Costco Wholesale Corporation (COST) is a solid performer. On Jan. 1, 2020, Costco's stock was trading below $300. Two years later, the company's share price nearly doubled. On top of this, Costco shares offer investors an annual dividend with an approximate annual yield of 0.8%, though Costco announced in April 2023 it would be increasing the dividend amount to $1.02 per quarter.
The retailer has a unique business model that could impact its long-term outlook, earnings, and share price. At its most basic, the company's approach is to keep prices so low that they are barely above cost and makeup on lost potential revenue by selling memberships. The company also sells some of its own brands and makes a little more on these items. It offers some things online, but the bulk of its business is in-person, in-warehouse sales. In a nutshell, Costco makes a lot of its money off of those memberships.
Key Takeaways
- Costco has a business model that depends heavily on repeat shoppers buying memberships and retaining brand loyalty.
- Like many other companies Costco is at risk of shifting customer preference. However, Costco's reliance on specific geographical regions heightens this risk.
- Costco must compete with other membership providers in hopes of securing customer loyalty.
- Costco is not an industry-leader regarding e-commerce capabilities, though it has made investments in the space to become more competitive.
- Costco has begun expanding its delivery service to ensure better customer interaction with the sale of larger, bulkier goods.
So far, Costco has been very successful. The company boasts a membership renewal rate of 93% in the U.S. and Canada as well as 90% worldwide. In 2022, its members paid $4.2 billion in membership fees, up 9% from the year before. Company-wide net sales for the fiscal year 2022 were over $222 billion, an increase of 16% from 2021.
Although Costco has experienced tremendous success, there are several risks to its business model.
1. Consumer Preferences
Changing consumer preferences could affect Costco. The company uses a warehouse approach as it buys certain items in large quantities and tries to sell them as quickly as possible. This method only works if it can maintain those high volumes. If consumer preferences change, Costco could be left with large amounts of unwanted, and possibly perishable, goods.
Costco is also highly dependent on the operational performance of specific segments. For example, the United States and Canadian operations comprise 87% of company-wide net sales. Specific to the United States, California operations comprise 28% of U.S. net sales. Changes in these markets ranging from increased labor costs, energy costs, competition in these specific areas, or customer preference to even lower margin products expose the U.S. and Canadian operations.
2. Memberships
One of the biggest risks with Costco's business model is its dependence on memberships. This strategy works well as long as its members keep coming back and continue purchasing items in bulk as they have historically, but several issues could affect that trend. Customers could choose to move their memberships to a competitor, such as Walmart's Sam's Club. Membership costs—which range between $60 and $120 per year at Costco—are roughly the same at other wholesale retailers, and the discounts are fairly similar as well. One real difference is selection, and that is also tied to consumer preference. In Canada, members can also get discounted pet insurance as a membership perk.
Over 118 Million Members
At the end of 2022, Costco had 118,900,000 total members, and 54 million cardholders paid for the Gold Star membership.
In Costco's annual report, it admits "membership loyalty and growth are essential to our business." Costco's Kirkland Signature brand generally carries higher margins than other national brand products, any loss of member acceptance or decline in memberships could adversely impact sales.
Costco's membership approach also poses a risk for self-cannibalization. The extent of membership growth is somewhat tied to warehouse openings in new markets. If Costco decides it more beneficial to open warehouses in existing markets, there's increased risk in decreased membership growth due to an already saturated market.
3. Omnichannel Experiences
Right now, most retailers are adopting an omnichannel focus, which offers the option to buy products online or in stores. Consumers today use different connected devices to shop online, research products, and compare prices. While Costco's emphasis on the warehouse allows the bulk discount retailer to keep prices very low, it does not really translate to the type of omnichannel experience many customers expect now.
Costco is making some investments towards that goal, such as by testing out curbside pickup in select locations, but there is no guarantee that those efforts will be successful or that the changes will be implemented in time for the company to remain competitive.
In addition, Costco has recognized the need for an online, e-commerce presence. Website sales represented approximately 7% of net sales in 2022.
4. Bulk Items Delivered
When buying in bulk, transporting everything home can be a real problem. For people in urban areas who may be unable to park near their buildings or families with young children who may find transporting bulk goods too much to handle, it can be a deciding issue.
Costco offers some online services, but there are other discount bulk providers such as Amazon Prime that offer similar deals and free shipping. Amazon offers Prime membership, which includes free shipping, streaming video, and several other benefits, for $139 per year.
Although it is investing in its digital presence, Costco only carries up to 11,000 unique SKUs online. Still, the company acquired Innovel Solutions in 2020. Now rebranded as Costco Wholesale Logistics, Costco has the ability to potentially scale last-mile delivery — specifically for large bulky products that may require white-glove service.
What Type of Competitive Strategy Does Costco Have?
Costco's competitive strategy is to drive customer loyalty through memberships. Members are often loyal to Costco's brand, even if its Kirkland Signature brand charges higher-than-average margins compared to other national brands.
What Are the Chief Elements of the Strategy That Costco Wholesale Is Pursuing?
Costco has recently turned its attention to the e-commerce space. By expanding its capabilities of delivering goods and increasing the number of products that can be purchased online, Costco is strategically positioning itself to adapt to the digital approach of generating sales.
How Well Does Costco Link Its Mission and Strategy With Its Philosophy and Values?
Costco's mission is to continually provide members with quality goods at the lowest prices possible. It is investing in warehouses around the world, promoting the value of household memberships, and expanding its digital presence, As Costco's strong stock market performance has indicated, the company is linking it's values and strategy well.
What Competitive Threats Does Costco Deal With?
There are other membership-style companies that Costco must rival to garner customer loyalty. In addition, larger online retailers may have greater digital capabilities such as larger inventory or greater delivery capacity.
As an enthusiast deeply immersed in the world of retail and financial markets, let me delve into the intricate details of the Costco Wholesale Corporation and provide insights into the concepts outlined in the article.
Costco's stock performance has been nothing short of impressive, nearly doubling in just two years. This surge is not just a stroke of luck; it's a reflection of the company's unique business model. Costco keeps prices extremely low, just above cost, relying heavily on membership sales to compensate for the low margins on products. Now, let's dissect the key concepts highlighted in the article:
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Business Model:
- Costco's business model revolves around maintaining ultra-low prices, relying on memberships for revenue.
- The company sells some of its own brands, contributing additional profit.
- Majority of sales are in-person, in-warehouse, emphasizing the importance of memberships.
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Financial Performance:
- Costco's annual dividend yield is approximately 0.8%, with an announced increase to $1.02 per quarter in April 2023.
- In 2022, Costco achieved a remarkable membership renewal rate of 93% in the U.S. and Canada.
- Company-wide net sales for fiscal year 2022 exceeded $222 billion, marking a 16% increase from 2021.
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Risks to Business Model:
- Consumer preferences pose a significant risk. A shift could leave Costco with unwanted, perishable goods.
- Heavy dependence on specific geographical regions, especially in the U.S. and Canada.
- Membership dependence is a critical factor, with potential threats from competitors like Walmart's Sam's Club.
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Omnichannel and E-commerce:
- Costco, traditionally focused on in-person sales, is making strides in e-commerce to stay competitive.
- Investments in delivery services for larger goods and testing curbside pickup indicate a move towards omnichannel experiences.
- Website sales represented about 7% of net sales in 2022, showcasing Costco's growing digital presence.
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Bulk Items and Delivery:
- Buying in bulk poses challenges for consumers. Costco aims to address this through online services.
- Limited online SKUs (Stock Keeping Units), but the acquisition of Innovel Solutions in 2020 enables last-mile delivery for bulky products.
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Competitive Strategy:
- Costco's competitive strategy centers around driving customer loyalty through memberships.
- Members often exhibit loyalty to the Costco brand, even with higher-than-average margins on Kirkland Signature products.
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Mission, Strategy, and Values:
- Costco's mission is to provide quality goods at the lowest prices possible.
- The company is strategically aligning its values with its mission and strategy by investing globally, promoting memberships, and expanding its digital presence.
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Competitive Threats:
- Costco faces competition from other membership-style companies and larger online retailers with superior digital capabilities.
In conclusion, Costco's success is not just a result of market trends but a testament to its well-crafted business model, adaptability in the digital age, and a strategic focus on customer loyalty through memberships. As the retail landscape evolves, Costco seems poised to navigate the challenges and maintain its strong market position.
