Consistent – that’s simply the best word to describe the performance of Costco Wholesale. In just 25 years of operations, they have grown from one warehouse in Seattle with 244,000 club members and $101 Million in sales to 555 warehouse clubs, 53.5 million members, and nearly $71 Billion in annual sales. Costco is now one of the largest, and certainly most admired companies in the world. Their strategy is simple: offer a limited selection of in-demand products at very competitive prices, with a policy of not marking up products by more than 15%. The success of this strategy, as well as the consistency, can be seen in their results:
While the success of their store operations has been phenomenal, e-commerce growth has been even more impressive. Web operations were launched in 2000, and they are fast becoming one of the world’s largest web-based retailers, with fiscal 2008 e-commerce sales of $1.7 Billion and 5-yr CAGR of 49.7%:
Unlike most brick-and-mortar retailers, Costco selects their online merchandise mix so that it doesn’t compete with, but rather complements the goods found in warehouse stores, with less than 5% overlap between warehouse and online items. Similar to their store strategy, the key to their online success is a narrow product range and focus on value-priced luxury goods. Costco.com carries about 4,000 SKU’s, compared to more than 1 million at walmart.com and over 10 million at Amazon.com.
Product offerings include computers, digital cameras, flat-screen tv’s, furniture, jewelry, and sporting goods, with the average ticket coming in north of $400. The site also offers unusual items such as fine art and caskets. Asked how they come up with ideas for what to offer on the web, CEO Jim Sinegal said “Certainly from our buyers, but they also come from our suppliers. When somebody sees that you’re willing to take a chance on coffins, odds are they’ll come up with some other good ideas.”
Listening to the customer will be key to their continued success – more than half of their online customers are gold club members who pay higher annual fees, and about three quarters of online buyers are college graduates with household incomes of more than $78k. The company is focused on doing a better job of connecting with these buyer through more personalized direct marketing campaigns as well as in-store promotions.
Growth has slowed somewhat during the recession, as they saw “only” 26% YoY growth in the fiscal 3rd quarter compared to 34% in the prior 3rd quarter. However, online sales in fiscal 2008 only made up 2.4% of total net sales, and the company expects to grow the e-commerce business to $5 Billion within the next several years. With a history of consistently meeting their goals, I wouldn’t bet against them…
I have noticed that on those days that the S&P retail Index is up, Costco, like Walmart, is consistently down, and vice versa. Clearly, investors see these two companies as a counter-cyclical play. Obviously, Coctco has been building share over a longer term, but it will be interesting to see how their trendline is affected as the economy begins to improve.