Finished Entire Progress Report For Costco

Meghan Fischer
Elisa Santamaria
Kara Fanty
Kaitlin Thomas
Matthew Murphy
TABLE OF CONTENTS
I. INTERNAL AUDIT........................................................................................................ ......................3
1. CURRENT SITUATION................................................................................................................3
A. THE PATH TO COSTCO WHOLESALE CORPORATION: A HISTORY 3
EXECUTIVE SUMMARY:
o Costco wants to move the company forward in various ways. First, the opening of new
stores in the United States, Canada and Japan will increase the company’s overall sales,
which will allow for an increase in its profitability.
o Next, Costco will divest their stores in Taiwan, due to their decreasing sales over the past
several years. Also, Wal-Mart is opening 100 new stores in the country, which will make
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it hard to compete. By divesting these stores, we can concentrate more on the opening
and success of the new stores in the United States, Canada and Japan.
o Lastly, Costco will revamp and update their existing website to include several more
features that will appeal to all the nations that Costco operates in. The online shopping
market of the website will first be tested in Japan since there is not a feature of online
shopping yet in that country.
I. INTERNAL AUDIT
1. CURRENT SITUATION
a. The Path to Costco Wholesale Corporation: A History
1976: Sol & Robert Price open Price Club on July 12, the first warehouse club for business
shoppers in San Diego, California.
1980 -1989: The Price Company offers public stock on July 12th, 1980. In 1982, Jeff Brotman
and Jim Sinegal meet and draw up plans to start a new wholesale club business. A year later the
first Costco warehouse opens in September in Seattle, Washington. Costco’s public stock is
available on December 5th, 1985. Price Club is named the Forbes Magazine's "Best Managed
Company" 10 years after its open. In 1989 Costco begins the year with 46 warehouses in
operation. The Price Company is the third most profitable company in the United States.
1990 - 1999: Costco celebrates its 10th anniversary in September of 1993 while shareholders
approve the merger of Price Company and Costco, forming PriceCostco.
Kirkland Signature, Costco's exclusive private label, is introduced in 1995. Two years later, the
company officially changes its name from PriceCostco to Costco Companies, and the Executive
Membership is introduced. 1997, Costco launches its E-Commerce site at Costco.com to bring
Costco prices and services to the internet. Before the turn of the millennium the average annual
sales per warehouse reaches $100 million. The Company changes its name to Costco Wholesale
Corporation on August 30th.
2000 – Present: The 2% reward program is initiated, increasing Executive Member value. In
July of 2001, Costco celebrates its 25th anniversary. Costco finishes the 2002 fiscal year with
40.5 million cardholders and 98,000 employees worldwide. Costco.com generated sales of $226
million in 2003 while average annual sales per warehouse were $105 million. In 2004, Costco is
the 5th largest retailer in the U.S. and 11th largest in the world. Fortune Magazine lists Costco
29th on the Fortune 500. Over 57,000 vacation packages were booked through Costco Travel in
2005. In 2006, Costco was named one of the "most admired" companies by Fortune magazine
while approximately 30 million rotisserie chickens were sold company wide.
* Source: “Historical Highlights” Costco.com
b. Costco’s Words to Live by: Mission & Keyword Analysis
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To continually provide our members with quality goods and services at the lowest possible
prices. In order to achieve our mission we will conduct our business with the following Code of
Ethics in mind:
Our Code of Ethics

• Obey the law.
• Take care of our members.
• Take care of our employees.
• Respect our suppliers.
If we do these four things throughout our organization, then we will achieve our ultimate goal,
which is to:
• Reward our shareholders.
(See Appendix)
*Source: “Code of Ethics” Costco.com
c. Current Long-term Objectives: (with in last 2-3 years)
• To increase sales
• To acquire increasing numbers of memberships each year
o Costco currently has 50.4 million cardholders broken down into:
 27.6 million households
 18.6 million Gold Star
 5.4 million Business
 3.4 million Business Add-Ons
*Source: Costco 10K 2006 p.16-7, Costco.com
d. Current Corporate Strategies (within last 2-3 yrs)
Growth
Intensive Market * Expand business in new markets by attaining a greater
Penetration overall market share.
*Continually offer quality products at significant savings
to members.
*Keep costs down and pass the savings on to members.
*Offer a unique “treasure hunt” experience while
shopping
Market *Open 20 new stores in United States and abroad during
Extension 2007
*Introduce a new line of fresh, refrigerated, and frozen
Product foods called "Kirkland Signature" by Martha Stewart
Development in 2008
Stabilization Enhancement *Continually meet and exceed the high standards for
4
energy efficiency placed by California law in all of our
warehouses in the United States
- Use of solar panel in warehouses – 2006
- Testing of hybrid trucks for distribution – Spring 2007
* Increase interaction with our members to fit current
customer trends.
– Sampling
*Spend approximately $1.4 – 1.6 billion for
warehousing, clubs, related operations:
- Real estate, Construction, Remodeling, Equipment
*Source: Costco 10K 2006, Costco 2006 Annual Report, Costco.com, Barbaro
2. FUNCTIONAL ANALYSIS:
a. Management:
Costco is committed to promoting from within the company. The majority of our current home
and regional office team members are "home grown." This means that they started in our
warehouses, depots and business centers, learned the business and moved up within the
company. This philosophy also ensures promotional opportunities for motivated individuals.
Costco has one of the most competitive benefits packages in the industry. Not only do we
provide our employees with a full spectrum of benefits, but employees also may elect coverage
for their spouses, children and domestic partners. The company pays a larger percentage of the
premiums than do most other retailers and employee-paid premiums are withheld pre-tax, which
means you get to keep more of your hard-earned money.
Merchandising is the lifeblood of Costco, and our business is centered on our warehouse
operations.
(See Appendix)
*Source: Costco.com
Costco vs. Wal-Mart Facts:
o 44% of Wal-Mart employees leave after the first year.

o 6% of Costco employees leave after the first year.
o Sell more because well-treated and motivated, which accounts for $16,550 of
operating income in 2004. Wal-Mart employees only contributed $12,800.
*Source: Greenhouse, DiCarlo, Costco.com
Analysis:
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As a corporation, Costco cares about their employees. They provide a stable work environment,
higher work salaries than the industry average and great benefits. They view their employees as
more than an asset. This is evident because many of the people in the top management positions
once worked as an employee of Costco.
Costco has the ability to furnish their employees with higher salaries because of the way they run
their warehouses. The warehouses are designed with a simple structure in mind. They are not
ostentatious or made to look expensive. This allows for there to be little overhead cost for each
warehouse. Aside from benefiting employees, Costco’s operations also benefit the customers
because it allows Costco to lower the retail price of their products. Lastly, the hours of
operations for Costco warehouses are shorter on the weekends, which help employees achieve a
better work – life balance.
In comparison to Wal-Mart, Costco has a significantly smaller employee turnover, meaning their
investments into employees are lasting and ultimately lead to a higher contribution.
In addition to employee benefits and store setup, Costco is a logistically sound company. They
stream light their distribution into a single-step channel they lower costs without cutting quality.
b. Marketing:
Costco figures that it saves a good two percent a year in costs because it rarely shells out money
for mass-media advertising. It does, however, effectively target small-business owners as its
primary target market. Operating largely under the radar of the general public, Costco has cadres
of marketing representatives who are attached to each store and whose continual task it is to
network with business owners.
There was a 13.7% increase in net sales from 2005-2006, driven by an 8% increase in
comparable store sales and opening of 25 new warehouses in 2006. Also, there was a 10.0%
increase in net sales from 2004 to 2005, driven by a 7% increase in comparable store sales and
the opening of 16 new warehouses in 2005.
(See Appendix)
Total Sales:
Net
% % Profit %
Revenue Increase Net Income Increase Margin Increase
2 $60,151,227 13.70% $1,103,215.0 4% $0.018 -9%
006 0
2 $52,952,226 10.10% $1,063,092.0 20% $0.02 9%
005 0
2 $48,109,907 13.10% $882,393.00 22% $0.018 8%
004
*Source: Costco 10K 2006
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Analysis:
Net sales in fiscal 2006 increased 13.7% over fiscal 2005, primarily because of an increase in
comparable sales of 8%, which include both U.S. comparable store sales growth rates and non-
U.S. comparable store sales growth rates, and the opening of 25 new warehouses. Membership
fees for fiscal 2006 increased 10.7% to $1.2 billion, representing new member sign-ups at new
warehouses opened during the fiscal year, increased penetration of the Executive Membership
program, and continued strong member renewal rates. As shown above, the profit margin
decreased as a percentage. We believe that this decrease is primarily due to increased penetration
of the Executive Membership two-percent reward program.
Comparable warehouse sales, which are broken down and shown in Costco’s 10K, are also a
major factor in overall net sales for Costco. Retailers see the percent increases or decreases of
the amount of warehouse sales, both in the United States and internationally, and react to what
they observe. They react by determining where to focus most of their distribution of products
because whichever warehouses are selling more are the areas the retailers want more of their
products to be shipped to.
Marketing Mix:
Products:
Our merchandising strategy is to provide our members with a broad range of high quality
merchandise at prices consistently lower than could be obtained through traditional wholesalers,
mass merchandisers, supermarkets and supercenters. An important element of this strategy is to
carry only those products on which we can provide our members significant cost savings.
The following table indicates the approximate percentage of net sales accounted for by major
category of items:
Segments 2004 Sales % of Sales 2005 Sales % of Sales 2006 Sales % of Sales
Sundries 12,027,476 25% 13,238,055 25% 14,436,269 24%
Hard Lines 9,621,981 20% 10,590,444 20% 12,030,245 20%
Food 9,621,981 20% 10,060,922 19% 11,428,733 19%

Soft Lines 6,254,287 13% 6,354,266 12% 7,218,147 12%
Fresh Foods 5,292,089 11% 5,824,744 11% 6,616,634 11%
Ancillary/ 5,292,089 11% 6,883,788 13% 8,421,171 14%

Other
Total 48,109,907 100% 52,952,223 100% 60,151,227 100%
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Members can also shop for private label Kirkland Signature products, designed to be of equal or
better quality than national brands, including juice, cookies, coffee, tires, housewares, luggage,
appliances, clothing and detergent. The Company also operates self-service gasoline stations at a
number of its U.S. and Canadian locations.
Additionally, Costco Wholesale Industries, a division of the Company, operates manufacturing

businesses, including special food packaging, optical laboratories, and meat processing and
jewelry distribution. These businesses have a common goal of providing members with high
quality products at substantially lower prices.
Price:
The main objective for Costco is to allow the customers to get more for less because they are
buying in bulk. This allows the company to receive a high industry turnover as well.
(See Appendix)
Place:
Our typical warehouse format averages approximately 140,000 square feet. Floor plans are
designed for economy and efficiency in the use of selling space, the handling of merchandise and
the control of inventory. Because shoppers are attracted principally by the availability of low
prices, our warehouses need not be located on prime commercial real estate sites or have
elaborate facilities.
(See Appendix)
Promotion:
We generally limit marketing and promotional activities to new warehouse openings, occasional
direct mail marketing to prospective new members and direct marketing programs (such as the
Costco Connection) to existing members promoting selected merchandise. These practices result
in lower marketing expenses as compared to typical retailers, discount retailers and
supermarkets.
(See Appendix)
Customer Profiles:
Costco is open only to members and offers three types of membership: Business, Gold Star
(individual) and the Executive membership. Business members qualify by owning or operating a
business, and pay an annual fee ($50 in the U.S.) to shop for resale, business and personal use.
This fee includes a spouse card. Business members may purchase up to six additional
membership cards ($40 each) for partners or associates in the business. Gold Star members pay a
$50 annual fee (in the U.S.), and is available to those individuals that do not own a business. This
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fee includes a free spouse membership.
Costco targets individuals who have a medium to large disposable income and/or are affiliated
with a small to medium sized business. Both target markets patron Costco because of the unique
product sizes and varieties combined with competitive prices. The Costco member differs from
the average Wal-Mart shopper. While both target markets are looking for valuable products and
services at low prices, the Costco shopper could perhaps afford to spend more because he/she has
a larger disposable income than the Wal-Mart shopper. Also, while the Costco member enjoys
the low-pricing structure offered, the “Treasure Hunts” that offer high-price products such as
designer apparel, are very appealing.
(See Appendix)
Analysis:
Costco does little to no advertising. Since Costco does not do formal advertising, they run the
risk of not being able to reach their full customer potential. However, their main form of
advertising relies on customer word–of–mouth and direct marketing. Pertaining to word–of–
mouth advertising, Costco feels that the best way to get customers to their warehouses are
positive feedback from current customers. Costco also receives word–of–mouth publicity from
celebrity clients, such as Oprah Winfrey, who name drop the company.
The company also attracts purchases through sampling, which is direct marketing for the specific
product and, overall, the company. Sampling involves tables and/or displays of different
products being strategically placed throughout the warehouses. These displays help to entice
customers to buy the products they are advertising.
*Source: Robes, Hazel, Costco.com, Costco 10K 2006
c. Financial Performance
Costco:
2004 2005 2006

Sales 47,148,627 51,879,070 58,963,180
Net income 882,393 1,063,092 1,103,215
Total Assets 15,092,548 16,665,205 17,495,070
Equity 7,624,810 8,881,109 9,143,439
Current Assets 7,269,099 8,238,001 8,232,082
Current Liability 6,170,550 6,760,537 7,819,191
Inventory 3,643,585 4,014,699 4,568,723
Debt 993,746 713,900 523,892
Receivables 335,175 529,150 565,373
Fixed Assets 7,219,829 7,790,192 8,564,295
COGS 42,092,016 46,346,961 52,745,497
Earnings Before Interest &
Taxes 1,400,624 1,548,962 1,751,417
Day Sales 129174.32 142134.44 161542.96
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2004 2005 2006
ROS (in %) 1.87% 2.05% 1.87%
Total Asset Turnover 3.1240 3.1130 3.3703
ROA (in %) 5.85% 6.38% 6.31%
Financial Leverage- Equity
multiplier 1.9794 1.8765 1.9134
ROE (in %) 11.57% 11.97% 12.07%
Current Ratio 1.1780 1.2185 1.0528
Quick Ratio 0.5876 0.6247 0.4685
Debt to equity 0.1303 0.0804 0.0573
Inventory Turnover 12.9402 12.9223 12.9058
Receivable Turnover 140.6687 98.0423 104.2908
Fixed Asset Turnover 6.5304 6.6595 6.8848
Gross Profit Margin 0.1072 0.1066 0.1055
Operating Profit Margin 0.0297 0.0299 0.0297
Day Sales Outstanding 2.5947 3.7229 3.4998
BJ’s:
2004 2005 2006

Total Asset Turnover 3.81 3.89 4.17
ROA (in %) 0.06 0.065 0.036
Financial Leverage- Equity multiplier 2.0139 1.9585 1.9539
ROE (in %) 0.12 0.13 0.07
Current Ratio 1.1933 1.986 2.043
Quick Ratio 0.26206 1.1885 0.355
Gross Profit Margin (in %) 8.17 10.3 10.4
Operating Profit Margin (in %) 1.6 1.7 0.9
Costco is in stable financial condition, this is evident in nearly all of their financial ratios.
Inventory turnover is particularly strong, with Costco turning over inventory approximately once
every month. Return on Sales and Return on Assets are also consistent from 2004-2006.
Costco’s current ratio is also greater than one meaning that the company is fairly liquid and able
to pay their debts as they become due. Also, Costco’s Accounts Receivable ratios show that,
aside from a slight decrease in 2005, Costco has approximately 104 days to be paid by their
creditors.
Comparing Costco to its competitor, BJ’s, the company is superior to BJ’s. This is evident in
several ratios such as Inventory Turnover, Gross Profit Margin and Operating Profit Margin. In
these, Costco excelled, such as having a greater ability to turnover inventory, which was about
once a month, and to turn more sales into profits, giving Costco a better GPM. However, in
Asset Turnover, BJ’s was better than Costco. Overall, Costco and BJ’s are stable companies on
their own, with Costco’s dominating BJ’s in most ratios.
(See Appendix)
*Source: Hoover’s Costco 10K 2006
10
*Source: BJ’s 10K 2006
d. Production/Operations:
Costco Wholesale operates stores in 37 US states and Puerto Rico. The company also operates
stores in nine Canadian provinces, Japan, South Korea, Taiwan, and the UK. Costco also
operates 29 outlets in Mexico via a joint venture.
Because of our high sales volume and rapid inventory turnover, we generally have the
opportunity to sell and be paid for inventory before we are required to pay many of our
merchandise vendors. As sales increase and inventory turnover becomes more rapid, a greater
percentage of the inventory is financed through payment terms provided by vendors rather than
by our working capital.
Our typical warehouse format averages approximately 140,000 square feet. Floor plans are
designed for economy and efficiency in the use of selling space, the handling of merchandise and
the control of inventory. Our warehouses generally operate on a seven-day, 69-hour week.
Generally, warehouses are open weekdays between 10:00 a.m. and 8:30 p.m., with earlier closing
hours on the weekend.
(For specific store counts, historical and forecasted, see IV. D “Operation Issues” pages 34 –
35)
(See Appendix)
*Source: Costco.com, Costco 10K 2006
*Source: Standard & Poor’s 2007
Analysis
Costco is very effective in tapping into global markets in addition to their domestic ones. Their
operations hours lower production costs and are appealing to employees.
e. Information Systems:
The Internet Systems Division of Costco consists of four groups:
1.) AS/400 Application Development - designs and maintains programs for the different business
applications within the company. For example, there are teams to maintain and enhance
accounting, inventory, payroll, membership, and payroll applications.
2.) Customer Service and System Support - is divided into several groups that provide focused,
daily support of all IS functions for users of all levels throughout the company.
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3.) Client/Server and Internet Technologies – is divided into three groups (Network Security, E-
Commerce Administration, and BackOffice Administration), each with a separate function.
4.) e-Commerce Application Development - supports Costco's corporate efforts in the Internet,
obtains the web technology needed to streamline internal systems, and implements major phases
and daily maintenance.
(See Appendix)
*Source: Costco.com, Costco 10K 2006
Analysis:
While Costco is effective with their significant participation in many international markets, the
company has yet to bring this strength to their websites. By only allowing shipping to Canada
and the United States through their website, they are potentially cutting off and not tapping in to
a huge segment of their online market. However, the company does offer websites in the official
languages of the countries they are in.
The website layout is over-whelming due to the clutter of the opening page. The tabs are not the
same size, the pictures are cluttered, and there is no distinct focal point of the page. As a result,
the navigation of the website is a little confusing, because it conveys a sensory overload.
Though the main page is problematic, the department pages give a simplistic way of navigating
the different products within each department. A more simplistic way of designing the layout of
the website would help parallel the message of the warehouse layouts, which are simple with a
lot of products.
In an effort to hedge against the confusing setup, the website does have a business tab that helps
remind the small business customers to check out the different products for companies.
The graphics of the website showcase the quality of the products because of their high-resolution
and clarity. Browsers are also able to enlarge the pictures. Also, some products can be viewed
in many different angles, allowing the customer to glean more information about the products.
II. GLOBAL EXTERNAL AUDIT:
1. MACRO ENVIROMENTAL AUDIT:
a. Economic Forces
The United States:
The US has the largest and most technologically powerful economy in the world with a $40,100
per capita purchasing power according to 2004 statistics. They have the fastest growing GDP
and one of the lowest unemployment rates showing a healthy and prosperous economy for
Costco to be in. These factors affect demand for products and services or require a change in the
12
mix of products they sell which adversely affects profitability. There inflation rate is however,
the highest of the three countries which causes Costco to face high cost of sales and operating,
selling, general and administrative expenses, and otherwise adversely affecting operations and
results. US as compared with Japan has more flexibility to expand capital plant, to lay off
surplus workers, and to develop new products. At the same time, the US faces higher barriers to
enter their rivals' home markets than foreign firms face entering US markets.
Canada:
Canada resembles the US in its market-oriented economic system, pattern of production, and
affluent living standards. While the GDP growth rate is not as prominent as the United States it is
still increasing by 2.4 percent. The GDP purchasing power is also slightly less then the United
States but above that of Japan with $31,500 per capita. The unemployment is the highest at 7
percent which could affect Costco by having a huge segment of the population out of work and
unable to purchase, slowing down the economy. Their inflation rate is lower then the United
States, which presents an opportunity for Costco to have lower cost of sales and operating
expenses. Costco is highly dependent on both Canada and the US, which represent 94 percent of
their total net sales. A prosperous economy is necessary for to ensue financial success for
Costco.
Japan:
Government-industry cooperation, a strong work ethic, mastery of high technology, and a

comparatively small defense allocation (1% of GDP) helped Japan advance to the rank of second
most technologically powerful economy in the world after the US and the third-largest economy
in the world after the US and China. Their GDP growth rate is 2.9 percent which is above that of
Canada and their GDP per capita is $29,400. Their unemployment rate is the lowest of the three
countries at 4.7 percent which has a high potential for Costco to profit. One notable
characteristic of the economy is how manufacturers, suppliers, and distributors work together in
closely-knit groups called keiretsu. A second basic feature has been the guarantee of lifetime
employment for a substantial portion of the urban labor force. This results in a stable economy
that is able to purchase Costco’s products.
United States Canada Japan

GDP Real Growth 4.4% (2004 est.) 2.4% (2004 est.) 2.9% (2004 est.)
Rate
GDP Per Capita purchasing power purchasing power purchasing power
parity - $40,100 (2004 parity - $31,500 (2004 parity - $29,400 (2004
est.) est.) est.)
Unemployment Rate 5.5% (2004 est.) 7% (2004) 4.7% (2004 est.)
Inflation Rate 2.5% (2004 est.) 1.9% (2004 est.) -0.1% (2004 est.)
Population Below 12% (2004 est.) 15.9% (2003) NA
Poverty Line
The following chart summarizes the economic situation for 2004 and forecasts that each of the
nations, the United States, Canada and Japan, will continue on this path. The United States will
13
continue to be the dominant nation when it comes to purchasing power. Canada has the highest
unemployment rate, which means there is a percentage of the population that is able to work and
could potentially work at Costco. Japan is second highest in GDP Real Growth Rate, next to the
United States, which make them a significant purchasing power for Costco.
Economy Forecasting: 2006 – 2009

Country Real GDP Growth Inflation Current Account (in billions)
United States 3.0% 2.7% -$862.3
Canada 3.6% 2.4% $20.56
Japan 2.2% 0.3% $174.4
*Source: www.indexmundi.com, CIA World Factbook, 2007
b. Demographic/Sociocultural Forces
The United States:
The United States is the most culturally diverse country of the three. They also have the highest
population and fastest growth rate. Majority of the spoken language is English but there is still
prominent speaking of Spanish and Asian languages. Costco must adapt to the diverse cultures
that are present in the US but also to the US’ own culture. The largest population age range is 67
percent between the ages of 15-64, which is a great segment for Costco to target to.
Canada:
Canada has a fairly diverse ethnic population with 28 percent British Isles, 23 percent French, 15
percent European and 2 percent American. Even though the country is diverse its population
maintains strong ties to their cultural background. It is important for Costco to understand and
adapt to the different cultural products and languages when doing business in Canada. They
have the lowest population of the three countries with around 32,000,000 and a growth rate .9
percent.
Japan:
Japan’s population is second to the United States with around 127,000,000 which averages out to
around 327 persons per square kilometer. Such a dense population has help to promote
extremely high land prices. They also maintain a strong pride in their culture do to the fact that
99 percent of the population is Japanese and it is the only spoken language. This forces Costco
to adapt to their language and culture to fully break into their market. The population growth is
the smallest out of the three countries and their biggest age range is 66 percent between the ages
of 15-64.

Ethnic Groups white 81.7%, black British Isles origin Japanese 99%, others
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12.9%, Asian 4.2%, 28%, French origin 1% (Korean 511,262,
Amerindian and 23%, other European Chinese 244,241,
Alaska native 1%, 15%, Amerindian 2%, Brazilian 182,232,
native Hawaiian and other, mostly Asian, Filipino 89,851, other
other Pacific islander African, Arab 6%, 237,914)
0.2% (2003 est.) mixed background note: up to 230,000
note: a separate listing 26% Brazilians of Japanese
for Hispanic is not origin migrated to
included because the Japan in the 1990s to
US Census Bureau work in industries;
considers Hispanic to some have returned to
mean a person of Brazil (2004)
Latin American
descent (including
persons of Cuban,
Mexican, or Puerto
Rican origin) living in
the US who may be of
any race or ethnic
group (white, black,
Asian, etc.)
Languages English 82.1%, English (official) Japanese
Spanish 10.7%, other 59.3%, French
Indo-European 3.8%, (official) 23.2%, other
Asian and Pacific 17.5%
island 2.7%, other
0.7% (2000 census)
Population 295,734,134 (July 32,805,041 (July 2005 127,417,244 (July
2005 est.) est.) 2005 est.)
Population Growth 0.92% (2005 est.) 0.9% (2005 est.) 0.05% (2005 est.)
Age Structure 0-14 years: 20.6% 0-14 years: 17.9% 0-14 years: 14.3%
(male (male (male
31,095,725/female 3,016,032/female 9,328,584/female
29,703,997) 2,869,244) 8,866,772)
15-64 years: 67% 15-64 years: 68.9% 15-64 years: 66.2%
(male (male (male
99,324,126) 11,244,356) 41,942,835)
65 years and over: 65 years and over: 65 years and over:
12.4% (male 13.2% (male 19.5% (male
21,397,228) (2005 2,475,488) (2005 est.) 14,381,236) (2005
est.) est.)
Literacy Rate definition: age 15 and definition: age 15 and definition: age 15 and
over can read and over can read and over can read and
write write write
15
total population: 97% total population: 97% total population: 99%
(1986 est.) male: 99%
male: 97% male: NA% female: 99% (2002)
female: 97% (1999 female: NA%
est.)
(See Appendix)
c. Political/Legal:

Budget revenues: $1.862 revenues: $151 billion revenues: $1.401
trillion trillion
expenditures: $2.338 expenditures: $144 expenditures: $1.748
trillion, including billion, including trillion, including
capital expenditures capital expenditures capital expenditures
of NA (2004 est.) of NA (2004 est.) (public works only) of
about $71 billion
(2004 est.)
(See Appendix)
d. Technological:

Telephones-Main Lines 181,599,900 (2003) 19,950,900 (2003) 71,149,000 (2002)
Telephones- Cellular 158.722 million 13,221,800 (2003) 86,658,600 (2003)
Phones (2003)
Internet Users 159 million (2002) 16.11 million (2002) 57.2 million (2002)
These three nations are very technologically advanced. Due to the growing Internet users in each
nation, visitors to the Costco website will increase. Also, many people are more and more
technologically savvy. This means that, for Costco, new ways of scanning membership cards or
having a more interactive shopping experience will become increasingly important to the success
of the company.
(See Appendix)
*Source: Costco 10K 2006
*Source: CIA World Factbook
*Source: U.S. Department of Commerce
*Source: U.S. Census Bureau, 2004, "U.S. Interim Projections by Age, Sex, Race, and Hispanic
Origin," <http://www.census.gov/ipc/www/usinterimproj/>
16
2. TASK ENVIRONMENT AUDIT
a. Industry Audit:
Costco is identified as a major player in the Warehouse Clubs & Supercenter industry along with
Sam’s Club and BJ’s Wholesale. According to NAICS, this industry specified with code 452910,
“comprises establishments known as warehouse clubs, superstores or supercenters primarily
engaged in retailing a general line of groceries in combination with general lines of new
merchandise, such as apparel, furniture, and appliances..”
Breakdown of Warehouse Club and Supercenter Industry from the parent industry of
Retail Trade is as follows:
% %
Industry NAICS # of % of % Estab. Sales
Estab Sale
Detail Code Description Estab. Sales . s GM GM
3,056,421,99
44-45 Retail Trade 1,114,637 7
452 General Merchandise Stores 40,723 445,224,985 3.7% 14.6%
Other General Merchandise
4529 Stores 31,368 224,482,103 2.8% 7.3% 77.0% 50%
45291 Warehouse Clubs & Supercenters 2,912 191,252,396 0.3% 6.3% 7.2% 43%
452910 Warehouse Clubs & Supercenters 2,912 191,252,396
Although Warehouse Clubs & Supercenters (WC&S) only make up .3% of the retail trade
industry in terms of number of establishments, this industry earns only 1% less than other
general merchandise stores in terms of sales.
If the WC&S industry is compared to General Merchandise Stores, it pulls in 43% of the
industry’s sales with only 7.2% of the industries establishments running with a WC&S
classification. According to Hoover’s Online, warehouse clubs are seeing customer membership
at an all-time high. While annual membership fees range from $40-100, Costco’s offers its
memberships from $45-60.
The supermarket industry lost market share to such warehouse clubs and supercenters. Currently
in North America, supercenter Wal-Mart has achieved the number one spot of top 10 Mass
Market Retailers, with Costco coming in at number 3. On the global scale, Costco is the seventh
largest food retailer. In regard to the warehouse industry, Costco rivals both Sam’s Club and BJ’s
for the number 1 spot.
(See Appendix)
*Source: US Census Bureau. – Industry Statistics Sampler
*Source: Hoover's, Inc.
*Source: Supermarket News 2006
17
*Source: Mass Market Retailers, August 2006
*Source Mintel Oxygen: Warehouse Club Buying, 2005
b. Financial Performance:
The industry has a steadily growing return on revenues and return on assets. Return on equity,
throughout the industry, varies from year to year. This is mainly because the amount of debt the
different companies take on during specific years. The debt to capital ratio has a wide range due
to the amount of financial leverage the different companies choose to incur. The net income is a
mixed stream throughout the industry due to the increase of sales of the varying companies. The
forecast of the industry appears to be positive, with strong financial activity ratios. This is
apparent from Costco’s Annual Report and their 10K statements.
(See Appendix)
*Source: Standard & Poor’s
18
Porter’s Model: Industry: Warehouse Club and Supercenters:
Threat of Entry = HIGH

Absolute Cost Advantage - High
Economies of Scale - High
Brand Identity - High
Access to Distribution – High
Switching Costs - High
Government Policy - Mod
Bargaining Power Bargaining Power

Of Suppliers = LOW Of Buyers
Supplier Degree of Rivalry = MOD. (consumers) = HIGH
Concentration – Low Number of Competitors – Low Buyer
# of Buyers – Low Industry Growth – Moderate Concentration – High
Switching Costs –Mod. Asset Intensity – Low #of Buyers – High
Substitute Raw Product Differentiation – Low Switching Costs – Low
Materials – High Exit Barriers - Low Substitute Products –
Threat of Forward Low
Integration – Low Threat of Backward
Integration – High
Threat of Substitution
Functional Similarity – High
Price/Performance Trend – Mod
Product Identity – High
Overall competitiveness is high to moderate, thus profit potential is moderate to low. This is
because the higher the competitiveness, the lower the attractiveness because margins are eroded
countering the forces.
* Source Mintel Oxygen: Warehouse Club Buying, 2005
*Source: Costco.com
*Source: Standard & Poor’s
c. Competitor Analysis:
Costco’s industry is highly competitive, based on factors such as price, merchandise quality and
selection, location and member service. In addition to other membership warehouse operators,
they compete with a wide range of national and regional retailers and wholesalers, including
supermarkets, supercenters, general merchandise chains, specialty chains, gasoline stations, as
19
well as E-commerce businesses. Over 1,178 warehouse club locations exist across the U.S. and
Canada, including our 426 North American warehouses, and every major metropolitan area has
one, if not several, club operations. Wal-Mart has become the largest retailer in the world and
has expanded further into various food merchandising formats. Target and Kohl’s have also
emerged as significant retail competitors. Low-cost operators selling a single category or narrow
range of merchandise, such as Lowe’s, Home Depot, Office Depot, PetSmart, Staples, Best Buy
and Barnes & Noble, have significant market share in their respective categories.
Competitor
Analysis BJ's Wal-Mart Staples
* Be environmentally
friendly and provide
* Provide high-quality, brand * Provide low cost goods various ways for
name merchandise so people can live better recycling
Current
Objectives
*Provide quality * Provide easy, multiple
* Provide lower prices than merchandise and options
other retailers services for customers
* Reward and embrace
*High sales with rapid mutual respect, integrity * Be the number one
inventory turnover and diversity. brand for
*Be first or second in every *Sam’s Club segment school and office
market provides brand- supplies
* Offer high quality
name merchandise at office products at a low
"members only" cost
prices for business and
personal use
* Continue unit growth,

*Offer narrow assortment of with 660 stores with half *Emphasize brand
food in the US quality
Current * Focus on supercenter *Donate school
Strategies and general merchandise growth supplies to
*Use warehouse club to sell schools around the
diversified categories. *Provide organic foods world
*Utilize store design * Target small
efficiency businesses
*Target small businesses,
households, and individual *Open two regional and
grocery distribution
centers
20
*EDLP and Rollback are *Domestic retail and
appealing strong sales
Competencies *Customer-friendly shopping to customers Operations
* One-stop shopping *Domestic delivery to
*High name recognition experience provide
*Streamlined management, * Distribution leads to prompt deliveries
distribution and marketing. high in-stock throughout
levels for products The U.S.
* Many stores are open *Strong brand
*Convenient operation hours 24 hours Recognition
*Diverse product line that * Operates in 14
exceeds countries
bulk packaging
Future *Open 8-10 new clubs in * Expand to Hungary, * Continue to

Outlook existing markets for 2007 Poland, differentiate from
*Develop new club
prototype *Taiwan major competitors
* Be the world's best
*Gain membership office products supplier
*Play harder against
competition
*Offer new presentation of
products
Staples Wal-mart BJ's

2006 2006 2006
Revenue 16,078. 315,654.0 7,949.90
80 0
Cost of Goods Sold 11,493. 240,391.0 7,123.70
30 0
Gross Profit 4,585.5 75,263.00 826.2
0
Gross Profit Margin 28.50% 23.80% 10.40%
SG&A Expense 2,968.4 52,016.00 518.5
0
Depreciation & Amortization 303.9 4,717.00 103.8
Operating Income 1,313.3 18,530.00 203.9
0
Operating Margin 8.20% 5.90% 2.60%
Non-operating Income 58 248 7.8
Non-operating Expenses 56.8 1,420.00 0.6
Income Before Taxes 1,314.5 17,358.00 211.1
0
Income Taxes 479.8 5,803.00 82.3
Net Income After Taxes 834.7 11,555.00 128.8
Continuing Operations 834.4 11,231.00 128.8
Discontinued Operations -- -- -0.3
21
Total Operations 834.4 11,231.00 128.5
Total Net Income 834.4 11,231.00 128.5
Net Profit Margin 5.20% 3.60% 1.60%

Gross Profit Margin 28.60% 24.20% 9.90%
Pre-Tax Profit Margin 8.10% 5.40% 1.80%
Net Profit Margin 5.40% 3.40% 0.90%
Return on Equity 21.00% 20.80% 7.80%
Return on Assets 12.60% 8.20% 4.10%
Days of Sales Outstanding 17.85 2.78 5.32
Days Cost of Goods Sold in Inventory 56 44 37
Asset Turnover 2.4 2.4 4.5
Current Ratio 1.59 0.84 1.32
Quick Ratio 0.7 0.2 0.4
Leverage Ratio 0.06 0.27 0.01
Looking the 3 competitors’ financials, Wal-Mart has a substantial amount of revenue over BJ’s
and Staples. BJ’s limits its expenses which reflect their low cost of goods sold and SG&A
expenses. They also turn over their inventory 9.7 times which is higher than Wal-Mart’s of 8.3.
However, Wal-Mart had a high debt leverage ratio of .27 when compared to staples .06. Wal-
Mart has high revenues and a strong leverage ratio which shows that they are at the top of the
industry and a leading retailer.
(See Appendix)
*Source: BJ’s 10K 2006
*Sources: BJ's 10-k, Hoovers, Planet Retail, Wal-mart's 10k, Staple's 10k
III. SWOT ANALYSIS: CURRENT SITUATION
Strengths Weaknesses
Management Majority of top management officials Simple layout may detract from
are “home grown”. luxury items offered in store.
Section B-1
Only 6% of Costco employees leave
after the first year, compared to 44% of
Wal-Mart’s.
Section B-1
Marketing Increase in comparable store sales 2004- Costco does little to no formal
2005 (8%) and 2005-2006(7%). advertising except in the instance of
a store opening, so they may not be
Internet sales increased 59% from 2005 reaching their full membership
to 2006 and are projected to reach $1 potential.
billion in 2007
Section B-2
22
Membership increases steadily at 10%
each year and is a constant 2% of
revenue
“Treasure Hunt” aspect makes shopping

fun again;
Costco’s philosophy is to keep overhead

costs low and pass those savings on to
customers in the form of low prices.
Section B-2
Accounting / Costco turns over its inventory nearly BJ’s has a stronger Asset Turnover
Finance once a month, which is more frequent than Costco.
than its competitor BJ’s.
Costco’s gross profit margin has
Costco has consistent Return on Sales declined from 2004-2006, while BJ’s
and Return on Assets. has increased.
Section B-3
Section B-3
Production & Costco operates stores in the US, Costco’s international sales are only
Operations Canada, Mexico, UK, Japan, South 6% of total net sales
Korea, and Taiwan.
Taiwan stores are losing money
Because of Costco’s high inventory Section B-4

turnover we generally have the
opportunity to sell and be paid for
inventory before we are required to pay
many of our merchandise vendors.
Section B-4
Information Costco has a separate website for stores Costco only offers an online retail
Systems in each of its international reasons. outlet to customers in Canada and
the US.
Costco offers special online deals each
week dubbed “This Week’s Treasure Costco’s homepage is overwhelming
Hunt”. due to the conglomeration of
graphics.
Costco’s website showcases the quality
of the products it offers and lets the Costco’s website focuses on
customer view products from various consumers, leaving out small
different angles. businesses.
Section B-5
Section B-5
23
Opportunities Threats
Economic High GDP per capita means these 12% of the US population is below
people have disposable income: the poverty line and 15.9% of
Canada’s population is below the
US- $40,100 poverty line.
Canada-$31,500
Japan- $29,400
Inflation Rates are relatively low:

US- 2.5%
Canada-1.9%
Japan- -0.1%
Demographic / Approximately 67% of the population in Costco will have to expend energy
Sociocultural the US, Japan, and Canada are between and resources for translation of
the ages of 15-64 company materials and websites as
all of the regions we operate in have
a different primary language.
Political / Legal Canada and Japan’s revenues and The United States’ expenditures far
expenditures are fairly balanced exceed their revenues.
Technological 159 million internet users in America 57.2 million Internet users do not
and 16.11 million in Canada have access to online purchases in
Japan.
1. STRATEGIC ISSUES:
Continue sales growth in a competitive, global market.
IV. STRATEGY ANALYSIS:
1. REVISED MISSION STATEMENT:
To continually provide our members with a unique product mix of quality brand name and
private label merchandise, as well as everyday services, at the lowest possible prices in order to
be an industry leader competing in a global market. In order to achieve our mission we will
conduct our business with the following Code of Ethics in mind:
Our Code of Ethics

• Obey the law.
• Be environmentally aware.
which is to:
24
(See Appendix)
2. LONG TERM OBJECTIVES:
o Increase sales by 14% annually for the next 3 years. (Note: 2006-2007 was 13.4%, 2007-
2008 was 17% and 2008-2009 was 14%)
(in thousands) 2006 2007 2008 2009
Total $58,963,180 $67,218,025 $76,628,549 $87,356,546
United States $46,642,516 $53,172,468 $60,616,613 $69,102,939
International $12,320,664 $14,045,557 $16,011,936 $18,253,607
o Increase membership sales by 12% annually for 3 years

(in thousands) 2006 2007 2008 2009
Membership Sales 1,188,047 1,330,613 1,490,286 1,669,120
3. POSSIBLE CORPORATE STRATEGY:
1. GE Matrix:
This GE Matrix explains that Costco’s three strongest locations, which means they have the most
industry attractiveness and competitiveness, are the United States, Canada and Mexico
respectively. The United Kingdom, Mexico, Japan and South Korea are average in these two
categories, while Taiwan is doing poorly in every aspects.
25
This GE Matrix explains that in the categories of industry attractiveness and competitive
position, food and sundries are doing very well in these categories. Hardlines, softlines and
ancillary are doing average, while membership is doing the poorest of all the products offered.
Therefore, this is why a strategy to increase membership sales through the website, which will
add to overall membership sales for Costco.
(See Appendix)
4. TOWS Matrix Model:

Strengths – S Weaknesses – W
1.) An increase in 1.) Costco only offers an
comparable store sales online retail outlet to
from 2004 to 2005 of customers in Canada
8% and from 2005 to and the United States.
2006 of 7%. 2.) Costco does little to no
2.) High inventory formal advertising.
turnover rate (nearly 3.) Costco has not yet
once a month). expanded into every
3.) Costco has a consistent region of the globe.
ROS and ROA. 4.) Costco puts so much
4.) Costco keeps overhead emphasis on being
cost low and pass those simple (layout of
savings on to warehouses) that is
customers in the form may translate to
of low prices. customers that no
quality products could
be bought there.
5.) Costco in Taiwan is
struggling to stay alive
and the market there is
failing.
26
Opportunities – O Strength – Opportunity Weakness – Opportunity
1.) Canada, Japan and Strategy: Strategy:
United States have
high GDP per capita SO1: Update the website to WO1: Costco will open new
and low inflation rates. facilitate international usage stores internationally (Japan
2.) Potential to compete in and advertise the new and Canada)
exploding global functionalities, while
markets. introducing an online WO2: Develop promotions
3.) There are 59 million shopping option with test trials online, such as buying
Internet users in the beginning in Japan. keywords through Google.
United States and
16.11 million in SO2: Open more stores in the WO3: Costco will close their
Canada. United States. stores in Taiwan.
4.) An online website that
ships to the United SO3: Costco will offer trial WO4: Costco will open stores
States and Canada. memberships through their in India.
5.) Costco in Japan is very website to increase same store
stable, with middle to sales and website visits. WO5: Costco will acquire
high market share, their competitor BJ’s.
growth, opportunities, SO4: Increase in-store
etc. sampling. WO6: Introduce new non-
food product lines such as a
makeup counter
Threats – T Strengths – Threats Weakness – Threats
1.) 57.2 million Internet Strategy: Strategy:
users do not have
access to online ST1: Improve asset turnover. WT1: Costco will close their
purchases in Japan. stores in Taiwan.
2.) BJ’s has a stronger ST2: Fully functional website
asset turnover ratio that has links to the Costco
than Costco. website in all the countries
3.) Different legal laws they are in.
and restrictions exist in
the different countries,
which creates a
challenge.
4.) Diversity of the
languages in the global
regions cause for
energy and resources
to be expended for
translation for
company materials and
the website.
5.) Wal-Mart is set to open
100 supercenters in
27
Taiwan.
5. STRATEGY SELECTION
Strategy Selection Matrix:
1 2 3 4 5 6 7 Total
SO1 5 4 4 5 3 4 3 28
SO2 5 4 5 5 4 4 3 30
SO3 4 4 5 5 3 4 5 30
SO4 5 4 5 4 4 4 4 30
ST1 4 3 4 4 2 3 2 22
ST2 5 4 5 4 3 4 4 29
WO1 5 3 5 5 2 4 3 27
WO2 4 2 4 3 2 3 4 22
WO3 5 4 4 4 3 4 3 27
WO4 4 3 4 4 3 2 2 22
WO5 3 4 4 4 2 3 2 22
WO6 4 4 3 4 2 3 2 22
WT1 3 3 3 5 2 5 2 23
1. Fit with mission, vision, & objectives

2. Consistency with realities of external audit
3. Feasibility given firm’s internal audit
4. Ability to build upon competitive advantage
5. Shelter from environmental changes
6. Potential rewards
7. Lack of risk
Chosen Strategies:
Rejected TOWS:
o WO2: Develop promotions online, such as buying keywords through Google.

o WO4: Costco will open stores in India.
o WO5: Costco will acquire their competitor BJ’s.
o WO6: Introduce new non-food product lines such as a makeup counter
o ST1: Improve asset turnover.
The above strategies were rejected because they are secondary strategies. This means that the
strategies we accepted should be implemented first, so later the rejected strategies could be put
into effect. Overall, these strategies are not as important for the initial long-term objectives, as
the accepted ones.
Accepted TOWS:
28
o SO1: Update the website to facilitate international usage and advertise the new
functionalities, while introducing an online shopping option with test trials beginning in
Japan.
o SO2: Open more stores in the United States.
o SO3: Costco will offer trial memberships through their website to increase same store
sales and website visits.
o SO4: Increase in-store sampling.
o WO3: Costco will divest their stores in Taiwan
o WO1: Costco will open new stores internationally (Japan and Canada)
o ST2: Fully functional website that has links to the Costco website in all the countries
they are in.
o WT2: Costco will close their stores in Taiwan.
The above strategies were accepted because they are the most influential to the growth and
success of Costco. Beginning with these strategies, Costco as a whole would feel a large positive
impact because these strategies are the best for implementing our long-term objectives. For
example, increase in advertising (since at the moment Costco does very little) and opening new
stores in the exploding global market are sure to help boost Costco’s success. These strategies
would be implemented first because they would set the pace for the strategies that were rejected,
in hopes of making all of the strategies contribute to the long-term success of Costco.
V. STRATEGY IMPLEMENTATION:
Costco plans to increase number of stores domestically and globally by 13.7%, or 63 stores (with
35 stores in the United States and 20 stores outside of the United States; 11 in Canada and 17 in
Japan), in 3 years.
Along with this, Costco will close all stores in Taiwan due to Wal-Mart opening 100 new stores
in the area, as well as these stores having decreasing sales over the past several years. By doing
this Costco will be able to focus more on the opening of their new stores.
Trial memberships through the Costco website (to increase comparable store sales) will allow
visitors to website to enter their driver’s license information and then print out a receipt of their
trial membership activation. Direct mail, to those in Costco’s demographic, will tell those
interested to go to the website for the membership. When a customer goes to the store they will
present their driver’s license and print out, which will activate their trial membership from that
day on.
Costco also plans to have some of their trial memberships to turnover to permanent
memberships.
• 50.4 million current membership card holders
• An increase of 2% of the current holders would give Costco 1 million new
members a year
• Assume that 0.5% (of the 2%) of the trial memberships would turn into new
memberships = 5000 trial to new memberships
29
Through the website, Costco will be able to increase their reach to small businesses. Since small
businesses tend to do more of their business transactions online, as to save time and energy, the
Costco website would be very helpful towards those needs. There would be a “Small
Businesses” tab that would allow those businesses to be able to log in and order quickly what
they need through a reorder link.
Lastly, sampling with in the stores will help increase the products sampled being purchased.
This will add to Costco’s net sales and their overall success. Every week different products
Costco currently sales will be able to be sampled. This, along with the expertise the employees
will market the products, will entice customers to buy those sampled products.
1. MANAGEMENT ISSUES:
Costco’s management structure is very stable and effective and there are little to no strategies
that need to occur to make this segment more productive. Most upper management are people
that were once long-term employees of the company that have since worked their way up.
Whether it be upper management or store employees, both stay with the company for long
periods of time, if not for an entire working career. Costco creates value for its employees,
which then creates value for its customers; this continues the value creation cycle. Costco is
significantly better than its competitors, in the management department, paying higher salaries to
their employees and lower employee turnover (higher employee retention). Having a complete
and effective management segment allows for other areas of Costco, those that may not be doing
so well, to be focused on and restructured.
Costco
Store
Locations
United United
Canada Korea Japan Taiwan
States Kingdom
*With Taiwan
30
Costco
Store
Locations
United United
Canada Korea Japan
States Kingdom
*Without Taiwan (after closing stores there)
2. MARKETING ISSUES:
a. The 4 P’s:
First, Costco’s product line will consist of a core group of products that will be sold in every
store Costco runs. However, in each of the different countries and regions there will be products
specifically geared to that culture and their tastes in food and other products that those specific
Costco stores will sell. Products will continue to be bundled, but in areas where storing food is
not a major issue, the bundles will be smaller and more tailored to the needs of the people in
those areas. Also, the website will help showcase these products to all those interested in
purchasing them through the website and in stores.
Next, Costco will keep the basic layout of their warehouses the same. They will however
increase the number of stores both in the United States and outside. Costco will open 63 new
stores globally in the next 3 years in the United States, Japan and Canada, but will close their
stores in Taiwan.
Price for sampling for Costco will be at 13%. This is because Costco has a cap of 14% for in-
store sampling. Therefore, by keeping sampling costs at 13%, Costco is able to be most cost
efficient.
Finally, for promotion Costco will increase advertising for new stores for a specific period of
time while there is still hype about the new openings, but will otherwise keep the amount of
advertising they currently do the same. To draw customers to the new and improved website,
Costco will offer a trial membership. To access the one month trial membership, the user will
print the membership card from the website and it is good for one month from the date of their
31
first visit to Costco stores. We hope that these trial members will eventually become longtime
loyal members. Finally Costco will increase the frequency and variety of products that are
sampled in store to encourage an increase in each individual shopper’s purchase amount which
will in turn raise same store sales.
Overall, the 4 P’s, as part of the marketing plan, will increase Costco’s company brand.
*Source: Progressive Grocer
Costco’s Sales Forecast:

Costco Wholesale Base Year Plan Year 1 Plan Year 2 Plan Year 3
(in millions) (actual) (forecasted) (forecasted) (forecasted)
2006 2007 2008 2009
Comparable $58,963.2 $65,374.5 $72,805.0 $82,665.4
Store Sales
New Store Sales -- $1,419 $5,031 $9,933
Total Net Sales $58,963.2 $66,793.5 $77,836.0 $92,598.4
Comparable Stores Sales Forecast:

Comparable Store Base Year Plan Year 1 Plan Year 2 Plan Year 3
Sales (in millions) (actual) 2006 (forecasted) (forecasted) (forecasted)
United States
$47,433.6 $49,315.4 $54,375.1 $60,490.3
International
$12,529 $14,290.2 $16,468.6 $19,991.0
Website
- $589.6 $653.7 $728.0
Sampling -
$589.6 $653.7 $728.0
Target Small -
Businesses $589.6 $653.7 $728.0
Total Net Sales
$58,963.2 $65,374.5 $72,805.0 $82,665.4
New Store Sales Forecast:
32
New Store Base Year Plan Year 1 Plan Year 2 Plan Year 3
Sales (in (actual) 2006 (forecasted) (forecasted) (forecasted)
millions)
United States - $1,419 $1,806 $774
Japan - $258 $387 $1,032
Canada - $258 $903 $3,096
Divest - ($516) - -
Taiwan
Total Net - $1,419 $5,031 $9,933
Sales
Costco’s sales are driven by the opening of new stores and an increase of comparable store sales.
Comparable stores sales have increased by 7% in the past in then United States and by 11%
internationally. Sampling, website and targeting of small business will each contribute another
1% to comparable store sales.
(See Appendix)
3. FINANCE/ACCOUNTING ISSUES:
Costco will finance their new stores through taking funds from their current cash on hand.
Pre-opening expenses for new stores for Costco (in thousands):

o 2007 = $37,957
o 2008 = $30,385
o 2009 = $32,171
Cost with Inflation
2009 2008 2007
Pre Cost Inflation Cost Pre Cost Inflation Cost Pre Cost Inflation Cost
0.025 US 14867 372 15239 20443 511 20954 26018 650 26669
0.019 CANADA 11151 212 11362 7434 141 7575 7434 141 7575
-0.001 JAPAN 5575 -6 5570 1858 -2 1857 3717 -4 3713
$ 32,171 $ 30,385 $ 37,957
It will also cost $5,016 (in thousands) to close stores in Taiwan. This is because of store closing
expenses.
WACC 11%
33
year 0 year 1 year 2 year 3
Project cash flow-PV 4,327,595 2,179,509 845,813 2,294,327
Project cost 100,702
NPV 4,226,892
** 0.039% Required Rate of Return (based on other store openings and return rates)
According to the NPV (being positive), Costco will accept the project of opening new stores for
each year.
WACC
WD(Kd)(1-
t)+(Wpfd)(Kpfd)+(We)(Ke)
Long-term debt 215369 Wd 2.139

Common Stock 23,120 Wpfd 0.230
28,18
Preferred Stock 0 We 0.280
Kd 0.055
WACC= 11% Kpfd 0.070
Beta 0.5 Ke 0.067
$
Risk Free Return 0.039 Intial In. 100,702
Market Risk Premium 0.055 Tax rate 0.371
*Source: Costco 10K
*Source: yahoofinance.com
4. OPERATION ISSUES:
Wal-Mart is moving into Taiwan and opening 100 new stores. This would make competing in
Taiwan difficult for Costco and would consume money and time. Therefore, closing Costco’s
stores in Taiwan would allow for the company to focus on opening new stores in other countries
that would be very successful; such as opening stores in the United States, Canada and Japan.
Previous Openings:
Year US Canada Other Total Total in
International Operation
2004 18 2 0 20 417
2005 11 2 3 16 433
2006 20 3 2 25 458
Future Openings:
34
Year US Canada Other Total Total in
International Operation
2007 14 4 2 20 478
2008 11 4 1 16 494
2009 8 6 3 17 511
Additionally, Costco operates regional cross-docking facilities (depots) for the consolidation and
distribution of most shipments to the warehouses, and various processing, packaging, and other
facilities to support ancillary and other businesses. At the end of fiscal 2006, we operated eleven
depots in the United States, three in Canada and two internationally, excluding Mexico,
consisting of approximately 6.5 million square feet.
*Source: Costco’s 2006 10K
5. SOCIAL RESPONSIBILITIES:
Costco have many different ways of being socially responsible. All of the United States
warehouses operate under an energy management system that meets or exceeds the demanding
energy efficiency standards that meet California law. In 2006, they increased their energy saving
efforts by installing the first, large scale solar panel system in one of the California warehouses.
Costco, in the future, is anticipating the installment of a second solar panel. Also, they will test
hybrid trucks in their business operations. Costco has a van-pool system, or Commute Trip
Reduction, which was started twelve years ago (1994). They started with 18 vans and now
currently have 52. Lastly, they offer employees subsidies to use the pool.
6. INFORMATION SYSTEMS ISSUES:
a. Mock Website:
35
Welcome to Costco.com
Select your location
North America:
United States
Canada
Mexico Personal
Europe: Business
United Kingdom
Asian Pacific:
Japan
Korea
Costco will revamp and update their current website to include features for all the different
nations they currently and will, in the future, do business in. Costco’s website will open the
availability of shipping in Japan, which it currently does not do. An example of this is Ikea’s
website; it allows links to all the different countries it does business in and constantly updates the
new products they have or are on sale.
A major factor in the revamping of the website is that there will be constant maintenance to the
website. Constant updating and construction to the site will take place to ensure that it is up to
the high standards the customers wish to receive.
To revamp the website it would take approximately $100,000 for two people. This is in
accordance with the United States of a web designer, which is $50,372. Costco already has a
web team that constantly updates their current website weekly. Therefore, the same team will
update the new website weekly. The costs of these updates are imbedded into SG&A in their
financial reports.
*Source: Costco 10K
*Source:
http://swz.salary.com/salarywizard/layouthtmls/swzl_compresult_national_IT10000109.html
VI. EVALUATION & CONTROL
1. 3 Year Pro Forma Forecast:
Costco’s projected financials are increases in all operating costs, which are shown as follows:
o Merchandise Costs will increase 14% because it is a variable cost.
36
o Selling, General and Administrative by using a consistent 86.9% because Costco is not
adding any additional product lines, therefore, we are not increasing SG&A.
o Pre-opening expenses will decrease from 0.06% to 0.05%.
o Impared Assets (which are shipping costs and damaged assets) and Closing Costs will
remain the same because Costco is closing stores in Taiwan, not reselling.
o Also, we are liquidating the inventory for the Taiwanese stores because the
packaging there will not translate well to another store location.
o Net Sales will increase an average of 14.68%.
The increases in all of the costs are due to the fact that Costco is opening new stores both
domestically and globally. This is all shown here:
Actual Projected Projected Projected

INCOME STATEMENT 2006 2007 2008 2009
(000) (000) (000) (000)
REVENUE
Net Sales 58,963,180 66,793,482 77,835,976 92,598,424 1
Membership Fees 1,188,047 1,342,493 1,530,442 1,760,008 2
Total Revenue 60,151,227 68,135,976 79,366,419 94,358,433
Merchandise Costs 52,745,497 59,109,277 68,881,395 81,945,508 3
Gross Profit 7,405,730 9,026,699 10,485,024 12,412,925
OPERATING EXPENSES
Selling Expenses 5,216,856 5,792,932 6,617,628 7,720,922 4
Depreciation 515,285 572,186 666,781 793,244 5
Website expense - 47.4 2.4 2.4 6
Preopening Expenses 42,504 22,770 36,432 36,432 7
Impared Assets and Closing Costs 5,453 5,016 - -
Total Operating Expenses 58,525,595 6,392,951 7,320,844 8,550,600
Operating Income 1,625,632 2,633,748 3,164,180 3,862,325
OTHER INCOME (EXPENSE)
Interest Expense (12,570) (13,958) (16,266) (19,351)
Interest Income and Other 138,355 153,633 179,032 212,987
IBIT 1,751,457 2,773,423 3,326,946 4,055,961
Provisions For Income Taxes 648,202 1,026,424 1,231,280 1,501,083 8
NET INCOME 1,103,215 1,746,998 2,095,667 2,554,878
1 Based on Sales Forecast
2 Membership increases 1% each projected year
3 Based on Average 13% Markup
4 Due to economies of scale, Selling Expenses decreases in terms of common stock
5 Depreciation is constant
6 Based on initial design costs, then decreases in 2008 & 2009 for Maintenance only
7 As per average opening costs per store
8 Equals Provisions For Income Taxes (previous year) / IBIT (previous year) * IBIT (projected year)
37
Common Size:
2006 2007 2008 2009

Projecte
Actual Projected Projected d
INCOME STATEMENT Common Common Common Common
% % % %
REVENUE
Net Sales 98.02% 98.03% 98.07% 98.13%
Membership Fees 1.98% 1.97% 1.93% 1.87%
Total Revenue 100.00% 100.00% 100.00% 100.00%
Merchandise Costs 87.69% 86.75% 86.79% 86.84%
Gross Profit 12.31% 13.25% 13.21% 13.16%
OPERATING EXPENSES
Selling Expenses 8.67% 8.50% 8.34% 8.18%
Depreciation 0.86% 0.84% 0.84% 0.84%
Website expense 0.00% 0.00% 0.00% 0.00%
Preopening Expenses 0.07% 0.03% 0.05% 0.04%
Impared Assets and Closing
Costs 0.01% 0.01% 0.00% 0.00%
Total Operating Expenses 97.30% 9.38% 9.22% 9.06%
Operating Income 2.70% 3.87% 3.99% 4.09%
Interest Expense -0.02% -0.02% -0.02% -0.02%
Interest Income and Other 0.23% 0.23% 0.23% 0.23%
IBIT 2.91% 4.07% 4.19% 4.30%
Provisions For Income Taxes 1.08% 1.51% 1.55% 1.59%
NET INCOME 1.83% 2.56% 2.64% 2.71%
(See Appendix)
Net Income per Common Share:
Actual Projected Projected Projected

NET INCOME PER COMMON SHARE 2006 2007 2008 2009
Basic 2.4 2.61 3.04 3.62
Diluted 2.3 2.55 2.98 3.54
Shares Used In Calculations (000's) - - - -
Basic 469,718.0 521,587.05 607,817.35 723,096.58
Diluted 480,341.0 533,383.10 621,563.56 739,449.92
Dividends Per Share 0.5 0.54 0.63 0.75
To forecast, common size for 2006 was used for each of the other numbers. This showed a
steady increase in our basic and diluted shares and our dividend per share.
2. Balanced Scorecard:
38
Financial:
Increase in Net Sales
Close Stores in
Taiwan
Customers: Internal:
Customer BALANCED Employee
Satisfaction SCORECARD Satisfaction
Customer Loyalty Regulatory and
New Memberships Social Process
Learning and
Growth:
Opening New
Stores Domestically
and Globally
Financial Perspective: Costco will continue to have growth in Net Sales. This will increase
their overall revenue growth. Along with an increase in Net Sales, closing stores in Taiwan will
help keep unnecessary costs out of Costco’s overall financials.
Internal Perspective:Costco will continue to make their employees feel like a major part of the
success of the company. Along with this, employee turnover rate will stay low, since there will
remain a sense of family within the company. Also, Costco will continue a regulatory and social
process; stay true to how they do business while being socially responsible.
Customer Perspective:Customer satisfaction will continue to be a major facet of Costco, due to

the fact that without them Costco would become obsolete. Costco will continue to provide their
customers with quality products at bargain prices. This will keep the customers loyal to Costco.
Lastly, the amount of memberships will continue to increase year by year.
Learning and Growth Perspective: Costco will open new stores, both domestically and
internationally. This will allow Costco to keep growing, which will ultimately allow revenues to
increase. Also, new stores will allow for more employment opportunities, as well as places
people can shop and therefore become loyal customers.
39
Appendix
Current Mission: To continually provide our members with quality goods and services at the
lowest possible prices. In order to achieve our mission we will conduct our business with the
following Code of Ethics in mind:
Our Code of Ethics

• Obey the law.
which is to:
Value Creation Quality goods and services, lowest possible

prices, members, employees, suppliers,
shareholders
Principal products or services n/a
Geographic scope n/a
Philosophies (basic values) Obey the law, Ethics
Self-image (distinctive competencies) n/a
Public image (social responsibility) Ethics
Revised Mission: To continually provide our members with a unique product mix of quality
brand name and private label merchandise, as well as everyday services, at the lowest possible
prices in order to be an industry leader competing in a global market. In order to achieve our
mission we will conduct our business with the following Code of Ethics in mind:
Our Code of Ethics

• Obey the law.
• Be environmentally aware.
If we do these four things throughout our organization, then we will achieve our ultimate goal, which is to:
Value Creation Quality goods and services, lowest possible

prices, members, employees, suppliers,
40
shareholders.
Principal products or services A unique product mix of quality brand
name and private label merchandise and
everyday services.
Geographic scope Global
Philosophies (basic values) Obey the law, Ethics
Self-image (distinctive competencies) Be our industry leader.
Public image (social responsibility) Be environmentally aware.
Long-term Objectives:
FISCAL YEAR 2006 Fourth Qtr ‘06

Opening Date Location 06/01/06 S. Austin, TX
First Qtr ‘06 06/02/06 Juarez, MX
9/17/2005 San Luis Obispo, CA 06/29/06 Sheffield, UK
10/14/2005 Pembroke Pines, FL 07/18/06 Lacey, WA
10/21/2005 Kalispell, MT (relocation) 07/27/06 E. Bayamon, PR
10/26/2005 La Habra, CA 07/28/06 Wilmington, NC
10/27/2005 Centennial, NV 08/09/06 Duncanville, TX
11/7/2005 Milton Keynes, UK 08/17/06 Sequim, WA (NRL)
11/10/2005 Veracruz, MX 08/23/06 Nampa, ID
11/11/2005 Phoenix, AZ (Cave Creek) 08/24/06 Lehi, UT
11/16/2005 Kanata, ON 08/25/06 Sparks, NV
11/17/2005 Hillsboro, OR
Second Qtr ‘06 FISCAL YEAR 2007
11/22/2005 W. Bountiful, UT Opening Date Location
12/1/2005 Chandler, AZ First Qtr ‘07
3/28/2006 Gatineau, QC (relocation) 09/21/06 Marysville, WA
3/29/2006 Sherwood Park, AB 10/17/06 Kauai, HI
3/30/2006 NW Calgary, AB 10/20/06 Gypsum Eagle Co., CO
4/26/2006 SW Bakersfield, CA 10/25/06 Raleigh, NC
5/3/2006 Mall of Georgia, GA 10/26/06 Louisville, KY
5/4/2006 SE Gilbert, AZ 10/27/06 Maple Grove, MN
5/5/2006 Lake Elsinore, CA 11/10/06 Vancouver, BC
Third Qtr ‘06 11/14/06 W. Nashville, TN
03/28/06 Gatineau, QC (NRL) 11/15/06 Cumberland Mall, GA
03/29/06 Sherwood Park, AB 11/16/06 Toluca, MX
03/30/06 NW. Calgary, AB 11/17/06 Fontana, CA
04/26/06 Bakersfield II, CA 11/21/06 Boisbriand, QC
05/03/06 Mall of Georgia, GA 11/22/06 La Quinta, CA
05/04/06 SE Gilbert, AZ Second Qtr ‘07
05/05/06 Lake Elsinore, CA 11/28/06 Helena, MT
41
11/29/06 Columbus, OH Fourth Qtr ‘07
11/30/06 Orland Park, IL 06/07/07 Tustin II, CA
12/02/06 Chester UK 07/12/07 Kawasaki, JP
Third Qtr ‘07 08/03/07 West Valley, UT
02/21/07 Thornton, CO 08/15/07 Spartanburg, SC
03/08/07 W. Homestead, PA 08/16/07 Greenville, SC
03/30/07 E. Markham, ON 08/23/07 NE San Jose, CA
04/12/07 Estero, FL 08/29/07 Toledo, OH
04/13/07 Royal Palm Beach, FL 08/30/07 Grafton,
05/05/07 Potomac Mills, VA
GE Matrix:
Sundries Good Med Poor High Med Low

Market Share 3 Market Growth 2
Technological Know How 2 Market Size 3
Product Quality 3 Capital Requirements 2
Distribution Network 3 Competitive Intensity 2
Price Competiveness 3
Operating Costs 2
Customer Know How 2
Total 18 9
Hardlines Good Med Poor High Med Low
Technological Know How 2 1 Market Size 3
Operating Costs 2
Customer Know How 2
Total 16 9
Softlines Good Med Poor High Med Low
Operating Costs 2
Customer Know How 2
Total 16 8
Food Good Med Poor High Med Low
Operating Costs 2
Customer Know How 3
Total 16 10
42
Ancillary/Other Good Med Poor High Med Low
Operating Costs 2
Customer Know How 3
Total 17 8
Membership Good Med Poor High Med Low
Operating Costs 3
Customer Know How 2
Total 14 8
US Good Med Poor High Med Low
Technological Know
How 3 Market Size 2
Operating Costs 3
Customer Know How 2
Total 20 Total 10
Canada Good Med Poor High Med Low
Technological Know
How 3 Market Size 3
Operating Costs 3
Customer Know How 2
Total 19 Total 10
Mexico Good Med Poor High Med Low
Technological Know
How 2 Market Size 2
Operating Costs 2
Customer Know How 2
Total 15 Total 8
UK Good Med Poor High Med Low
43
Technological Know
How 2 Market Size 2
Operating Costs 3
Customer Know How 2
Total 16 Total 9
Japan Good Med Poor High Med Low
Technological Know
How 2 Market Size 3
Operating Costs 3
Customer Know How 2
Total 18 Total 9
S. Korea Good Med Poor High Med Low
Technological Know
How 2 Market Size 2
Operating Costs 2
Customer Know How 2
Total 13 Total 8
Taiwan Good Med Poor High Med Low
Technological Know
How 1 Market Size 1
Operating Costs 2
Customer Know How 1
Total 9 Total 5
Management:
Some of the benefits that management provides to their employees are:
o Health Care
o Dental Care
o WorkLife Program
o Voluntary Short Term Disability
44
o Pharmacy Program
o Long Term Disability
o Vision Program
o Life Insurance
o 401(k) Plan
o Employee Stock Purchase Plan
o Health Care Reimbursement Account
o Long-Term Care Insurance
o Dependent Care Reimbursement Account
o Employee Assistance Program
With the average age of the top management being 66 years old and having an average span with
the company for twenty-one years, they are more likely to continue with the current way the
company is being run. This has been successful for the company over the years
Usually it means that one to two people are working the phones all day calling prospective
members and setting up appointments, and others are out calling on businesses," says Wanklin.
"They work leads that they get from business lists and networking. They go through unions,
credit unions, church affiliations and more."
At the same time, while competitor Wal-Mart is being attacked more and more for its low-
compensation policies, Costco is emerging as an exemplar of how to treat employees right. In
turn, this highly motivated staff of internal marketers is a powerful force for building Costco's
sales.
Marketing:
45
Breakdown of Revenue 2006 Breakdown of Revenue 2005
2% 2%
14% Food 12% Food

30% 31%
Sundries 12% Sundries
12%
Hardlines 16% 29% Hardlines
20% 24%
Softlines Softlines
Other Other
Membership Membership
Breakdown of Revenue 2004

2%
11% Food
13% 31%
Sundries
16% 29% Hardlines
Softlines
Other
Membership
Sales Forecast Calculations:
NEW STORE SALES FORECAST

2007 Contribution 2008 Contribution 2009 Contribution
US 14 1444.8 11 3192.75 8 3217.411765
JAP 2 206.4 1 290.25 3 1206.529412
CAN 4 412.8 4 1161 6 2413.058824
Total 20 2064 16 4644 17 6837
Divest Taiwan 516
TOTAL New Store Sales 1548 4644 6837
COMPARABLE STORE SALES FORECAST

2006
TOTAL 0.00
US/store 46,642.5
INTL/store 12,320.7
58,963.2
2006 2007 Comparable Store Sales
1
US US .07 $49,907.5
INTL Intl 1.11 $13,675.9
46
0
Web .01 $589.6
0
2007 sample .01 $589.6
37 0
US 1 target sm .01 $589.6 07 New Store Sales 07 Net Sales
INTL 98 $65,352.3 1548 $66,900.35
% change 13.46%
2008 2008 Comparable Store Sales
1
US 14 1915.34735 US .07 $55,450.5
INTL 6 820.86315 Intl 1.11 $16,091.5
0
Web .01 $653.5
0
2009 Sample .01 $653.5
0
US 11 1702.20056 Target SM .01 $653.5 08 New Store Sales 80 Net Sales
INTL 5 773.727526 $73,502.5 4644 $78,146.5
% change 16.81%
2009 Comparable Store Sales
1
US .07 $61,153.3
Intl 1.11 $18,720.4
0
Web .01 $735.0
0
Sample .01 $735.0
0
Target SM .01 $735.0 09 New Store Sales 09 Net Sales
$82,078.8 6837 $88,915.8
% change 13.78%
SALES FORECAST BY PRODUCT LINE

2006 2007 2008 2009
Net Sales $58,963.2 $66,900.3 $78,146.5 $88,915.8
Food 31% $18,278.6 $20,739.1 $24,225.4 $27,563.9
Sundries 23% $13,561.5 $15,387.1 $17,973.7 $20,450.6
Hardlines 20% $11,792.6 $13,380.1 $15,629.3 $17,783.2
Softlines 11% $6,486.0 $7,359.0 $8,596.1 $9,780.7
Other 15% $8,844.5 $10,035.1 $11,722.0 $13,337.4
Total 100% $58,963.2 $66,900.3 $78,146.5 $88,915.8
Membership Breakdown:
Gold Star 17,338

Business 5,214
Total primary cardholders 22,552
Add-on cardholders 25,127
Total cardholders 47,679
47
Increase in Comparable Warehouse Sales:
2006 2005 2004 2003 2002
United States 7% 6% 9% 4% 7%
International 11% 11% 14% 10% 2%
Total 8% 7% 10% 5% 6%
Products:
Items that members may request but that cannot be purchased at prices low enough to pass along
meaningful cost savings are often not carried. We seek to limit specific items in each product line
to fast-selling models, sizes and colors. Therefore, we carry an average of approximately 4,000
active stock keeping units (SKUs) per warehouse in our core warehouse business, as opposed to
discount retailers and supermarkets that normally stock 40,000 to 60,000 SKUs or more.
Selected Products and Services
• Alcoholic beverages • Checks and form printing

• Apparel • Cleaning and institutional supplies
• Appliances • Collectibles
• Automotive insurance products • Computer hardware and software
(tires, batteries) • Computer training services
• Automobile sales • Copying and printing services
• Baby products • Credit card processing
• Books • DVDs
• Cameras, film, and photofinishing • Electronics
• Candy • Eye exams
• Caskets • Flooring
• CDs
• Floral arrangements
• Gasoline
• Gifts
• Glasses and contact lenses • Insurance (automobile, small-
• Groceries and institutionally business health, home)
packaged foods • Jewelry
• Hardware • Lighting supplies
• Health and beauty aids • Mortgage service
• Hearing aids • Office equipment and supplies
• Home insurance • Outdoor living products
• Housewares • Payroll processing
• Pet supplies
48
• Pharmaceuticals • Tools
• Plumbing supplies • Toys
• Real estate services • Travel packages and other travel
• Snack foods services
• Soft drinks • Video games and system
• Sporting goods
Private Label
• Tobacco
o Kirkland Signature
Price:
Costco’s products are priced lower than their competitors. This is due to the fact that they have a
loyalty to the customers not to mark up their prices. They maintain this strategy by combining
the wholesaler and retailer parts of the distribution channel into one. This saves Costco money,
which they then can then cut from the prices of their products. Also, by maintaining a simplistic
warehouse layout and cutting labor costs by avoiding the hassle of breaking down many
products, Costco is able to ultimately offer lower prices for the customer.
Business members qualify by owning or operating a business, and pay an annual fee ($50 in the
U.S.) to shop for resale, business and personal use. This fee includes a spouse card. Business
members may purchase up to six additional membership cards ($40 each) for partners or
associates in the business. Gold Star members pay a $50 annual fee (in the U.S.), and is available
to those individuals that do not own a business. This fee includes a free spouse membership. The
Company also has a third membership level, called the Executive Membership. In addition to
offering all of the usual benefits, it allows members to purchase a variety of discounted consumer
services (auto and homeowner insurance, real estate and mortgage services, long-distance
telephone services, auto buying, personal check printing, financial planning) and/or discounted
business services (merchant credit card processing, health insurance, business lending, payroll
processing, communication solutions, check and forms printing) at substantially reduced rates.
Executive Members also receive a 2% annual reward (up to $500) on most of their warehouse
purchases. Executive Members pay an annual fee of $100.
Membership Data: 50.4 million cardholders
27.5 million Households
18.6 million Gold star
5.4 million Business
3.4 million Business ad ons
Place:
49
Costco’s warehouses are not only domestic, but global as well. They maintain the mentality that
it is not a necessity to spend excessive amounts of money on prime real estate. Instead, the
company buys large areas of land for their stores. This results in many of their stores being in
suburban or secluded areas. These suburbs are targeted by Costco because they have the correct
customer profile. Many of the residents here have the option to shop in higher priced stores, but
shop at Costco because they have good quality products for a discounted price. Also, the
warehouses are built very large as to hold all the many different products Costco offers.
Number of Warehouses: 518 as of (8/30/07)

Locations: 383 locations in 39 U.S. States & Puerto Rico;
71 locations in nine Canadian provinces;
19 locations in the United Kingdom;
4 locations in Taiwan;
5 locations in Korea;
6 locations in Japan;
30 locations in 18 Mexican states
Warehouse Information:
Warehouses in Operations (2) 2006 2005 2004 2003 2002
Beginning of the Year 433 417 397 374 345
Opened (3) 28 21 20 29 35
Closed (3) (3) (5) -- (6) (6)
End of Year 458 433 417 397 374
Promotion:
In connection with new warehouse openings, our marketing teams personally contact businesses
in the area that are potential wholesale members. These contacts are supported by direct mailings
during the period immediately prior to opening. Potential Gold Star (individual) members are
contacted by direct mail or by providing membership offerings to be distributed through
employee associations and other entities. After a membership base is established in an area, most
new memberships result from word-of-mouth advertising, follow-up messages distributed
50
through regular payroll or other organizational communications to employee groups and ongoing
direct solicitations to prospective Business and Gold Star members.
Customer Profiles:
Costco’s marketing mix is unique to the company and their industry. They have a large range of
products that are offered in bulk and for competitive prices. They have their own signature
product label, Kirkland, along with other big name brands. Costco also changes their offerings
every so often to give their customers the feeling of a “treasure hunt.” This form of surprise
makes a sense of excitement for the customers. Their products are in bulk packaging, which are
variety packs a lot of the time. This allows for the customers to have variety; not a large amount
of the same thing.
o Customers:
o Small to medium size businesses
o Individuals
 The typical Costco customer is both a business owner with a family who
heads to Costco to shop for both. They are homeowners with higher
education levels and annual household incomes of more than $100,000
yearly. A customer shops there about 20-50 times a year, depending on
whether or not he/she carries an annual Gold membership or the pricier
Executive membership.
o Averages:
o Medium age: 51.8 years (well above U.S. mediums of 35.6)
o Medium Income: $85,000 yearly (well above the U.S. mediums of $ 41,000
yearly.
o 42% of Costco’s customers earn over $100,000 yearly.
Membership Fees:
Fiscal 2006 Fiscal 2005 Fiscal 2004
Membership fees $1,188,047 $1,073,156 $961,280
Membership fees increase 10.7% 11.6% 12.7%
Membership fees as a percent of net sales 2.02% 2.07% 2.04%
Total cardholders 47,679 45,258 42,416
2006 vs. 2005

Membership fees increased 10.7% to $1.19 billion, or 2.02% of net sales, in fiscal 2006 from
$1.07 billion, or 2.07% of net sales, in fiscal 2005. This increase was primarily due to additional
membership sign-ups at the 25 new warehouses opened in fiscal 2006, increased penetration of
the Executive Membership program, and high overall member renewal rates consistent with
recent years, currently 86.5%. In April 2006, we announced plans to increase annual membership
fees by $5 for our U.S. and Canada Gold Star (individual), Business, and Business Add-on
Members, effective May 1, 2006 for new members and July 1, 2006 for renewals. Approximately
15 million members will be affected by this increase. Membership fees are accounted for on a
deferred basis, whereby membership fee revenue is recognized ratably over the one-year term of
51
the membership, which will have the effect of spreading the full realization of the increase over
the next two fiscal years.
2005 vs. 2004

Membership fees increased 11.6% to $1.07 billion, or 2.07% of net sales, in fiscal 2005 from
$961 million, or 2.04% of net sales, in fiscal 2004. This increase was primarily due to additional
membership 22 sign-ups at the 16 new warehouses opened in fiscal 2005, increased penetration
of our Executive Membership program and a high overall member renewal rate of 86%.
Financial Performance:
Selling, general and administrative expenses consist primarily of salaries, benefits and workers’
compensation costs for warehouse employees, other than depots, fresh foods and certain
ancillary businesses, as well as all regional and home office employees, including buying
personnel. Selling, general and administrative expenses also include utilities, bank charges and
substantially all building and equipment depreciation, as well as other operating costs incurred to
support warehouse operations.

Selling, General and Administrative $4,600,792 $5,061,339 $5,732,141
Expense
Selling, General and Administrative 9.76% 9.76% 9.72%
Expense as a Percent of Net Sales
2006 vs. 2005

Selling, general and administrative (SG&A) expenses were $5.73 billion, or 9.72% of net sales in
fiscal 2006, compared to $5.06 billion, or 9.76% of net sales in fiscal 2005. Improved warehouse
and central operating costs positively impacted SG&A by approximately nine basis points,
primarily due to increased expense leverage of warehouse payroll, which was positively
impacted by strong comparable warehouse sales and a lower rate of increase in workers’
compensation costs. This improvement was partially offset by an increase in stock-based
compensation cost of approximately five basis points in fiscal 2006.
2005 vs. 2004

SG&A expenses were $5.06 billion, or 9.76% of net sales, in fiscal 2005 compared to $4.60
billion, or 9.76% of net sales, in fiscal 2004. Had EITF 03-10 been in effect for all of fiscal 2004,
SG&A expenses as a percent of net sales would have shown improvement of four basis points as
a percent of net sales in fiscal 2005. For fiscal 2005, warehouse and central operating costs
positively impacted SG&A comparisons year-over-year by approximately ten basis points,
primarily due to improved payroll utilization at the warehouse level, including increased
leverage from increased comparable sales and cost control measures employed in employee
benefits, primarily health care. This improvement was offset by the implementation of EITF 03-
10, which negatively impacted SG&A as a percentage of net sales by five basis points, and an
increase in stock-based compensation costs approximating six basis points year-over-year.
52
The Company considers as cash and cash equivalents all highly liquid investments with a
maturity of three months or less at the date of purchase and proceeds due from credit and debit
card transactions with settlement terms of less than five days. Of the total cash and cash
equivalents of $1,510,939 at September 3, 2006 and $2,062,585 at August 28, 2005, credit and
debit card receivables were $593,645 and $521,634, respectively.
In general, short-term investments have a maturity of three months to five years at the date of
purchase. Investments with maturities beyond five years may be classified as short-term based
on their highly liquid nature and because such marketable securities represent the investment of
cash that is available for current operations. Short-term investments classified as available-for-
sale are recorded at market value using the specific identification method with the unrealized
gains and losses reflected in accumulated other comprehensive income until realized. The
estimate of fair
value is based on publicly available market information or other estimates determined by
management. Realized gains and losses from the sale of available-for-sale securities, if any, are
determined on a specific identification basis.
Receivables consist primarily of vendor rebates and promotional allowances, receivables from
government tax authorities, reinsurance receivables held by the Company’s wholly-owned
captive insurance subsidiary and other miscellaneous amounts due to the Company. Amounts are
recorded net of an allowance for doubtful accounts of $2,423 at September 3, 2006 and $1,416 at
August 28, 2005. Management determines the allowance for doubtful accounts based on
historical experience and application of the specific identification method.
Cash Flows:
(in thousands) 2004 2005 2006
Operating Activities 2,096,265 1,775,961 1,827,290
Investing Activities (1,045,963) (2,051,513) (1,153,560)
Financing Activities 209,569 (518,651) (1,233,227)
Net Income in Cash & Equivalents (551,646) (760,550) (1,277,696)
Cash & Equivalents at Beginning of Year 1,545,439 2,823,135 2,062,585
Cash & Equivalents at End of Year 2,823,135 2,062,585 1,510,939
Costco’s Cash Flows show that the company is stable and growing somewhat. They are
investing, which means they are repurchasing stock and are paying their dividends. Also, over
the years Costco’s Net Income in Cash & Equivalents and Cash & Equivalents have grown
which shows the company is growing and prosperous. Costco is also financing more, which
means they are able to pay off debt. One downside is that the company did increase investing
from 2004 to 2005, but from 2005 to 2006 they decreased investing, which shows they were not
growing at a steady rate.
Common Stock:
10/12/07 2006 2005 2004 2003
Price – Close 68.00 52.87 49.47 48.41 37.18
High 70.55 57.94 51.21 50.46 39.02
Low 51.52 46.00 39.48 35.05 27.00
53
Our common stock is traded on the National Market tier of the NASDAQ Stock Market LLC
(“NASDAQ”) under the symbol “COST.” On October 31, 2006 we had 8,172 stockholders of
record.
Payment of future dividends is subject to declaration by the Board of Directors. Factors

considered in determining the size of the dividends are our profitability and expected capital
needs. Subject to qualifications stated above, we presently expect to pay dividends on a quarterly
basis.
Share repurchases are not displayed separately as treasury stock on the consolidated balance
sheets or consolidated statements of stockholders’ equity in accordance with the Washington
Business Corporation Act, which requires the retirement of repurchased shares. The par value of
repurchased shares is deducted from common stock and the remaining excess repurchase price
over par value is deducted from additional paid-in capital and retained earnings. See Note 5 for
additional information.
Ownership Breakdown:
Shares Outstanding (in millions) 437,940

Institutional Ownership (%) 82
Number of Shareholders 8,100
Costco is not a closely held company. The majority of the company is held by outside
shareholders, as well as having a large percent of the company held by employees.
Cost of Goods Sold:
(in thousands) 2004 2005 2006
Cost of goods sold or 42,092,01 46,346,961 52,745,497

Cost of sales 6
Total Sales or Total Revenue 48,109,90 52,952,226 60,151,227
7
Common Size .875 .875 .877
(cost of goods sold divided by total sales)
Costco’s COGS have remained relatively consistent. Cost of Sales have risen from 2004 to 2005
to 2006, but that is due to the increase of sales from new warehouses. Common Size has
remained almost exact.
Operations:
Costco buys the majority of their merchandise directly from manufacturers and route it to a
cross-docking consolidation point (“depot”) or directly to our warehouses. This maximizes
freight volume and handling efficiencies, thereby lowering our receiving costs by eliminating
54
many of the costs associated with multiple step distribution channels. Our depots receive
container-based shipments from manufacturers and reallocate these goods for combined
shipment to our individual warehouses, generally in less than twenty-four hours. Because
shoppers are attracted principally by the availability of low prices, our warehouses need not be
located on prime commercial real estate sites or have elaborate facilities. By strictly controlling
the entrances and exits of our warehouses and using a membership format, we have limited
inventory losses to less than two-tenths of one percent of net sales in each of the last three fiscal
years—well below those of typical discount retail operations. Gasoline operations generally
have extended hours. Because the hours of operation are shorter than those of traditional
retailers, discount retailers and supermarkets and due to other operational efficiencies inherent in
a warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is
generally stored on racks above the sales floor and displayed on pallets containing large
quantities of each item, thereby reducing labor required for handling and stocking.

Preopening Expenses $30,451 $53,230 $42,504
Preopening Expenses 0.07% 0.10% 0.07%
as a Percent of Net
Sales
Warehouse Openings 20 21 28
Relocations 20 16 25
2006 vs. 2005

Preopening expenses totaled $42.5 million, or 0.07% of net sales, during fiscal 2006 compared to
$53.2 million, or 0.10% of net sales, during fiscal 2005. During fiscal 2005, in response to the
February 7, 2005 letter of the Securities and Exchange Commission (SEC) concerning
accounting standards related to leases, we adjusted our method of accounting for leases (entered
into over the previous twenty years), primarily related to
ground leases at certain owned warehouse locations that did not require rental payments during
the period of construction. We recorded a cumulative pre-tax, non-cash charge of $16.0 million
to preopening expense in the second quarter of fiscal 2005. Twenty-eight warehouses (including
three relocations) were opened in fiscal 2006 compared to the opening of
twenty-one warehouses (including five relocations) in fiscal 2005. Preopening expenses also
include costs related to remodels and expanded ancillary operations at existing warehouses.
2005 vs. 2004

Preopening expenses totaled $53.2 million, or 0.10% of net sales, during fiscal 2005 compared to
$30.5 million, or 0.07% of net sales, during fiscal 2004. As discussed above, fiscal 2005 included
a cumulative pre-tax, non-cash charge of $16.0 million to preopening expense related to an
adjustment to the method of accounting for leases. Twenty-one warehouses (including five
relocations) were opened in fiscal 2005 compared to the opening of 20 warehouses in fiscal
2004. Preopening expenses also include costs related to remodels and expanded ancillary
operations at existing warehouses.
“We operate membership warehouses based on the concept that offering our members very low
prices on a limited selection of nationally branded and selected private label products in a wide
range of merchandise categories will produce high sales volumes and rapid inventory turnover.
55
This rapid inventory turnover, when combined with the operating efficiencies achieved by
volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-
service warehouse facilities, enables us to operate profitably at significantly lower gross margins
than traditional wholesalers, mass merchandisers, supermarkets and supercenters.”
“These practices are consistent with our membership policies of satisfying both the business and
personal shopping needs of our wholesale members, thereby encouraging high volume shopping.
Many consumable products are offered for sale in case, carton or multiple-pack quantities only.
Appliances, equipment and tools often feature commercial and professional models. In keeping
with our policy of member satisfaction, our policy is to accept returns of merchandise.”
Costco New Store Openings 2007-2009:
2007 (15) Delaware County, PA

Lackawanna County, PA
United States (11) Kent County, DE
Laramie County, WY New Castle County, DE
Cass County, ND Milwaukee County, WI
Pennington County, SD Santa Fe County, NM
Oklahoma County, OK Hillsborough County, NH
Jackson, MO
St. Louis County, MO
Pulaski County, AR Japan (3)
Caddo County, LA Fukushima, Honshu
Kanawha County, WV Asahikawa, Hokkaido
Lancaster County, NE Morioka, Honshu
Shawnee County, KS
Canada (7)
Japan (2) Fox Creek, Alberta
Sapporo, Hokkaido Merritt, British Columbia
Kochi, Shikoku Wawa, Ontario
Amos, Quebec
Canada (2) Swift Current, Saskatchewan
Westlock, Alberta Gander, Newfoundland
Port McNeill, British Columbia Fredericton, Nova Scotia
2008 (24) 2009 (24)
United States (14) United States (10)

Rockingham County, NH Allen County, IN
Cumberland County, ME Gloucester County, NJ
Aroostook County, ME Atlantic County, NJ
Richland County, SC Collin County, TX
Berkley County, SC Linn County, IA
Dakota County, MN Shelby County, AL
Knox County, TN Fayette County, KY
56
Marietta County, GA
Albany County, NY Canada (8)
Douglas County, KS New Hazelton, British Columbia
Yorkton, Saskatchewan
Japan (6) Pierceland, Saskatchewan
Nago, Honshu Portage la Prairie, Quebec
Osaka, Honshu Dauphin, Quebec
Miyazaki, Kyushu New Glasglow, Nova Scotia
Toshigi, Honshu Victoria, British Columbia
Oita, Skikoku Churchill, Manitoba
Kofu, Honshu
Information Systems:
1.) Most of our applications are developed in house, using a mixture of RPG III and RPG IV.
Costco also utilizes third-party applications, such as Lawson for payroll, Order Power for
fulfillment, and Infinium's (Software 200) Fixed Asset system. For candidates with
experience in these areas, Costco offers challenging and rewarding opportunities to use and
expand their skills.
2.) Individual groups supply and maintain workstations and software installations, and provide
around-the-clock on-call support for users of all AS/400 and microsystem applications. Other
groups develop and maintain multimedia training and printed user manuals, and provide person-
to-person training on AS/400 applications. Another group ensures the efficient operation of the
AS/400s and other systems in our 24-hour computer room.
For candidates with AS/400 operations, hardware, training, multimedia, technical writing, or
other support experience, Costco offers many fast-paced and rewarding opportunities to use and
expand their skills.
3.) Network Security designs and supports all Firewall, Internet, extra-net, and VPN access. This
group is also responsible for supporting the UNIX environment and Network Management
system.
o E-Commerce Administration is responsible for over 30 servers and 20 applications on our

e-commerce site (Costco.Com), as well as the resources necessary to support our
company-wide intranet.
o BackOffice Administration is responsible for an infrastructure of 90 servers that supports
various applications available to our company's 4000 users.
Costco utilizes NT and UNIX, SQL and Oracle databases. We administer and support other third-
party applications, such as Exchange as our email platform, and anti-virus applications to protect
our network. Via distributed servers, Costco exchanges information with our regional and
international data centers.
57
Current efforts include preparation for Windows 2000, implementing a software management
solution, improving our backups (via SAN or fiber backup solution), automating the collection of
performance data, and standardizing the data center design.
For candidates with experience in NT system administration, IIS, SQL Database, messaging
technology, network security, or network management, Costco offers challenging and rewarding
opportunities to use and expand their skills.
4.) This group utilizes Microsoft technology for hardware, software, coding standards, and
project management. In some cases, third-party applications are utilized for specific functions,
such as tax, shipping, and address verification, and out-of-the-box technology is modified to
meet the specific needs of the online warehouse.
In development, Costco uses a mixture of ASP, COM, SQL, and VB, programming languages
which are handled through the Visual Interdev/Visual Source Safe environment. Development
teams work on individual NT server stations ("sandboxes"), and work closely with server
administration, hardware support, and testing groups as projects pass through a common
development system for testing and movement through the build process.
For candidates with programming and ISS software experience in any of these applications,
Costco offers challenging and rewarding opportunities to use and expand their skills.
Internet Page:
o Gives information and financials of Costco, while also functions as an online shopping
resource.
o Costco’s website:
o Costco has an American, European and Canadian website
o The language of Costco’s websites depend on the native language of the country
 Canada is in both French and English because they are both national
languages
o Websites still require Costco membership
o Offers shipping to the United States and Canada
o Very busy opening site page
o Displays current products and/or products that are on sale
Macro Environment:
We also intend to open warehouses in new markets. The risks associated with entering a new
market include difficulties in attracting members due to a lack of familiarity with us, our lack of
familiarity with local member preferences and seasonal differences in the market. In addition,
entry into new markets may bring us into competition with new competitors or with existing
competitors with a large, established market presence. While we have a track record of profitable
growth, in new markets we cannot ensure that our new warehouses will be profitably deployed;
as a result, our future profitability may be materially adversely affected.
58
Any inability to open new warehouses on schedule could hurt our financial performance. We
expect to increase our presence in existing markets and enter new markets. Our opening of new
warehouses, domestically and internationally, will depend on our ability to: identify and secure
suitable locations; negotiate leases or real estate purchase agreements on acceptable terms; attract
and train qualified employees; and manage preopening expenses, including construction costs.
We compete with other retailers and businesses for suitable locations for our warehouses. Our
ability to open new warehouses also is affected by environmental regulations, local zoning issues
and other laws related to land use. Failure to effectively manage these and other similar factors
will affect our ability to open warehouses on schedule, which could adversely affect our financial
performance.
We are highly dependent on the financial performance of our United States and Canada
operations. Our financial performance is highly dependent on our United States and Canada
operations, which comprised 94% of consolidated net sales in both fiscal 2006 and 2005. Within
the United States, we are highly dependent on our California operations, which comprised 31%
and 30% of consolidated net sales in fiscal 2006 and 2005, respectively. Any substantial or
sustained decline in these operations could materially adversely affect our business and financial
results.
Declines in financial performance of our United States and Canada operations could arise from,
among other things:
o failing to meet annual targets for warehouse openings;
o declines in actual or estimated comparable warehouse sales growth rates and
expectations;
o negative trends in operating expenses, including increased labor costs;
o cannibalizing existing locations with new warehouses;
o shifts in sales mix toward lower gross margin products;
o changes or uncertainties in economic conditions in our markets;
o failing consistently to provide high quality products and innovative new products to
retain our existing member base and attract new members.
Risks associated with the suppliers from whom our products are sourced could adversely affect
our financial performance. The products we sell are sourced from a wide variety of domestic and
international suppliers. Effective global sourcing of many of the products we sell is an important
factor in our financial performance. Our ability to find qualified suppliers who meet our
standards, and to access products in a timely and efficient manner is a significant challenge,
especially with respect to suppliers located and goods sourced outside the United States. Political
and economic instability in the countries in which foreign suppliers are located, the financial
instability of suppliers, suppliers’ failure to meet our standards, labor problems experienced by
our suppliers, the availability of raw materials to suppliers, merchandise quality issues, currency
exchange rates, transport availability and cost, inflation, and other factors relating to the
suppliers and the countries in which they are located are beyond our control. In addition, the
United States’ foreign trade policies, tariffs and other impositions on imported goods, trade
sanctions imposed on certain countries, the limitation on the importation of certain types of
goods or of goods containing certain materials from other countries and other factors relating to
foreign trade are beyond our control. We may also face changes in the cost to us of accepting
59
various payment methods and changes in the rate of utilization of these payment methods by our
members.
We may not timely identify or effectively respond to consumer trends, which could adversely
affect our relationship with our members, the demand for our products and services, and our
market share. It is difficult to consistently and successfully predict the products and services our
members will demand. The success of our business depends in part on our ability to identify and
respond to evolving trends in demographics and consumer preferences. Failure to timely identify
or effectively respond to changing consumer tastes, preferences and spending patterns could
adversely affect our relationship with our members, the demand for our products and services
and our market share.
Changes in accounting standards and subjective assumptions, estimates and judgments by

management related to complex accounting matters could significantly affect our financial
results. Generally accepted accounting principles and related accounting pronouncements,
implementation guidelines and interpretations with regard to a wide range of matters that are
relevant to our business, such as revenue recognition, impairment of long-lived assets and
warehouse closing costs, inventories, self insurance, stock-based compensation, income taxes,
unclaimed property laws and litigation, are highly complex and involve many subjective
assumptions, estimates and judgments by our management. Changes in these rules or their
interpretation or changes in underlying assumptions, estimates or judgments by our management
could significantly change our reported or expected financial performance.
Our international operations subject us to risks associated with the legislative, judicial,
accounting, regulatory, political and economic factors specific to the countries or regions in
which we operate, which could adversely affect our financial performance. Our international
operations could form a larger portion of our net sales in future years. Future operating results
internationally could be negatively affected by a variety of factors, many beyond our control.
These factors include political conditions, economic conditions, regulatory constraints, currency
regulations and exchange rates, and other matters in any of the countries or regions in which we
operate, now or in the future. Other factors that may impact international operations include
foreign trade, monetary and fiscal policies both of the United States and of other countries, laws
and regulations of foreign governments, agencies and similar organizations, and risks associated
with having major facilities located in countries which have been historically less stable than the
United States.
Implementation of technology initiatives could disrupt our operations in the near term and fail to
provide the anticipated benefits. We have made and will continue to make significant technology
investments both in our warehouses and in our administrative functions. The cost and potential
problems and interruptions associated with the implementation of technology initiatives could
disrupt or reduce the efficiency of our operations in the near term. In addition, new or upgraded
technology might not provide the anticipated benefits; it might take longer than expected to
realize the anticipated benefits or the technology might fail.
Market expectations for our financial performance is high. We believe that the price of our stock
reflects high market expectations for our future operating results. Any failure to meet these
60
expectations for our comparable warehouse sales growth rates, earnings per share and new
warehouse openings could cause the market price of our stock to drop.
Cost related to natural disasters could adversely affect our financial performance. The
occurrence of one or more natural disasters, such as hurricanes or earthquakes particularly in
California where over 30% of our net sales are generated) could adversely affect our operations
and financial performance. Such events could result in physical damage to one or more of our
properties, the temporary closure of one or more warehouses or depots, the temporary lack of an
adequate work force in a market, the temporary or long-term disruption in the supply of products
from some local and overseas suppliers, the temporary disruption in the transport of goods from
overseas, delay in the delivery of goods to our depots or warehouses within a country in which
we are operating and the temporary reduction in the availability of products in our warehouses.
We are subject to a wide variety of federal, state, regional, local and international laws and
regulations relating to the use, storage, discharge, and disposal of hazardous materials and
hazardous and non-hazardous wastes, and other environmental matters. While we believe that
our operations are currently in material compliance with all environmental laws, any failure to
comply with these laws could result in costs to satisfy environmental compliance, remediation
requirements, or the imposition of severe penalties or restrictions on operations by government
agencies or courts that could adversely affect our operations.
We are involved in a number of legal proceedings, and while we cannot predict the outcomes of
such proceedings and other contingencies with certainty, some of these outcomes may adversely
affect our operations or increase our costs. We are involved in a number of legal proceedings,
including consumer, employment, tort and other litigation. We cannot predict with certainty the
outcomes of these legal proceedings and other contingencies, including environmental
remediation and other proceedings commenced by government authorities. The outcome of some
of these legal proceedings and other contingencies could require us to take, or refrain from
taking, actions which could adversely affect our operations or could require us to pay substantial
amounts of money. Additionally, defending against these lawsuits and proceedings may involve
significant expense and diversion of management’s attention and resources. Our business
requires compliance with a great variety of laws and regulations. Failure to achieve compliance
could subject us to lawsuits and other proceedings, and lead to damage awards, fines and
penalties.
Failure of our internal control over financial reporting could harm our business and financial
results. Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting for external purposes
in accordance with U.S. generally accepted accounting principles. Internal control over financial
reporting includes: maintaining records that in reasonable detail accurately and fairly reflect our
transactions; providing reasonable assurance that transactions are recorded as necessary for
preparation of the financial statements; providing reasonable assurance that our receipts and
expenditures of our assets are made in accordance with management authorization; and
providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements would be prevented or detected on a
61
timely basis. Because of its inherent limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of our financial statements would be
prevented or detected. Any failure to maintain an effective system of internal control over
financial reporting could limit our ability to report our financial results accurately and timely or
to detect and prevent fraud.
United States Projected Population:
Population or percent and race or

Hispanic origin 2000 2010 2020 2030 2040 2050
POPULATION
.TOTAL 282,125 308,936 335,805 363,584 391,946 419,854
.White alone 228,548 244,995 260,629 275,731 289,690 302,626

.Black alone 35,818 40,454 45,365 50,442 55,876 61,361
.Asian Alone 10,684 14,241 17,988 22,580 27,992 33,430
.All other races 1/ 7,075 9,246 11,822 14,831 18,388 22,437
.Hispanic (of any race) 35,622 47,756 59,756 73,055 87,585 102,560
.White alone, not Hispanic 195,729 201,112 205,936 209,176 210,331 210,283
PERCENT OF TOTAL
POPULATION
.TOTAL 100.0 100.0 100.0 100.0 100.0 100.0
.White alone 81.0 79.3 77.6 75.8 73.9 72.1

.Black alone 12.7 13.1 13.5 13.9 14.3 14.6
.Asian Alone 3.8 4.6 5.4 6.2 7.1 8.0
.All other races 1/ 2.5 3.0 3.5 4.1 4.7 5.3
62
.Hispanic (of any race) 12.6 15.5 17.8 20.1 22.3 24.4
.White alone, not Hispanic 69.4 65.1 61.3 57.5 53.7 50.1
Japan’s Projected Population:
Canada’s Projected Population:
2006
Low growth Medium growth High growth
thousands
All ages1 32,531.3 32,547.2 32,559.9
0 to 4 1,686.9 1,697.5 1,705.0
63
5 to 9 1,842.5 1,842.6 1,842.6
10 to 14 2,084.6 2,084.6 2,084.6
15 to 19 2,164.8 2,164.8 2,164.9
20 to 24 2,252.9 2,252.9 2,253.0
25 to 29 2,226.0 2,226.1 2,226.1
30 to 34 2,222.5 2,222.6 2,222.6
35 to 39 2,351.0 2,351.1 2,351.1
40 to 44 2,698.2 2,698.3 2,698.4
45 to 49 2,671.3 2,671.5 2,671.7
50 to 54 2,363.6 2,363.9 2,364.2
55 to 59 2,082.1 2,082.5 2,082.9
60 to 64 1,582.9 1,583.3 1,583.7
65 to 69 1,226.8 1,227.3 1,227.7
70 to 74 1,043.6 1,044.2 1,044.8
75 to 79 877.3 878.0 878.7
80 to 84 637.5 638.3 639.0
85 to 89 342.3 342.8 343.4
90 to 94 137.0 137.3 137.5
95 to 99 33.0 33.1 33.2
100 and over 4.7 4.7 4.7
2026 2031
Low growth Medium growth High growth Low growth Medium growth High growth
thousands thousands
All ages1 35,786.7 37,882.7 39,931.3 36,261.2 39,029.4 41,810.8
0 to 4 1,530.7 1,812.8 2,094.9 1,486.4 1,781.3 2,101.3
5 to 9 1,606.8 1,910.9 2,197.0 1,602.3 1,910.9 2,222.3
10 to 14 1,688.8 1,956.8 2,193.9 1,670.5 1,999.4 2,313.3
15 to 19 1,808.3 1,990.3 2,146.6 1,767.2 2,058.4 2,321.4
20 to 24 2,010.4 2,096.8 2,183.4 1,931.8 2,138.2 2,321.5
64
25 to 29 2,153.9 2,241.4 2,333.0 2,073.1 2,198.8 2,328.8
30 to 34 2,425.1 2,542.1 2,665.1 2,255.9 2,402.7 2,559.4
35 to 39 2,502.3 2,639.6 2,783.3 2,503.3 2,671.1 2,850.1
40 to 44 2,511.0 2,649.3 2,793.3 2,544.7 2,717.1 2,899.4
45 to 49 2,445.9 2,561.7 2,681.3 2,522.4 2,683.3 2,852.1
50 to 54 2,336.1 2,417.8 2,501.5 2,433.3 2,563.0 2,697.8
55 to 59 2,348.1 2,404.5 2,461.7 2,309.0 2,401.4 2,496.4
60 to 64 2,567.7 2,612.4 2,657.1 2,300.3 2,367.8 2,436.5
65 to 69 2,425.6 2,466.6 2,507.2 2,469.8 2,527.6 2,585.7
70 to 74 2,004.2 2,044.1 2,083.3 2,263.6 2,318.2 2,372.4
75 to 79 1,572.0 1,610.8 1,648.8 1,785.2 1,837.3 1,888.7
80 to 84 984.3 1,016.1 1,047.5 1,283.7 1,332.1 1,379.8
85 to 89 537.2 560.3 583.4 685.0 719.8 754.8
90 to 94 243.3 257.2 271.3 280.3 299.2 318.7
95 to 99 73.6 79.0 84.5 80.4 87.4 94.8
100 and over 11.2 12.1 13.1 13.0 14.4 15.8
One of multiple
Combined As single
Ethnicity responses
responses response
per respondent
"Canadian" 11,682,680 6,748,135 4,934,545
English 5,978,875 1,479,525 4,499,355
French 4,668,410 1,060,760 3,607,655
Scottish 4,157,210 607,235 3,549,975
Irish 3,822,660 496,865 3,325,795
German 2,742,765 705,600 2,037,170
Italian 1,270,370 726,275 544,090
Chinese 1,094,700 936,210 158,490
Ukrainian 1,071,060 326,195 744,860
First Nations 1,000,890 455,805 545,085
Dutch (Netherlands) 923,310 316,220 607,090
Polish 817,085 260,415 556,665
East Indian 713,330 581,665 131,665
65
Norwegian 363,760 4
Portuguese 357,690 25
Welsh 350,365 2
Jewish 348,605 18
Russian 337,960 7
Filipino 327,550 26
Métis 307,845 7
Swedish 282,760 3
Hungarian (Magyar) 267,255 9
American (USA) 250,005 2
Greek 215,105 14
Spanish 213,105 6
Jamaican 211,720 13
Danish 170,780 3
Vietnamese 151,410 11
Industry Audit:
By offering a convenient, low cost shopping environment to consumers, warehouse clubs

provide a value to consumers that is not replicated in other channels. As such, across the three
main competitors, consumer satisfaction and member retention are high. Mintel’s exclusive
consumer research indicate that 80% of warehouse club respondent shoppers agree that clubs
provide an enjoyable shopping experience, while 60% of warehouse club respondent shoppers
agree that these retailers provide the most time efficient way to shop.
Furthermore, by rapidly turning inventory, expanding selections, and stocking new items quickly,
warehouse clubs are among the most responsive merchandising channels, which attracts
consumers because there is always something new. This ability will remain one of the key
features to differentiate warehouse clubs from other retail channels.
The online retail channel is one of the most rapidly expanding markets. The following figure
details retail ecommerce sale sin the U.S. from 1999 through 2004.
Because of the vast differences in the number of SKUs carried, warehouse clubs typically limit
selection to items that are brand name leaders within their respective category or to staple
products in which private label brands can compete.
Consumers have different expectations when shopping at warehouse clubs, thereby creating a
unique experience which separates these retailers from competitors in other channels. Warehouse
clubs appeal to consumers’ sense of value and the convenience of stocking up on certain items. A
66
typical supermarket will stock 30,000-52,000 SKUs. Supercenters normally stock up to 125,000
SKUs. Warehouse clubs by contrast typically carry 4,000 SKUs.
Even though they carry fewer SKUs, the large number of product categories covered means that
warehouse clubs face a wide array of competitors ranging from drug stores to florists.
Tracking of same store sales shows that growth in the market is varied from month to month and
does not display a consistent trend. In December 2004, sales increased a combined 7.3%,
however, earlier growth in April 2004 was much higher. In that month, Costco, BJ’s Wholesale
and Sam’s Club posted 16%, 12.1% and 11.8% gains respectively.
Overall, membership revenues—which are excluded in market size data—represent only a small
share of total revenue, approximately 2-3% on average. Over the review period, Costco’s
membership fees as a share of net sales were 1.9-2.0%. Similarly, SAM’S CLUB’s ranged from
2.5-2.7%. This indicates that membership revenues are driven, in large part, by new store
openings and by same store sales increases, to lesser degree.
In terms of warehouse club locations, the market has grown 32% over the review period. Overall,
41 new warehouse clubs were added in the U.S. in 2004, following growth by 50 stores in 2003.
Note that warehouse club locations is computed as the net value of store opening minus store
closings over the year. However, store closings in the U.S. are relatively infrequent with only a
few closings among the three industry leaders in recent years.
Despite the companies’ similarities, there is a great deal of differentiation among the top three
warehouse clubs, both in terms of performance and strategic execution. This differentiation
exists in multiple areas, including SKU assortment, customer segments targeted, distribution
capabilities and manufacturers partnered with.
Top 10 Mass Market Retailers (North America) (Annual Sales):
1. Wal-Mart 6. CVS/Caremark
2. Kroger 7. Albertsons
3. Costco Wholesale 8. Safeway
4. Target 9. Ahold USA
5. Walgreen 10. Loblaw
Top 10 Worldwide Food Retailers (Annual Sales):
1. Wal-Mart 6. Royal Ahold

2. Carrefour 7. Costco Wholesale
3. Tesco 8. REWE-Zentral
4. METRO AG 9. Lidl
5. Kroger 10. ALDI
Top 5 US Warehouse Clubs (Annual Sales):
67
1. Costco Wholesale
2. Sam’s Club
3. BJ's Wholesale Club
4. Smart & Final
5. PriceSmart
Financial Performance:
Return on Revenues (%)
Yr.
2 2 2 2 2 2 2
Ticker Company End 008 007 006 005 004 003 002
HYPERMARKETS & SUPER CENTERS‡

BJ † BJ'S WHOLESALE CLUB INC JAN 1.0 1.1 1.1 1.6 1.6 1.6 2.5
AU
COST * COSTCO WHOLESALE CORP G 1.8 1.9 1.8 2.0 1.8 1.7 1.8
WMT * WAL-MART STORES INC JAN 3.5 3.6 3.5 3.6 3.6 3.4 3.3
Return on Assets (%)
Yr.
2 2 2 2 2 2 2

AU
Return on Equity (%)
Yr.
2 2 2 2 2 2 2

AU
Current Ratio
Yr.
68
008 007 006 005 004 003
BJ'S WHOLESALE CLUB INC # JAN 1.2 1.1 1.2 1.3 1.3 1.2 1.2
COSTCO WHOLESALE CORP AUG 1.2 1.1 1.1 1.2 1.2 1.1 1.0
WAL-MART STORES INC # JAN 1.0 0.9 0.9 0.9 0.9 0.9 0.9
Debt / Capital Ratio (%)
Yr.
2 2 2 2 2 2 2

BJ BJ'S WHOLESALE CLUB INC # JAN 0.2 0.2 0.2 0.3 0.3 0.4 0.0
COST COSTCO WHOLESALE CORP AUG 2.0 2.1 2.2 7.2 11.2 15.8 16.9
WMT WAL-MART STORES INC # JAN 32.7 32.6 32.5 35.6 31.8 30.8 32.5
Debt as a % of
Net Working Capital
Yr.
2 2 2 2 2 2 2

COST COSTCO WHOLESALE CORP AUG 61.7 55.3 52.2 48.1 90.5 184.1 669.6
WMT WAL-MART STORES INC # JAN NM NM NM NM NM NM NM
Net
Income
Yr. 2008 2007 2006 2005 2004 2003 2002

Ticker Company End

COST COSTCO WHOLESALE CORP AUG 1,697.2 1,438.3 1,103.2 1,063.1 882.4 721.0 700.0
15,653. 13,743. 12,178. 10,267. 8,861.
WMT WAL-MART STORES INC # JAN 3 4 0 11,231.0 0 0 8,039.0
Porter’s Model:
Threat of Entry
o Absolute Cost Advantage
o Economies of Scale – High
 The three players in the industry have extremely large stores.
 A unique experience, high sales with lower SKUs than traditional
Supermarkets.
 Rapid inventory turnover.
69
 Low labor costs.
Consumers have different expectations when shopping at warehouse clubs, thereby creating a
unique experience which separates these retailers from competitors in other channels. Warehouse
clubs appeal to consumers’ sense of value and the convenience of stocking up on certain items. A
typical supermarket will stock 30,000-52,000 SKUs. Supercenters normally stock up to 125,000
SKUs. Warehouse clubs by contrast typically carry 4,000 SKUs.
Brand Identity – High

o Membership increases each year
o Wide array of products offered
Even though they carry fewer SKUs, the large number of product categories covered means that
warehouse clubs face a wide array of competitors ranging from drug stores to florists.
o Access to Distribution
o Switching Costs
o Government Policy
Degree of Rivalry
o Number of competitors – Low
 There are three main players in this industry: Costco, Sam’s Club and BJ’s
o Industry Growth - Moderate

 Industry growth of 7.3% is below Market Median of 11.35
 Same store growth does not show consistency
 Location growth has risen to 32%
 Store closings is rare
Tracking of same store sales shows that growth in the market is varied from month to month and
does not display a consistent trend. In December 2004, sales increased a combined 7.3%,
however, earlier growth in April 2004 was much higher. In that month, Costco, BJ’s Wholesale
and Sam’s Club posted 16%, 12.1% and 11.8% gains respectively.
Overall, membership revenues—which are excluded in market size data—represent only a small
share of total revenue, approximately 2-3% on average. Over the review period, Costco’s
membership fees as a share of net sales were 1.9-2.0%. Similarly, SAM’S CLUB’s ranged from
2.5-2.7%. This indicates that membership revenues are driven, in large part, by new store
openings and by same store sales increases, to lesser degree.
In terms of warehouse club locations, the market has grown 32% over the review period. Overall,
41 new warehouse clubs were added in the U.S. in 2004, following growth by 50 stores in 2003.
Note that warehouse club locations is computed as the net value of store opening minus store
closings over the year. However, store closings in the U.S. are relatively infrequent with only a
few closings among the three industry leaders in recent years.
70
Asset Intensity - High
o Industry ROA of 4.7% exceeds the Market Median of 1.5%
Product Differentiation - High

o Warehouse Clubs offer high value to customers in unique bulk sizes.
o High appeal for small businesses.
o Differentiation exists between the three players
Despite the companies’ similarities, there is a great deal of differentiation among the top three
warehouse clubs, both in terms of performance and strategic execution. This differentiation
exists in multiple areas, including SKU assortment, customer segments targeted, distribution
capabilities and manufacturers partnered with.
Exit Barriers – Low

o The retail industry can easily apply inventory to other locations or liquidate.
Threat of Substitution
o Functional Similarity – Low
o Warehouse clubs are hard to replicate because of the low cost shopping experience for
customers coupled with high value.
o 60% of warehouse club customers agree that channel is the most time efficient.
o New products are common – exciting for customers
o Increased use of ecommerce
By offering a convenient, low cost shopping environment to consumers, warehouse clubs

provide a value to consumers that is not replicated in other channels. As such, across the three
main competitors, consumer satisfaction and member retention are high. Mintel’s exclusive
consumer research indicate that 80% of warehouse club respondent shoppers agree that clubs
provide an enjoyable shopping experience, while 60% of warehouse club respondent shoppers
agree that these retailers provide the most time efficient way to shop.
Furthermore, by rapidly turning inventory, expanding selections, and stocking new items quickly,
warehouse clubs are among the most responsive merchandising channels, which attracts
consumers because there is always something new. This ability will remain one of the key
features to differentiate warehouse clubs from other retail channels.
The online retail channel is one of the most rapidly expanding markets. The following figure
details retail ecommerce sale sin the U.S. from 1999 through 2004.
Price/Performance Trend - Product Identity – High

o 65% of BJ’s sales came from their private label in 2004.
o Private label brand items are heavily featured because of the undulating SKUs carried
71
Because of the vast differences in the number of SKUs carried, warehouse clubs typically limit
selection to items that are brand name leaders within their respective category or to staple
products in which private label brands can compete.
Bargaining Power of Suppliers

o Supplier Concentration – High
o # of Buyers – High
o Switching Costs – Mod.
o Substitute Raw Materials – High
o Threat of Forward Integration – Low
Bargaining Power of Buyers

o Buyer Concentration – High
o #of Buyers – High
o Switching Costs – Low
o Substitute Products – Low
o Threat of Backward
o Integration – Mod.
Competitor Analysis:
Competitor: BJ’s
o As of 2007 Annual Report: 172 stores in US in 16 states
o New England in 1984
o Ticker: BJ
o 287th on Fortune 500 largest public corps.
o Smaller package sizes can be found in fresh food categories, including dairy,
meat, bakery, fish and produce.
o Limit the items offered in each product line to fast selling styles, sizes and colors,
carrying an average of approximately 7,500 active stockkeeping units (SKU’s).
By contrast, supermarkets normally stock from 30,000 to 52,000 SKU’s, and
supercenters typically stock up to 125,000 SKU’s.
o Food accounted for approximately 60% of BJ’s total food and general
merchandise sales in 2006. The remaining 40% consisted of a wide variety of
general merchandise items.
o Paid membership is an essential part of the warehouse club concept. In addition to
providing a source of revenue which permits us to offer low prices, membership
reinforces customer loyalty. They have two types of members:
 Inner Circle members
72
• Most of our Inner Circle members are likely to be home owners
whose incomes are above the average for the Company’s trading
areas.
• Generally charge $45 per year for a primary Inner Circle
membership that includes one free supplemental membership.
 Business members
• A significant percentage of business members also shops BJ’s for
their personal needs.
• A business membership also costs $45 per year and includes one
free supplemental membership.
• Additional supplemental business memberships cost $20 each.
o Have approximately 8.7 million BJ’s members (including supplemental
cardholders) at February 3, 2007.
o Members in the same household may purchase additional supplemental
memberships for $20 each.
o BJ’s Rewards Membership program, which is geared to high frequency, high
volume members, offers a 2% rebate, capped at $500 per year, on generally all in-
club purchases.
o The annual fee for a BJ’s Rewards Membership is $80. At the end of 2006,
Rewards Members accounted for approximately 5% of their primary members
and approximately 13% of our food and general merchandise sales during the
year.
o As of January 28, 2006, approximately 21,200 full-time and part-time employees
(“team members”).
o None of their team members is represented by a union.
BJ’s Financials:
Quick Ratio 0.26206 1.1885 0.355
Gross Profit Margin (in %) 8.17 10.3 10.4
Operating Profit Margin (in %) 1.6 1.7 0.9
2006 2007 2008 2009

Projecte
Actual Projected Projected d
INCOME STATEMENT Change Change Change Change
% % % %
73
REVENUE
Net Sales 13.66% 13.28% 17% 18.97%
Membership Fees 10.71% 13.00% 14% 15.00%
Total Revenue 13.60% 13.27% 16% 18.89%
Merchandise Costs 13.81% 12.07% 17% 18.97%
Gross Profit 12.12% 21.89% 16% 18.39%
OPERATING EXPENSES
Selling Expenses 13.92% 11.04% 14% 16.67%
Depreciation 6.94% 11.04% 17% 18.97%
Website expense -95% 0.00%
Preopening Expenses -20.15% -46.43% 60% 0.00%
Impared Assets and Closing
Costs -66.74% -8.01% -100%
Total Operating Expenses 13.69% -89.08% 15% 16.80%
Operating Income 10.26% 62.01% 20% 22.06%
Interest Expense -63.50% 11.04% 17% 18.97%
Interest Income and Other 26.82% 11.04% 17% 18.97%
IBIT 13.07% 58.35% 20% 21.91%
Provisions For Income Taxes 33.41% 58.35% 20% 21.91%
NET INCOME 3.77% 58.36% 20% 21.91%
74
Works Cited
Barbaro, Michael. "Next Venture From Stewart: Costco Food." The New York Times. 4 May
2007. 11 Sept. 2007.
<http://www.nytimes.com/2007/05/04/business/media/04martha.html?_r=2&n=Top/New
s/Business/Small%20Business/Marketing%20and%20Advertising&oref=slogin&oref=sl
ogin>.
"BJ's Investor Relations." BJ's Wholesale Club. 2007.<http://www.bjsinvestor.com/profile.cfm>.
"Code of Ethics." Costco.com. 2004. Costco. 11 Sep 2007 <http://media.corporate-

ir.net/media_files/NSD/cost/reports/our_mission.pdf>.
"Company Profile." Costco.com. 2004. Costco. 11 Sep 2007 <http://phx.corporate-

ir.net/phoenix.zhtml?c=83830&p=irol-homeprofile>.
Costco Wholesale Corporation (2006). “Form 10-K” Edgar Search. Online database. Mergent
Online. 9 Sept. 2007. < http://www.mergentonline.com/compsearch.asp?type=edgar>.
DiCarlo, Lisa. "Costco Rings Up Results." Forbes 07 Dec 2004 11 Sept. 2007
<http://www.forbes.com/2004/12/07/cx_ld_1207overachiever.html>.
Greenhouse, Steven. "How Costco Became the Anti-Wal-Mart." The New York Times 17 Jul
2005 11 Sept. 2007
<http://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?ei=5090&en=
8b3103305fea6d68&ex=1279252800&adxnnl=1&partner=rssuserland&emc=rss&pagew
anted=1&adxnnlx=1121705296-Q4tqPzmKJ9sYl9Q2a0xDYA>.
Hazel, Debra. "Costco Taking Anchor Spots." International Council of Shopping Centers. Jul.
2003. 13 Sept. 2007. <http://www.icsc.org/srch/sct/sct0703/index.php>.
"Historical Highlights." Costco.com. 2004. Costco. 11 Sept. 2007. <http://media.corporate-

ir.net/media_files/irol/83/83830/HistoricalHighlights.pdf>.
Hoover's. (2007). Costco Wholesale Corporation. 11 Sept. 2007.

<http://premium.hoovers.com/subscribe/co/factsheet.xhtml?ID=rkfjfrfyysrxcy>.
75
"Ideas for export." Progressive Grocer 05 Sept. 2007 15 Nov. 2007
<http://www.lexisnexis.com.ezproxy.sju.edu/us/lnacademic/results/docview/docview.do?r
isb=21_T2646526303&format=GNBFI&sort=BOOLEAN&startDocNo=176&resultsUrl
Key=29_T2646517634&cisb=22_T2646526359&treeMax=true&treeWidth=0&csi=1675
46&docNo=187>.
Planet Retail. 2007. <www.planetretail.com>.
Robes, Karen. "Costco will reshape Lakewood Center." Presstelegram.com 17 Sept. 2007 17
Sept. 2007 <http://www.presstelegram.com/ci_6923019?source=most_emailed>.
Rosenberg, Matthew. "Geography." CIA World Factbook. 2007. The New York Times.
<http://geography.about.com/library/cia/blcindex.htm>.
"GDP - Real Growth Rate." Index Mundi. 1 Jan. 2007. CIA World Factbook.
<http://www.indexmundi.com/g/r.aspx?c=ja&v=66>.
"Salary of Web Designers." Salary.Com. 2005. CNN Money.

<http://swz.salary.com/salarywizard/layouthtmls/swzl_compresult_national_IT10000109.html>.
76

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Meghan Fischer

I. INTERNAL AUDIT........................................................................................................ ......................3

a. The Path to Costco Wholesale Corporation: A History

* Source: “Historical Highlights” Costco.com

b. Costco’s Words to Live by: Mission & Keyword Analysis

Our Code of Ethics

*Source: “Code of Ethics” Costco.com

c. Current Long-term Objectives: (with in last 2-3 years)

*Source: Costco 10K 2006 p.16-7, Costco.com

d. Current Corporate Strategies (within last 2-3 yrs)

Costco vs. Wal-Mart Facts:

o 44% of Wal-Mart employees leave after the first year.

*Source: Greenhouse, DiCarlo, Costco.com

Sundries 12,027,476 25% 13,238,055 25% 14,436,269 24%

Hard Lines 9,621,981 20% 10,590,444 20% 12,030,245 20%

Food 9,621,981 20% 10,060,922 19% 11,428,733 19%

Ancillary/ 5,292,089 11% 6,883,788 13% 8,421,171 14%

Additionally, Costco Wholesale Industries, a division of the Company, operates manufacturing

*Source: Robes, Hazel, Costco.com, Costco 10K 2006

2004 2005 2006

2004 2005 2006

*Source: Hoover’s Costco 10K 2006

*Source: Costco.com, Costco 10K 2006

*Source: Standard & Poor’s 2007

The Internet Systems Division of Costco consists of four groups:

*Source: Costco.com, Costco 10K 2006

II. GLOBAL EXTERNAL AUDIT:

1. MACRO ENVIROMENTAL AUDIT:

The United States:

Government-industry cooperation, a strong work ethic, mastery of high technology, and a

United States Canada Japan

Economy Forecasting: 2006 – 2009

*Source: www.indexmundi.com, CIA World Factbook, 2007

The United States:

United States Canada Japan

United States Canada Japan

United States Canada Japan

*Source: Costco 10K 2006

*Source: CIA World Factbook

*Source: U.S. Department of Commerce

*Source: US Census Bureau. – Industry Statistics Sampler

*Source: Hoover's, Inc.

*Source: Supermarket News 2006

*Source Mintel Oxygen: Warehouse Club Buying, 2005

*Source: Standard & Poor’s

Threat of Entry = HIGH

Bargaining Power Bargaining Power

* Source Mintel Oxygen: Warehouse Club Buying, 2005

*Source: Standard & Poor’s

* Continue unit growth,

Future *Open 8-10 new clubs in * Expand to Hungary, * Continue to

Staples Wal-mart BJ's

Net Profit Margin 5.20% 3.60% 1.60%

*Source: BJ’s 10K 2006

III. SWOT ANALYSIS: CURRENT SITUATION

“Treasure Hunt” aspect makes shopping

Costco’s philosophy is to keep overhead

Because of Costco’s high inventory Section B-4

Inflation Rates are relatively low:

Continue sales growth in a competitive, global market.

IV. STRATEGY ANALYSIS:

1. REVISED MISSION STATEMENT:

Future Open 8-10 new clubs in Expand to Hungary, * Continue to