Costco Wholesale (COST)

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See all 5 Bulls Reasons Bulls: Reasons To Buy Costco Quaterly Report Beats Forecasts 0% agree Costco Quaterly Report Beats Forecasts Quarterly Report Tops Wall Street Forecasts The bulk discounter reported a 32% increase in its fiscal third quarter profit, topping Wall Street expectations, as cash squeezed customers flocked to its warehouse clubs in search of bargains on food, toiletries, TVs and... read more View or Edit Reason 0 votes 0% agree Law passed in favor of company 0% agree Law passed in favor of company The new California law that decreases Costco's employee's pay, will contribute to helping the company increase their total amount of stores. The more stores Costco gets, the more memberships they will receive. All in all this will increase the companies total revenues each year. View or Edit Reason 0 votes 0% agree Membership fees a reliable revenue stream 0% agree Membership fees a reliable revenue stream Membership rates have stayed constant over the past 8 years and are a constant, steady stream of revenue. Costco will be financially healthy in the long run as long as customer loyalty remains constant. View or Edit Reason 0 votes 0% agree See all 4 Bears Reasons Bears: Reasons To Sell too many new locations 0% agree too many new locations Increasing the number of clubs may cause cannibalization of sales at already existing clubs, instead of allowing Costco to take more market share from competitors like Sam's Club and BJs. View or Edit Reason 0 votes 0% agree Context of margin and employee policy 0% agree Context of margin and employee policy The context of the company's margins and employee policy needs to be explained a little better. Costco's entire business model is predicated on low margins and high volume, and the company's high employee cost is favorable as it creates low turnover, attracts better... read more View or Edit Reason 0 votes 0% agree Low margins 0% agree Low margins Costco has had consistently low profit margins in past years, and Costco's ability to increase margins is limited by its high employee cost. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion digital camera [Dismiss] [Done] digital camera [Dismiss] [Done] digital camera [Dismiss] [Done] See All Suggestions

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Costco's customer membership business model is relatively unique in the industry, designed to reinforce customer loyalty and provide a continuing source of membership fee revenue. Their stated purpose for employing this model is to leverage its membership revenue to offer lower prices.

Costco's high expenses are problematic to Costco's overall profits. Costco has been trying to decrease expenses in order to gain a larger profit margin by making changes within company structure, such as employee costs. Another factor that Costco must be aware of is customer loyalty. Costco's business model is built upon customer membership, who join and renew annually. This directly monetizes customer loyalty as unsatisfied members may not renew and represents a real cost to Costco's business.

Costco has already begun expanding its warehouse empire across the U.S., which has allowed it to gain the majority of the market share from the competition. In the first three quarters of FY2008, Costco opened 18 new warehouse locations around the world, not including four re-locations.^[2] With respect to industry presence, Costco has managed to be extremely successful despite Wal-Mart's dominating retail empire, which is why continuing company expansion will be important for Costco in order to maintain its top selling status in the warehouse club market.

[edit] Products

Costco's private label, Kirkland, manufactures everything from food to apparel. Kirkland products made up 16% of sales for 2006 and sales are expected to make up almost 25% over the next few years. If Kirkland continues to perform well for the next few years, Costco will most likely invest those gains back into pricing.

Costco's broad product line attracts a variety of different customers. Costco sells a wide variety of merchandise throughout its retail warehouses such as:

• Household goods Household goods include a wide range of linens, various appliances, and home decor.
• Apparel Costco sells a select few name-brand clothing lines for lower-than-retail prices. Costco has been pushing its jewelry merchandise to sell more high end products in-store and online.
• Entertainment and Electronics The entertainment and electronics merchandise is the base for Costco's sales. The merchandise includes plasma TVs, DVDs, stereos, etc. Costco has recently introduced high end electronics into its product line and has been successful.
• Food Costco's food section has a variety of foods and beverages that customers would find at a grocery store, but for lower prices. The food section includes bakery goods, meats, and frozen foods. Costco also carries specialty foods and wines.
• DIY The DIY (Do-It-Yourself) products include home improvement products and auto parts. Home improvement products include tools and hardware; auto parts include tires and car radios.
• Outdoor and Recreation Costco has a large outdoor and recreation product line. They sell everything from gardening tools to barbecues to outdoor Jacuzzis.
• Health Costco's health products include vitamins and home health care products. Costco's pharmacy business has been growing over the past years. Expiring patents have led Costco to sell generic drugs for low prices.

[edit] How Costco Makes Money

Costco's success is closely tied with membership fee income because of its unique club membership business model. Unlike other retail stores, Costco realized membership fee revenue in addition to sales of merchandise. In its fiscal year 2007 (September 2007) membership fees were just over $1.3 billion, or two percent of total sales.

Costco can only make a significant percentage increase in profits if they raise membership fees. Membership fees are, and have been, a steady stream of revenue for Costco, which is why customer loyalty is such an important factor to Costco's success.

[edit] Importance of customer loyalty

Customer loyalty is the ultimate factor for Costco's success. Customer loyalty can be measured through yearly renewed membership. Although Costco has been steadily increasing membership rates over the past 6 years, Costco's customer loyalty has stayed at a constant 86% since 1999, except for a 1% dip in 2002. As of 2006, Costco had about 48 million members world wide.

Membership fees can affect customer loyalty if customers believe the membership fee to be too pricey. Costco's competitors have lower membership fees, but Costco has been able to retain their membership since their competitors have also been increasing their prices.

[edit] Dependence on new stores

Costco plans to open about 35 more stores in the next few years. Opening more stores will make it more convenient for customers to find Costco locations and most importantly, contribute to more memberships. The only way in which Costco can significantly increase its membership is by opening new stores.

Costco's expansion will lead to more memberships in the long run, but could immediately hurt sales of already existing Costco clubs due to overlapping markets. If Costco can strategically open new clubs in areas where clubs do not exist, or where the competition has already established a market, Costco will gain market share and more memberships. On the other hand, if Costco opens new clubs near already existing Costco clubs, the new clubs will steal sales from old clubs. This effect is known as cannibalization. If cannibalization occurs, new stores will provide a location for current members to shop rather than increasing new member enrollment. Costco hopes to minimize the effects of cannibalization by expanding its presence internationally in countries such as Australia, where the company hopes to have about five stores opened during fiscal 2008.

[edit] The E-commerce question

Costco is already using the internet as a viable retail outlet by raking in over $500 million in E-commerce sales in 2005. They are expecting a 40% increase in internet sales over the next year.

Costco's website attracts different consumer groups, which may help increase its visibility and impact future membership. Online sales are available to non-club members, who must pay a extra 5% fee. Online sales also make Costco's products accessible to individuals who are not geographically near a Costco location or those who dislike the warehouse atmosphere. However, Costco's online presence may also simply shift membership sales from individual warehouses to the website, due to convenience and consumer preferences.

[edit] Higher employee costs

Costco's employees are paid 40% more per hour than the competition, including Wal-Mart. Costco is also known for providing its employees with benefits which are well over the industry average. New California laws have lowered workers compensation costs, which will help reduce employee costs.

The upside to Costco’s high employee costs are increased employee loyalty and motivation. Costco has a lower employee turnover than the competition, which saves them money on employee recruiting and training costs. In addition, Costco avoids the negative exposure regarding employee wages and benefits that current surrounds companies such as Wal-Mart.

[edit] Costco and the Competition

Costco has gained the majority of the market share in the wholesale club market in terms of sales. However, this market still remains fiercely competitive. Costco's main competition is Wal-Mart's Sam's Club. Costco has taken away market share from Sam's Club by opening new clubs throughout the Midwest and the South over the past years, which was previously dominated by Sam's Club. BJ's, a smaller retail warehouse chain, also competes with Costco and Sam's Club.

Costco is leading the retail warehouse industry with sales and market share, even though Sam's club has more clubs. Costco will be trying to stay ahead of the competition by opening new clubs to take sales and market share away from its competition, but Costco must be careful not to cannibalize their own store's sales.

Customer loyalty will also be important to Costco in the coming years as they have been increasing membership fees. Costco's membership fees are more expensive than the competition, but customer loyalty has been unchanged over the past 8 years.

 Costco Wholesale

	Select All  |  Select None Metrics Inventory Long Term Debt Sales per Store Membership Fee per Customer Net Income Operating Income Comparable Sales Growth Number of Stores Revenue from Membership Fees Cancel

	Select All  |  Select None Companies Costco Wholesale (COST) BJ's Wholesale Club (BJ) PriceSmart (PSMT) Wal-Mart Stores (WMT) Cancel

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Company	Data From	Comparable Sales Growth	Number of Stores	Revenue from Membership Fees
BJ's Wholesale Club (BJ)	2006	1.2%[3]	172[4]	$177M[5]
Costco Wholesale (COST)	2007	6%[6]	488[6]	$1.31B[6]
PriceSmart (PSMT)	2007	20.1%[7]	23[8]	$13.9M[9]

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[edit] References

1. ↑ [Q3FY2008 COST Earnings Release http://seekingalpha.com/symbol/cost]
2. ↑ [Q3FY2008 COST Earnings Release http://seekingalpha.com/symbol/cost]
3. ↑ BJ,2006,10-K,Item-7,Page-18
4. ↑ BJ,2006,10-K,Item-1,Page-3
5. ↑ BJ,2006,10-K,Item-6,Page-12
6. ↑ ^{6.0 6.1 6.2} Cost,2007,10-K,Item 6,Page-15
7. ↑ PSMT,2007,10-K,Item-15,Page-5
8. ↑ PSMT,2007,10-K,Item-1,Page-2
9. ↑ PSMT,2007,10-K,Item-15,Page-4