Costco Wholesale Corporation, founded in 1983 in Seattle WA, operates an international chain of membership warehouses selling a large variety of products ranging from but not limited to groceries, merchandise, apparel and furniture. The company’s mission is “to continually provide our members with quality goods and services at the lowest possible prices.” (Costco). Costco prides itself on its low margin high volume business model built on revenues from customer membership fees, careful cost-saving strategies, customer satisfaction and loyalty.
Costco Wholesale operates in the warehouse club and supercenter sector, a competitive branch of the retail trade industry. The warehouse club industry is made up of companies with large lines of stores that offer customers wide selections of merchandise, often in bulk quantities and at reduced prices, in exchange for membership fees.
The Warehouse Clubs and Supercenters industry is segmented into three different parties by market share. Walmart Inc. holds the largest share in the industry, 70.2%. It is “the world’s largest retailer and grocery chain.” Costco Wholesale Corporation makes up the second largest portion of market share at 19.4% and is “the largest membership-only warehouse club in the United States.” The remaining 10.4% of the market is shared by other companies, such as Meijer Inc. at 3.6%, Target Corporation at 3.0%, and BJ’s Wholesale Club Inc. at 2.7%, among others (Kalyani).
Walmart Inc., representing the largest market share, competes with Costco Wholesale Corporation directly with its Sam’s Club division, which is projected to generate $352.6 billion revenue in fiscal 2019, reflecting annual growth of 2.8% over the past five years. IBISWorld states that “Sam’s Club has experienced more subdued growth during the period, including a contraction within the last year.” Costco’s revenue is projected to total $97.7 billion in fiscal 2019, which represents annual revenue growth of 5.2% during the previous five year period.
Additionally, Costco is projected to grow at an annual rate of 7.2% in the current projection period, which is backed by “a steady increase in revenue and profit… as Costco has increased its provision of higher-end brands and expanded its portfolio of Kirkland Signature items” (Kalyani). The market is condensed down to a few key players (e.g. Walmart Inc., Costco Wholesale Corp), and this is largely due to economies of scale — larger companies can better optimize the wholesale trade business model.
Warehouse clubs generally include gasoline stations that generate a share of their revenues. Thus, revenues trend up when the world price of crude oil is higher. In a recent press release by Costco, the company reported a fourth-quarter increase by 10%, which factors in the impact of gasoline prices and currency effects (Trefis Team). Overall, the IBISWorld report on the industry reports an annualized growth rate of 1.3% of the warehouse club and supercenter sector, with revenues totaling $502.5 billion. Overall, an in-depth analysis of the industry reveals slow, but mature growth of revenues, coupled by a world decrease in crude oil prices, forcing “operators to charge less for fuel at their gas stations” (Kalyani).
Moreover, Costco has built its success on enormous economies of scale allowing the company to negotiate lower prices from its suppliers and vendors. The company operates on a business model with very low SKUs, which not only saves the company resources but also gives Costco power in negotiations with vendors paying for shelf space. Furthermore, thanks to the company’s membership fees model, which accounts for 80% of Costco’s gross margin and 70% of its operating income, Costco is not only able to collect most of its profits 12 months in advance, but can also keep its margins slim and set lower prices in its stores relative to its competitors (Lewis).
In the retailer landscape, Costco competes heavily with Walmart, Target and online retail giant Amazon with its unique pull on customers. Since its first opening in Seattle, it has established a strong presence on the west coast as the first bulk retailer. With its headquarter located in Issaquah, Costco currently operates 527 membership warehouses with a strong emphasis on the west coast, especially in Washington and California. (Costco Wholesale)
A hallmark of the warehouse business model run by Costco is limiting the number of stores to a small number of the most profitable locations. Costco’s main competitor, Walmart, which has the presence in about 8 times as many locations, only has about three and a half times the market share (Walmart). Costco has the belief that “if sales are good, ‘everything else will take care of itself”(Lutz) and that idea can be seen in the high amount of revenue per store. A large share of revenue comes from the stickiness of Costco’s vast base of loyal customers; Costco enjoys a “member renewal rates are 90% in the U.S. and Canada and 87% worldwide.” (Trefis Team)
Costco is exposed to different macroeconomic threats, factors such as international trade tensions, slowing economy, higher interest rates, and reduced consumer spending create uncertainty for Costco’s growth and profits. Furthermore, e-commerce has become a significant retail industry disruptor
- https://www.forbes.com/sites/greatspeculations/2018/05/30/costco-to-benefit-from-growth-in-comparable-sales-in-q3/#1b6d65a2740c ⇒ 90% member renewal rate