Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
Costco Wholesale (COST)Stock (Discount Clubs Industry, Retail Industry)
 Costco's low prices help the retailer maintain positive growth during the rough economic times. In Q4 2008 for example, as the 2008 Financial Crisis hit its peak, Costco's sales increased by 13%, particularly because of a 9% jump in comparable store sales.[5] Costco's biggest concern is overexpansion and cannibalization, which the company claims had a 2.67% negative effect on its 2008 comparable store sales.[3] As a result, the company has announced it will slow its domestic expansion plans, opening 15 domestic stores in 2008 and 19 planned openings in 2009, down from a peak of 25 new domestic stores in 2005.[1] Costco will instead look to international markets for future growth, with plans to open a new store in Australia and an additional 13 new international markets during 2009-2010.[6]
[edit] Company OverviewCostco operates 512 locations stores of its membership-only warehouse club[1] that sell general merchandise including fresh and packaged foods, appliances, and apparel. Almost 80% of the company's stores are in the U.S., with additional stores in Canada, Korea, Japan, Taiwan, and the United Kingdom.[1] The United States also accounted for almost 80% of the company's sales, followed by Canada at 15% and other international sales representing 7% of its 2008 revenue.[7]  The company focuses on selling high volumes of its merchandise at low prices at its warehouses worldwide, which together earned about $71 billion in revenue in 2008.[2] This represents a 12.5% increase in sales from 2007 which the company attributes to an 8% increase in comparable store sales and the opening of 24 new warehouses during 2008.[4] In 2009, Costco plans to open 25 new locations, 19 of which will be in the U.S.[8] Costco's merchandise categories include:
 [edit] Financial Analysis Costco earned $71 billion in revenue in 2008, a 12.5% increase from 2007.[2] Furthermore, Costco's 2008 sales mark a 50% growth in revenue since 2004[2], primarily due to an average 7.8% annual increase in comparable store sales[2] as well as the opening of an average of 23 new stores each year.[2] In 2008, U.S. sales increased 10.4%, revenue from Canadian operations grew 20.7%, and Costco's other international sales increased by 21.9%.[7] This growth was primarily driven by a 6% and 15% increase in domestic and international comparable store sales each respectively, contributing to an overall 8% increase in Costco's comparable store sales.[2] The increases in comparable store sales were primarily due to slightly higher average amounts spent by consumers as well as higher gas prices.[3] In 2008, Costco operated at a 10.53% gross margin, up slightly from 10.52% in 2007 due to 0.24% increase in sales higher margin categories, primarily food and sundries.[10] Similar to its main competitor Wal-Mart, Costco is also vulnerable to cannibalization from existing stores because of overexpansion. For example, Costco attributes cannibalization to its slowing growth in comparable store sales since 2005- Costco's domestic comparable store sales have increased an average of 6% annually from 2005 to 2008, down from 9% in 2004.[2] Additionally, Costco's 6% increase in comparable store sales in 2008 is deceptive as higher gas prices in 2008 contributed to 2.67% of this growth.[3] As a result, the company has reduced its domestic expansion plans, opening 15 domestic stores in 2008 and 19 planned openings in 2009, down from its peak of 25 new domestic stores in 2005.[1] Costco's operating margin reached 2.77% in 2008, up from 2.55% in 2007, which was mainly due to the slight increase in gross margin.[2] As a result, Costco's net income reached $1.28 billion in 2008, a 18.5% increase from 2007, which outpaced the company's 12.5% growth in revenue.[11]
[edit] Business GrowthFor the month of October 2008 (4 weeks ending November 2, 2008), Costco reported total sales of $5.30 billion, which is an increase of 2% from the $5.21 billion sales made in the same four-week period of 2007. Comparable sales for October for stores outside the US increase by 9% in local currency, while gasoline price increases did not have significant effect on October's sales. Including the effect of foreign currency exchange rate fluctuations, during the four-week and nine-week periods ending November 2, 2008, comparable sales were:
[edit] Trends and Forces[edit] Overexpansion Leads to Cannibalization of SalesCostco's domestic comparable store sales have increased an average of 6% annually between 2005 and 2008, down from 9% in 2004.[2] Like most retailers, Costco's long term sales and net income growth depends primarily on opening new stores and expansion into new markets. However, Costco's overexpansion domestically risks cannibalizing the sales of preexisting stores, essentially competing with itself.  As a result of domestic overexpansion, Costco reduced its expansion plans for 2008 and 2009 and switched focus to opening new stores in new markets internationally. For example, Costco opened 24 new stores in 2008, compared to its 2007 forecast of 35 new stores.[13] Furthermore, the company plans to open a new store in Australia and an additional 13 stores in new international markets during 2009-2010.[6] [edit] Higher Employee Pay Leads to Better PerformanceCostco's employees are paid significantly more than its competitors. For example, Costco employees are paid an average of $16 per hour, while Wal-Mart employees earn an average $9.68/hr.[14] Costco is also known for providing its employees with better benefits- Costco covers almost 90% of its employees health insurance premiums, compared to 60% coverage at Wal-Mart.[15] These higher labor expenses contribute to Costco's 2.77% operating margin[2], which is lower than Wal-Mart's Sam's Club operating margin of 3.65%.[16] The upside to Costco’s high employee costs is increased productivity - in 2005, Costco earned $13,647 in operating profit per hourly employee, compared to $11,039 per employee at Wal-Mart.[14] Additionally, Costco has a lower employee turnover than the competition, which saves them money on employee recruiting and training costs. For example, Costco's employee turnover rate is slightly above 20%, significantly less than the industry average of 65% or Wal-Mart's 50% turnover rate.[14] According to a 2005 Rutgers University Study, Costco's lower turnover rate saves the company between $1.5 to $2 million in hiring and training costs each year.[14] [edit] Low Prices Attract Customers During Weakened EconomyBecause of its low prices and bulk product offerings, Costco is an ideal place for customers to stretch their dollars in times of an economic downturn. For example, the subprime lending crisis and 2007 Credit Crunch drastically reduced the levels of dispensable income for many consumers. As a result, many consumers have turned to Costco for many of their shopping needs. In Q4 2008, Costco's sales grew by 13%, driven primarily by a 9% increase in comparable store sales as consumers gravitated towards Costco's low prices in the weakened U.S. economy.[5] [edit] CompetitionCostco is the largest retailer in the warehouse club market in terms of sales.[2] Costco's main competition is Wal-Mart's Sam's Club. BJ's, a smaller retail warehouse chain, also competes with Costco and Sam's Club. The three companies share a similar business model, selling high volumes of merhandise at low prices in a membership-only warehouse club. Each company sells a similar array of general merchandise, including food, apparel, and gasoline.
 Costco Wholesale2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
|
The Shelf
|
Edit
History
Bookmark
