What’s the Advantage of Costco’s Retail Model?

Why shopping at Costco is different

Costco Wholesale’s (COST) selling model is structured a little differently from other mainstream retailers (XRT) (RTH). The company follows the membership warehouse concept, whereby customers pay an annual fee for membership to shop at Costco. In return, members get to purchase store-brand as well as national-brand merchandise in higher volumes at competitive prices.

What’s the Advantage of Costco’s Retail Model?

Selective stocking

Costco operates 697 warehouses in the US and eight other countries. Each Costco warehouse is about 144,000 square feet on average. Costco operates on a very lean operating cost model. The company seeks to limit the number of available stock keeping units to ~3,700 in its warehouses, as it believes in higher volumes to drive a higher profit.

In keeping with its lean and mean cost model, the lower number of items at Costco ensures that the fastest-selling items are displayed to optimize the use of retail space. The control over merchandise and inventory levels, as well as control over entrances and exits in its no-frills warehouses, also ensures lower shrinkage and lower employee costs.

Store productivity

As a result of these strategies, Costco’s sales per square foot is the highest among competitor firms operating in the industry[1. The above chart displays the sales per square foot for Costco and its rivals. The fiscal year ends in August / September for Costco, while it’s late January / early February for the other firms].

Rivals carry more products

That said, the number of items stocked at Costco is considerably lower than peers including other warehouse clubs. The average Sam’s Club operated by Walmart (WMT), which is also a warehouse club concept, carries about 5,500 products. Each Sam’s Club averages 132,000 square feet in size. Walmart’s considerably smaller neighborhood format stores carry about 29,000 items while its 187,000-square-foot supercenters offer 142,000 items. BJ’s Wholesale Club carries about 7,000 items. Supermarket chain Kroger (KR) stocks about 13,000 private-label items alone.