Strategy Features That Differentiated BJ’s
BJ’s had developed a strategy and operating model that management believed differentiated the company from Costco and Sam’s
Club:
Offering a wide range of choice—7.000 items versus 3,700 to 4,000 items at Costco and Sam’s Club.
Focusing on the individual consumer via merchandising strategies that emphasized a customer-friendly shopping experience.
Clustering club locations to achieve the benefit of name recognition and maximize the efficiencies of management support,
distribution, and marketing activities.
· Trying to establish and maintain the first or second industry leading position in each major market where it operated.
Creating an exciting shopping experience for members with a constantly changing mix of food and general merchandise items
and carrying a broader product assortment than competitors.
Supplementing the warehouse format with aisle markers, express checkout lanes, self-checkout lanes, and low-cost video-based
sales aids to make shopping more efficient for members.
· Being open longer hours than competitors: typical hours of operation were 9 am to 7p.m Monday through Friday and 9 am
to 6 pm Saturday and Sunday.
• Offering smaller package sizes of many items.
· Accepting manufacturers’ coupons.
· Accepting more credit card payment options.
Membership
BJ’s Wholesale Club had about 9.6 million members in 2011 (see Exhibit 6C). In 2016, individuals and businesses could
become members for a fee of $50 per year that included one free supplemental card. Both individual and business members could
opt for a BI’s Perks RewardIN membership and earn 2 percent cash back on in-club and online purchases. Members paying the $50
membership fee could apply for a BJ’s Perks PlusTM credit card (MasterCard) which had no annual credit card fee and earned 3
percent cash back on in-club and online purchases, 10-cents of per gallon at BJ’s gas stations, and 1 percent cash back on all noo-
BI’s purchases everywhere MasterCard was accepted. Individuals and businesses with a BJ’s Perks RewardTM membership could
apply for a BJ’s Perks EliteTM MasterCard which had no annual fee and earned 5 percent cash back on in-club and online purchases,
10 cents off per gallon at BJ’s gas stations, and 1 percent cash back on all non-BJ’s purchases everywhere MasterCard was
accepted. BJ’s accepted MasterCard, Visa, Discover, and American Express cards at all locations; members could also pay for
purchases by cash or check BJ’s accepted returns of most merchandise within 30 days after purchase.
Marketing and Promotion
BI’s increased customer awareness of its clubs primarily through direct mail, public relations efforts, marketing programs for newly
opened clubs, and a publication called BJ” Journal, which was mailed to members throughout the year.
Warehouse Club Operations
BJ’s warehouses were located in both freestanding locations and shopping centers. As of 2011. construction and site development
costs for a full-sized owned BJ’s club were in the $6 to $10 million range: land acquisition costs ranged from $3 to $10 million but
could be significantly higher in some locations. Each warehouse generally had an investment of $3 to $4 million for Page 0-46
fixtures and equipment Preopening expenses at a new club ran $1.0 to $2.0 million. Including space for parking, a
typical full-sized BJ’s club required 13 to 14 acres of land, smaller clubs typically required about 3 acres. Prior to being acquired in
2011, BJ’s had financed all of its club expansions, as well as all other capital expenditures, with internally generated funds.
Merchandise purchased from manufacturers was routed either to a BI’s cross-docking facility or directly to clube. Personnel at the
Cross-docking facilities broke down truckload quantity shipments from manufacturers and reallocated goods for shipment to
individual clubs, generally within 24 hours. BJ’s worked closely with manufacturers to minimize the amount of handling required
once merchandise is received at a club. Merchandise was generally displayed on pallets containing large quantities of each item,
thereby reducing labor required for handling, stocking, and restocking. Backup merchandise was generally stored in steel racks
above the sales floor. Most merchandise was premarked by the manufacturer so it did not require ticketing at the club. Full-sized
clubs had approximately $2 million in inventory. Management had been able to limit inventory shrinkage to no more than 0.2
percent of net sales in each of the last three fiscal years (a percentage well below those of other types of retailers) by strictly
controlling the exits of clubs, by zenerally limiting customers to members, and by using state-of-the-art electronic article
surveillance technology
ENDNOTES
1. As quoted in Alan B. Goldberg and Bill Ritter, “Costco CEO Funds Pro-Worker Means Profitability:” an ABC News original
report on 2020, August 2, 2006, abcnews.go.com/2020/Business/story?id=1362779 (accessed November 15, 2006).
2. Ibid
3. As described in Nina Shapiro, “Company for the People,” Seattle Weekly, December 15, 2004. www.seattleweekly.com
(accessed November 14, 2006).
4. Investopedia, “How Much Does a Costeo Store Sell Each Year?” June 19. 2015. posted at www.investopedia.com/stock-analy
sis061015/how-much-dore-costeo-store-sell-each-Parccostar SH31descessed Fear 2010
Costco Wholesale in 2016: Mission,
Business Model, and Strategy
E connect
Graw
Hill
Arthur A. Thompson Jr.
The University of Alabama
F
our years after being appointed as Costco Wholesale’s president and chief executive officer, Craig Jelinek was proving fully
capable of cementing the company’s standing as one of the world’s biggest and best consumer goods merchandisers. His
predecessor, Jim Sinegal, cofounder and CEO of Costco Wholesale from 1983 until year-end 2011, had been the driving force
behind Costco’s 28-year evolution from a startup entrepreneurial venture into the third largest retailer in the United States, the
seventh largest retailer in the world, and the undisputed leader of the discount warehouse and wholesale club segment of the North
American retailing industry. Jelinek was handpicked by Sinegal to be his successor. Since January 2012, Jelinek had presided over
Costco’s growth from annual revenues of $89 billion and 598 membership warehouses at year-end fiscal 2011 to annual revenues
of $116 billion and 686 membership warehouses at year-end fiscal 2015. Going into 2016, Costco ranked as the second largest
retailer in both the United States and the world (behind Walmart).
COMPANY BACKGROUND
The membership warehouse concept was pioneered by discount merchandising sage Sol Price, who opened the first Price Club in a
converted airplane hangar on Morena Boulevard in San Diego in 1976. Price Club lost $750,000 in its first year of operation, but
by 1979 it had two stores, 900 employees, 200,000 members, and a $1 million profit. Years earlier, Sol Price had experimented
with discount retailing at a San Diego store called Fed-Mart. Jim Sinegal got his start in retailing at the age of 18, loading
mattresses for $1.25 an hour at Fed-Mart while attending San Diego Community College. When Sol Price sold Fed-Mart, Sinegal
left with Price to help him start the San Diego Price Club store; within a few years, Sol Price’s Price Club emerged as the
unchallenged leader in member warehouse retailing, with stores operating primarily on the West Coast.
Although Price originally conceived Price Club as a place where small local businesses could obtain needed merchandise at
economical prices, he soon concluded that his fledgling operation could achieve far greater sales volumes and gain buying clout
with suppliers by also granting membership to individuals—a conclusion that launched the deep-discount warehouse club industry
on a steep growth curve.
When Sinegal was 26, Sol Price made him the manager of the original San Diego store, which had become unprofitable. Price saw
that Sinegal had a special knack for discount retailing and for spotting what a store was doing wrong (usually either not being in the
right merchandise categories or not selling items at the right price points)—the very things that Sol Price was good at and that were
at the root of Price Club’s growing success in the marketplace. Sincgal soon got the San Diego store back into the black. Over the
next several years, Sinegal continued to build his prowess and talents for discount merchandising. He mirrored Sol Price’s attention
Warehouses generally operated on a seven-day, 70-hour week, typically being open between 10:00 a.m. and 8:30 p.m. Page C-34
weekdays, with earlier closing hours on the weekend: the gasoline operations outside many stores usually had extended
hours. The shorter hours of operation as compared to those of traditional retailers, discount retailers, and supermarkets resulted in
lower labor costs relative to the volume of sales.
Growth Strategy
Costco’s growth strategy was to increase sales at existing stores by 5 percent or more annually and to open additional warehouses,
both domestically and internationally. Average annual growth at stores open at least a year was 10 percent in fiscal 2011, 6 percent
in both fiscal 2013 and 2014, and 7 percent in fiscal 2015. In fiscal 2011, sales at Costco’s existing warehouses grew by an average
of 10 percent, chiefly because members shopped Costco warehouses an average of 4 percent more often and spent about 5 percent
more per visit than they did in fiscal 2010 (see Exhibit 1 Q for recent average annual sales increases at existing stores). Costco
expected to open 32 new warehouses in its fiscal year beginning September 1, 2016: 22 in the United States, 3 in Canada, 2 cach in
Japan and Australia, and 1 each in the UK, Taiwan, and Spain. As of January 2016, 12 of these had already been opened.
Exhibit 4 shows a breakdown of Costco’s geographic operations for fiscal years 2005, 2010, and 2015.
EXHIBIT 4
Selected Geographic Operating Data, Costco Wholesale Corporation, Fiscal Years 2005–2015 ($ in millions)
United
States Canadian
Other
Operations Operations International Operations
Total
$ 17,341
$ 84,451
2,308
771
$14,507 $116,199
545
3,624
671 2,393
120 697
1,574
148
487
90
$59,624
$ 6,271
Year Ended August 30, 2015
Total revenue (including membership fees)
Operating income
Capital expenditures
Number of warehouses
Year Ended August 29, 2010
Total revenue (including membership fees)
Operating income
Capital expenditures
Number of warehouses
Year Ended August 28, 2005
Total revenue (including membership fees)
Operating income
Capital expenditures
Number of warehouses
$12,501
547
$77,946
2,077
1,310
220
804
162
89
1,055
416
79
45
540
$43,064
$ 6,732
$ 3,155 $52,952
1,168
242
65
1,474
734
140
122
995
338
65
30
433
Note: The dollar numbers shown for “Other countries represent only Costco’s ownership share, since all foreign operations were joint ventures (although Costco was the
majority owner of these ventures): the warehouses operated by Costco Mexico in which Costco was a 50 percent joint venture partner were not included in the data for the
Other countries until fiscal year 2011.
Marketing and Advertising
Costco’s low prices and its reputation for making shopping at Costco something of a treasure-hunt made it unnecessary to engage
in extensive advertising or sales campaigns. Marketing and promotional activities were generally limited to monthly coupon
mailers to members, weekly e-mails to members from Costco.com, occasional direct mail to prospective new members, and
regular direct marketing programs (such as The Costco Connection, a magazine published for members), in-store product sampling,
and special campaigns for new warehouse openings.
For new warehouse openings, marketing teams personally contacted businesses in the area that were potential Page C-35
wholesale members; these contacts were supplemented with direct mailings during the period immediately prior to
opening. Potential Gold Star (individual) members were contacted by direct mail or by promotions at local employee associations
and businesses with large numbers of employees. After a membership base was established in an area, most new memberships
came from word of mouth (existing members telling friends and acquaintances about their shopping experiences at Costco),
follow-up messages distributed through regular payroll or other organizational communications to employee groups, and ongoing
direct solicitations to prospective business and Gold Star members.
Website Sales
Costco operated websites in the United States, Canada, Mexico, the United Kingdom, and Korea—both to enable members to shop
for many in-store products online and to provide members with a means of obtaining a much wider variety of value-priced products
and services that were not practical to stock at the company’s warehouses. Examples of items that members could buy online at low
Costco prices included sofas, beds, entertainment centers and TV lift cabinets, outdoor furniture, office furniture, kitchen
appliances, billiard tables, and hot tubs. Members could also use the company’s websites for such services as digital photo
processing, prescription fulfillment, travel, the Costco auto program (for purchasing selected new vehicles with discount prices
through participating dealerships), and other membership services. In 2015, Costco sold 465,000 vehicles through its 3,000 dealer
partners: the big attraction to members of buying a new or used vehicle through Costco’s auto program was being able to skip the
hassle of bargaining with the dealer over price and instead, paying an attractively low price prearranged by Costco. At Costco’s
online photo center customers could upload images and pick up the prints at their local warehouse in little over an hour. Online
sales had accounted for about 3 percent of total merchandise sales for the past three fiscal years ($3.4 billion in fiscal 2015).
Supply Chain and Distribution
Costco bought the majority of its merchandise directly from manufacturers, routing it either directly to its warehouse stores or to
one of the company’s cross-docking depots that served as distribution points for nearby stores and for shipping orders to members
making online purchases. Depots received container-based shipments from manufacturers and reallocated these goods for
combined shipment to individual warehouses, generally in less than 24 hours. This maximized freight volume and handling
efficiencies. Going into 2016, Costco had 23 cross-docking depots with a combined space of 9.3 million square feet in the United
States, Canada, and various other international locations. When merchandise arrived at a warehouse, it was moved straight to the
sales floor, very little was stored in locations off the sales floor in order to minimize receiving and handling costs.
Costco had direct buying relationships with many producers of national brand-name merchandise and with manufacturers that
supplied its Kirkland Signature products. Costco’s merchandise buyers were always alert for opportunities to add products of top
quality manufacturers and vendors on a one-time or ongoing basis. No one manufacturer supplied a significant percentage of the
merchandise that Costco stocked. Costco had not experienced difficulty in obtaining sufficient quantities of merchandise, and
management believed that if one or more of its current sources of supply became unavailable, the company could switch its
purchases to alternative manufacturers without experiencing a substantial disruption of its business.
Costco’s Membership Base and Member Demographics
Costco attracted the most affluent customers in discount retailing—the average income of individual members was about $75,000,
with over 30 percent of members having annual incomes of $100,000 or more. Many members were affluent urbanites, living in
nice neighborhoods not far from Costco warehouses. One loyal Executive member, a criminal defense lawyer, said, “I think I spend
over $20,000-$25,000 a year buying all my products here from food to clothing—except my suits. I have to buy them at the
Armani stores.”14 Another Costco loyalist said, “This is the best place in the world. It’s like going to church on Sunday. You can’t
get anything better than this. This is a religious experience 5:15
Costco had two primary types of memberships: Business and Gold Star (individual). Business memberships were Page C-36
limited to businesses, but included individuals with a business license, retail sales license, or other evidence of business
existence. A Business membership also included a free household card (a significant number of business members shopped at
Costco for their personal needs). Business members also had the ability to purchase “add-on” membership cards for partners or
associates in the business. Costco’s current annual fee for Business and Gold Star memberships was $55 in the United States and
Canada and varied by country in its other international operations. All paid memberships for Business members included a free
household card. Individuals in the United States and Canada who did not qualify for a Business membership could purchase a Gold
Star membership, which included a household card for another family member additional add-on cards could not be purchased by
Gold Star members).
Both Business and Gold Star members could upgrade to an Executive membership for an annual fee of $110. Executive members
were entitled to an additional 2 percent savings on qualified purchases at Costco (redeemable at Costco warehouses), up to a
maximum rebate of $750 per year. Executive members also were eligible for savings and benefits on various business and
consumer services offered by Costco, including merchant credit card processing, small-business loans, auto and home insurance,
long-distance telephone service, check printing, and real estate and mortgage services; these services were mostly offered by third-
party providers and varied by state. In fiscal 2015, Executive members represented close to 40 percent of Costco’s primary
membership base and generally spent more than other members. Recent trends in membership are shown at the bottom of
Exhibit 1. Members could shop at any Costco warehouse. Costco’s member renewal rate was approximately 91 percent in the
United States and Canada, and approximately 88 percent on a worldwide basis in 2015.
Costco warehouses accepted cash, checks, most debit cards, Visa, and a private-label Costco credit card. Costco accepted
merchandise returns when members were dissatisfied with their purchases. Losses associated with dishonored checks were
minimal because any member whose check had been dishonored was prevented from paying by check or cashing a check at the
point of sale until restitution was made. The membership format facilitated strictly controlling the entrances and exits of
warehouses, resulting in limited inventory losses of less than two-tenths of 1 percent of net sales-well below those of typical
discount retail operations.
Warehouse Management
Costco warehouse managers were delegated considerable authority over store operations. In effect, warehouse managers functioned
as entrepreneurs running their own retail operation. They were responsible for coming up with new ideas about what items would
sell in their stores, effectively merchandising the ever-changing lineup of treasure-hunt products, and orchestrating in-store product
locations and displays to maximize sales and quick turnover. In experimenting with what items to stock and what in-store
Purchase answer to see full
attachment
BJ’s had developed a strategy and operating model that management believed differentiated the company from Costco and Sam’s
Club:
Offering a wide range of choice—7.000 items versus 3,700 to 4,000 items at Costco and Sam’s Club.
Focusing on the individual consumer via merchandising strategies that emphasized a customer-friendly shopping experience.
Clustering club locations to achieve the benefit of name recognition and maximize the efficiencies of management support,
distribution, and marketing activities.
· Trying to establish and maintain the first or second industry leading position in each major market where it operated.
Creating an exciting shopping experience for members with a constantly changing mix of food and general merchandise items
and carrying a broader product assortment than competitors.
Supplementing the warehouse format with aisle markers, express checkout lanes, self-checkout lanes, and low-cost video-based
sales aids to make shopping more efficient for members.
· Being open longer hours than competitors: typical hours of operation were 9 am to 7p.m Monday through Friday and 9 am
to 6 pm Saturday and Sunday.
• Offering smaller package sizes of many items.
· Accepting manufacturers’ coupons.
· Accepting more credit card payment options.
Membership
BJ’s Wholesale Club had about 9.6 million members in 2011 (see Exhibit 6C). In 2016, individuals and businesses could
become members for a fee of $50 per year that included one free supplemental card. Both individual and business members could
opt for a BI’s Perks RewardIN membership and earn 2 percent cash back on in-club and online purchases. Members paying the $50
membership fee could apply for a BJ’s Perks PlusTM credit card (MasterCard) which had no annual credit card fee and earned 3
percent cash back on in-club and online purchases, 10-cents of per gallon at BJ’s gas stations, and 1 percent cash back on all noo-
BI’s purchases everywhere MasterCard was accepted. Individuals and businesses with a BJ’s Perks RewardTM membership could
apply for a BJ’s Perks EliteTM MasterCard which had no annual fee and earned 5 percent cash back on in-club and online purchases,
10 cents off per gallon at BJ’s gas stations, and 1 percent cash back on all non-BJ’s purchases everywhere MasterCard was
accepted. BJ’s accepted MasterCard, Visa, Discover, and American Express cards at all locations; members could also pay for
purchases by cash or check BJ’s accepted returns of most merchandise within 30 days after purchase.
Marketing and Promotion
BI’s increased customer awareness of its clubs primarily through direct mail, public relations efforts, marketing programs for newly
opened clubs, and a publication called BJ” Journal, which was mailed to members throughout the year.
Warehouse Club Operations
BJ’s warehouses were located in both freestanding locations and shopping centers. As of 2011. construction and site development
costs for a full-sized owned BJ’s club were in the $6 to $10 million range: land acquisition costs ranged from $3 to $10 million but
could be significantly higher in some locations. Each warehouse generally had an investment of $3 to $4 million for Page 0-46
fixtures and equipment Preopening expenses at a new club ran $1.0 to $2.0 million. Including space for parking, a
typical full-sized BJ’s club required 13 to 14 acres of land, smaller clubs typically required about 3 acres. Prior to being acquired in
2011, BJ’s had financed all of its club expansions, as well as all other capital expenditures, with internally generated funds.
Merchandise purchased from manufacturers was routed either to a BI’s cross-docking facility or directly to clube. Personnel at the
Cross-docking facilities broke down truckload quantity shipments from manufacturers and reallocated goods for shipment to
individual clubs, generally within 24 hours. BJ’s worked closely with manufacturers to minimize the amount of handling required
once merchandise is received at a club. Merchandise was generally displayed on pallets containing large quantities of each item,
thereby reducing labor required for handling, stocking, and restocking. Backup merchandise was generally stored in steel racks
above the sales floor. Most merchandise was premarked by the manufacturer so it did not require ticketing at the club. Full-sized
clubs had approximately $2 million in inventory. Management had been able to limit inventory shrinkage to no more than 0.2
percent of net sales in each of the last three fiscal years (a percentage well below those of other types of retailers) by strictly
controlling the exits of clubs, by zenerally limiting customers to members, and by using state-of-the-art electronic article
surveillance technology
ENDNOTES
1. As quoted in Alan B. Goldberg and Bill Ritter, “Costco CEO Funds Pro-Worker Means Profitability:” an ABC News original
report on 2020, August 2, 2006, abcnews.go.com/2020/Business/story?id=1362779 (accessed November 15, 2006).
2. Ibid
3. As described in Nina Shapiro, “Company for the People,” Seattle Weekly, December 15, 2004. www.seattleweekly.com
(accessed November 14, 2006).
4. Investopedia, “How Much Does a Costeo Store Sell Each Year?” June 19. 2015. posted at www.investopedia.com/stock-analy
sis061015/how-much-dore-costeo-store-sell-each-Parccostar SH31descessed Fear 2010
Costco Wholesale in 2016: Mission,
Business Model, and Strategy
E connect
Graw
Hill
Arthur A. Thompson Jr.
The University of Alabama
F
our years after being appointed as Costco Wholesale’s president and chief executive officer, Craig Jelinek was proving fully
capable of cementing the company’s standing as one of the world’s biggest and best consumer goods merchandisers. His
predecessor, Jim Sinegal, cofounder and CEO of Costco Wholesale from 1983 until year-end 2011, had been the driving force
behind Costco’s 28-year evolution from a startup entrepreneurial venture into the third largest retailer in the United States, the
seventh largest retailer in the world, and the undisputed leader of the discount warehouse and wholesale club segment of the North
American retailing industry. Jelinek was handpicked by Sinegal to be his successor. Since January 2012, Jelinek had presided over
Costco’s growth from annual revenues of $89 billion and 598 membership warehouses at year-end fiscal 2011 to annual revenues
of $116 billion and 686 membership warehouses at year-end fiscal 2015. Going into 2016, Costco ranked as the second largest
retailer in both the United States and the world (behind Walmart).
COMPANY BACKGROUND
The membership warehouse concept was pioneered by discount merchandising sage Sol Price, who opened the first Price Club in a
converted airplane hangar on Morena Boulevard in San Diego in 1976. Price Club lost $750,000 in its first year of operation, but
by 1979 it had two stores, 900 employees, 200,000 members, and a $1 million profit. Years earlier, Sol Price had experimented
with discount retailing at a San Diego store called Fed-Mart. Jim Sinegal got his start in retailing at the age of 18, loading
mattresses for $1.25 an hour at Fed-Mart while attending San Diego Community College. When Sol Price sold Fed-Mart, Sinegal
left with Price to help him start the San Diego Price Club store; within a few years, Sol Price’s Price Club emerged as the
unchallenged leader in member warehouse retailing, with stores operating primarily on the West Coast.
Although Price originally conceived Price Club as a place where small local businesses could obtain needed merchandise at
economical prices, he soon concluded that his fledgling operation could achieve far greater sales volumes and gain buying clout
with suppliers by also granting membership to individuals—a conclusion that launched the deep-discount warehouse club industry
on a steep growth curve.
When Sinegal was 26, Sol Price made him the manager of the original San Diego store, which had become unprofitable. Price saw
that Sinegal had a special knack for discount retailing and for spotting what a store was doing wrong (usually either not being in the
right merchandise categories or not selling items at the right price points)—the very things that Sol Price was good at and that were
at the root of Price Club’s growing success in the marketplace. Sincgal soon got the San Diego store back into the black. Over the
next several years, Sinegal continued to build his prowess and talents for discount merchandising. He mirrored Sol Price’s attention
Warehouses generally operated on a seven-day, 70-hour week, typically being open between 10:00 a.m. and 8:30 p.m. Page C-34
weekdays, with earlier closing hours on the weekend: the gasoline operations outside many stores usually had extended
hours. The shorter hours of operation as compared to those of traditional retailers, discount retailers, and supermarkets resulted in
lower labor costs relative to the volume of sales.
Growth Strategy
Costco’s growth strategy was to increase sales at existing stores by 5 percent or more annually and to open additional warehouses,
both domestically and internationally. Average annual growth at stores open at least a year was 10 percent in fiscal 2011, 6 percent
in both fiscal 2013 and 2014, and 7 percent in fiscal 2015. In fiscal 2011, sales at Costco’s existing warehouses grew by an average
of 10 percent, chiefly because members shopped Costco warehouses an average of 4 percent more often and spent about 5 percent
more per visit than they did in fiscal 2010 (see Exhibit 1 Q for recent average annual sales increases at existing stores). Costco
expected to open 32 new warehouses in its fiscal year beginning September 1, 2016: 22 in the United States, 3 in Canada, 2 cach in
Japan and Australia, and 1 each in the UK, Taiwan, and Spain. As of January 2016, 12 of these had already been opened.
Exhibit 4 shows a breakdown of Costco’s geographic operations for fiscal years 2005, 2010, and 2015.
EXHIBIT 4
Selected Geographic Operating Data, Costco Wholesale Corporation, Fiscal Years 2005–2015 ($ in millions)
United
States Canadian
Other
Operations Operations International Operations
Total
$ 17,341
$ 84,451
2,308
771
$14,507 $116,199
545
3,624
671 2,393
120 697
1,574
148
487
90
$59,624
$ 6,271
Year Ended August 30, 2015
Total revenue (including membership fees)
Operating income
Capital expenditures
Number of warehouses
Year Ended August 29, 2010
Total revenue (including membership fees)
Operating income
Capital expenditures
Number of warehouses
Year Ended August 28, 2005
Total revenue (including membership fees)
Operating income
Capital expenditures
Number of warehouses
$12,501
547
$77,946
2,077
1,310
220
804
162
89
1,055
416
79
45
540
$43,064
$ 6,732
$ 3,155 $52,952
1,168
242
65
1,474
734
140
122
995
338
65
30
433
Note: The dollar numbers shown for “Other countries represent only Costco’s ownership share, since all foreign operations were joint ventures (although Costco was the
majority owner of these ventures): the warehouses operated by Costco Mexico in which Costco was a 50 percent joint venture partner were not included in the data for the
Other countries until fiscal year 2011.
Marketing and Advertising
Costco’s low prices and its reputation for making shopping at Costco something of a treasure-hunt made it unnecessary to engage
in extensive advertising or sales campaigns. Marketing and promotional activities were generally limited to monthly coupon
mailers to members, weekly e-mails to members from Costco.com, occasional direct mail to prospective new members, and
regular direct marketing programs (such as The Costco Connection, a magazine published for members), in-store product sampling,
and special campaigns for new warehouse openings.
For new warehouse openings, marketing teams personally contacted businesses in the area that were potential Page C-35
wholesale members; these contacts were supplemented with direct mailings during the period immediately prior to
opening. Potential Gold Star (individual) members were contacted by direct mail or by promotions at local employee associations
and businesses with large numbers of employees. After a membership base was established in an area, most new memberships
came from word of mouth (existing members telling friends and acquaintances about their shopping experiences at Costco),
follow-up messages distributed through regular payroll or other organizational communications to employee groups, and ongoing
direct solicitations to prospective business and Gold Star members.
Website Sales
Costco operated websites in the United States, Canada, Mexico, the United Kingdom, and Korea—both to enable members to shop
for many in-store products online and to provide members with a means of obtaining a much wider variety of value-priced products
and services that were not practical to stock at the company’s warehouses. Examples of items that members could buy online at low
Costco prices included sofas, beds, entertainment centers and TV lift cabinets, outdoor furniture, office furniture, kitchen
appliances, billiard tables, and hot tubs. Members could also use the company’s websites for such services as digital photo
processing, prescription fulfillment, travel, the Costco auto program (for purchasing selected new vehicles with discount prices
through participating dealerships), and other membership services. In 2015, Costco sold 465,000 vehicles through its 3,000 dealer
partners: the big attraction to members of buying a new or used vehicle through Costco’s auto program was being able to skip the
hassle of bargaining with the dealer over price and instead, paying an attractively low price prearranged by Costco. At Costco’s
online photo center customers could upload images and pick up the prints at their local warehouse in little over an hour. Online
sales had accounted for about 3 percent of total merchandise sales for the past three fiscal years ($3.4 billion in fiscal 2015).
Supply Chain and Distribution
Costco bought the majority of its merchandise directly from manufacturers, routing it either directly to its warehouse stores or to
one of the company’s cross-docking depots that served as distribution points for nearby stores and for shipping orders to members
making online purchases. Depots received container-based shipments from manufacturers and reallocated these goods for
combined shipment to individual warehouses, generally in less than 24 hours. This maximized freight volume and handling
efficiencies. Going into 2016, Costco had 23 cross-docking depots with a combined space of 9.3 million square feet in the United
States, Canada, and various other international locations. When merchandise arrived at a warehouse, it was moved straight to the
sales floor, very little was stored in locations off the sales floor in order to minimize receiving and handling costs.
Costco had direct buying relationships with many producers of national brand-name merchandise and with manufacturers that
supplied its Kirkland Signature products. Costco’s merchandise buyers were always alert for opportunities to add products of top
quality manufacturers and vendors on a one-time or ongoing basis. No one manufacturer supplied a significant percentage of the
merchandise that Costco stocked. Costco had not experienced difficulty in obtaining sufficient quantities of merchandise, and
management believed that if one or more of its current sources of supply became unavailable, the company could switch its
purchases to alternative manufacturers without experiencing a substantial disruption of its business.
Costco’s Membership Base and Member Demographics
Costco attracted the most affluent customers in discount retailing—the average income of individual members was about $75,000,
with over 30 percent of members having annual incomes of $100,000 or more. Many members were affluent urbanites, living in
nice neighborhoods not far from Costco warehouses. One loyal Executive member, a criminal defense lawyer, said, “I think I spend
over $20,000-$25,000 a year buying all my products here from food to clothing—except my suits. I have to buy them at the
Armani stores.”14 Another Costco loyalist said, “This is the best place in the world. It’s like going to church on Sunday. You can’t
get anything better than this. This is a religious experience 5:15
Costco had two primary types of memberships: Business and Gold Star (individual). Business memberships were Page C-36
limited to businesses, but included individuals with a business license, retail sales license, or other evidence of business
existence. A Business membership also included a free household card (a significant number of business members shopped at
Costco for their personal needs). Business members also had the ability to purchase “add-on” membership cards for partners or
associates in the business. Costco’s current annual fee for Business and Gold Star memberships was $55 in the United States and
Canada and varied by country in its other international operations. All paid memberships for Business members included a free
household card. Individuals in the United States and Canada who did not qualify for a Business membership could purchase a Gold
Star membership, which included a household card for another family member additional add-on cards could not be purchased by
Gold Star members).
Both Business and Gold Star members could upgrade to an Executive membership for an annual fee of $110. Executive members
were entitled to an additional 2 percent savings on qualified purchases at Costco (redeemable at Costco warehouses), up to a
maximum rebate of $750 per year. Executive members also were eligible for savings and benefits on various business and
consumer services offered by Costco, including merchant credit card processing, small-business loans, auto and home insurance,
long-distance telephone service, check printing, and real estate and mortgage services; these services were mostly offered by third-
party providers and varied by state. In fiscal 2015, Executive members represented close to 40 percent of Costco’s primary
membership base and generally spent more than other members. Recent trends in membership are shown at the bottom of
Exhibit 1. Members could shop at any Costco warehouse. Costco’s member renewal rate was approximately 91 percent in the
United States and Canada, and approximately 88 percent on a worldwide basis in 2015.
Costco warehouses accepted cash, checks, most debit cards, Visa, and a private-label Costco credit card. Costco accepted
merchandise returns when members were dissatisfied with their purchases. Losses associated with dishonored checks were
minimal because any member whose check had been dishonored was prevented from paying by check or cashing a check at the
point of sale until restitution was made. The membership format facilitated strictly controlling the entrances and exits of
warehouses, resulting in limited inventory losses of less than two-tenths of 1 percent of net sales-well below those of typical
discount retail operations.
Warehouse Management
Costco warehouse managers were delegated considerable authority over store operations. In effect, warehouse managers functioned
as entrepreneurs running their own retail operation. They were responsible for coming up with new ideas about what items would
sell in their stores, effectively merchandising the ever-changing lineup of treasure-hunt products, and orchestrating in-store product
locations and displays to maximize sales and quick turnover. In experimenting with what items to stock and what in-store
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