Costco Wholesale Accounting Analysis

Kyle Highfield

Daniel Lott

Angeles de los Rios

Costco Wholesale

Costco, a bulk retailer that got its’ start in Washington State in 1983, today boasts almost 100 million members around the world. Their low prices and bulk quantities, combined with the expansion of their private label, Kirkland Signature, have contributed to this expansion and to Costco’s success. Kirkland Signature, for example, has helped Costco become the largest seller of fine wines in the U.S (CBS News).

Costco keeps its prices low by buying in huge quantity and never marking up any product more than 15%. This is less than the typical 25% at a supermarket and 50% at a department store. Another cost saving strategy is Costco stacks its inventory to the ceiling in the warehouse where customers shop. This inventory is stacked on the same industrial pallets on which it is shipped, saving millions in labor costs (CNBC). Costco carries a limited array of options for each product they sell compared to Walmart, Target, and other competitors.This is a strategic business model because suppliers must bid a high amount to get shelf space in Costco. These suppliers are aware that Costco only carries a limited variety of products, so they are willing to bid a very high amount to be the single brand on the shelf. In addition, this bidding war between vendors allows Costco to negotiates its costs down (CBS News).

Also, this strategy for Costco  allows them to keep inventory levels lower, and turnover higher, than other traditional retailers like Walmart and Target. For instance, a typical Costco averages only 4,000 different items, while a Walmart Supercenter averages 100,000. This limited array of options for each item actually helps Costco generate more sales. They have found that customers are more likely to buy a product if there is less variety to choose from (CNBC).

Another unique business strategy of Costco is their rotisserie chicken. This extremely large rotisserie chicken is only $4.99 and is one of Costco’s most popular items because it is so cheap. Costco places this item in the very back of the store, where customers will have to walk through the plasma screen televisions, massage chairs, and other exciting items (Scaling up Business). Customers end up walking out of the store with a ton of items they were not expecting to buy, just because they had to walk by them to get to the rotisserie chicken.

Walmart and Target have done a much better job than Costco at transitioning into a world of online purchases, with a much larger percentage of their inventory available for purchase online for delivery or in-store pickup. By comparison, Costco’s online inventory is much more limited, as are delivery options.

Amazon, on the other hand, has combined the wide range of inventory of Walmart or Target with the low overhead of Costco into the quintessential online shopping experience. With a much wider range of inventory, especially if third party sellers are included, and the convenience of delivery in two days or less with Amazon Prime, Amazon combines the selection of a Walmart with the pricing of Costco, all without leaving the house.

However, these competitors are not affecting Costco’s success. According to Business Insider, Costco has been able to hold its own because of its membership model and the ability to incentivize visits to their brick-and-mortar locations. For example, Costco is well known for selling any item imaginable, but Costco also has food courts, pharmacies, gas stations, and is also an automobile retailer. In addition, Costco is famous for their hot dog and refillable drink combo for $1.50, and is one of the largest pizza chains in the country. Therefore, despite the convenience of purchasing online, these online businesses cannot provide all of these things the way Costco can (Business Insider).

This explains why Costco continues to increase revenue from year to year, even with increased competition. They incentivise being a member with the promise of lower priced - high quality items (investopedia). These incentives are why customers are so loyal, and is also why Costco’s membership renewal rate is at 90.6% (CBS News).

Review of Costco’s Financial Statement Footnotes

• General: Costco buys most of its merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to their warehouses. The depots receive large shipments from manufacturers, and these goods are quickly shipped to the the warehouses. This process eliminates many costs associated with traditional multi-step distribution channels.
• Net Sales: Net sales increased 4% in 2017 largely due to an increase in shopper frequency, and lower gas prices. Sales increased 2% in 2016.
• Cash Flow from Financing Activities: The primary cashed used in 2017 were dividend payments and repayment of Senior Notes totaling $2.2 million.
• Revenue Recognition: Sales are recognized at the time the customer takes possession of the merchandise or receives services. Membership fee revenue is accounted for on a deferred basis. Revenue from memberships are recognized ratably over one year.
• Merchandise Inventories: Merchandise inventories are stated at the lower cost or market, and are valued using the LIFO Method.
• Short-Term and Long-Term Debt: In 2017 Costco did borrow any money from creditors. Their only material debt was Long-Term debt from Senior Notes issued in May. Interest on all outstanding Long-Term debt is payable semi-annually. Costco has the right to redeem the Senior Notes at any time, but will have to pay for this bond at 101% of the principal amount plus accrued and unpaid interest to the date of the event.

COSTCO VS. WAL-MART (including notes to financial statements)

**Amount in Billions

Wal-Mart is all about low-cost and save money. They try to involve people with innovation, creating customer-centric experience, they incorporate online shopping besides the physical shopping. The company’s operations consist of the U.S Wal-Mart international Wal-Mart and Sam’s club.