Part 2

Economic: UNITED STATES: General economic factors, domestically and internationally, may adversely affect Costco’s financial performance. Higher interest rates, energy costs, inflation, levels of unemployment, consumer debt levels, and other economic factors could MOVE TO BOTTOM adversely affect demand for their products and services or require a change in the mix of products they sell that adversely affects profitability. These factors can also increase the cost of sales and operating, selling, general and administrative expenses, and otherwise adversely affect our operations and results.

General economic conditions can also be affected by the outbreak of war, acts of terrorism or other significant national or international events. The US Economy has the world’s largest economy and the most technologically advanced. It has a great gap between the wealthy and the poor as well as those that live comfortable and those who struggle. Such a huge gap between classes that is continuously getting wider can be a problem for Costco. They target a middle class and upper middle class which are slowly disappearing and have to struggle to define who they target. US economic strength is based on diversified industrial and services sectors, investments abroad, the dollar as a major world currency, a demand driven consumer society and exports. Service sector employs more people than manufacturing but US remains leader in industry and high technology. These are all positive factors that affect Costco with a strong work force and a consumer driven society. Canada is another place Costco does business and also has one of strongest economies in the world. They are the leader in the production of gold, silver, copper, uranium, oil, natural gas, agriculture, wood pulp, and timber related products. In 1993, Canada signed NAFTA with Mexico and the US for freer movement of capital and goods making it easies for Costco to operate there. Their currency is the Canadian dollar which is weaker then the American dollar and more then 14 percent of the population live in poverty. Costco takes a monetary loss when doing business in Canada because of their weaker currency. Japan Economy is another contender for one of the world’s largest economies. They do however face many challenges in their operation such as few natural resources forcing them to import most raw materials. Only 12 percent of the land can be used for cultivation and they import nearly half of their food supply. The US is Japans biggest trading partner and although there is some friction between the two nations with trade, overall they support each other in major economic difficulties. Good relations with Japan allow Costco to more easily do business. Japan has a record high in unemployment, slipping productivity, low consumer spending, and high bankruptcy. Also lack of economic reform has inhibited recovery and growth. When operating in Japan, Costco faces many economic challenges such as the low consumer spending and high

bankruptcy. However, opening new stores there might allow for more employment and fuel the economy in its favor. Overall, there are many economic factors that Costco faces. 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. There inflation rate is however, the highest of the three countries which causes Costco to face high cost of goods sold. 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. GDP Real Growth Rate GDP Per Capita Unemployment Rate Inflation Rate Population Below Poverty Line

United States

Canada

Japan

4.4% (2004 est.)

2.4% (2004 est.)

2.9% (2004 est.)

purchasing power parity $40,100 (2004 est.) 5.5% (2004 est.)

purchasing power parity $31,500 (2004 est.) 7% (2004)

purchasing power parity $29,400 (2004 est.) 4.7% (2004 est.)

2.5% (2004 est.) 12% (2004 est.)

1.9% (2004 est.) 15.9% (2003)

-0.1% (2004 est.)

United States

Canada

Japan

white 81.7%, black 12.9%, Asian 4.2%, Amerindian and Alaska native 1%, native Hawaiian and other Pacific islander 0.2% (2003 est.) note: a separate listing for Hispanic is not included because the US Census Bureau considers Hispanic to mean a person of 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.) English 82.1%, Spanish 10.7%, other IndoEuropean 3.8%, Asian and Pacific island 2.7%, other 0.7% (2000 census) 295,734,134 (July 2005 est.) 0.92% (2005 est.) 0-14 years: 20.6% (male 31,095,725/female

British Isles origin 28%, French origin 23%, other European 15%, Amerindian 2%, other, mostly Asian, African, Arab 6%, mixed background 26%

Japanese 99%, others 1% (Korean 511,262, Chinese 244,241, Brazilian 182,232, Filipino 89,851, other 237,914) note: up to 230,000 Brazilians of Japanese origin migrated to Japan in the 1990s to work in industries; some have returned to Brazil (2004)

English (official) 59.3%, French (official) 23.2%, other 17.5%

Japanese

32,805,041 (July 2005 est.) 0.9% (2005 est.) 0-14 years: 17.9% (male 3,016,032/female

127,417,244 (July 2005 est.) 0.05% (2005 est.) 0-14 years: 14.3% (male 9,328,584/female

NA

Demographic/Sociocultural: Ethnic Groups

Languages

Population Population Growth Age Structure

Literacy Rate

29,703,997) 15-64 years: 67% (male 98,914,382/female 99,324,126) 65 years and over: 12.4% (male 15,298,676/female 21,397,228) (2005 est.) definition: age 15 and over can read and write total population: 97% male: 97% female: 97% (1999 est.)

2,869,244) 15-64 years: 68.9% (male 11,357,425/female 11,244,356) 65 years and over: 13.2% (male 1,842,496/female 2,475,488) (2005 est.) definition: age 15 and over can read and write total population: 97% (1986 est.) male: NA% female: NA%

8,866,772) 15-64 years: 66.2% (male 42,462,533/female 41,942,835) 65 years and over: 19.5% (male 10,435,284/female 14,381,236) (2005 est.) definition: age 15 and over can read and write total population: 99% male: 99% female: 99% (2002)

Political/Legal: United States

Canada

Japan

Government Type

Constitution-based federal republic; strong democratic tradition

constitutional monarchy with a parliamentary government

Legal System

federal court system based on English common law; each state has its own unique legal system, of which all but one (Louisiana's) is based on English common law; judicial review of legislative acts; accepts compulsory ICJ jurisdiction with reservations revenues: $1.862 trillion expenditures: $2.338 trillion, including capital expenditures of NA (2004 est.)

a constitutional monarchy that is also a parliamentary democracy and a federation based on English common law, except in Quebec, where civil law system based on French law prevails; accepts compulsory ICJ jurisdiction, with reservations

revenues: $151 billion expenditures: $144 billion, including capital expenditures of NA (2004 est.)

revenues: $1.401 trillion expenditures: $1.748 trillion, including capital expenditures (public works only) of about $71 billion (2004 est.)

Budget

modeled after European civil law system with English-American influence; judicial review of legislative acts in the Supreme Court; accepts compulsory ICJ jurisdiction with reservations

Technological: Telephones-Main Lines Telephones- Cellular Phones Internet Users

United States

Canada

Japan

181,599,900 (2003) 158.722 million (2003)

19,950,900 (2003) 13,221,800 (2003)

71.149 million (2002) 86,658,600 (2003)

159 million (2002)

16.11 million (2002)

57.2 million (2002)

Source: CIA World Factbook: http://geography.about.com/library/cia/blcindex.htm