Costco Economic Analysis

Costco: Economic Analysis

Introduction

Costco is company at the top of their market, but can it get better? This paper will analyze the company's history and overview as well as its current market environment including their products, services, competitors, and the difficulty of others entering or exiting the market. The following will also look at supply/demand, production costs, distribution needs, and pricing. Finally, it will recommend potential any areas for future growth based on product, location, supplier, or customer base changes.

History and Overview

Costco opened their first location in an old airplane hangar in San Diego in 1976 with the name of Price Club. They started only selling wholesale to small business, but eventually found much greater success by allowing other non-business members to shop there as well. This spurred a great amount of growth for the company, and in 1983 they opened the first Costco warehouse in Seattle. Costco was the first company to ever grow from nothing to over $3,000,000,000 in sales in less than six years. The merger of Price Club and Costco took place in 1993; and at that point the combined company had 206 locations with $16,000,000,000 in sales annually.

In 1985, the company went public at $10.00 per share. With adjustments accounting for stock splits, the initial price was approximately $1.67 per share. The stock closed on the NASDAQ today at $104.15 per share. That is a 6,237% increase in just over 27 years. If someone bought $1,000 worth of stock when Costco went public it would be worth approximately $62,365 today.

Costco, still run by co-founder and CEO Jim Sinegal, now has over 92,000 employees. They are listed at 24th on the 2012 Forbes 500, and 1st in the specialty retailer's category ahead of Home Depot and Best Buy. (Fortune 500) They are considered the fifth largest retailer in the U.S., and second largest in Canada.

Current Market Environment

As a company Costco has maintained a high level of success through a difficult decade because they always try to improve their initial retail value proposition. On the other hand, most of the other retailers have been required to reorganize their strategies because their profit has all but disappeared. Costco focuses on maximizing sales by selling in bulk with very low markup. Their products have so little markup that the revenue from membership fees alone is more than their net profit each year. The annual net profit is still over a billion dollars.

Costco manages to maintain this retail value proposition by increasing operating efficiency when supplier's prices have increased. They provide many varieties of products and services that seem to be growing along with the company. They now offer gas, tire service, and car washes at many of their locations. These services are generally priced lower than most competitors, and customers appreciate the convenience of being able to take care of multiple tasks at one place.

They have created