The It Factor

She decided to use net sales of goods as the point of comparison and express other line items, including membership fees, as a percentage of net sales in order to allow for a clearer reflection of gross and operating margins. This format enabled her to analyze the profit and asset structures of Costco over time. To begin, Margarita Torres’ common-size financial statements for Costco demonstrate a rise in membership fees and other sources of revenue from 1.82% in 1997 to 1.93% in 2001. This is supported by Costco’s trend to increase membership fees over time and also gain new members. For example fees cost $25 in 1986 and rose as high as $45 in 2002. But why were customers willing to pay a fee to shop at Costco when they could go to discount stores for free? Costco created value for the customer by only purchasing a handful of SKUs from its vendors, by selling goods at such a low per unit cost due to bulk packaging, by expanding its selection of name-brand products, by adding ancillary services, and by refusing to mark up products more than 14% over the distributor’s price. Also, because of its target market composed of wealthier clientele of small business owners and middle class shoppers, small increases in membership fees didn’t seem to be heavily resisted. This may have been very different if Margarita was analyzing membership fee increases at Sam’s club who traditionally cater to a lower income customer. Thus, the more savings Costco passed on to its customers, the more it was able to increase its membership fee and the more members it attracted.

Moving onto operating expenses, merchandise costs experienced a slight decrease from 89.9% of net sales in 1997 to 89.63% in 2001. This signifies Costco’s ongoing attempt to provide customers with the lowest per unit cost possible and demonstrates the increase in purchasing power obtained through expansion. Another interesting trend under the operating expenses section relates to the rise in SG&A (selling, general...