are still Americans that use and develop film. We decided that offering more equity would
generate the most money.
93
Seek top level executives from competitors to bring fresh new ideas
One thing that Costco can do to not only help themselves but hurt their competition is
hire a few top level executives from their competitors. This will pull away from the competition
while adding to their repertoire. By hiring these experienced and successful executives, they will
implement a few of their successful strategies to help Costco gain market share. Other companies
have been successful at attempting this strategy.126
Another method that we though was an alternative to our choice was to increase
membership fees. This strategy would generate money for the company because of the increase
in fees. Membership fees are a major factor in Costco's financial success. By increasing these
fees we will increase the amount of revenue we generate from this aspect of Costco's channels of
financial support. The negative aspect to this strategy would be the possible decrease in customer
satisfaction resulting in the decrease in membership numbers. If this occurs, this strategy would
lose money for the company so we decided to not choose this strategy.
126
Alsever, J. (2013, May 15). The great expatriate hiring boom. CNN Money. Retrieved from
http://management.fortune.cnn.com/2013/05/15/hiring-emerging-markets/
94
Cost/Revenue Analysis for Implementation

Acquire Rocky Mountain Chocolate Factory 127 128 129
Method 1
Common Stock + APIC + RE + Goodwill
$182,054 + $7,559,442 + $8,642,093 + $1,046,944
$17,430,533
Method 2
5
x
5
Current Profits
x $1,478,212
$7,391,060
5 x Five year average profit level

5 x [($1,478,212+$3,876,032+$3,910,841+$3,580,000+$3,719,000)/2]
5 x $3,312,817
$16,564,085
Method 3
(MKT price of common stock/EPS) x Five year average profit level
(12.28/.24) x $3,312,817
$169,505,803.20
Method 4
# Of shares outstanding
6,162,389
(MKT price per share + 25% premium)

x
(12.18 x 1.25)
$94,592,671.15
127
Rocky Mountain Chocolate Factory, Inc. Rocky Mountain Chocolate Factory 2013 Form 10-K op cit
Rocky Mountain Chocolate Factory, Inc. Rocky Mountain Chocolate Factory 2011 Form 10-K op cit
129
Yahoo! Finance. "Rocky Mountain Chocolate Factory Inc.." http://finance.yahoo.com/q?s=rmcf&ql=1 (accessed
April 15, 2014).
128
95
Revenue
2013: $36,315,201
4.88%
2012: $34,626,892
11.24%
2011: $31,127,971
-2.35%
2010: $31,878,000
1%
2009: $31,573,000
Based on the previous years of growth the projected profit of 2014 will see an increase of 3.69%.
$36,315,201
1.0369
$37,655,231.92
The method that is going to be used to value Rocky Mountain Chocolate Factory is
Method 3 received the highest valuation at $169,505,804 ($169,505,803.20). This will allow
Costco to gain control of their largest supplier of chocolate which could lead to helping develop
future strategies and is projected revenue of $37,655,231.92 in the first year under the control of
Costco.
96
Expand in Brazil
City
Sau Paulo*
Rio de Janeiro*
Brasilia*
Fortaleza
Belo Horizonte*
Curitiba*
Recife
Porto Alegre
Belem
Goiania
Total
*Wealthiest Cities in Brazil131
Population130
11,244,000
6,323,000
2,562,000
2,447,000
2,375,000
1,747,000
1,536,000
1,409,000
1,392,000
1,301,000
New Stores for 2014

15
15
15
10
15
15
5
5
5
5
105
Cost (from average of 2013): 132

Opening Expenses / Stores
$2,083,000,000 / 26
$80,115,385 per store
Cost per store x new stores opening
$80,115,385 x 105
$8,412,115,425
130
Brazil Cities. (n.d.). Brazil Cities. Retrieved April 23, 2014, from http://www.brazil.org.za/brazilcities.html#.U1gGZvk2y3h
131
Latin American Herald Tribune - Welcome. (n.d.). Latin American Herald Tribune - Welcome. Retrieved April
23, 2014, from http://www.laht.com/article.asp?ArticleId=452297&CategoryId=14090
132
Costco Wholesale, Inc. (2014) Costco FY 2013 Annual Report.Accessed February 25, 2014.
97
Marketing Cost for new stores:

2014 World Cup Brazil: Cost $75,000,000 for 112 commercials, 112 vinhetas(5
second commercials and hundreds of quick mentions.133
Twitter Advertisement Cost: 134

Twitter Promoted Tweets: Cost $2.00 when interacted with
$2.00 x 6 tweets x 2,500 interactions x 12 months
$360,000
Twitter Promoted Account: Cost $4.00 per follower
$4.00 x 500,000 followers
2,000,000
Twitter Promoted Trends: $200,000 per day
$200,000 x 1 day x 12 months
$2,400,000
Total Cost: $8,491,875,425
To expand in Brazil we looked at the cities with the largest population to choose the
locations for the stores. The locations of the new stores will be within 50 miles of the cities
selected. The top five wealthiest cities are receiving more stores at 15 with Fortaleza receiving
10 stores based on population. The remaining four locations will receive 5 stores based on the
smaller population. We will market the new stores during the 2014 World Cup in Brazil. In
2010 the World Cup had over 3.2 billion viewer and over 715 million viewers for the finale
alone.135 Also we wanted to be more involved with social networking. Forbes named Brazil as
133
Super What? Cup Sponsors Spending $600M on Brazil Network | Special: 2014 Sports - Advertising Age.
(n.d.).Advertising Age Special Report 2014 Sports RSS. Retrieved April 23, 2014, from
http://adage.com/article/special-report-2014-sports/super-cup-sponsors-spending-600m-brazil-network/291117/
134
"Blog Entries." Penna Powers Brian Haynes. http://www.ppbh.com/how-much-do-ads-on-twitter-cost/ (accessed
April 14, 2014).
135
Brazil's World Cup Is a Marketer's Dream, but Also a Potential Nightmare. (n.d.). AdWeek. Retrieved April 22,
2014, from http://www.adweek.com/news/advertising-branding/brazil-s-world-cup-marketers-dream-also-potentialnightmare-152890
98
the social networking capital of the world.136 One of the most popular social networking
websites is Twitter. Twitter offers three types of advertisements; Promoted Tweets, Promoted
Account, and Promoted Trends. We would use 6 promoted tweets per month expecting 2500
interactions with the promoted tweet because even if you dont pay for a promoted tweet you can
still tweet at no charge but without the same amount of traffic the promoted tweet gets. Next is
the promoted account, this cost four dollars per follower and based on an average retail business
we would expect around 500,000 followers. Last is promoted trend and since we would already
be so involved in Twitter this would be the least common advertising technique we would purse
at once a month.
136
Brazil: A Social Media Marketers' Gold Mine. (n.d.). RSS. Retrieved April 23, 2014, from
http://socialmediatoday.com/christian-arno/1337541/brazil-social-media-marketing-gold-mine
99
Revenue:137
Costco Average Revenue per store (2013):
Revenue (2013) / Stores
$105,156,000,000 / 634
$165,861,199
Revenue for additional stores:
Average revenue per store x additional stores
$165,861,199 x 105
$17,415,425,895
Marketing Revenue:
Marketing Cost x 1.5
$79,760,000 x 1.5
$119,640,000
Total Revenue from expansion:
$17,535,065,895
Brazil is in the top five for highest populations in the world which would help expand the Costco
brand and get into new markets. Retail sales growth for 2013 was 8.5% making them a very
popular target for Costco to expand.138
137
Dismal.com - Please Login. (n.d.).Dismal.com - Please Login. Retrieved April 23, 2014, from
https://www.economy.com/home/login/ds_proLogin_4.asp?script_name=/dismal/pro/release.asp&r=b
138
100
Restructure long-term debt with better finance offers139 140

Raise $2,000,000,000 in equity to reform finance structure and pay off 59% of debt due within
the next 5 years.
Interest Saved:
Money Raised / LT debt
$2,000,000,000/$4,987,000,000
40.1%
Interest due x Percent of debt being paid off by money raised
$85,000,000 x 40.1%
34,085,000 Interest Saved
New Shares:
Money Raised/ Closing Cost per share at Costco
$2,000,000,000/ $113.19
17,669,406
Effect on EPS:
2014 Proforma Net Income / # of shares
$2,127,790,084/ 454,508,406
$4.68 New EPS
$4.68 Old EPS
$0.00 Difference
$2,000,000 would pay off over 50% of the long-term debt currently on Costcos financial
statements and save $34,085,000 in interest. This would increase shares by over 17 million and
based on projected revenues it would increase earnings per share by $0.00.
139
Costco Valueline. (n.d.). Valueline. Retrieved April 16, 2014, from http://www3.valueline.com.proxyfs.researchport.umd.edu/secure/vlispdf/stk
140
101
Seek top level executives from competitors to bring fresh new ideas
Diego Piacentini, Senior Vice President, International Consumer Business at Amazon 141
Current Salary:
$230,905 x 50% premium
$346,358
Stephen F. Quinn, Chief Marketing Officer at Walmart142
Average CMO salary:
$1,500,000 x 50% premium
$2,250,000
Total Cost:
$346,358 + $2,250,000
$2,596,358
Of the two executives we are currently seeking we would offer them a 50% premium of
their current salary as an incentive to join our team. This strategy doesnt necessarily bring in
any revenue right away but because Costco has limited marketing expenses and the expense they
do have are included in selling and administrative cost the maximum revenue Costco generates at
this point in time is just over $10 for every $1 spent in marketing. While Walmart generates just
over $203 for every $1 spent. This extra expertise will help with the extra marketing expenses
Costco is about to take on.
143
Amazon this past year has international revenue accounting for
40% of their annual revenue while Costco is just over 30% obtaining Diego Piacentini will be a
great asset for Costco at an affordable price. 144
141
"Amazon.com Inc." AMZN Executive Compensation. http://insiders.morningstar.com/trading/executivecompensation.action?t=AMZN (accessed April 15, 2014).
142
"CMOs Snag an Average of $1.5 Million a Year | CMO Strategy - Advertising Age." Advertising Age CMO
Strategy RSS. http://adage.com/article/cmo-strategy/cmos-snag-average-1-5-million-a-year/129932/ (accessed April
15, 2014).
143
Filing.
144
The State of Amazon: 2013 Results and 2014 Challenges. (n.d.). Appeagle. Retrieved April 16, 2014, from
https://www.appeagle.com/e-commerce-updates/state-amazon-2013-results-2014-challenges/
102
Adding Dry Cleaning services for customers 145 146

Cost:
Average Startup Cost x Stores
$200,000 x 634 stores
$126,800,000
Revenue:
Average Revenue x Stores
$233,333 x 634
$147,933,122
This service would create just over $147 million in revenue based on the average revenue
of about 30,000 dry cleaners in the United States while costing $126 million initially. After
recouping all sunk cost this service would create a significant amount of revenue based on the
fact that typically dry cleaners mark-up cost is around 150-200%.
145
How to Value a Dry Cleaning Service | Zamucen. (n.d.). Zamucen. Retrieved April 16, 2014, from
http://www.zamucen.com/blog/how-to-value-a-dry-cleaning-service/
146
Cleaning Industry Analysis 2014 - Cost & Trends. (n.d.). Cleaning Industry Analysis 2014 - Cost & Trends.
Retrieved April 16, 2014, from https://www.franchisehelp.com/industry-reports/cleaning-industry-report/
103
EPS/EBIT Analysis and Pro Forma Analysis

for Recommended Strategies
Decision Stage Information
Capital to Raise
$8,790,777,587
Per share Price
$113.19
Tax
35%
Interest
2.24%*
Number of Shares(including additional
454,508,406
17,669,406 for strategy)
Existing Interest(minus addition of strategy)
$64,915,000
EBIT
3,698,066,908
*Average of previous four loans
100% Debt
Recession
Normal
EBIT
1,849,033,454
3,698,066,908
(Interest)
261,828,418
261,828,418
EBT
1,587,205,036
3,436,238,490
(Tax)
555,521,763
1,202,683,472
Earnings
1,031,683,273
2,233,555,019
# of shares
454,508,406
454,508,406
outstanding
EPS
$2.27
$4.91
Booming
7,396,133,816
261,828,418
7,134,305,398
2,497,006,889
4,637,298,509
454,508,406
$10.20
100% Equity
EBIT
(Interest)
EBT
(Tax)
Earnings
# of shares
outstanding
EPS
Recession
1,849,033,454
64,915,000
1,784,118,454
624,441,459
1,159,676,995
532,172,313
Normal
3,698,066,908
64,915,000
3,633,151,908
1,271,603,168
2,361,548,740
532,172,313
Booming
7,396,133,816
64,915,000
7,331,218,816
2,565,926,586
4,765,292,230
532,172,313
$2.18
$4.44
$8.95
104
EBIT
(Interest)
EBT
(Tax)
Earnings
# of shares
outstanding
EPS
EBIT
(Interest)
EBT
(Tax)
Earnings
# of shares
outstanding
EPS
EBIT
(Interest)
EBT
(Tax)
Earnings
# of shares
outstanding
EPS
50% Debt/ 50% Equity

Recession
Normal
1,849,033,454
3,698,066,908
163,371,709
163,371,709
1,685,661,745
3,534,695,199
589,981,611
1,237,143,320
1,095,680,134
2,297,551,879
493,340,360
493,340,360
$2.22
Booming
7,396,133,816
163,371,709
7,232,762,107
2,531,466,737
4,701,295,370
493,340,360
$4.66
$9.53

Recession
Normal
1,849,033,454
3,698,066,908
183,063,051
183,063,051
1,665,970,403
3,515,003,857
583,089,641
1,230,251,350
1,082,880,762
2,284,752,507
485,573,969
485,573,969
Booming
7,396,133,816
183,063,051
7,213,070,765
2,524,574,768
4,688,495,997
485,573,969
$2.23
$4.71
$9.66

Recession
Normal
1,849,033,454
3,698,066,908
143,680,367
143,680,367
1,705,353,087
3,554,386,541
596,873,580
1,244,035,289
1,108,479,507
2,310,351,252
501,106,750
501,106,750
Booming
7,396,133,816
143,680,367
7,252,453,449
2,538,358,707
4,714,094,742
501,106,750
$2.21
$4.61
$9.41
105
EBIT
(Interest)
EBT
(Tax)
Earnings
# of shares
outstanding
EPS
EBIT
(Interest)
EBT
(Tax)
Earnings
# of shares
outstanding
EPS
EBIT
(Interest)
EBT
(Tax)
Earnings
# of shares
outstanding
EPS

Recession
Normal
1,849,033,454
3,698,066,908
222,445,734
222,445,734
1,626,587,720
3,475,621,174
569,305,702
1,216,467,411
1,057,282,018
2,259,153,763
470,041,188
470,041,188
$2.25
Booming
7,396,133,816
222,445,734
7,173,688,082
2,510,790,829
4,662,897,253
470,041,188
$4.81
$9.92

Recession
Normal
1,849,033,454
3,698,066,908
104,297,684
104,297,684
1,744,735,770
3,593,769,224
610,657,520
1,257,819,228
1,134,078,251
2,335,949,996
516,639,532
516,639,532
Booming
7,396,133,816
104,297,684
7,291,836,132
2,552,142,646
4,739,693,486
516,639,532
$2.20
$4.52
$9.17

Recession
Normal
1,849,033,454
3,698,066,908
123,989,025
123,989,025
1,725,044,429
3,574,077,883
603,765,550
1,250,927,259
1,121,278,879
2,323,150,624
508,873,141
508,873,141
Booming
7,396,133,816
123,989,025
7,272,144,791
2,545,250,677
4,726,894,114
508,873,141
$2.20
$4.57
$9.29
106
EPS/EBIT Options Graph

10.75
10.25
9.75
9.25
8.75
8.25
100% Debt
7.75
100% Equity
7.25
50% D/50% E
6.75
60% D/40% E
6.25
40% D/60% E
5.75
80% D/20% E
5.25
20% D/80% E
30%D/70%E
4.75
4.25
3.75
3.25
2.75
2.25
Recession
Normal
Booming
107
EPS/EBIT Conclusion
If Costco is seeking profit maximization then they would choose 100% Equity as the
choice of financing. This would maximize the amount of earnings after interest and taxes but
would result in lower earnings per share. If maximization of shareholders wealth is what Costco
is seeking then they would choose 100% debt as there optimal financing technique. This would
increase the interest expense while keeping the same amount of outstanding common shares.
Therefore, it would be the optimal financing technique for having the maximum earnings per
share. If Costco would like control the company would choose 60% debt/40% Equity. This
leaves the company in control and does not dilute the ownership. If they are seeking flexibility
they would choose 30% Debt/70%Equity. This helps the company with future capital needs.
The financing technique that was chosen to finance the cost needed to implement the strategies is
30% Debt/ 70% Equity. This is a more future oriented approach and will help the strategies in
the future considering there will be far less debt in the company.
108
Pro Forma Balance Sheet
Assets
Current Assets:
Cash and Cash Equivalents
Short-Term Investments
Receivables, net
Refundable Income Taxes
Merchandise Inventories
Deferred income taxes and
other current assets
Notes Receivables, current
portion
Total Current Assets
Property, Plant, and
Equipment:
Land
Buildings and Improvements
Equipment and Fixtures
Construction in Progress
Less Accumulated
depreciation and
amortization
Net Property and Equipment
Other Assets
Total Assets
Liabilities and Equity
Current Liabilities:
Accounts Payable
Accrued salaries and benefits
Accrued member rewards
Accrued sales and other
taxes
Deferred membership fees
Other current liabilities
Other accrued expenses
Dividend payable
Total current liabilities
Costco
September
1,2013
RMCF
February
28, 2013
4,644,000,000
1,480,000,000
1,201,000,000
5,321,696
3,916,320
724,911
4,221,036
887,803
3,832,362,431
1,221,632,416
991,338,197
724,911
6,515,923,170
512,590,358
197,078
197,078
15,840,000,000
14,543,933
13,074,768,561
4,409,000,000
11,556,000,000
4,512,000,000
585,000,000
21,022,000,000
(7,141,000,000)
4,409,000,000
19,968,115,425
4,638,800,000
585,000,000
29,600,915,425
(10,055,186,807)
13,881,000,000
562,000,000
30,283,000,000
6,777,143
2,512,869
23,833,945
7,872,000,000
2,037,000,000
710,000,000
382,000,000
1,998,897
1,184,739
-
1,167,000,000
1,089,000,000
13,257,000,000
417,484
1,294,487
667,532
5,563,139
7,894,000,000
621,000,000
Strategy
Additions
8,412,115,425
126,800,000
Proforma
Balance Sheet
Costco
September 1,
2014
19,552,505,761
564,512,869
33,191,787,191
2,596,358
7,873,998,897
2,538,577,050
710,000,000
382,000,000
1,167,417,484
1,089,000,000
1,294,487
667,532
13,762,955,450
109
Long-Term Debt, excluding

current portion
Deferred Income Taxes and
Other Liabilities
Total Liabilities
Commitments and
Contingencies:
Equity:
Preferred Stock $.005 par
value; 100,000,000 shares
authorized; no shares issued
and outstanding
Common Stock $.005 par
value; 900,000,000 shares
authorized; 456,404,680
shares issued and
outstanding
Additional paid-in capital
Accumulated other
comprehensive(loss) income
Retained Earnings
Non-controlling interest in
equity of subsidiary
Total Stockholders Equity
Noncontrolling interest
Total Equity
Total Liabilities and
Equity
4,998,000,000
(2,000,000,000) 5,635,233,276
2,637,233,276
1,016,881,694
1,016,000,000
881,694
19,271,000,000
6,644,833
20,415,070,420
2,000,000
182,054
4,670,000,000
(122,000,000)
7,559,442
-
6,283,000,000
-
8,642,093
1,005,523
10,833,000,000
179,000,000
11,012,000,000
30,283,000,000
17,389,112
23,833,945
262,342
52,206,119
1,697,059,198
2,444,396
4,729,765,561
(122,000,000)
7,988,701,291
1,005,523
12,597,716,771
179,000
12,776,716,771
33,191,787,191
110
Pro Forma Balance Sheet Description

Assets:
Cash and Cash Equivalents:
Plug
Short-Term Investments:
Percent of total current assets
Receivables, net:
Refundable Income taxes:
Carryover from previous year
Merchandise Inventories:
Deferred income taxes:
Total Current Assets:
Total of all current assets
Land:
Carryover from FY2013 balance sheet
Building and Improvements:
Amount from FY2013 (11,556,000,000) plus cost of
expansion to Brazil excluding marketing cost associated (8,412,115,425)
Equipment and Fixtures:
Amount from FY2013 (4,512,000,000) plus cost associated
with dry cleaning strategy (126,800,000)
Construction in Progress:
Less Accumulated Depreciation:
Percent of accumulated depreciation from FY2013 times
property, plant, and equipment of 2014
Net Property and Equipment:
All cost associated with property, plant, and equipment less
accumulated depreciation plus Rocky Mountain Chocolate Factorys number.
Other Assets:
Total Assets:
Current Assets plus Net property, plant, and equipment plus
Liabilities and Equity
Accounts Payable:
Accrued salaries and benefits:
Percent of Sales plus cost associated with strategy of
gaining competitors executives
Accrued members rewards:
Accrued sales and other taxes:
Deferred membership fees:
Other Current Liabilities:
Total Current Liabilities:
Total of all current liabilities from above
Long-Term Debt:
Amount from FY2013 minus $2,000,000,000 associated
with strategy and plus $2,637,233,276 associated with financing cost of strategies
Deferred Income Taxes:
Total Liabilities:
Current Liabilities plus LT debt plus deferred income taxes
Preferred Stock:
Common Stock:
Amount from FY2013 plus cost associated with financing
cost of strategies through common stock times the par value
Additional paid-in capital:
Amount from FY2013 plus cost of financing strategies
minus par value
Accumulated other comprehensive: Carryover from FY2013 balance sheet
111
Retained Earnings:
forma income statement 2014
Total Stockholders Equity:
Noncontrolling interest:
Total Equity:
Total Liabilities and Equity:
Amount from FY2013 plus retained earnings from pro

Total equity from above
Total Stockholders Equity minus noncontrolling interest
Total Liabilities plus Total Equity
112
Pro Forma Income Statement

Revenue:
Expand in Brazil
Dry Cleaning
Rocky Mountain Chocolate Factory
ValueLine
Total
$17,535,065,895
$147,933,122
$37,655,232
$113,000,000,000
$130,720,654,249
Cost:
Expand in Brazil
$8,491,875,725
(79,760,000 Marketing; 8,412,115,425 Expansion)
Dry Cleaning
$126,800,000
Rocky Mountain Chocolate Factory
$169,505,804
Acquire top executives
$2,596,358
Total
$8,790,777,587
Interest Saving:
Restructure long-term debt
$34,085,000 (17,669,406 new shares)
113
September 1, 2013
September 1, 2014
$105,156,000,000
$130,720,654,249
Merchandise Cost
91,948,000,000
114,380,572,468
Selling, General, Administrative
10,104,000,000
12,642,014,873
Income before Interest and Income taxes
3,053,000,000
3,698,066,908
Interest Expense
99,000,000,000
123,989,025
Income before Income Taxes
3,051,000,000
3,574,077,883
990,000,000
1,250,927,259
2,039,000,000
2,323,150,624
Net Income per common share attributed

to Costco:
Basic
$4.68
$4.57
Diluted
$4.63
$5.27
Basic
435,741,000
508,873,141
Diluted
440,512,000
440,512,000
$8.17*
$1.25
Revenue
Operating Expenses:
Provision for Income Taxes

Net Income
Shares used in calculation
Cash Dividend declared per share

Common Share
Common Share
Retained Earnings
$636,091,426
-
$1,697,059,198
*$7.00 special dividend declared
114
Pro Forma Income Statement Description

Revenue:
Valueline revenue plus revenue associated with strategies
Merchandise Cost:
Percent of sales(87.5%)
Selling, General, Administrative:
Percent of sales (9.61%) plus cost of marketing in Brazil
EBIT:
Revenue minus merchandise cost and selling, general,
administrative
Interest Expense:
Amount from FY2013 minus interest saving of strategy
plus interest associated with financing cost of strategies. (Interest percentage of 2.24% came
from average interest percent associated with the last four loans which are also the largest)
EBT:
EBIT minus Interest Expense
Provision for Income Taxes:
EBT times tax rate of 35% provided by Valueline
Net Income:
EBT minus Provision for income taxes
Basic EPS:
From EPS/EBIT analysis
Diluted EPS:
Net income divided by diluted shares
Basic Shares:
Shares from FY2013 plus shares associated with strategy
plus shares associated with financing cost of strategies.
Diluted Shares:
Shares from FY2013
Cash Dividend declared per share: From Valueline
Common Share:
Cash dividend declared times basic shares outstanding
Retained Earnings:
Net Income minus common share dividend declared
115
Pro Forma Financial Ratios

Liquidity Ratio
Proforma Financial Ratios

Costco
Costco
Costco
2013
2012
2011
Current Ratio
Quick Ratio
Leverage Ratio (%)
1.20
.60
Costco
2013
1.10
.53
Costco
2012
1.14
.52
Costco
2011

Long-Term Debt to Equity
Times Interest Earned Ratio
Ratio Activity Ratio
63.64
175.00
54.61
30.84
Costco
2013
53.88
116.81
18.87
29.04
Costco
2012
53.02
112.85
17.01
21.03
Costco
2011
Inventory Ratio
Accounts Receivable Turnover
Average Collection Period
7.58
3.47
Costco
2013
7.65
3.65
Costco
2012
7.15
3.32
Costco
2011
Gross Profit Margin

Net Profit Margin
Return on Stockholders Equity
Earnings Per Share
Growth Ratios (%)
12.56
2.90
1.94
6.73
18.52
$4.68
24.19
Costco
2013
12.42
2.78
1.72
6.30
13.65
$3.94
24.82
Costco
2012
12.57
2.74
1.64
5.46
11.63
$3.35
24.52
Costco
2011
Sales
Net Income
Earnings Per Share
Dividends Per Share
6.07
19.31
18.78
693.20
11.50
16.89
17.61
15.73
14.07
12.20
12.80
15.58
Costco Pro
Forma
2014
.95
.48
Costco Pro
Forma
2014
61.51
162.05
44.73
32.00
Costco Pro
Forma
2014
6.50
3.94
Costco Pro
Forma
2014
12.50
2.83
1.78
7.00
18.44
$4.57
24.77
Costco Pro
Forma
2014
24.31
13.94
-2.35
-84.70
S/W/N
2014
W
W
S/W/N
2014
S
S
S
S
S/W/N
2014
W
S
S/W/N
2014
N
N
N
N
N
W
N
S/W/N
2014
S
W
W
N*
*Would be an increase if not for special dividend of $7.00 in 2013($1.17 without special
dividend) $1.25 dividend in 2014 would be an increase
116
Pro Forma Financial Ratios Description

Liquidity Ratios: Liquidity Ratios measure how easily the company can cover their current
liabilities. Both of the liquidity ratios did decrease for the pro forma year 2014 meaning they
will not be able to meet there short-term obligations as easily as they have in the past.
Leverage Ratios: Leverage Ratios measure the extent to which a firm has been financed by debt.
All of these ratios are a strength compared to the prior year. The Debt-to-Equity ratio decreased
by nearly 11% which is helping Costco becomes more balanced than they have in the past.
Times interest earned ratio also increased meaning there is more leverage when it comes to the
revenue being made and the interest maturing.
Activity Ratios: This category as a whole is neutral. There are only two ratios that we are able to
calculate and one is strength and one is a weakness compared to fiscal year 2013. Fixed Asset
Turnover decreased which tells us how efficiently they are using the plant and equipment. Total
Asset Turnover increased which means they are generating plenty of sales for the size of their
operation.
Profitability Ratio: All of these ratios are neutral except the earnings per share which is a
weakness compared to the previous year. Earnings per share have decrease by about ten cents
because of the increase in shares outstanding. Other ratios have been consistent with the
previous year and we would expect to increase as we continue the strategies that have been
implemented.
Growth Ratios: These ratios compare sales, net income, earnings per share, and dividends per
share to the previous year. Sales have increased by nearly 25% which is an outstanding number
for one years difference. Net income and earnings both have decrease in the amount they have
increased from previous years but net income has increased compared to 2013. Dividend per
share is neutral because it would have increased from last year if it were not the $7.00 special
dividend declared in fiscal year 2013.
117
McKinsey 7S Framework
Current Company Snapshot for Costco Wholesale, Inc.:
Hard Elements
Skills
There is a low level skillset in associates: primarily in the field of customer service and
merchandising stocking. The executive leadership has a high level of marketing and
merchandising skills. In addition, the organization has the ability to transfer customer wants into
private label goods for sale within a short period of time, as shown with private label brand
performance.
Style
Team oriented, Value focused, Customer service oriented
Heavy executive involvement as evidenced by death marches by CEO location visits 200+
days out of the year147
Staff
Dedicated staff a valuable asset, low turnover a strength, ranked a best place to work
consistently148
Soft Elements
Shared Values and Superordinate Goals
To continually provide our members with quality goods and services at the lowest possible
prices. Through five primary ethics-focused goals: 1) Obey the Law, 2) Take care of our
members, 3) Take care of our employees, 4) Respect our suppliers, and 5) Reward our
shareholders.149
147
148
Smith, J. (2013, November 21). The Best Retail Companies to work for right now. Accessed on May 1, 2014.
Retrieved from http://www.forbes.com/sites/jacquelynsmith/2013/11/21/the-best-retail-companies-to-work-forright-now/
149
Costco Wholesale, Inc. (2014) Costco Mission Statement and Code of Ethics. op cit.
118
Strategy
Costco has at its core mission to deliver quality products at the lowest possible prices, due to low
overhead, which results in the lowest industry markup possible (at the most 14%). According to
Jim Sinegal, former CEO, Costco is able to offer lower prices and better values by eliminating
virtually all the frills and costs historically associated with conventional wholesalers and
retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We
run a tight operation with extremely low overhead which enables us to pass on dramatic savings
to our members.
Structure
Associate level has a strong culture that breeds positivity and customer focus.
Other aspects of the business outside of stores include manufacturing and distribution, their
structure is unknown, but most likely efficient considering low overhead. Other aspects of the
business are known to be divisional in structure. 150
Systems
Customer service, restock, product positioning, merchandising focused
Backend Costco Wholesale Industries makes up a large portion of the business, includes
processing of meats, chickens, seafood, baking, and other products sold.
Backward Integration: Gain Control of Rocky Mountain Chocolate

Factory
Hard Elements
Skills
Costcos division of manufacturing and executive leadership has expert understanding of their
customers merchandising expectations. This will allow Costco to easily acquire the chocolate
Style
Costco has at its core mission to focus on satisfying the customer, and to deliver value to the
customer in the areas that the customer expects and wants. Costco wants its brands to deliver
above initial customer expectations at a price point that is highly competitive. Simple packaging,
bulk pricing, and large product size are what customers expect.
150
Coriolis Research, Ltd. (June 2004). Understanding Costco. Accessed on May 1, 2014. Retrieved from
http://www.coriolisresearch.com/pdfs/coriolis_understanding_Costco.pdf
119
Staff
Additional skills may be acquired by understanding the manufacture of their own chocolate
products. Staff changeover from the Rocky Mountain Chocolate Factory will require additional
training to ensure understanding of Costcos mission and vision of delivering value & a quality
product to the customer. Additional divisional oversight may be necessary to ensure quality
delivery of the product.
Soft Elements
To deliver the highest quality products to customers and to increase the private label brand,
Kirkland Signatures, brand equity. By controlling the manufacture and sale of their products,
Costco can better achieve this goal of ensuring the translation of value to their loyal customers.
Strategy
By integrating the manufacturer of additional quality products, Costco can continue to maintain
lower margins and have less reliance upon other suppliers. In addition, having complete control
of the manufacture of additional Kirkland brand products
Structure
This acquisition would easily be managed by existing industry and manufacturing management
of other Kirkland brand products. Crossover of policies from Rocky Mountain may need to be
adapted to ensure quality control and employee compensation.
Systems
Additional management and oversight policies may need to be implemented, as stated above.
120
Market Development: Expand in Brazil

Hard Elements
Skills
Costcos executive team and store management will need to be well versed in the native
language of the foreign market being entered, in this case, with the language of Portugese, as
well as the culture that may influence preferred merchandise by new customers.
Style
It is in the interest of Costco Wholesale Corporation to continuously deliver value to its
shareholders and customers. By expanding into a growing retail market, Costco has the
opportunity to increase its revenues, allowing for further growth toward its goal of becoming the
worldwide leader in discount stores.
Staff
Costco will require skilled merchandise and sales associates to deliver the best customer service
experience to their new Brazilian customers. In addition, Costco must acquire local marketing
knowledge and may need to hire a marketing director or outside agency familiar with the local
consumer marketplace for successful market expansion.
Soft Elements
To become the worldwide leader in discount stores, Costco must expand into developing
markets, while focusing on their marketing efforts in new and unfamiliar markets.
Strategy
Additional costs may be incurred due to changes in legal, regulatory, or other local requirements
of the Brazilian municipalities in which Costco wishes to expand into. These additional factors
could adversely affect their goal of delivering value to the customer and maintaining their low
markup percentage.
Structure
In following with Costcos divisional management structure, Costco will need additional
oversight and executive leadership for a newly created Brazil division.
Systems
121
Inclusion of Costcos management information systems will be required for new locations. Due
to the geographic distance from normal marketplaces, additional infrastructure may be required.
In addition to expansion of the MIS, Costco will need to implement new policies and systems to
efficiently manage distribution infrastructure.
Unrelated Diversification: Provide discounted dry cleaning services for

card members
Hard Elements
Skills
Costco does not currently have staff qualified in the proper care of garments or with experience
in the dry cleaning industry. Additional staff will need to hired who have experience in this
industry.
Style
Costco has at its core mission to focus on satisfying the customer, and to deliver value to the
customer in the areas that the customer expects and wants.
Staff
Additional staffing will be required to manage and operate dry cleaning services.
Soft Elements
Added convenience adds value to membership for existing cardholders, increasing membership
retention, and attracting new customers. Adding dry cleaning services would provide customers
with an incentive to visit the stores often.
Strategy
Additional services for customers will help Costco differentiate itself from other big box
retailers, while adding value to its memberships for customers.
Structure
Oversight and management of dry cleaning services will require minimal added training to
existing store management.
Systems
122
Policies that protect and ensure quality service will need to be implemented for dry cleaning
services.
Retrenchment: Restructure long-term debt with better finance offers

Hard Elements
Skills
Executive financial oversight has the experience needed to perform necessary actions.
Style
Financial strength is an important part of doing good business and allowing Costco to account
for unexpected market changes.
Staff
See skills.
Soft Elements
Decreasing long-term debt will increase revenues through interest savings, allowing Costco to
further their reinvestment capabilities in the future.
Strategy
Maintaining financial strength is an important part of Costcos competitive advantage.
Structure
No changes are needed for this strategy.
Systems
No changes are needed for this strategy.
123
Other: Seek top level executives from competitors to bring fresh new
ideas
Hard Elements
Skills
Acquiring valuable industry experience and outside skills is essential for the executive team of
Costco to stay ahead of competitors. Acquiring an executive with marketing background will
help Costco position itself better in more competitive and growing international markets.
Style
Costco should try to find an executive who shares in the belief of delivering value to the
customer rather than to their own personal bank accounts. In keeping with the history of
executive compensation, perhaps finding a talented and eager young executive with retail
marketing experience would be more beneficial than picking from competitors executive pools.
Staff
The creation of a new position (VP of Marketing) will require accommodation at each divisional
level of management. Store managers and executive leadership will work together to ensure
brand unity and proper brand management.
Soft Elements
To build brand reputation and expand
Strategy
By targeting other competitors and displaying the value of buying in bulk for consumers, Costco
can expand its brand awareness and membership base, expanding revenues overtime.
Structure
Costco in large part does not have a marketing department at the executive level, therefore the
hiring of a new Vice President of Marketing will require the creation of a new position and
department within the company. This position will align the companies branding and instill
marketing objectives to be instilled in divisional areas of Costco stores.
Systems
Additions to existing management information systems may be required to ensure consistency &
timeliness in marketing efforts.
124
Questions for Strategy Evaluation

Backward Integration: Gain control of Rocky Mountain Chocolate Factory
1. Has the integration of manufacturing with Rocky Mountain Chocolate Factory
successfully occurred?
2. Has the sale of Rocky Mountain Chocolate Factory products under Kirkland labels
provided favorable sales returns against ownership costs?
3. Does the resulting product of Rocky Mountain Chocolate Factory hold up to the
standards of the Kirkland brand that Costco consumers expect?
4. Does the product enhance or degrade the brand image of Kirkland Signature brand
products?
Market Development: Expand in Brazil
1. Has the Brazilian market shown favor to the Costco brand and its retail concept?
2. What is the merchandise sales performance? What products should be removed or added
to appease consumers desires?
3. What regulatory, social, and political concerns exist that may affect the successful
operation of the Costco stores?
4. What marketing efforts are effective to attracting a larger customer base?
5. What internal capabilities does Costco have to continue to be successful? More
specifically, what internal capabilities will the Brazil division need that perhaps
traditional Costco management does not have?
6. Is the customer experience adequate for continued success and differentiation? If not, Is
additional management or training necessary to improve the customer experience?
7. In the event of stock outs or unusually high inventory turnover, can the newly created
distribution network handle such changes in demand? What must be done to ensure
distribution timeliness and efficiency?
125
Unrelated Diversification: Provide discounted dry cleaning services for card members
1. Have Costco consumers receptively began to utilize the dry cleaning services?
2. Are the dry cleaning staff adequately trained and prepared to handle large differences in
demand requirements?
3. Are garments being properly handled and finished throughout the process?
Retrenchment: Restructure long-term debt with better finance offers
1. Has this process been successfully completed?
2. Did this process save Costco Corporation money?
3. Has the long-term debt of the company been adequately reduced?
Other: Seek top level executives from competitors to bring fresh new ideas
1. Has the newly appointed executive developed a marketing or branding strategy that
aligns with the way Costco would like to represent itself?
2. Have newly created innovative ideas helped the organization in some way to becoming
the worldwide leader in discount stores?
3. What additional training or oversight will be needed to ensure long term success of the
newly appointed executive board member?
126
Contingency Plans
Integrative Strategy: Enter a joint venture with Amazon to increase brand awareness
If our original strategy to acquire Rocky Mountain Chocolate Factory is not successful,
we will enter into a joint venture with Amazon to increase our brand awareness. Amazon is the
leading online retailer and we plan to gain brand awareness by doing business with them. We
believe through this brand awareness, membership and sales will both grow.
Intensive Strategy: Increase marketing on social networks Facebook, Twitter, and growing
networks like Tumblr
Our contingent intensive strategy is to increase our marketing efforts on social networks
Facebook, Twitter, and growing networks like Tumblr. This is a very low cost way to increase
our brand awareness. The increasing use of social media is a great potential market to take
advantage of. Constant updates on these networks will reach our potential customers and
hopefully increase our sales and membership numbers. The only expense associated with this
strategy would be implemented if we decide to advertise. We would then have to pay Facebook
and the other networks for our advertisement space.
Diversification Strategy: Expand sun dries segment and include pay by the pound
Expanding the sun dries segment of the store to include pay by the pound option would
be our contingency plan for our diversification strategy. This will provide a small amenity for
our current members. They will be able to pick the sun dries that they want. This is a smaller
project that would hopefully increase our customer satisfaction.
127
Defensive Strategy: Remove analog photo centers from store locations to adapt for shift in
prominence of digital prints market
The removal of analog photo centers from our store locations to adapt for the shift in the
prominence of digital prints market is our contingent defensive strategy. This will allow us to
remove a service that is not being frequently used by Americans. This will allow also for more
space for other products or services.
Other Strategy: Increase membership fees
Increasing membership fees would be our other contingency strategy. This would affect
our members but it would increase our revenue. Membership fees are one of the ways that
Costco generates their revenue. We did not initially want to implement this strategy because we
were afraid our membership numbers would decrease. If we do increase membership fees, we
would also need to provide extra benefits for our customers to ensure they would be willing to
remain members.
128
Conclusion
Based upon our analysis of Costco Wholesale Corporation we recommended the
implementation of the following strategies: 1) Gaining control of Rocky Mountain chocolate
factory, 2) Expansion into the growing Brazilian retail market, 3) The expansion of services to
include discounted dry cleaning products, 4) The restructuring of long-term debt, and 5) The
addition of outside executive talent. We believe that these strategies will allow Costco to: 1)
Competitively expand sales within their private label brand, Kirkland Signature, 2) Expand their
international market share and increase revenues, 3) Improve their customer experience by
providing additional services, 4) Strengthen their financial situation for future expansions and
investments, and 5) Improve their overall brand awareness and marketing prowess against
competitor Wal-Mart.
129
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135
Appendices
Appendix 1: Calculations for Financials
Appendix 2: Pro Forma Calculations
136
Appendix 1: Calculations for Financials

Costco Calculations (in millions)
2013
2012
2011
Current Ratio
(15,840) /(13,257)
(13,526) /(12,260)
(13,706) /(12,050)
Quick Ratio
(15,840-7,894) /
(13,526-7,096) /
(13,706-6,638)
(13,257)
(12,260)
/(13,706)
Debt to Total Assets
(19,271) / (30,283)
(14,622) / (27,140)
(14,188) / (26,761)
Debt to Total Equity
(19,271) / (11,012)
(14,622) / (12,518)
(14,188) / (12,573)
LT Debt to Equity
(19,271-13,257) /
(14,622-12,260) /
(14,188-12,050) /
(11,012)
(12,518)
(12,573)
(3,053) /(99)
(2,759)/ (95)
(2,439) / (116)
(105,156) / (13,881)
(99,137) / (12,961)
(88,915) / (12,432)
(105,156) / (30,283)
(99,137) / (27,140)
(88,915) / (26,761)
(105,156-91,948) /
(99,137-86,823) /
(88,915-77,739) /
(105,156)
(99,137)
(88,915)
Oper. Profit Margin
(3,053) / (105,156)
(2,759) / (99,137)
(2,439) / (88,915)
Net Profit Margin
(2,039) / (105,156)
(1,709) / (99,137)
(1,462) / (88,915)
Return on Tot.
(2,039)/ (30,283)
(1,709) / (27,140)
(1,462) /(26,761)
Times Interest
Earned
Fixed Asset
Turnover
Total Asset
Turnover
Gross Profit Margin
Assets
137
Return on SE
(2,039) / (11,012)
(1,709) / (12,518)
(1,462) / (12,573)
EPS
(2,039)/ (435)
(1,709) / (433)
(1,462) / (436)
Price Earning Ratio
(113.19)/ (4.68)
(97.79) / (3.94)
(82.13) /(3.35)
Sales
(105,156-99,137)/
(99,137-88,915)/
(88,915-77,946)/
(99,137)
(88,915)
(77,946)
Net Income
(2,039-1,709) /(1,709)
(1,709-1,462)/ (1,462)
(1,462-1,303)/ (1,303
EPS
(4.68-3.94)/ (3.94)
(3.94-3.35)/ (3.35)
(3.35-2.97)/ (2.97)
Dividends Per Share
(8.17-1.03)/ (1.03)
(1.03-.89)/ (.89)
(.89-.77)/ (.77)
Walmart Calculations (in millions)

2013
2012
2011
Current Ratio
(59,940) / (71,818)
(54,975) / (62,300)
(52,012)/ (58,603)
Quick Ratio
(59,940-43,803) /
(54,975-40,714) /
(52,012-36,437)/
(71,818)
(62,300)
(58,603)
(121,367)/ (203,105)
(117,645) / (193,406)
(109,535) / (180,782)
(121,367) / (81,738)
(117,645)/ (75,761)
(109,535) / (71,247)
LT Debt to Equity
(49,549)/ (81,738)
(55,345)/ (75,761)
(50,932) / (71,247)
Times Interest
(25,737) /(688)
(24,398)/ (604)
(23,538)/ (513)
(469,162)/(143,165)
(446,950) / (138,431)
(421,849)/ (128,770)
Earned
Fixed Asset
Turnover
138
(469,162)/(203,105)
(446,950)/ (193,406)
(421,849) /(180,782)
(469,162-352,488)/
(446,950-335,127)/
(421,849-314,946) /
(469,162)
(446,950)
(421,849)
Oper. Profit Margin
(25,737) /(469,162)
(24,398)/ (446,950)
(23,538) / (421,849)
Net Profit Margin
(16,999)/ (469,162)
(15,699) / (446,950)
(16,389) /(421,849)
Return on Tot.
(16,999)/ (203,105)
(15,699)/ (193,406)
(16,389)/ (180,782)
Return on SE
(16,999) / (81,738)
(15,699)/ (75,761)
(16,839) / (71,247)
EPS
(16,999) / (3,374)
(15,699) / (3,406)
(16,839)/ (3,656)
Price Earning Ratio
(73.44)/ (5.04)
(61.79) /(4.54)
(56.07) / (4.48)
(469,162-446,950)/
(446,950)
(445,950-421,849)/
(421,849-408,085) /
(421,849)
(408,085)
(16,999-15,699)/
(15,699-16,389)/
(16,389-14,370)/
(15,699)
(16,389)
(14,370)
EPS
(5.04-4.54)/ (4.54)
(4.54-4.48)/ (4.48)
(4.48-3.72) / (3.72)
Dividends Per Share
(1.59-1.46)/ (1.46)
(1.46-1.21)/ (1.21)
(1.21-1.09)/ (1.09)
Total Asset
Turnover
Gross Profit Margin
Assets
Sales
Net Income
Target Calculations (in millions)

2012
2011
Current Ratio
(16,388) /(14,031)
(16,449)/(14,287)
Quick Ratio
(16,388-7,903)/ (14,031)
(16,449-7,918)/ (14,287)
139
(48,163-16,558)/ (48,163)
(46,630-15,821)/ (46,630)
Debt to Total Equity Ratio
(48,163-16,558)/(16,558)
(46,630-15,821)/ (15,821)
LT Debt to Equity
(17,574)/ (16,558)
(16,522)/ (15,821)
Times interest Earned
(5,371)/ (762)
(5,322) / (866)
(71,960)/ (31,775)
(68,466)/ (30,181)
(71,960)/ (48,163)
(68,466)/ (46,630)
Gross Profit Margin
(71,960-50,568)/(71,960)
(68,466-47,860)/ (68,466)
(5,371)/ (71,960)
(5,322)/ (68,466)
Net Profit Margin
(2,999)/ (71,960)
(2,929) / (68,466)
(2,999)/ (48,163)
(2,929)/ (46,630)
Return on SE
(2,999) / (16,558)
(2,929) / (15,821)
EPS
4.57
4.31
Price Earnings Ratio
(61.00)/(4.57)
(52.14)/ (4.31)
Sales
(71,960-68,466)/ (68,466)
(68,466-65,786)/ (65,786)
Net Income
(2,999-2,929)/(2,929)
(2,9292,920)/(2,920)
EPS
(4.57-4.31)/(4.31)
(4.31-4.03)/(4.03)
Dividends Per Share
(1.38-1.15)/(1.15)
(1.15-.92)/ (.92)
140
Appendix 2: Pro Forma Ratio Calculations

2014
Current Ratio
(13,074,768,561)/(13,762,955,040)
Quick Ratio
(13,074,768,561-6,515,923,170)/(13,762,955,040)
(20,415,070,420)/(33,191,787,191)
(20,415,070,420)/(12,597,716,771)
LT Debt to Equity
(5,635,233,276)/(12,597,716,771)
Times Interest
(3,698,066,908)/123,989,025)
Earned
Fixed Asset
(130,720,654,249)/(19,552,505,761+564,512,869)
Turnover
Total Asset
(130,720,654,249)/(33,191,787,191)
Turnover
Gross Profit Margin
(130,720,654,249-114,380,572,468)/(130,720,654,249)
Oper. Profit Margin
(3,698,066,908)/(130,720,654,249)
Net Profit Margin
(2,323,150,624)/(130,720,654,249)
Return on Tot.
(2,323,150,624)/(33,191,787,191)
Assets
Return on SE
(2,323,150,624)/12,597,716,771)
EPS
Pro Forma Income Statement
Price Earning Ratio
(113.19/4.57)
Sales
(130,720,654,249-105,156,000,000)/(105,156,000,000)
141
Net Income
(2,323,150,624-2,039,000,000)/(2,039,000,000)
EPS
(4.57-4.68)/(4.68)
Dividends Per Share
(1.25-8.17)/(1.17)
142

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Management 485: Business Policy and Strategy

Written Case Analysis

Pro Forma Income Statement Description .............................................................................. 115

Our Proposed Vision Statement:

Existing Mission Statement

Analysis of Existing Mission Statement

Customers: Our members

Products and Services: Missing component

Markets: Missing component

Technology: Missing component

Concern for survival, growth and profitability: Missing component

Philosophy: Missing component

Self-concept: Missing component

Concern for public image: Missing component

Concern for employers: Missing component

Revised Comprehensive Mission Statement

Analysis of Revised Comprehensive Mission Statement

Customers: Our members have trusted us to provide; provides the best

Markets: Within communities around the world where we do business

Technology: Develop new ideas, programs and facilities

Philosophy: We believe our goal is to continuously provide the most authentic

Concern for public image: Give back to our communities.

Concern for employers: Much care and attention must be administered to

Simplicity of warehouse format allows Costco to deliver products efficiently

Wal-Mart has a larger employee base, at 2.2 Million, compared to Costco.

Costco Wholesale, Inc. 2013 Annual Report op cit, Pg. 26.

Research and Development

Costco Wholesale Corporation does not have a significant amount of

Costco Wholesale, Inc. Costco FY 2013 Annual Report. op cit, Pg. 7.

Brad Stone. (June 6, 2013). op cit.

Costco Wholesale, Inc. Annual Report. op cit, Pg. 5

Strong value proposition for the consumer surrounds the nature of

Brand awareness can be adversely affected by the marketing efforts and

Porters Industry Analysis

Threat of Substitute Products (Negative) (Low)

Porters Five Forces and Characteristics Chart

Threat of New Entrants

Bargaining Power of Customers

Planners are involved in decision making about

how land use will impact the fiscal situation in

Tech-enabled millenials are threatening the

Competition within the Industry

The number of Walmart supercenters has

continually gone up over the past decade and is

Bargaining Power of Suppliers

Threat of Substitute Products

Some companies, like Walmart have

With a big-box retail store which

distribution centers, but Costco, which recently

specializes in hardline and softline

Porters Analysis Conclusion

Costco Wholesale, Inc. Costco FY 2013 Annual Report. op cit.

Net Profit Margin 2011-2013

Profit Margin Percentage

No information for Target in 2013

External Environmental Analysis

Emerging health and natural trends for consumer products.

Increased competition in cross-platform retail sales will present a make-or-break

Expanding middle class segments in international markets, with higher disposable

The American middle class is feeling continued pressure by increasing expenses,

Steven Sparrow, op cit.

Warehouse clubs and supercenters industry is growing internationally.

Simplicity of warehouse format allows Costco to deliver products efficiently