A Progressive Digital Media business COMPANY PROFILE Costco Wholesale Corporation REFERENCE CODE: 7EE0FB19-6C6E-4865-AFD1-D601275DC508 PUBLICATION DATE: 17 Jul 2019 www.marketline.com COPYRIGHT MARKETLINE. THIS CONTENT IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED OR DISTRIBUTED Costco Wholesale Corporation TABLE OF CONTENTS TABLE OF CONTENTS Company Overview ........................................................................................................3 Key Facts ......................................................................................................................... 3 SWOT Analysis ...............................................................................................................4 Costco Wholesale Corporation © MarketLine Page 2 Costco Wholesale Corporation Company Overview Company Overview COMPANY OVERVIEW Costco Wholesale Corporation (Costco or 'the company') operates an international chain of membership warehouses. The company offers a limited selection of nationally branded and private-label products across a wide range of merchandise categories, including foods, sundries, hardlines, fresh foods, softlines and other (gas stations and pharmacy), at lower prices. The company classifies its business operations into three segments, classified based on geographical presence. Costco has operations in the US, Puerto Rico, Canada, the UK, Korea, Taiwan, Japan, Mexico, Spain and Australia. The company is headquartered in Issaquah, Washington. The company reported revenues of (US Dollars) US$141,576 million for the fiscal year ended September 2018 (FY2018), an increase of 9.7% over FY2017. In FY2018, the company’s operating margin was 3.2%, compared to an operating margin of 3.2% in FY2017. In FY2018, the company recorded a net margin of 2.2%, compared to a net margin of 2.1% in FY2017. Key Facts KEY FACTS Head Office Costco Wholesale Corporation 999 Lake Drive Issaquah Washington Issaquah Washington USA Phone 1 425 3138100 Fax Web Address www.costco.com Revenue / turnover (USD Mn) 141,576.0 Financial Year End September Employees 143,000 NASDAQ Ticker COST Costco Wholesale Corporation © MarketLine Page 3 Costco Wholesale Corporation SWOT Analysis SWOT Analysis SWOT ANALYSIS Costco operates an international chain of membership warehouses. The company offers an attractive value proposition to its customers, which enables it to drive customer traffic and generate strong membership renewals. However, increasing labor costs and healthcare costs in its major market could affect the company's profitability. Strength Weakness Low Cost Operating Model Overdependence on the US and Canadian Markets Sustainability Initiatives Limited Product Choice Price Positioning Leads to Increased Customer Loyalty Opportunity Threat Growing Online Retail Sales Increasing labor costs in the US Favorable Trends in the Global Consumer Electronics Intense Competition Market Foreign Exchange Rate Fluctuations Growing Demand for Private Label Brands Strength Low Cost Operating Model Costco's processes are made efficient at every point, which, in turn, helps the company to maintain margins despite of low price positioning. The company offers only a limited selection of national brands and private labels across a wide merchandise range. Since these are offered at low prices, the inventory turnover is very rapid which reduces the inventory costs. Costco encourages volume purchasing and therefore, the sales volume is kept high despite low prices. The company's high sales volume and rapid inventory turnover enable it to sell and be paid for inventory before Costco is required to pay the merchandise vendors. As and when the sales increase and inventory turnover becomes more rapid, a greater percentage of inventories are financed through payment terms provided by suppliers rather than by the working capital, thereby reducing the company's financing costs. Additionally, the company's streamlined distribution network enables it to reduce certain redundant costs. Costco's depots receive container-based shipments from manufacturers and reallocate these goods for shipment to the individual warehouses, generally in less than 24 hours. Through such a process, Costco maximizes freight volume and handling efficiencies which leads to low receiving costs as the process eliminates many of the costs associated with multiple-step distribution channels. Costco relies on the attractive value proposition to gain customers and therefore operates no-frills, selfservice warehouse facilities. Merchandise is stored on racks above the sales floor itself, and pallets containing large quantities of each item are displayed, thereby reducing labor required for handling and Costco Wholesale Corporation © MarketLine Page 4 Costco Wholesale Corporation SWOT Analysis stocking. The company engages in very limited marketing programs, including community outreach programs to local businesses in new and existing markets and direct mail to prospective new members. These efficient processes enable Costco to maintain its price positioning and sustain competition in the industry. Sustainability Initiatives To maintain its business in a sustainable and environmentally responsible manner, the company focuses on reducing its carbon footprint, enhancing warehouse energy management systems, expanding packaging design initiatives, and developing its recycling and waste stream management systems. Costco focuses on features such as green building design and sustainability while constructing its warehouses. Majority of its main building structures use 80% recycled steel materials which helps minimize the amount of material utilized. Furthermore, the company operates large rooftop solar photovoltaic systems at 91 warehouses in Arizona, California, Colorado, Hawaii, Japan, New Jersey, New Mexico, New York, Ohio, Puerto Rico, Spain and Utah. These systems are projected to generate 77 million kilowatt-hours of electricity annually. The company also recycles and renews waste generated by warehouses into usable products, biofuels or compost, or to use as feed stock. In addition, Costco has a warehouse program where meat scraps and rotisserie chicken grease are recycled by third parties to produce animal feed, biodiesel fuel, soaps, and other products. These grease recovery systems in most of the company's warehouses divert millions of pounds of grease from the waste stream on an annual basis. The company's electronic waste (E-waste) diversion program recycled 4,132 tons, and the company further recycled 409,482 tons of baled corrugate during the same period. Moreover, it continues to expand the use of non-chemical water treatment systems used in the cooling towers to reduce the amount of chemicals going into sewer systems. Therefore, through its focus on being environment friendly and its sustainability-driven innovation, the company can increase its product awareness, besides considerably reducing its costs and catering to the growing demand of green products. Price Positioning Leads to Increased Customer Loyalty Costco positioned itself as a price leader to acquire market share. According to the industry sources, the company maintains a maximum markup of 16% for branded and private label products. Private label items offer a significant amount of savings compared to the leading national brand. The average markup on the company's merchandise is much lower compared to more than 26% at supermarkets and department stores. Offering attractive value proposition to the customers acts as a competitive advantage for the company. Value price positioning enables Costco to drive customer traffic and generate strong membership renewals. The company's membership renewal rate was 90% in the US and Canada, and 87% worldwide in FY2017. The penetration of executive membership offered by Costco apart from its other membership programs has also been increasing. The executive membership program offers an additional 2% (up to a maximum of approximately USD750 per year) discount to the members on qualified purchases that can be redeemed at Costco warehouses. At the end of FY2017, executive members represented 38% of eligible cardholders. Executive members generally spend more than other members, and the percentage of Costco's net sales attributable to these members continues to increase. Costco Wholesale Corporation © MarketLine Page 5 Costco Wholesale Corporation SWOT Analysis In the recent past, there has been an increase in the price sensitive customer base and industry reports suggest the increase in demand for value products at low price points. In the economy characterized by cautious consumer spending, value retailers and warehouse retailers are expected to fare well. Thus, shift in consumer preference for value products and the attractive price proposition of Costco will enable the company to attract a large customer base. Additionally, the customer loyalty the company enjoys will enable it to retain customers in a highly competitive market. Weakness Overdependence on the US and Canadian Markets Costco is highly dependent on the US and Canada for revenue generation. In FY2017, the US and Canadian markets together contributed 72.7% to the consolidated net sales of the company. Furthermore, within the US, the company is highly dependent on its California operations, which represented 30% of the US net sales in FY2017. The company also has a larger percentage of higher volume warehouses in California, compared to other markets. Any decline in the sales of the US (particularly in California) and Canadian operations due to weakening demand trends, increase in unemployment rates, increase in labor costs and other factors could significantly affect the company's sales. Limited Product Choice Costco offers a limited selection of products. A typical Costco warehouse stocks an average of about 3,700 products for sale at a particular time. Many competitors of the company such as discount retailers, supermarkets and supercenters offer a larger selection of products at a particular time. For instance, The Home Depot offers approximately 30,000 to 40,000 products at its stores. Wal-Mart’s membership warehouse, Sam’s Club offers around 51,000 products across five merchandise categories such as grocery, home and apparel, technology, health and wellness, and fuel and others. Customers prefer a seamless shopping experience and prefer one stop shop options. Thus, limited product offering may act as a competitive disadvantage and adversely impact the average spend of customers at Costco's stores. Opportunity Growing Online Retail Sales Interactive online shopping is increasingly being preferred over traditional shopping by consumers who have become more vigilant about spending money. A According to in-house report, the US online retail sector recorded growth of 15.5% in 2017 and is expected to reach a value of US$447.4 billion by 2020, an increase of 50.3% since 2017. The US online retail sector generated total revenue of US$297.8 billion in 2017, with an anticipated CAGR of 8.5% over 2017–2022, which will drive the sector to a value of $447.4bn by the end of 2022. The online retail sector is heavily fragmented, with a number of large companies including Amazon. E-commerce sales in the third quarter of 2017 accounted for 9.1% of total sales. The use of smart phones, tablets and other internet enabled devices contributed to growing Ecommerce market. The online retail sector’s growth will continue to be strong during the forecast period, Costco Wholesale Corporation © MarketLine Page 6 Costco Wholesale Corporation SWOT Analysis largely driven by supply; the largest multichannel retailers will focus on increasing their proportion of online sales, while Amazon, as the leading online retailer, will continue to heavily expand its operations. Costco operates its online business through its websites, www.costco.com, www.costco.ca, www.costco.com.mx, www.costco.co.uk, www.costco.co.kr and www.costco.com.tw. Therefore, Costco can leverage its online presence to serve a large customer base, which, in turn, will augment its revenue. Favorable Trends in the Global Consumer Electronics Market The demand for consumer electronics is expected to increase in the next few years. According to industry sources, the global consumer electronics market is expected to grow at a compound annual growth rate (CAGR) of more than 15% during 2016–20. Rising disposable income among the middle class in major Asian markets is expected to increase the demand for consumer electronics, such as smartphones, tablets, and TVs. In developed markets of North America and Europe, the market will be influenced by technological innovations to the existing models. Costco offers a wide range of electronic products, including televisions, cameras and camcorders, security and surveillance, and car electronics. Therefore, the company can improve its sales from this category amidst the increasing demand. Growing Demand for Private Label Brands Costco stands to benefit from the increasing demand for private label products. Following a period of slow and negative economic growth, private label sales are rising as consumers increasingly shop to a budget. While price is a prime factor driving private label sales, improvements in packaging and quality have helped to remove the stigma attached to buying store brands. Private label sales have been increasing as consumers increasingly shop within the budget. While price is a prime factor driving private label sales, improvements in packaging and quality have helped remove the stigma attached to buying store brands. The improving quality of private label products assures higher demand for such products. According to industry estimates, the global private-label penetration is expected to reach 50% by 2025. Costco offers private label items under the brand Kirkland Signature and Costco Wholesale. Its private label products include juice, cookies, coffee, housewares, luggage, clothing and detergent. Costco has a strong opportunity to increase its profit margins in the future. Threat Increasing labor costs in the US Tight labor markets, increased overtime, government mandated increases in minimum wages and a higher proportion of full-time employees have resulted in an increase in labor costs for many of the employers. The federal minimum wage rate in the US reached US$7.25per hour in January 2018. Nearly, 18 states and 20 cities, including New York City, Washington, D.C., and California cities increased their minimum wage to US$12 and above. Arizona and California increased their minimum wage by US$0.5 per hour to US$9.80 and US$11 per hour, respectively; and Alaska increased their minimum wage by 0.04 to US$9.84. Colorado, Florida, Hawaii, Maine and Michigan increased their minimum wages to US$10.2, US$8.25, US$10.10, US$10 and US$9.25, respectively. Moreover, New Jersey, Ohio, Washington and Rhode Island increased their minimum wages to US$US$8.6, US$8.3, US$11.5 and Costco Wholesale Corporation © MarketLine Page 7 Costco Wholesale Corporation SWOT Analysis US$10.1, respectively. Intense Competition The company operates in a highly competitive industry, where players primarily compete on the basis of price, merchandise quality and selection, location and customer service. Costco competes with warehouse club operations across the US and Mexico (primarily Wal-Mart's Sam's Club and BJ's Wholesale Club). It also competes with global, national and regional wholesalers and retailers, including supermarkets, supercenters, department and specialty stores, gasoline stations, and internet retailers across the world. Costco's competitors in the general merchandise retail category include Wal-Mart, Target, Kroger and Amazon.com. The company also competes with operators selling a single category or narrow range of merchandise, such as Lowe's, Home Depot, Office Depot, PetSmart, Staples, Kohl’s, Trader Joe's, Whole Foods, CVS, Walgreens, and Best Buy. Some of these competitors may have greater financial resources, better access to merchandise and greater market penetration than the company. Also, the evolution of retailing in online and mobile channels has improved customers' ability to compare similar products with different digital devices, further intensifying competition. Thus, such intense competition could have a negative impact on Costco's market share. Foreign Exchange Rate Fluctuations Though Costco's widespread geographic presence has its benefits, it also exposes the company to foreign exchange rate fluctuations. Costco has operations in the US, Puerto Rico, Canada, the UK, Korea, Taiwan, Japan, Mexico, Spain and Australia. Thus, the company generates revenue in many other currencies besides its domestic currency which is the US dollar. In FY2017, countries other than the US accounted for 28.3% of the company's overall revenue. Therefore, the company's revenues are subject to fluctuations in foreign exchange rates of all applicable currencies. While a strong US dollar decreases the revenues of the company, the weakening currency would have the reverse effect. During FY2017, changes in foreign currencies relative to the US dollar negatively impacted diluted earnings per share by USD0.24, largely driven by changes in the Canadian dollar and Mexican peso. Therefore, the revenues of the company are exposed to high risk due to the fluctuations in all applicable foreign exchange rates. Costco Wholesale Corporation © MarketLine Page 8 Copyright of Costco Wholesale Corporation SWOT Analysis is the property of MarketLine, a Progressive Digital Media business and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.
