Costco 2014 Annual Report Download - page 18

We are subject to payment related risks.
We accept payments using a variety of methods, including cash and checks, a select variety of credit and
debit cards, and our proprietary cash card. As we offer new payment options to our members, we may be
subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain
payment methods, we pay interchange and other related card acceptance fees, along with additional
transaction processing fees which may increase over time and raise our operating costs. We rely on third
parties to provide payment transaction processing services, including the processing of credit and debit
cards, and our proprietary cash card, and it could temporarily disrupt our business if these companies
become unwilling or unable to provide these services to us. We are also subject to payment card
association rules and network operating rules, including data security rules, certification requirements and
rules governing electronic funds transfers, which could change over time. If we fail to comply with these
rules or transaction processing requirements, we may not be able to accept certain payment methods. In
addition, if our internal systems are breached or compromised, we may be liable for banks' compromised
card re-issuance costs, subject to fines and higher transaction fees and lose our ability to accept credit
and/or debit card payments from our members, and our business and operating results could be
adversely affected.
We are subject to the risks of selling unsafe products which could result in illness or injury to our
members, harm our reputation, and subject us to litigation.
If our merchandise offerings, including food and prepared food products for human consumption, drugs,
children's products, pet products, and durable goods do not meet or are perceived not to meet applicable
safety standards or our members' expectations regarding safety, we could experience lost sales,
increased costs and be exposed to legal and reputational risk. The sale of these items involves the risk of
health-related illness or injury to our members. Such illnesses or injuries could result from tampering by
unauthorized third parties, product contamination or spoilage, including the presence of foreign objects,
substances, chemicals, other agents, or residues introduced during the growing, manufacturing, storage,
handling and transportation phases, or faulty design. Our vendors are generally contractually required to
comply with applicable product safety laws, and we are dependent on them to ensure that the products
we buy comply with all safety standards. While we are subject to governmental inspection and regulations
and work to comply in all material respects with applicable laws and regulations, we cannot be sure that
consumption or use of our products will not cause a health-related illness or injury in the future or that we
will not be subject to claims, lawsuits, or government investigations relating to such matters resulting in
costly product recalls and other liabilities that could adversely affect our business and results of
operations. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity
surrounding any assertion that our products caused illness or injury could adversely affect our reputation
with existing and potential members and our corporate and brand image and these effects could be long
term.
We may not timely identify or effectively respond to consumer trends, which could negatively
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 desire.
Our success depends, in part, on our ability to identify and respond to trends in demographics and
consumer preferences. Failure to timely identify or effectively respond to changing consumer tastes,
preferences (including those relating to sustainability of product sources) and spending patterns could
negatively affect our relationship with our members, the demand for our products and services and our
market share. If we are not successful at predicting our sales trends and adjusting our purchases
accordingly, we may have excess inventory, which could result in additional markdowns and reduce our
operating performance. This could have an adverse effect on margins (net sales less merchandise costs)
and operating income.
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