Wholesale clubs require customer to purchase annual membership to shop in their premises. They relied on two main components on its business model. Firstly, they implemented rapid inventory turnover. The clubs carry a narrow selection of quality merchandise in each product category with a wide range of merchandise categories. They sold the items in bulk which enable them to negotiate better deals from vendors and pass on the savings to consumers in the form of lower prices and allow to turn inventory over faster. Secondly, they implemented good operating efficiencies through broad distribution channels and volume purchasing of products. The stores are run in no-frills and self-service warehouses and opted for reduced handling of merchandise to reduce labour cost and distributed goods through cross docking procedure to reduce transportation costs. These methods help to lower operating expenses significantly as the clubs run on low gross margins and lower profits.
Common size income statement
Membership fees increased gradually from 1.82% in 1997 to 1.93% in 2001 over the years as net sales increased and more savings are passed on to the customers overtime and therefore Costco was able to increase its membership fees. There is a slight drop in total revenue in 1999 at 1.78% and in 2000 at 1.72% because of higher taxes. Operating expenses hover around 98.4 % to 99.03 % from 1997 to 2001. There is a slight drop between 1998 to 2000 below 99% due to efficient distribution of goods and reducing labour cost and transportation cost through reduced handling of merchandise and cross docking of goods.
Common size balance sheet statement
Total current asset increases over the years from 1997 to 2001 except in 2001. Cash and equivalent decrease and net receivables increase in 2001. More memberships are sold as the consumers become more aware of the perks and benefit of becoming a member.
In view of long term debt under non-current...