Costco

Costco Wholesale Corporation

Costco logo Costco logo
Company type	Public
Industry	Retail (warehouse club)
Founded	1976, San Diego, California
Headquarters	Issaquah, Washington
Key people	James Sinegal, Founder & CEO Jeffrey Brotman, Founder & Chairman
Products	Retail (Specialty) Kirkland Signature Brand
Revenue	$47.15 billion USD (2004)
Operating income	1,969,000,000 United States dollar (2008)
Net income	1,283,000,000 United States dollar (2008)
Total assets	68,994,000,000 United States dollar (2023)
Number of employees	103,000
Website	www.costco.com

Costco Wholesale Corporation Nasdaq: COST is the largest membership warehouse club chain in the world, and headquartered in Issaquah, Washington, United States, with its flagship warehouse #1 in nearby Seattle.

History

Costco is the result of a 1993 merger between The Price Company and Costco Wholesale. The Price Company, originator of the wholesale club sales format, was originally founded by Sol Price, in 1976 using the "Price Club" name for its warehouse locations. The first Price Club was housed in a Quonset hut in the Rose Canyon area of San Diego. Its unique model of serving primarily small-business owners proved very successful, prompting James Sinegal, who had previously been employed with The Price Company, and Jeffrey Brotman to open the first Costco warehouse location in Seattle. This new venture also proved very successful; Costco became the first company ever to grow from zero to $3 billion in sales in less than six years. After the 1993 merger, the combined company had 206 locations generating $16 billion in annual sales, and was led primarily by the management team that had been with Costco. Costco's web site was first introduced in 1995, and it started conducting e-commerce in 1998 at Costco.com. The company's corporate headquarters, initially in the city of Kirkland, Washington, is now in Issaquah, Washington.

Costco today

Patrons entering a typical Costco warehouse

As of December 2005 Costco has 471 locations:

• 346 in the United States and Puerto Rico,
• 66 in Canada,
• 28 in Mexico,
• 17 in the United Kingdom (1 additional store opening soon),
• 5 in South Korea,
• 5 in Japan, and
• 4 in Taiwan.

Costco employs about 126,000 full- and part-time employees, including seasonal workers, and for fiscal year 2005, ended in August, the company's store sales totaled $51.9 billion. Costco's closest competitor, Wal-Mart-owned Sam's Club, has two hundred more stores than Costco, yet routinely earns more than $1 billion less in revenues each year. As of 2005, Sinegal and Brotman act as Chief Executive Officer and President and Chairman, respectively.

Sales model

Typical Costco warehouse interior

Costco's success is a result of its focus on selling products at low prices, often at very high volume. These goods are usually bulk-packaged and sold primarily to large families, small businesses and small business owners' families. As a warehouse club, Costco is open to only members and their guests, except for purchases of liquor, gasoline and prescription drugs in some US states due to state law and liquor license restrictions. The food court where one can purchase fast food items such as hot dogs and pizza is open to both members and non-members. Memberships must be purchased in advance; the cheapest membership costs $45 for one year. Purchases made at Costco's website do not require a membership, however a 5% surcharge is added to purchases made by non-members. Purchases made with gift cards, called Costco cash also do not require a membership.

Costco is able to charge sometimes astonishingly low prices by keeping overhead low, returning savings to consumers. In fact, many senior executives, including Costco's CEO, use office furniture that was purchased from the Boeing Company when Costco was started. Costco doesn't have a public relations department either, believing it is unnecessary. The corporate jet is not used unless it is filled to capacity. The company's warehouses are sparsely decorated, with the exception of colorful marketing banners. Most products are delivered to the store on shipping pallets, and the pallets are used to display products for sale on the retail floor. This contrasts with other retailers who take the additional trouble to break down pallets and stock individual products on shelves. Costco caps its profit margin on most products at 14% and allows itself slightly higher margins only on its Kirkland Signature store brand (a name derived from its previous headquarters in Kirkland) with a strict 15% profit limit. [citation needed]

Besides frugality, Costco is also famous for its idiosyncratic inventory practices. Unlike many retailers, stores do not maintain a full range of every product type and every major brand within each product category. Rather, stores carry only a few very popular product categories and selected products within each category.

Costco concentrates more on overall value than the lowest possible price for its product range. Many of the products it stocks are high quality at a reasonable cost instead of inferior quality at a low price.

In some product categories, the company does not rotate products often, so customers can expect certain brands of snacks or beverages to be in stock indefinitely. In many other categories the company constantly seeks the best deals currently available, so products will appear and disappear over short periods of time. This encourages consumers to regularly visit their local warehouse for surprise deals.

Since Costco has such high sales volume and rapid inventory turnover, it is able to receive cash from the sale of a large portion of its inventory before it has to pay back its suppliers. This use of float is a major advantage in its own right; Costco is essentially borrowing money from their suppliers with no interest.

Employees

Costco is noted for providing full benefits and comparatively generous compensation to its employees. For instance, a cashier with four years of experience can earn more than $40,000 with full benefits, including medical, dental, Rx, disability, and life, and is even entitled to participate in a 401k program and purchase stock options.

These perks are the highest in the industry and especially surprising considering Costco's price-centric sales strategy (similar to Wal-Mart's, a company criticized for its low pay and refusal to offer benefits to some employees). A recent estimate (New York Times, July 17, 2005) puts Costco's average pay at $17 per hour, or 42% higher than Walmart-owned "Sam's Club". Wall Street analyst Bill Dreher of Deutsche Bank criticized Mr. Sinegal in 2004, saying "it's better to be an employee or a customer than a shareholder." Sinegal counters that good wages and benefits more than pay for themselves by holding down employee turnover, reducing employee theft and by appealing to a certain percentage of affluent customers who appreciate that the low prices do not come at the workers' expense.

Products

Typical Costco food concession

Over the years, Costco has gradually expanded its range of products and services. Initially it preferred to sell only boxed products that could be dispensed by simply tearing the shrinkwrap off a pallet. It now sells many other products that are more difficult to handle, such as fresh produce, meat, seafood, fresh baked goods, flowers, clothing, books, software, home electronics, jewelry, art and furniture. Many stores have tire garages, pharmacies, Hearing Aid Centers, optometrists, photo processing and gas stations. Some locations have liquor stores which are usually separate in order to comply with liquor license restrictions. Costco also acts as a broker for services such as investment products and travel including air travel and cruise vacations. They have also introduced an automobile purchasing program where members can purchase new cars at specially arranged prices.

Costco has a very generous product return policy that allows customers to return most products indefinitely. Unlike other stores, Costco allows returns of opened media. Many people take advantage of this with DVDs, software and other media. Buyers effectively "rent" the product temporarily by buying and later returning it for a refund. Computers, which most retailers loathe to accept for a refund, have a six-month return period. Even the membership fee is fully refundable at any time.

Costco is also well known for its hot dog stands. These began as stand-alone impromptu arrangements outside of warehouses but are now built directly into current warehouses as actual mini-restaurants. The price of the hot dog and soda is still the same price as it was when they first opened ($1.50)- a price Jim Sinegal has stated will remain indefinitely. The hot dogs used are kosher and the brands used are Sinai Kosher or Hebrew National. The company has added other types of food, such as pizza, chicken bakes, chicken salad, smoothies, churros, pretzels and ice cream. The chicken strips found in chicken bakes are the same chicken strips used in the chicken salads. A yearly event (usually in mid-July) is pizza week, where $3 coupons are distributed for whole pizzas.

Criticism

Costco tore down the Casino de la Selva in Cuernavaca, Mexico, to build a store there and has faced opposition[1] from TIAA-CREF shareholders as well as its own shareholders[2]. Costco has issued a document[3] clearly leveled at the charges of mural damage and unnecessary tree removal.

External links

• Official website
• Costco Investor Relations website
• Costco profile at BuyBlue.org
• Learn More About Costco
• "Merchandising masters: Costco continues to clobber competition"
• Costco's Dilemma: Is Treating Employees Well Unacceptable for a Public Corporation? Wall Street Journal, March 26, 2004 Article detailing Costco's relatively generous compensation for its employees (with comparison to Wal-Mart) and pressure from Wall St.
• How Costco Became the Anti-Wal-Mart, New York Times, July 17, 2005
• Company for the People Seattle Weekly, December 15 - 21, 2004, Article which contrasts Wal-Mart with employee-friendly Costco.