Costco
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| Costco Wholesale Corporation | |
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| Type | Public (NASDAQ: COST) |
| Founded | 1983, Costco, Seattle, Washington |
| Headquarters |  Issaquah, Washington |
| Key people | Jim Sinegal, Founder & CEO Jeffrey Brotman, Founder & Chairman Richard Galanti, CFO Dick DiCerchio, COO |
| Industry | Retail (Warehouse Club) |
| Products | Retail (Specialty) Private Label - Kirkland Signature |
| Revenue | $64.4 billion USD (2007) |
| Employees | 132,000 |
| Website | www.Costco.com |
Costco Wholesale Corporation (NASDAQ: COST) is the largest membership warehouse club chain in the world based on sales volume, headquartered in Issaquah, Washington, United States,[1] with its flagship warehouse in nearby Seattle.[2] Costco's Canadian operations are based in Ottawa, Ontario.[3] It is the fourth biggest general retailer in the United States, after Wal-Mart, The Home Depot, and Kroger.
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[edit] Wholesale club history – from Price Club to Costco
In the mid-1970s, small business owners had no options other than to buy their products and supplies from regional wholesalers or cash-and-carry operations. Sol Price set out to offer an alternative. In 1976, with $800,000 of his own, $1 million raised among local California small business owners, and an additional $500,000 from former FedMart employees, Price, along with his son Robert, formed the Price Company and opened the first Price Club store in San Diego. Price's other son, Laurence, declined to join the new company.
Price Club represented a revolution in retailing. Its concept was simple: it would offer a small selection of products covering a broad range of goods and sell in bulk in order to keep prices low, usually at no more than a 10 percent markup over the wholesale cost. To maintain such discount prices, overhead was kept to a bare minimum. Products were stocked directly on the selling floor in minimally decorated warehouses built on cheap industrial land, sales help was almost nonexistent, and there was no advertising, except to announce the opening of new stores. Selection was limited, offering the broad range, but not the depth and consequent inventory burden, of the typical department store. Products were bought in bulk directly from the manufacturers. Low margins were further offset by rapid inventory turnover, as high as 20 turns a year, allowing stores to pay suppliers quickly and achieve added early payment discounts. Membership was initially limited to small business owners, with the membership fee offsetting overhead costs. Restricted membership reduced the risk of bad checks and shoplifting because members would be more financially secure than the general buying public. The store also refused to accept credit cards, in part to avoid the cost of their administration and credit card fees of as much as 1.5 percent.
Price's first year went poorly, with losses of $750,000 on sales of $16 million. Price Club responded by broadening its membership base to include members of selected credit unions and savings and loan associations and government, utility, and hospital employees. Additional stock sold to friends generated enough capital to keep the company in business, and, by 1978, Price had recovered sufficiently to open its second warehouse in Phoenix, Arizona. In that year, Laurence Price borrowed money from the Price Company to open a tire mounting and battery installation shop next to a Price Club store. The new shop leased its space from Price, servicing the tires and car batteries sold there.
The Price Company continued to expand, opening two more stores, in Arizona and California, and, when it went public in 1980, was already generating annual sales of $150 million. Business boomed among customers who appreciated the no frills approach in exchange for low prices, and their word of mouth remained the company's most important, and only, advertisement.
The typical Price Club was a marked contrast to the department stores of the day. Located in industrial districts on a city's outskirts, where land and building costs were low, a Price Club store was housed in little more than a large warehouse space, generally from 100,000 to 120,000 square feet (11,000 m²). Goods, ranging from five-pound bags of rice and five-gallon jars of peanut butter to tires, televisions, and snowblowers, were loaded by forklift directly onto 18-foot (5.5 m)-high shelves. Bulk packaging of smaller items appealed both to the small business owner and to families. Personnel and administration costs were also kept to a minimum by restricting store hours to a single-shift, eight-hour day. The stores had no expensive, trained sales staff, such as those found in department stores. In later years, the introduction of computerized scanning devices further reduced the need for personnel.
The rising inflation of the 1970s aided the success of the Price Club concept. Customers proved they were willing to travel to an out-of-the-way location for the best prices. Soon, Price began acquiring additional land and properties, forming a subsidiary, TPCR Corporation, to develop and operate land in excess of Price Club needs. Reasoning that increased traffic would offset increased competition, Price entered partnerships with developers, who would construct additional retail buildings, splitting rents with the Price Company. Price stepped up its expansion only slightly. By 1984 it had added 16 new stores, entering New Mexico and building two stores in Virginia. The East Coast proved a somewhat less accessible market, with suitably priced, commercially zoned land difficult to find. Consumers on the East Coast also faced heavier traffic when traveling to the stores' typically remote locations. The company's desire to own the land under stores they built themselves was another factor that kept the pace of its expansion slow. Nevertheless, Price moved into Maryland and formed a joint venture with Steinberg Corporation to operate Price Clubs in Canada. In 1985, Price posted profits of $45 million on sales of $1.9 billion.
By then, Sol Price's warehouse concept had grown to a $4 billion per year industry. In 1983, Price was suddenly faced with new competitors who were successfully copying the Price Club idea. Wal-Mart's Sam's Clubs quickly became a giant in the young industry, with added competition from Kmart's PACE Memberships Clubs, and from Costco, whose Seattle, Washington-based Costco Wholesale Clubs directly challenged Price's hold on the West Coast market. At the same time, traditional retailers began introducing elements of the Price concept, including bulk goods and heavy discounting, providing additional competition.
James D. Sinegal, co-founder of Costco, had worked with Sol Price at FedMart before joining him at the Price Company. Sinegal left Price, having reached the level of executive vice president, and in 1983 formed Costco Wholesale Corporation with Jeffrey H. Brotman, who also contributed extensive retail experience to the partnership. The first Costco, based heavily on the Price Club concept, opened on September 15, 1983 in Seattle, Washington. [4] In less than two years, Costco went public, expanded into Canada, and became one of Price's fiercest competitors. Costco was also seen as the more creative merchandiser, becoming the first warehouser to extend its product line to encompass such fresh foods as baked goods, meats, seafood, and produce. As much as two-thirds of its sales were based on such recession-proof items, which became an important element to its success in the economic downturn of the late 1980s. In later years, Costco would also expand into the do-it-yourself market. By 1988, Costco had achieved sales of $2 billion, and by 1993 Costco was ranked third in the industry, with 103 stores.
Despite the increased competition, Price's growth continued. In 1986 it posted earnings of $75 million on sales of $2.6 billion. The company's stock reached its all-time high of $55.75 per share. Industry observers, however, began to predict a shakeout in an industry that was becoming increasingly crowded. By 1986, Sam's Clubs had taken over the lead. Added trouble came in 1986 when, after a quarrel between Sol Price and Laurence Price, Price attempted to exercise its option to buy out Laurence Price's tire-mounting and battery-installation chain, which by then had grown to 20 centers and over $5 million in sales. Laurence Price filed for arbitration, winning a $3.7 million settlement, then filed a $100 million lawsuit against Price Company.
Price's conservative approach to expansion during this period was also criticized. "Instead of responding to the threat by pushing into and dominating new markets," Business Week reported, "Price Co. remained almost exclusively on the West Coast ... [leaving] the rest of the country wide open for more aggressive competitors." Price's focus on owning its own real estate had slowed its expansion. More than half of the Price properties also included shopping center and mall developments. Developing its property and building its own warehouses became a heavy financial burden for the company, during a time when its competitors were pursuing far more rapid expansion plans. Price also lagged behind in industry developments as well, as Costco and other competitors moved to provide fresh foods and other products, expanding the one-stop shopping experience. By 1987, Costco had 39 stores and Sam's had 49 stores, passing Price's 35.
Sol Price resigned as chairman of the Price Company in 1988 and was replaced by Robert Price. By then, Price had grown to $4 billion in sales, and earnings were growing steadily each year. In the next year, Price paid its first and only cash dividend of $1.50 per common share, for a total of $75 million. By then, Price Clubs had extended to New Jersey, Connecticut, New York, and Quebec. However, Price Club's fortunes were beginning to fade. Attempts to venture into the home and office furniture market failed. In addition, despite a more aggressive expansion push in the early 1990s, many of the new Price Clubs were opened in California, adding, in 1991, 11 stores to the 29 already operating in that state. Staggered by a $630 million overhead burden, Price was also in effect cannibalizing its own stores. The following year, Price's earnings dropped for the first time since it had gone public.
In just 17 years, the warehouse club industry had grown to a $39 billion industry. However, the rapid growth of the 1980s slowed drastically in the 1990s as the U.S. market became saturated with stores. The increasing numbers of warehouse-concept stores specializing in single markets, such as pet foods or office supplies, were adding to the competition. The warehouse clubs were beginning to cannibalize each others' sales. Price moved into Mexico in a joint venture with Mexican retailer Controladora Comercial Mexicana in 1991, while adding stores in Colorado and British Columbia. But in order to finance its growth, Price was forced to spin off some $150 million of its real estate assets. Its expansion had come too late; competition from Sam's and PACE closed down its newly opened stores in New York and Pennsylvania.
Threats of a Costco takeover by Sam's Clubs, which by 1993 owned 434 stores and nearly half of the market, prompted Price to begin merger negotiations with Costco in 1992. Costco, too, was eager to avoid being swallowed up by Sam's and was equally frightened by the prospect of Price selling out to Sam's Club. Yet negotiations broke down when the parties could not decide on who would head the projected new company. When Price's earnings continued to drop, however, down 40 percent in the second quarter of 1993, Price finally entered into a deal with Costco. Sinegal would take the CEO position and Robert Price was named as chairman of the board. Called a partial merger, the two companies would continue to operate their respective headquarters, with the bulk of domestic responsibility going to Costco and international business to be headed by Price. Price shareholders, including the 13 percent share of the Price family, would retain 48 percent of the new company to Costco's 52 percent, the largest part of which, 24 percent, was controlled by the French Carrefour retailer. The merger allowed the two companies to consolidate their purchasing and shipping operations, share scanner and other technologies, and to dominate the West Coast market.
The new company, PriceCostco, Inc., continued Price's international expansion, developing more stores in Mexico, opening two stores in England, and licensing a Price Club in South Korea. However, hopes that the merger would halt sales declines did not materialize, and by 1994 sales for stores open more than a year had fallen by 3 percent, with a corresponding drop in earnings. Despite the initial optimism that had greeted the merger, the two management sides had never reached agreement on many crucial issues. New membership cards and many warehouses unceremoniously adopted the PriceCostco name. The company continued to operate out of both headquarters. Soon, arguments arose over which direction PriceCostco should take. Robert Price sought to continue his company's real estate interests, whereas Sinegal pushed for further expansion of the warehouse chain. Disputes also arose over whether to continue funding the in-store Quest Electronic Catalogue, a computerized network that allowed customers to purchase products not stocked in the stores.
By the middle of 1994, the PriceCostco merger was being called premature. Disagreements between Sinegal and Robert Price finally resulted in a partial breakup announced in July 1994. PriceCostco's commercial real estate properties, as well as other assets, were spun off as Price Enterprises, Inc., to be headed by Robert Price. Apart from its commercial real estate, Price Enterprises took with it four warehouse locations; a 51 percent interest in the Quest catalogue; and 51 percent ownership of PriceCostco's international development projects in Central America, Australia, and New Zealand. Together, these assets represented less than 10 percent of PriceCostco's earnings. Sinegal remained as president and CEO of PriceCostco, while his long-time partner, Jeffrey Brotman, took over as chairman.
In 1997, PriceCostco changed its name to Costco Wholesale.[5]
[edit] Costco today
The main competitor in the membership warehouse space is Sam's Club. Although Sam's Club has more warehouses[6] than Costco, Costco has higher total sales volume.[7] Costco employs about 132,000 full- and part-time employees,[8] including seasonal workers. It has 51.8 million members, representing 28.3 million households [8]. For fiscal year 2007, which ended on September 2, 2007, the company's store sales totaled $64.4 billion[8]. In 2006, $1.1 billion of the revenue was net profit.[9] Costco is #32 on the Fortune 500.[9]
In the United States, Costco is closed on the following holidays (most other major retailers stay open on all of these dates except Thanksgiving and Christmas):
[edit] Other retail formats
Costco currently operates two other retail formats, a home furnishings concept known as "Costco Home," and a strictly business operation known as "Costco Business Center."
There are currently two Costco Home locations (Washington State & Arizona, both in former HomeBase warehouse stores) with plans for a third on the west coast. Costco membership is required, and hours of operation are identical to that of regular Costco warehouses.
There are a handful of Business Centers, all of which offer delivery via a private fleet of trucks. Some locations have a retail selling floor open to Costco members who wish to shop in person, while others are strictly delivery only.
Plans for Costco Fresh, a gourmet supermarket, were abandoned in 2004. Many locations were fitted with a refrigerated room. A red sign hangs over the entrance to the room saying Costco Fresh.
[edit] Sales model
Costco focuses on selling products at low prices, often at very high volume. These goods are usually bulk-packaged and marketed primarily to large families and businesses. Furthermore, Costco does not carry multiple brands or varieties where the item is essentially the same except when it has a house brand to sell, typically under the Kirkland Signature label. This results in high volume of sales from single vendor, allowing further reduction in price, and reducing marketing costs. Costco also saves money by not stocking extra bags or packing materials; to carry out their goods, customers must bring their own bags or use the merchandise shipping boxes from the company's outside vendors.
Currently membership fees at Costco are $50 per year for Goldstar and Business Memberships, which can be upgraded to Executive membership for an additional $50 per year. Along with the additional benefits the executive membership has (e.g. car purchasing savings, home loans, car insurance, check printing services) executive members also receive an annual "2% Rewards Check" of up to $500.00 from Costco on all purchases made (excluding select items such as gasoline, alcohol, and tobacco).
Costco is only open to members and their guests, except for purchases of liquor and gasoline in some U.S. states due to state law; and prescription drugs due to federal law. Memberships must be purchased in advance for one year (as of May 5, 2007).[8] 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 Costco Cash Cards also do not require a membership, and there is no surcharge. Canadian and United States Costco locations only accept American Express (not in the UK and only Samsung credit cards in South Korea), PIN-based debit cards (Interac in Canada), cash, and checks. Guests of members are not allowed to write checks. American Express is the only accepted credit card (in the United States and Canada) because they do not charge Costco retailer fees (a percentage of revenue from total sales made on "X" credit card; Visa for example) as Costco's margins are low in comparison to other retailers[citation needed], they cannot accept the fee without raising prices. The relationship between Costco and American Express is an interesting one as American Express retailer fees are usually the highest.
Lighting costs are reduced on sunny days, as most Costco locations have several skylights. During the day, electronic light meters measure how much light is coming in the skylights and turn off an appropriate percentage of the interior lights. During a typical sunny day, it is very common for the center section of the warehouse to have no interior lights burning.
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 that break down pallets and stock individual products on shelves. Costco caps its profit margin on most products at 14% or 15%, but generally limits price markup on products from 8%-10%.
[edit] Food service
Most Costco locations have either a food court or a hot dog cart. Both offer a quarter-pound kosher hot dog or Polish sausage and 20 fluid oz drink (with free refill) for $1.50, the same price as when (pre-merger) Costco opened in 1983.
[edit] Costco Cash Cards
Costco Cash Cards can be purchased in the warehouse and members can load them with money to make non-cash purchases at all Costco warehouses in the United States. Because Costco gas stations take only Costco Cash, debit cards, and American Express, people who can only pay for gas by check or cash must purchase a Costco Cash Card inside the building before filling up.
[edit] Return policy
Costco memberships can be refunded in full at any time before they expire. Costco guarantees almost all of their products with a full refund at any time. Exceptions include televisions, projectors, computers, cameras, camcorders, digital audio players, and cellular phones; these may be returned within 90 days of purchase for any reason for a refund. After 90 days those returns must be due to an unrepairable break down. Costco gives a free two-year warranty for new TVs and computers in addition to the manufacturer warranty.
[edit] Online
The domain costco.com attracted at least 58 million visitors annually by 2008 according to a Compete.com survey.
[edit] Products
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, dairy, seafood, fresh baked goods, flowers, clothing, books, software, vacuums, appliances, home electronics, jewelry, art, fine wine, hot tubs, and furniture. Many stores have tire garages, pharmacies, hearing aid centers, optometrists, photo processors, and gas stations. Optometrists working at Costco locations will see patients without Costco memberships. However to fill prescriptions through the optical department, membership is required.
Some locations have liquor stores, often kept separate in order to comply with liquor license restrictions. In some states (such as Texas), the liquor store must be owned and operated by a separate company with separate employees. In 2006, Costco won a court decision against the state of Washington allowing it to purchase wine directly from the producer, bypassing the state retail monopoly.
Costco also acts as an investment broker and travel agent. They have also introduced an automobile purchasing program where members can purchase new cars at specially arranged prices. They also have an agreement with Ameriprise for auto and home insurance.
In 2004 Costco offered an original artwork by artist Pablo Picasso on their online store. More recently a "100 point" 1982 Mouton Rothchild wine has been offered as well as other rare wines in rotation.
[edit] Kirkland Signature
Kirkland Signature is Costco's store brand, otherwise known in the retail industry as an "own-brand" or "house brand". It is found exclusively at Costco stores and is trademarked by the company. The name derives from the fact that Costco's corporate headquarters were located in the city of Kirkland, Washington, between 1987 and 1996.[10]
Costco introduced Kirkland Signature as its house brand in 1995. The idea was to identify categories in which a private label product could provide brand name quality at discounted prices.[11]
To counteract the consumer confidence problem common in store branding, Kirkland Signature sometimes relies on co-branding. According to Costco, while consumers may be wary of same-store-branding, they are less likely to be wary of brands that they are familiar with and trust.[12]
Kirkland Signature products are generally rated highly. Consumer reports have given high ratings for several products including batteries and laundry detergent. A number one rating was given to Kirkland Signature anodized cookware which sells for significantly less than some comparable products.
[edit] Trivia
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Trivia sections are discouraged under Wikipedia guidelines. The article could be improved by integrating relevant items and removing inappropriate ones. |
- The very first Price Club location was an old airplane hangar, previously owned by Howard Hughes, and is still in operation today (Warehouse #401 San Diego).
- Prior to the 1993 Price Club/Costco merger, Wal-Mart founder Sam Walton wanted to merge Sam's Club with Price Club.[13]
- In 2002, Costco surpassed $600 million in sales of wine becoming the largest wine retailer in the United States.[citation needed]
- Costco became the first company ever to grow from zero to $3 billion in sales in less than six years. [14]
- Costco Optical ranked as the fourth-largest optical company in the US.[15]
- The ACSI (The American Customer Satisfaction Index) named Costco number one in the retail industry with a score of 81 in 2006. [16]
- Costco Food Courts ranked as the third largest pizza chain in the nation.
[edit] Working at Costco
While some former Price Club locations in California and the northeastern United States are staffed by Teamsters, the majority of Costco locations are not unionized. The non-union locations have revisions to their Costco Employee Agreement every three years concurrent with union contract ratifications in locations with collective bargaining agreements. Similar to a union contract, the Employee Agreement sets forth such things such as benefits, compensations, wages, disciplinary procedures, paid holidays, bonuses, and seniority. As of March 2008, non-supervisory hourly wages range from $11.00 to $19.75 in the United States and 11.00 to 21.85 in Canada.
Product-demonstration (e.g., food samples) employees are employed by an outside company. In the western USA, the company is called Warehouse Demo Services, Kirkland, Washington.[17] Costco also uses Club Demonstration Services, based in San Diego, California.[18]
[edit] Locations
As of May 29, 2008, Costco has 538 locations.
- 394 in the United States and Puerto Rico
- 75 in Canada
- 31 in Mexico (50-50 joint venture)
- 19 in the United Kingdom
- 8 in Japan
- 6 in South Korea
- 5 in Taiwan
- Costco has announced that it will begin to open stores in Melbourne, Australia in late 2008, and in Sydney and the Gold Coast in 2009. Membership will be A$50 on an annual basis. [19]
[edit] See also
- Sam's Club - Competitor
- BJ's Wholesale Club - Competitor
[edit] References
This article was originally based on material from the Free On-line Dictionary of Computing, which is licensed under the GFDL.
- ^ Costco - Shareholder Info
- ^ What is costco?
- ^ Costco Contacts
- ^ Costco - Why Become A Costco Member?
- ^ Costco Membership
- ^ Sam's Club
- ^ SAM'S CLUB - Company Overview - Hoover's
- ^ a b c d Costco - Company Profile
- ^ a b Fortune 500: The Top 50 - 32. Costco Wholesale (32) - FORTUNE
- ^ Business Spotlight: Costco Wholesale. Retrieved on 2006-10-26.
- ^ Costco buying power makes dent in private-label wine market. Retrieved on 2007-03-30.
- ^ A private label success story | DSN Retailing Today | Find Articles at BNET.com
- ^ Sol Price On Off-Price - November 24, 2003
- ^ Costco Membership
- ^ untitled
- ^ [1]
- ^ Warehouse Demo Services (WDS) - Costco Product Demonstrations
- ^ Club Demonstration Services
- ^ Costco to move into Melbourne Herald Sun October 28, 2007. Retrieved on October 28, 2007
[edit] External links
- Official website
- How Costco Became the Anti-Wal-Mart - NY Times
- Why Costco is so addictive
- "The Cult of Costco"
- Company History
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