Costco is the 9th largest retailer in the world in market capitalization and recently was ranked by Fortune Magazine as the 22nd most admired company. On the University of Michigan’s American Consumer Satisfaction Index, Costco ranks high among retailers.
Costco has grown over the 27 years of its existence into a global company that owns 573 warehouses and plans to open another nine over the coming six months. It operates in the United States, Puerto Rico, Canada, Japan, Korea, Mexico, Taiwan, United Kingdom, and Australia.
Despite the economic downturn, revenue for 2010 reached $78 billion, including membership fees of $1.5 billion, an increase of 9 percent over fiscal year 2009. Costco’s investors have still been paid a dividend, which has increased around 12 percent over the past five years.
Costco’s shares value increased by 14 percent during the third quarter in 2010, far above its competitor BJ’s, which increased by a mere 3.2 percent during the same period. “We think FY11 is shaping up well for Costco, and are reiterating our Buy recommendation and $70.00 price target on the stock,” according to an article on Seeking Alpha, a stock analysis website.
The company’s warehouse business model calls for keeping costs low and earning the majority of its profit through a membership fee, while keeping prices as low as possible for its membership and selling only products that are popular.
"Costco’s business model is meant to maximize efficiency. The warehouse format keeps costs low, as they buy and sell items in bulk. Shoppers pay membership fees, and in return receive exceptionally low prices," according to Dividend Monk.
The company reports an annual customer retention rate of 87 percent. The loyalty is earned by offering the best product return policy of any company. For example, one customer returned a mattress after using it for almost a year because it did not stay firm as promised, receiving a full refund on the purchase price.
Included in the business model is also a 2 percent cash back policy for all purchases during the year and the same percentage for all purchases on the American Express credit card for executive members.
Warren Buffet’s Berkshire Hathaway Inc. owns more than $300 million in Costco stock. For Berkshire, this stock holding is tiny compared to its other holdings, but Buffet’s ownership is nonetheless a tribute to the company’s operating efficiency.
Continued, see Getting the Customer in the Door on the next page…
