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Costco: A Retail Powerhouse

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This article provides an overview of one of the retail industry’s most successful businesses: Costco. IAMC members can learn more about the business at the Educational session on December 5. The presentation will highlight Costco’s history, customer-centric strategy, and expansion prospects.


Unique and differentiated from traditional supermarkets, Costco has grown significantly since opening its first warehouse in Seattle in 1983. Since going public in 1985, sales and profits have compounded annually at 12% and 13% respectively. With 128 million cardholders worldwide, Costco operates 871 locations across 14 countries and reported $237.7 billion in revenue in FY 2023, making it the third-largest retailer globally. With 600 locations, the United States accounts for 73% of revenues, making Costco the country’s third-largest grocery retailer (not including general merchandise sales). Costco’s philosophy focuses on providing members with quality merchandise and services at the lowest prices.


Costco warehouses and e-commerce websites offer low prices on nationally branded and private label (Kirkland Signature) products across a wide range of categories, primarily composing of food and general merchandise. The company achieves operating efficiencies through volume purchases, efficient distribution, and limited handling of merchandise through self-service warehouses. Economies of scale enable the company to operate at lower gross margins and offer lower prices.


Despite Costco’s low-price strategy, Costco caters to upper-middle-income households. Costco’s products are offered in bulk, requiring higher household incomes that can afford to spend upfront. Suburban homeowners are a key part of Costco’s customer base since they have the space to store products. The median household income of Costco members is roughly $125,000, compared to the U.S. median of $80,000.


Members are attracted to product quality and low prices offered at warehouses. Quality products are backed up by Costco’s lenient refund policy and 100% satisfaction guarantee. Costco’s pricing strategy ensures cost savings are passed directly to customers, lowering prices. The company could increase prices and margins, but markups are limited to 14% for national brands and 15% for Kirkland Signature (competitors often markup by 25-50%), maintaining customer trust and loyalty.


Costco warehouses have simple, industrial layouts and are used as both retail and storage spaces, reducing inventory management costs. Stores feature a treasure hunt shopping experience, requiring customers to search for products throughout the store’s unlabelled aisles. The average warehouse is roughly 147,000 sq. ft., with a limited range of products compared to competitors. At less than 4,000 SKUs per warehouse (Walmart Supercentres have over 142,000 SKUs), products are limited to fast-selling models, sizes and colours. Items are carefully selected for the best quality and value, ensuring customers do not face choice paralysis in warehouses. A smaller range of products also provides Costco with greater negotiating leverage. Online sales remain limited and complementary to Costco’s core focus on the warehouse shopping experience.


The company separates into four revenue streams: food and sundries (over 40% of revenues), non-foods (general merchandise - over 25% of revenues), fresh foods (over 13% of revenues), and warehouse ancillary and other businesses (gasoline, pharmacy, food court, etc. - over 20% of revenues).


Membership fees are a core part of Costco’s strategy, providing stable income and enabling lower prices. Basic membership plans cost $65 and executive plans cost $130 (offering annual cashback of 2%). In 2023, membership fees provided $4.58 billion of revenue, contributing significantly to Costco’s profit of $6.29 billion. Membership renewal rates are above 90% in the United States, demonstrating strong customer loyalty. Once consumers pay for their membership fee, they often recognize it as a sunk cost and make more trips to stores, spending more to get value out of their fee.


Through Costco’s Kirkland Signature brand, private-label products are offered across a range of categories and integral to Costco’s business model. With over $59 billion USD of sales (more than 25% of Costco’s total revenue), Kirkland Signature is America’s largest CPG brand by revenue. Products aim to be of equal or better quality than leading brand products and are often cheaper than brand-name equivalents by more than 20%. Many Kirkland products are manufactured by name-brand companies and then sold under the Kirkland brand.


Costco’s culture of excellence and efficiency is highlighted by its investment in employees. Costco’s higher employee wages and benefits reduce employee turnover to 13% (compared to the retail industry’s average above 20%), while fostering employee loyalty and productivity. Despite higher wages, the company has the highest revenue per employee in the retail sector, nearly tripling the average Walmart and Target employee. In addition to a high revenue per employee, Costco also demonstrates high efficiency through a high revenue per square foot.


With its focus on a differentiated, customer-centric experience, Costco continues to grow. Costco’s relentless focus on a limited range of quality products at lower prices ensures strong customer loyalty. By remaining focused on the customers and employees, Costco is likely to continue its growth internationally while driving value for shareholders.



 
 
 

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