Costco Companies, Inc.
Presented by Jose D. Carmona
May 10, 2012
1. Executive Summary
Costco Wholesale Corporation, which began operations in 1983 in Seattle, originated the membership wholesale club retail concept. By providing low prices on consumables like fresh foods, health and beauty care items, high-quality apparel, electronics, jewelry and other general merchandise, the company pioneered the retail concept that encourages members to visit regularly to achieve savings. In the meantime, the retailer has been successful in encouraging members to spend the savings on impulse big-ticket, discretionary purchases. Today, Costco operates about 278 membership warehouse stores across 24 US states. Costco has 16 million members that have provided almost $400 million in fees. Costco has a net income of $312 million on sales of $21.5 billion. The company's stores stock 3,900 products on average, ranging from alcoholic beverages to appliances to fresh food. Clients become a member by paying an annual fee to shop at Costco warehouses. This membership format is designed to promote customer loyalty and provide a recurring revenue stream, which in turn helps the company lower retail prices. Costco member renewal rates are strong, and have varied between 85.0% and 88.0% during the past five years. In response to market request, Costco has developed a portfolio of new services including auto and home insurance, mortgage and real estate services, long distance telephone plans, credit card processing, and check and business forms printing. Costco is offering these new services because it has been possible to achieve the 20% to 40% discounts from the preferred vendors. These new services would only be obtained by signing up for the “Executive” membership for an annual fee of $100. The main objective of having the “Executive” membership is to make it more attractive for existing business and higher-end members to come to the warehouse and buy more from Costco. With the implementation of the marketing plan, Costco may create exclusivity and a bond with the selected members. For instance, business customers account for 60% of total sales. Unlike other club formats, this strategy involves a lower shopping frequency and less range, than conventional competitors. The “Executive” membership concept is very important to the company. First, the “Executive” membership provides a way for the company to pre-select the demographics of its customer base without having to do all the extensive research that would otherwise be required. In addition, the test market shows that the services could be profitable. If the upgrade rate generated by the market test held nationally, services would have a one-year pay back. Services have a one-year payback compared to the five-to six- year payback for building and stocking a warehouse.
2. Market Analysis
The Warehouse Clubs and Supercenters industry has been one of the fastest-growing industries in the retail sector. Experts estimates that revenue will increase at an average annual rate of 3.8% in the next five years to total $413.4 billion. This growth has been enabled by the industry's ability to pass down lower prices on a range of merchandise to clients. In fact, the industry attracted new value-focused clients, leading to significant revenue growth. In the next five years, revenue is expected to grow an additional 4.8% due to rising consumer disposable income. Costco has identified that most business and higher-end members are the most profitable ones because they spend more with the company over time, cost less to maintain, and recommend us to potential buyers. Eighty-five percent of heavy wholesale club shoppers are from the upper income groups. Consumers account for 76% of memberships, but only 40% of sales; businesses account for 24% of membership and 60% of sales, but it is estimated 50% of business sales are for household use. The Costco...
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