Wal-Mart isn't a behemoth in every business. Operating more than 680 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 40-plus US states 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 4,000 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 ancillary and other. It generated 57% of its revenue in fiscal 2015 (ended August) from sundries, food, and fresh food. Another 16% came from hardline product sales (such as electronics, appliances, jewelry, etc.), while 11% 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 (2% of FY2015 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 480 US stores rang up 73% of its total sales in FY2015, while the company's 89 stores in Canada accounted for 15% 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 emails from costco.com, costco.ca, and costco.co.uk.
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 3% to $116.2 billion in fiscal 2015 (ended August), driven by new store openings in 2014 and 2015 and a 1% increase in same-store sales at the company's warehouse stores. Membership fee income increased by 4% thanks to new member sign-ups and members upgrading to higher-fee executive membership program. Geographically, sales in the US grew by 5%, while sales in Canada declined by 3% due to a poorer economy there. Sales elsewhere grew by 2% during the year.
Higher revenue in FY2015 boosted Costco's net income by 16% to $2.38 billion for the year. Its operating cash levels rose by 8% to $4.28 billion as its cash earnings rose.
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.
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 planned to open 34 new warehouses in FY2015 (about the same as in FY2014 and up from 26 in FY2013) to boost its total square footage by 5%, including 20 new stores in the US, four in Mexico, three in Japan, two each in Australia and Korea, and one each in Canada, the UK, and Taiwan.