Costco: Company Description

Costco operates a chain of membership warehouse clubs and offers annual memberships across two categories:Gold Star and Business.In each category, a regular membership is priced at $60 and an Executive upgrade is available for $120. The company opened its first warehouse in 1983 in Seattle, Washington. Costco operated a total of 759warehouses as of August 2018. The company offers products across various categories, including fresh and packaged foods, home appliances, and apparel. Costco also offers gas and pharmacy services at some locations.

Source: Company reports

Key Events Overview, 2008–2018

1. 2015–2018: In the last four years, Costco has focused on expanding its business by opening numerous warehouses and entering new markets such as Iceland and France. Costco opened its first store in Iceland in May 2017 and its first store in France in June 2017. In September 2016, Costco announced plans to open seven stores in Canada in addition to a business center in Toronto designed to cater to the needs of business customers. In October 2015, Costco announced plans to open 12 new warehouses worldwide by the end of 2015.
2. 2012–2014: In 2014, Costco entered China by opening a store on Tmall Global, Alibaba’s cross-border,business-to-consumer e-commerce platform. Costco also partnered with Hertz in 2014 in order to provide Costco customers with the option to rent vans in store parking lots so they could drive their purchases home. In December 2013, Costco announced plans to expand to 30 new locations before the end of its 2014 fiscal year, in addition to a new store in Mexico that it had announced in April 2013. The company announced that it would open 16 new stores in the US; four in Australia; three in Canada; two each in Japan, South Korea and Spain; and one location in Mexico.
3. 2008–2011: During the 2008–2011 period, Costco announced partnerships with various healthcare providers. In December 2011, the company partnered with US healthcare technology providers Etransmedia and Allscripts to introduce a software and services application for healthcare professionals. In addition, Costco partnered with Aetna in November 2008 to introduce prescription drug plans for eligible Medicare subscribers. In November 2011, Costco announced the appointment of Craig Jelinek as President and CEO, a position he currently holds. In March 2009, Costco announced that it planned to begin operations in Australia and open its first store in the country, in Melbourne, by July 2009.

Source: Company reports/S&P Capital IQ/Coresight Research

Costco in Charts

Source: Company reports/Coresight Research

Source: Company reports/Coresight Research

Source: Company reports/Coresight Research

Figures represent sum of Gold Star members and Business members for each year. Household cards, which are bonus cards given to members who purchase Executive membership upgrades, have been excluded from this calculation. Source: Company reports/Coresight Research

Company Strategy

Costco had 49.4 million paid members in December 2017 and leads the warehouse club sector by revenue. The company’s core strategy is to offer the highest-quality goods at the best value to members and to continue its member-focused initiatives to increase total sales. The company has outlined two key strategies:

1. Achieve higher sales by maintaining cost leadership: The prime strategy outlined by Costco is to provide goods to its customers at lower prices than its competitors without compromising on quality. Costco offers its members a limited selection of goods that are fast-selling variants, including its private-label products. Costco warehouses carry an average of 3,800 SKUs—a much narrower range than that offered by broadline retailers such as Walmart, which offers millions of SKUs, and Kroger and Target, which offer tens of thousands of SKUs. Costco also refrains from expensive marketing initiatives and uses simple, low-cost signage and shelf markers within its warehouses. These practices enable Costco to pass on cost benefits to its members and continue providing them with a lower-priced offering than its competitors can.
2. Improve the online shopping experience: Online sales accounted for 4% of Costco’s net sales in 2016 and 2017, up from 3% in 2015 and likely the highest share among its warehouse club rivals. Costco made enhancements to the online shopping experience in 2017, improving its online merchandise offerings, site functionality, search efficiency and checkout times.The company also partnered with Instacart in 2017in order to provide services such as same-day and two-day delivery to online shoppers. The company expects to continue its efforts to improve the customer shopping experience.

Company Outlook

In the fiscal year ended September 2017, Costco posted $126 billion in net revenue,representing impressive, 9% growth over the previous year. The company aims to grow further by continuing to offer products at low prices. Costco’s sales have improved and its private-label brand, Kirkland Signature, has kept pace with company’s increasing revenue.Kirkland Signature registered $35 billion in sales in fiscal year 2017 as the company expanded the brand’s offerings to include apparel, sporting goods, fresh foods and organic produce. The company’s business model makes further growth highly viable,and with increased offerings to its members and an expanding global presence, Costco is on the path to continue its robust growth.