COST Overview

Founded in 1976 in Kirkland, Washington, Costco Wholesale Corporation (COST) operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities.

Created by James Sinegal and Jeffrey Brotman, Costco first opened their flagship warehouse in Seattle, Washington, in 1983. Offering a wide range of products varying from candy, snack foods, tobacco, alcoholic and nonalcoholic beverages, to appliances, electronics, office supplies, home furnishings, meat, bakery, deli, and produce items.

In the beginning, Sinegal began his retail career at FedMart, a discount department store started in the mid-1950s that was directed towards government employees. Memberships here were $2 per family. During the first year, FedMart was increasingly successful, and over the next 20 year, began to generate more than $300M in sales annually. From there, Sinegal went on to work at Price Club.

As for Brotman, he was an attorney in a family whose heritage dated back to the retailing business in Seattle, and spent much of his childhood within that environment. In 1993, Costco would merge with Price Club to form PriceCostco, effectively doubling the size of each of the parent companies. The name was officially changed in 1997 to Costco.

Upon the merger, the company now consisted of 206 locations producing more than $16B in annual sales. The joining of the two companies also denied Sam Walton, founder of Wal-Mart, the opportunity to merge with Price Club, which he had intended on doing before Costco stepped in.

Membership fees at Costco are $50 per year for Goldstar and Business type memberships, which can be upgraded to an Executive membership for an additional $50 per year. The executive membership, which includes perks such as car purchasing savings, home loans, car insurance and check printing services, also offers those members enrolled in the executive service an annual "2% Rewards Check" of up to $500.00 from Costco on all purchases made. These purchases, however, exclude items such as alcohol, gasoline or tobacco from receiving those benefits.

The company currently competes with Wal-Mart’s Sam’s Club (WMT), BJ’s Wholesale Club (BJ), Target (TGT), Kohl’s (KSS), Lowe’s (LOW), Home Depot (HD), Office Depot (ODP), PetSmart (PETM), Staples (SPLS), Trader Joe’s, Whole Foods (WFMI), Best Buy (BBY) and Barnes & Noble (BKS).

Of those listed above, the main competitor in the membership warehouse industry is Sam's Club. Although Sam's Club has more warehouses than Costco, Costco has higher total sales volume. As of August 2008, Costco operated 512 warehouses comprising 394 in the US and 4 in Puerto Rico, 75 in Canada, 20 in the UK, 8 in Japan, 6 in Korea and 5 in Taiwan. Costco employs about 142,000 full- and part-time employees, including seasonal workers and currently has more than 57 million members.

For fiscal year 2008, the company's sales totaled $71B, with $1.3B of the revenues being net profit. Costco focuses on selling their products at low prices in high volume. These goods are usually bulk-packaged and marketed primarily to large families and businesses. Costco buys the majority of its merchandise directly from manufacturers and routes it to a company-owned depot or directly to its warehouses.

During the fiscal year ending August 2008, sundries, which include candy, snack foods, tobacco, alcoholic and non-alcoholic beverages and cleaning and institutional supplies, accounted for 22% of Costco’s net sales. Additionally, food, including dry and institutionally packaged foods, accounted for 20%. Fresh foods, including meat, bakery, deli and produce, accounted for 12%, while ancillary and other items, including gas stations, pharmacy, food court, optical, one-hour photo, hearing aid and travel, accounted for 17%.

A retailing term, hardlines, which include appliances, electronics, health and beauty aids, hardware, office supplies, garden and patio, sporting goods, furniture and automotive supplies, accounted for 19% of total sales, while softlines, those including apparel, domestics, jewelry, housewares, media, home furnishings, cameras and small appliances, accounted for 10% of sales.

Costco has gradually expanded its range of products and services over the year, as many stores today have tire garages, pharmacies, hearing aid centers, optometrists, photo processors, and gas stations. Costco Optical ranks as the fourth largest optical company in the U.S., and to fill prescriptions through the optical department, a membership at Costco is required.

Like many of the other bulk retailers, Costco does not carry multiple brands when it has its own house brand to market and sell. Costco’s house brand is the Kirkland Signature label. The name is derived from Costco's corporate headquarters being previously located in Kirkland, Washington, between 1987 and 1996. Introduced in 1995, the brand was conceived to provide brand named quality at reduced prices.

In what could be considered a little surprising, Costco also acts as an investment broker and travel agent. In addition, the company has started an automobile purchasing program wherein members can purchase new cars at specially arranged prices, while collaborating with Ameriprise for auto and home insurance for current members as well.

By BetterTrades