Costco Wholesale Corporation

10809 120th Avenue N.E.
Kirkland, Washington 98033
U.S.A.
(206) 828-8100

Public Company
Incorporated: 1983
Employees: 15,000
Sales: $5.20 billion
Stock Exchange: NASDAQ

Costco Wholesale Corporation operates a chain of membership warehouses that sell a wide variety of name-brand products at discount prices to businesses and individuals who are members of selected employee groups. The membership warehouse-club concept emerged in the early 1980s and has become a $30 billion industry. Costco is the third largest of such companies; the top four account for 85% of industry sales. With 82 warehouses, located mostly in the Pacific Northwest, California, Florida, and Canada, it was, in the early 1990s, the fastest growing chain in the industry.

In September 1983 Costco’s first warehouse opened in Seattle, Washington. At this time, warehouse outlets had long existed, but the concept of a wholesale club was relatively new and promising. Dubbed “buyers’ clubs” and begun in 1976, these warehouses were wholesalers that required shoppers to become members and pay an annual membership fee. The membership fee helps reduce already-low overhead, so that items can be sold at an average of 9% over cost from the manufacturer. At the time Costco was formed, membership warehouses were primarily a west-coast phenomenon. Their popularity has since spread throughout the United States and Canada.

From the company’s inception, Jeffrey H. Brotman has served as chairman, and James D. Sinegal has been president. While Sinegal had a background in membership warehouses and retail chains, Brotman was an executive of an oil exploration company and co-founder of a group that operated a chain of apparel stores. In 1985 Costco became a publicly owned company.

The economic slowdown of the late 1980s gave a further boost to membership warehouses. Where most retailers suffered during this period, Costco thrived. Roughly one-third of its sales being food and one-third vending-machine sundries such as candy, tobacco, and soft drinks, the majority of Costco ’s primary sales are recession-proof basics. In the fiscal year ending September 1, 1991, Costco’s net income rose 72%. At this time, 60% to 65% of industry-wide club members were small-business owners, for whom cost-cutting was imperative.

Costco closed three units in west Florida in 1990. They were still performing poorly after several years. Stores in central and south Florida, however, had done well. In the fall of 1990 Costco opened its first two units in the Northeast, both in Massachusetts. In 1991 a third Massachusetts location opened. These stores have been successful, and the company continued an ambitious expansion program. During the 1992 fiscal year, Costco planned to open 18 new warehouses.

A factor in Costco’s strong growth was its creative merchandising. Most of Costco’s warehouses offer a complete fresh food section—including a bakery, refrigerated produce area, fresh meats, and seafood. It was the first membership warehouse to offer such a selection.

Costco has two basic memberships, business and individual. Any business or store with a retail sales license is qualified for a business membership. Business members can also buy goods for private use. Gold Card memberships are available to individuals in selected occupations or groups. These memberships include the same wholesale prices offered to business members. Annual fees are refunded fully if members are not satisfied.

Costco’s strategy is to offer high-quality, brand-name merchandise at prices below those of traditional wholesalers, discount retailers, and supermarkets. To achieve this, Costco buys nearly all of its merchandise at volume discounts from manufacturers, rather than distributors, and stock is usually shipped directly to selling warehouses to minimize freight costs. Warehouses are often on industrial sites or in other areas where property costs are at a minimum, and stocked items are placed directly onto the selling floor, reducing handling and stocking labor. The number of sales and service employees is also minimal. Half of the company’s employees in 1990 held part-time status. Warehouses are almost entirely self-service, from finding and buying items, to loading them into a customer’s vehicle.

Another key to Costco’s low overhead is its advertising policy, which limits expenditures to new warehouse openings. Word of mouth and savings do the rest. The entire operation is cash and carry, eliminating the expense of credit card administration. Bad checks are rare since qualifications for membership minimize them.

In March 1991 the company completed a public offering of 3.45 million shares of common stocks. Proceeds of approximately $200 million were used to fund expansion and to reduce the company’s debt.

—Carol I. Keeley