Only Costco can go toe-to-toe with Wal-Mart in the wholesale stakes and come out on top. Operating more than 715 membership warehouse stores, Costco is the nation's largest wholesale club operator (ahead of Wal-Mart's SAM'S CLUB). Primarily under the Costco Wholesale banner, it serves more than 71 million members in 44 US states, Washington, DC, and Puerto Rico, as well as in Canada, Mexico, the UK, Japan, South Korea, Taiwan, and Spain. Stores offer discount prices on an average of about 3,700 products (many in bulk packaging), ranging from alcoholic beverages and appliances to fresh food, pharmaceuticals, and tires. Certain club memberships also offer products and services, such as car and home insurance, mortgage and real estate services, and travel packages.
Costco generates revenue from six major product categories: sundries, hardlines, softlines, food, fresh food, and other. It generated 59% of its revenue in fiscal 2016 (ended August) from sundries, food, and hardlines (such as electronics, appliances, jewelry, etc.). Another 14% came from fresh food sales (such as meat, produce, deli etc), while 12% came from softline product sales (such as clothing, footwear, and other apparel).
Serving the retail stores is Costco Wholesale Industries, a division of the company, that operates manufacturing businesses, including special food packaging, optical labs, meat processing and jewelry distribution.
To shop at Costco, customers must be members -- a policy the company believes reinforces customer loyalty and provides a steady source of fee revenue (to the tune of about 2% of yearly sales). Three types of annual memberships are available: Business ($55 each); Gold Star ($55, for individuals and their spouses): and Executive ($110, allows members to purchase products and services, including insurance, mortgage services, and long-distance phone service, at reduced rates). Costco also operates the e-commerce site costco.com, which offers products not found in its stores.
Costco Wholesale's 510 US stores rang up 73% of its total sales in FY2016, while the company's 91 stores in Canada accounted for 14% of sales. Other countries -- including Mexico, the UK, Japan, Korea, Taiwan, Australia, and Spain -- contributed the rest of its revenue. Costco operates in Taiwan and Korea through majority-owned subsidiaries.
Sales and Marketing
Costco uses several marketing and promotional tactics to reach existing and prospective members. It typically promotes new warehouse openings, sends direct mail pieces to potential new members, and employs a regular direct-marketing program. The program, which targets existing members to promote selected merchandise, consists of The Costco Connection magazine, coupon mailers, handouts, and promotional emails to members.
The company sells around 200 of its products in China through Alibaba's Tmall site. Other e-commerce businesses, such as Google Express, Instacart, Boxed, and Jet.com, offer Costco products for delivery via their online services.
The warehouse club operator's revenues and profits have been rising over the past several years as it's expanded its store count and in-store amenities.
The wholesaler's revenue grew 2% to $118.7 billion in fiscal 2016 (ended August), driven by sales at newly opened warehouses. Comparable sales were flat. The strong US dollar impacted negatively on comparable sales, as did the low prices at the pump. Membership revenue was up 4% for the year on the back of new memberships at new and existing warehouses, and an increase in the number of upgrades to executive membership.
Net income fell 1% to $2.4 billion as SGA expenses climbed $623 million. The company's cash position weakened, with cash from operations falling 23% for year year to $3.3 billion.
Costco aims to offer its members a broad range of high-quality merchandise at consistently lower prices than they can find elsewhere. To keep inventory costs low, its merchandising strategy is to limit certain items to fast-selling models, sizes, and colors. By doing this, Costco is able to limit its number of stock keeping units (SKUs) to about 3,700 per warehouse; enabling it to hold significantly fewer items than other discount retailers, supermarkets, and supercenters. Its product lines are not entirely static however, and in 2016 it introduced new Kirkland Signature products, including organic 2% milk, liquid eggs, coconut water, artisan breads and light beer. New non-Kirkland Signature products include new apparel and footwear.
Facing competition from no-fee discounters like Wal-Mart and Target, as well as from rivals SAM'S CLUB and BJ's Wholesale, Costco has been busy expanding and retrofitting its warehouses (which average about 144,000 sq. ft.) to accommodate fresh food sections and other ancillary units, such as gas stations, optical departments, pharmacies, and food courts. It also continues to offer new customer loyalty programs, such as the co-branded rewards credit card it established with Visa and Citi in early 2015. Indeed, thanks to efforts like these, Costco in FY2015 boasted a 91% renewal rate in North America and 88% worldwide, despite intense competition.
Costco is also aggressively expanding its portfolio of stores in both the US and overseas. On the international front, the retailer is looking to take advantage of rising consumer demand in developing markets, especially in Asia in the key markets of Japan, Korea, and Taiwan. Altogether, the wholesaler opened 29 new warehouses in FY2016 (down from 34 in FY2015) to boost its total square footage, including 21 new stores in the US, two in Canada and Japan, one in the UK, Taiwan, Spain and Australia.