Costco Wholesale (COST) employs a dominant no-frills and relatively recession-resistant retail (XRT) model. The company believes in competitive pricing, even if its margins have to take a hit in the short term. This is one of the company’s major strengths. Even during the Great Recession of 2008-09, its same-store sales (excluding fuel) were positive.
Costco’s consistent increase in same-store sales is one of its major strengths. Its value-for-money philosophy has helped the retailer attract and retain a loyal customer base. Renewal rates are rising, both in the US and abroad.
Consistent financial results
Costco’s management has also exhibited good cost control. Profitability margins haven’t varied much in the last ten years. In fact, they’ve risen slightly, owing to the company’s strategic expansion and cost control initiatives. Consistency in financial results is reflected in the company’s cumulative performance, which has surpassed the performance of its peer group in the five years through August 30, 2015. The peer group comprises Walmart (WMT), Target (TGT), The Home Depot (HD), Lowe’s (LOW), Amazon (AMZN), Best Buy (BBY), Kroger (KR), and Staples (SPLS).
Costco has looked at measured expansion in the US and abroad. Its store footprint as yet is considerably smaller than Walmart’s and Target’s, as well as several other competitors. As such, Costco has a sizable opportunity in transitioning from primarily a North America-based retailer to a truly global name.
Attracting and retaining millennial customers is both a challenge and an opportunity for Costco and other wholesale clubs in North America. Part of the challenge stems from the fact that millennials tend to prefer urban living, whereas Costco’s warehouses, out of economic necessity, tend to be located in more suburban locations. According to Richard Galanti, CFO of Costco, about one-third of new membership signups in recent months have been millennials.
Organics and fresh food
Adding to its fresh and organic produce will be a key attractor for millennials. Plus, organics also represents a sizable opportunity for Costco, both for the top and bottom lines. Also, Costco’s e-commerce channel growth should also boost sales both from millennials as well as other demographic groups.