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Costco Wholesale (COST) |
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WIKI ANALYSIS
Costco (NASDAQ: COST) is the largest warehouse club retailer and the second largest general retailer in the United States. Costco sells food and general merchandise, including appliances and other household goods, in bulk and at heavily discounted prices. Costco's two main competitors are Sam's Club and BJ's Wholesale Club (BJ), both of which have similar business strategies to Costco.
Costco's business strategy providing items in bulk and at low prices help the retailer maintain positive growth during slow economic times. Price conscious consumers gravitate toward discount retailers like Costco, hoping to get the most out of their money. As a result, Costco's bottom line has fared well since the economic slowdown. Costco's biggest concern is over expansion and cannibalization of existing store locations. As a result, the company has announced it will slow its domestic expansion plans. Costco will instead look to international markets for future growth.
Company Overview
Business Segments
Costco's merchandise categories include:
- Sundries (23% of Net Sales): Sundries is Costco's largest segment by revenue and includes the sales of candy, snack foods, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies.
- Hardlines (19% of Net Sales): The hardlines segment sells major appliances, electronics, health and beauty aids, hardware, office supplies, garden and patio, sporting goods, furniture, and automotive supplies.
- Food (21% of Net Sales): This segment is responsible for the sale of dry and institutionally packaged foods (oatmeal, rice, cereal, etc.) The food segment is Costco's second largest segment.
- Softlines (10% of Net Sales): Softlines is Costco's smallest business segment and is responsible for the sale of apparel, domestics, jewelry, housewares, media, home furnishings, cameras, and small appliances (toasters, microwaves).
- Fresh Food (12% of Net Sales): The fresh food segment is responsible for the sale of meat, bakery goods, deli and produce.
- Ancillary and Other (15% of Net Sales): The ancillary and other business segment is in charge of the company's gas stations, pharmacy, food court, optical, one-hour photo, hearing aid, and travel products.
Business Growth
FY 2010 (ended August 30, 2010)[1]
- Net sales increased 9.1% to $76.2 billion.
- Net income increased 20% to $1.3 billion.
Trends and Forces
Mall Strategy Aids Costco's Urban Expansion
The sluggish economy and weak housing market caused many companies, especially department stores, to vacate space in shopping malls. As a result, Costco has stepped in and has been buying up these empty spaces previously occupied by department stores. Although this mall strategy is in contrast to Costco's current strategy of big box retailing in stand-alone stores, Costco stands to benefit from the switch. First, it allows Costco to expand at a quicker rate because the company won't have to worry about setting up infrastructure or have to deal with community opposition in building warehouse stores. Second, it brings Costco's stores to more generally populated areas and to high-traffic areas like malls. So instead of having to drive a long distance to a strip-mall to get Costco's low prices, consumers will now have easier access to the low prices while still being able to shop at other stores under the safe roof. Costco's bottom line stands to benefit from higher traffic and more sales.
Consumers Looking For More Than Just Bulk
Consumers prefer not to have to travel to different places in order to shop. One of the biggest reasons why giant retailers like Wal-Mart (WMT) are successful is because their stores are more than just a place for people to buy food -- these stores provide ancillary services like places to eat or get a hair cut. Many of Costco's stores already provide ancillary services like in-store food service, one-hour photo centers, optical dispensing centers, pharmacies, gas stations, hearing-aid centers, printing/copy centers and car washes. Costco uses these services to attract customers into their stores for more than just buying bulk items and improving on these services will help to increase traffic flow into Costco stores and will help generate sales.
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