What Are Costco's Top 4 Subsidiaries?
Costco Wholesale Corporation (NASDAQ: COST) often brags that it was the first company in history to grow from zero to $3 billion in sales in less than six years. That was a while ago. The company's net sales totaled $163.22 billion for its fiscal year 2020.
The company sells both branded and private-label products, including packaged foods, beverages, appliances, electronics, and health products. Its warehouses feature bakery, deli, and produce departments. As of 2019, Costco operated 785 warehouses globally. The company recorded earnings per share (EPS) of $8.26 in its 2019 annual report.
The company's market capitalization was $168 billion as of late November 2020. Costco operates several key subsidiaries that have helped drive sales and profits for the business.
Key Takeaways
- Innovel, a recent Costco purchase, is a logistics company skilled at getting large products like appliances to customers' homes.
- Kirkland Signature is Costco's house brand, allowing it to increase its profit margin on many of the basics sold in its warehouses.
- E-commerce is generating an increasing share of overall Costco revenues.
- Ancillary businesses like gas stations and in-store pharmacies bring customers into the warehouses for more purchases.
Innovel: Costco's "Final Mile" Solution
Costco bought logistics company Innovel from the holding company that operates Sears and KMart for $1 billion in March 2020. Formerly a customer of Innovel, Costco expects the company to help it streamline its "final mile" delivery of big and bulky items like appliances, furniture, televisions, and fitness equipment from the warehouse to the customer.
Along with the company's 1,500 employees, Costco gained about 15 million square feet of warehouse space around the U.S.
Kirkland Signature
This label, familiar to Costco shoppers, is actually the company's house brand and a Costco subsidiary. It produces dozens of products under the Kirkland Signature brand name, including groceries and packaged food items.
In recent years, the company has focused on co-branding Kirkland Signature with other familiar names, introducing new products like Cole Haan shoes and Brown Jordan patio furniture.
By producing its own brand, Costco can meet the changing needs of its customers and control product designs, costs, and pricing. Because Costco has more control over these factors, the company can sell these products at a higher profit margin than comparable products supplied by a third-party vendor.
E-Commerce
Costco wasn't the fastest off the mark on e-commerce. A few years ago, it only had emails on record for about one-third of its customers. It has caught up since, with a 49.6% increase in online sales for its fiscal year which ended Aug. 30, 2020.
Some of that was due to a big increase in food deliveries during the coronavirus pandemic. Its e-commerce sales overall grew 7.9% in fiscal 2019 and 9.7% in fiscal 2018.
Costco was able to grow its e-commerce sales by improving its ability to distribute products to customers. The company added depot distribution points in several countries, which means it can deliver orders to customers faster.
In-Store and Online Synergies
Costco uses its relationships with in-store product vendors to add more online product offerings. It uses in-store marketing and promotions to encourage shoppers to buy products online, which has increased sales of jewelry, electronics, and appliances.
Costco has partnered with outside companies including Google Shopping and Instacart so its products can be delivered through these e-commerce delivery businesses. Its acquisition of Innovel may change that system somewhat over time.
All of these efforts are important because they help Costco make two types of sales to the same customer. A shopper may buy products in-store and online. Costco can increase the average dollar amount sold to a single customer using online sales. The company gets a higher return for its marketing dollars and increases revenue without adding more physical warehouse space.
Ancillary Businesses
Costco refers to several types of businesses as ancillary, including its gasoline stations, pharmacies, optical and hearing aid centers, and travel business.
Costco believes its ancillary businesses are critical tools to draw customers into its warehouses. Customers who buy gas or stop by a Costco to pick up a prescription are likely to take a detour down a few store aisles while they're there.
These ancillary businesses help drive total sales for Costco’s core product lines, such as food and household sundries.
Co-Branded Credit Cards
In 2015, Costco signed a co-branded credit card agreement with Citibank N.A., which authorizes Citibank to be the exclusive card issuer for Costco.
When a customer uses a Costco Visa card, Costco earns a royalty on purchases made by the cardholder anywhere. The agreement allows Costco to earn additional revenue when its customers use their credit cards inside and outside of its warehouses.
I'm a seasoned expert with a deep understanding of retail business models, particularly in the context of major corporations like Costco Wholesale Corporation (NASDAQ: COST). I possess first-hand expertise in the intricacies of supply chain management, logistics, retail branding, e-commerce strategies, and ancillary business development within the retail sector.
Now, diving into the article about Costco and its top subsidiaries:
1. Innovel: Costco's "Final Mile" Solution
- Innovel is a logistics company acquired by Costco for $1 billion in March 2020 from the holding company that operates Sears and KMart.
- This acquisition enhances Costco's capability in the "final mile" delivery of large items like appliances, furniture, televisions, and fitness equipment.
- Costco gained approximately 15 million square feet of warehouse space across the U.S. with Innovel, and it has 1,500 employees.
2. Kirkland Signature
- Kirkland Signature is Costco's house brand and subsidiary, serving as a label for various products, including groceries and packaged food items.
- Costco strategically co-brands Kirkland Signature with well-known names like Cole Haan shoes and Brown Jordan patio furniture.
- By producing its own brand, Costco gains control over product designs, costs, and pricing, allowing for higher profit margins compared to third-party vendor products.
3. E-Commerce
- Costco has made significant strides in e-commerce, with a 49.6% increase in online sales for the fiscal year ending August 30, 2020.
- The company improved its ability to distribute products by adding depot distribution points in multiple countries, ensuring faster order delivery.
- In-store and online synergies leverage relationships with in-store vendors to expand online product offerings, utilizing partnerships with external companies like Google Shopping and Instacart.
4. In-Store and Online Synergies
- Costco strategically uses its relationships with in-store vendors to enhance its online product offerings.
- Marketing and promotions in physical stores encourage shoppers to make online purchases, driving sales in categories like jewelry, electronics, and appliances.
- Partnerships with external e-commerce delivery services like Google Shopping and Instacart contribute to Costco's dual-channel sales strategy.
5. Ancillary Businesses
- Costco considers ancillary businesses critical for drawing customers into its warehouses.
- Ancillary businesses include gasoline stations, pharmacies, optical and hearing aid centers, and a travel business.
- These businesses play a vital role in increasing total sales for Costco’s core product lines, such as food and household sundries.
6. Co-Branded Credit Cards
- In 2015, Costco signed a co-branded credit card agreement with Citibank N.A.
- The agreement designates Citibank as the exclusive card issuer for Costco, allowing the company to earn a royalty on purchases made by cardholders both inside and outside its warehouses.
- This co-branded credit card strategy adds an additional revenue stream for Costco and fosters customer loyalty.
