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Costco (NASDAQ: COST) sells food and general merchandise, including appliances and other household goods, in bulk and at heavily discounted prices. It operates 555 membership warehouses, 80% of which are located in the United States.[1] Costco's two main competitors are Sam's Club and BJ's Wholesale Club (BJ), both of which have similar business strategies to Costco. The company earned $71 billion in revenue in 2008, a 12.5% increase from a year earlier.[2] This growth was driven by an 8% increase in comparable store sales[3] and the revenues of 24 new stores opened in 2008.[4]
Costco's low prices help the retailer maintain positive growth during rough economic times. For example, in Q4 2008, as the 2008 Financial Crisis hit its peak, Costco's sales increased 13% with a 9% jump in comparable store sales.[5]
Costco's biggest concern is overexpansion and cannibalization of existing store locations, which the company claims had a 2.67% negative effect on its 2008 comparable store sales.[3] As a result, the company has announced it will slow its domestic expansion plans, opening 15 domestic stores in 2008 and 19 in 2009, down from a peak of 25 new domestic stores in 2005.[1] Costco will instead look to international markets for future growth, with plans to open a new store in Australia and an additional 13 stores in new international markets during 2009-2010.[6]
[edit] Company Overview
Costco operates 555 locations stores of its membership-only warehouse club[1] that sell general merchandise including fresh and packaged foods, appliances, and apparel. Almost 80% of the company's stores are in the U.S., with additional stores in Canada, Korea, Japan, Taiwan, and the United Kingdom.[1] The United States also accounted for almost 80% of the company's sales, followed by Canada at 15% and other international sales representing 7% of its 2008 revenue.[7]
The company focuses on selling high volumes of its merchandise at low prices at its warehouses worldwide, which together earned about $71 billion in revenue in 2008.[2] This represents a 12.5% increase in sales from 2007, which the company attributes to an 8% increase in comparable store sales and the opening of 24 new warehouses during 2008.[4] In 2009, Costco plans to open 25 new locations, 19 of which will be in the U.S.[8]
Costco's merchandise categories include:[9]
[edit] Sundries (22% of 2008 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. In 2008, sundries represented 22% of net sales, which was a 1% decrease from 23% of net sales in 2007.
[edit] Hardlines (19% of 2008 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. In 2008, this segment represented 19% of net sales, a 2% decrease from 2007.
[edit] Food (20% of 2008 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 larget segment and in 2008 represented 20% of net sales, which was a 1% increase from 2007.
[edit] Softlines (10% of 2008 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). In 2008 the segment only represented 10% of net sales, which was a 1% decrease from 2007.
[edit] Fresh Food (12% of 2008 Net Sales)
The fresh food segment is responsible for the sale of meat, bakery goods, deli and produce. It represented 12% of net sales in 2008 and in 2007.
[edit] Ancillary and Other (17% of 2008 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. From 2007 to 2008, Costco heavily increased the number of ancillary businesses including the addition of 28 gas stations, 24 food courts and hot dog stands, and 22 pharmacies. As a result, net sales of the segment increased 3% in 2008 to 17% of net sales.
[edit] Financial Analysis
Costco earned $71 billion in revenue in 2008, a 12.5% increase from 2007.[2] Furthermore, Costco's 2008 sales mark a 50% growth in revenue since 2004[2], primarily due to an average 7.8% annual increase in comparable store sales[2] as well as the opening of an average of 23 new stores each year.[2] In 2008, U.S. sales increased 10.4%, revenue from Canadian operations grew 20.7%, and Costco's other international sales increased by 21.9%.[7] This growth was primarily driven by a 6% and 15% increase in domestic and international comparable store sales each respectively, contributing to an overall 8% increase in Costco's comparable store sales.[2] The increases in comparable store sales were primarily due to slightly higher average amounts spent by consumers as well as higher gas prices.[3] In 2008, Costco operated at a 10.53% gross margin, up slightly from 10.52% in 2007 due to 0.24% increase in sales higher margin categories, primarily food and sundries.[10]
Similar to its main competitor Wal-Mart, Costco is also vulnerable to cannibalization from existing stores because of overexpansion. For example, Costco attributes cannibalization to its slowing growth in comparable store sales since 2005. Costco's domestic comparable store sales have increased an average of 6% annually from 2005 to 2008, down from 9% in 2004.[2] Additionally, Costco's 6% increase in comparable store sales in 2008 is deceptive as higher gas prices in 2008 contributed to 2.67% of this growth.[3] As a result, the company has reduced its domestic expansion plans, opening 15 domestic stores in 2008 and 19 planned openings in 2009, down from its peak of 25 new domestic stores in 2005.[1]
Costco's operating margin reached 2.77% in 2008, up from 2.55% in 2007, which was mainly due to the slight increase in gross margin.[2] As a result, Costco's net income reached $1.28 billion in 2008, a 18.5% increase from 2007, which outpaced the company's 12.5% growth in revenue.[11]
| Metric | FY2008 | % Change | FY2007 | % Change | FY2006 |
|---|---|---|---|---|---|
| Net Sales Revenue | $72,483 | 12.6% | $64,400 | 7.1% | $60,151 |
| Gross Profit | $8,980 | 13% | $7,950 | 7.4% | $7,405 |
| Operating Margin | 2.7% | 0.2% | 2.5% | (0.2%) | 2.7% |
| Net Income | $1,282 | 18.5% | $1,082 | (1.9%) | $1,103 |
| Comparable Store Sales | 8% | 2% | 6% | (2%) | 8% |
[edit] Trends and Forces
[edit] Overexpansion Leads to Cannibalization of Sales
Costco's domestic comparable store sales have increased an average of 6% annually between 2005 and 2008, down from 9% in 2004.[2] Like most retailers, Costco's long term sales and net income growth depends primarily on opening new stores and expansion into new markets. However, Costco's overexpansion domestically risks cannibalizing the sales of preexisting stores, essentially competing with itself. For example, if Costco builds a store relatively close to one if its already existing stores, the new store might take away customers from the old store (a reason could be convenience) thus hampering comparable store sales -- this is cannibalization.
As a result of domestic overexpansion, Costco reduced its expansion plans for 2008 and 2009 and switched focus to opening new stores in new markets internationally. For example, Costco opened 24 new stores in 2008, compared to its 2007 forecast of 35 new stores.[13] Furthermore, the company plans to open a new store in Australia and an additional 13 stores in new international markets during 2009-2010.[6]
[edit] Higher Employee Pay Leads to Better Performance
Costco's employees are paid significantly more than its competitors. For example, Costco employees are paid an average of $16 per hour, while Wal-Mart employees earn an average $9.68/hr.[14] Costco is also known for providing its employees with better benefits- Costco covers almost 90% of its employees health insurance premiums, compared to 60% coverage at Wal-Mart.[15] These higher labor expenses contribute to Costco's 2.77% operating margin[2], which is lower than Wal-Mart's Sam's Club operating margin of 3.65%.[16]
The upside to Costco’s high employee costs is increased productivity - in 2005, Costco earned $13,647 in operating profit per hourly employee, compared to $11,039 per employee at Wal-Mart.[14] Additionally, Costco has a lower employee turnover than the competition, which saves them money on employee recruiting and training costs. For example, Costco's employee turnover rate is slightly above 20%, significantly less than the industry average of 65% or Wal-Mart's 50% turnover rate.[14] According to a 2005 Rutgers University Study, Costco's lower turnover rate saves the company between $1.5 to $2 million in hiring and training costs each year.[14]
[edit] Low Prices Attract Customers During Weakened Economy
Because of its low prices and bulk product offerings, Costco is an ideal place for customers to stretch their dollars in times of an economic downturn. For example, the subprime lending crisis and 2007 Credit Crunch drastically reduced the levels of dispensable income for many consumers. In Q4 2008, Costco's sales grew by 13%, driven primarily by a 9% increase in comparable store sales as consumers gravitated towards Costco's low prices in the weakened U.S. economy.[5]
[edit] Competition
Costco is the largest retailer in the warehouse club market in terms of sales.[2] Costco's main competition is Wal-Mart's Sam's Club. BJ's, a smaller retail warehouse chain, also competes with Costco and Sam's Club. The three companies share a similar business model, selling high volumes of merhandise at low prices in a membership-only warehouse club. Each company sells a similar array of general merchandise, including food, apparel, and gasoline.
- Sam's Club operated 602 warehouse clubs nationwide and earned $46.8 billion in revenue in 2008.[16]
- BJ's operated 180 warehouse clubs across the eastern U.S.[17] In 2008, the company received $10.0 billion in total revenues.
| Company | Revenue (Billions) | Net Income (Billions) | Operating Margin | Comparable Store Sales (Decline) | Number of Store Locations |
| Costco | $70.9 | $1.3 | 2.7% | 6% | 512 |
| Sam's Club | $46.8 | N/A | 3.4% | 4.8% | 602 |
| BJ's Wholesale Club (BJ) | $10.0 | $2.3 | 2.3% | 9.4% | 180 |
| Company | Revenue (Millions) | % Change | YOY Revenue (Millions) | Net Income (Millions) | % Change | YOY Net Income (Millions) |
| Costco (3Q 2009)[18] | $15,806 | (4.9%) | $16,614 | $210 | (28.8%) | $295 |
| Sam's Club (1Q 2010)[19] | $10,964 | (1.4%) | $11,124 | N/A | N/A | N/A |
| BJ's Wholesale Club (BJ) (1Q 2009)[20] | $2,314 | 0.3% | $2,308 | $24.3 | 35.8% | $17.9 |
[edit] References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 COST 2009 10-K, Pg. 14
- ↑ 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 2.11 2.12 COST 2008 10-K, Pg. 16
- ↑ 3.0 3.1 3.2 3.3 COST 2008 10-K, Pg. 19
- ↑ 4.0 4.1 COST 2008 10-K, Pg. 17
- ↑ 5.0 5.1 "Costco Drives a Hard Bargain" 10/10/2008
- ↑ 6.0 6.1 "Costco plans Australian store as part of expansion" 6/17/2008
- ↑ 7.0 7.1 7.2 COST 2008 10-K, Pg. 83
- ↑ COST Press Release 8/31/2008
- ↑ 9.0 9.1 COST 2008 10-K, Pg. 4
- ↑ COST 2008 10-K, Pg. 20
- ↑ COST 2008 10-K, Pg. 24
- ↑ COST 2008 10-K, Pg. 46
- ↑ MSN Money 2/16/2007
- ↑ 14.0 14.1 14.2 14.3 The Labor Research Association 7/5/2005
- ↑ "Wage Against the Machine" 6/27/2008
- ↑ 16.0 16.1 16.2 Wal-Mart Stores (WMT) Annual Report 2009
- ↑ 17.0 17.1 BJ's Wholesale Club Annual Report 2008
- ↑ Google Finance: COST Overview
- ↑ WMT 2010 Q1 Report, Pg. 8
- ↑ Google Finance: BJ Overview
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