Costco Wholesale Corporation

founded: 1983

Contact Information:

headquarters: po box 34331
issaquah, wa 98027 phone: (425)313-8100 fax: (425)313-6430 toll free: (800)774-2678 url: http://www.costco.com

OVERVIEW

Costco Wholesale Corporation operates a chain of 386 no-frills membership warehouse stores that carry name-brand merchandise at substantially discounted prices. Costco stores are geared to meet the needs of small- and medium-sized businesses. Individual memberships are also available to those who belong to a qualifying organization. More than 22 million households hold Costco memberships, accounting for more than 39 million cardholders. As of February 2002, Costco operated 386 locations. Of that total, 285 stores were located in 36 United States and Puerto Rico. International locations include Canada, Mexico, the United Kingdom, Taiwan, Korea, and Japan.

Three types of membership are offered, and membership is required to shop at a Costco warehouse. Business members pay annual fee of $45, which includes a spouse card. Up to six additional cards may be purchased by a business member for $35 each for partners or associates in the business. Gold Star membership is for individuals not associated with a business. Individual members pay a $45 annual fee, which includes a free spouse membership. The Executive membership plan provides the regular benefits of shopping at Costco, as well as allowing executive members to purchase a range of discounted consumer services such as auto and homeowner's insurance and long-distance telephone service. Additional discounted business services are also made available, including health insurance, payroll processing, and merchant credit card processing. Executive membership costs $100 annually. The largest membership group is Gold Star, with 14.0 million members, followed by Business, with 4.4 million members. Executive accounts and add-on members accounted for 1.3 million and 3.6 million memberships, respectively.

COMPANY FINANCES

For fiscal year 2001, net sales totaled $34.14 billion. Adding memberships fees of $66 million, the total income for 2001 was $34.8 billion, reflecting an increase of $2.6 billion over fiscal year 2000 total revenues of $32.16 billion. Despite the increase in net sales, net income dropped from $631 million in 2000 to $602 million, due primarily to increased operating expenses. Earnings per share also fell, from $1.35 per share in 2000 to $1.29 per share in 2001. Although Costco's value decreased slightly during 2001, the company grew significantly in the last 10 years. In 1992 net income totaled $242.0 million on total revenues of $14.1 billion, and stock earnings were $0.49 a share; therefore, in the 10 years prior to fiscal 2001, Costco more than doubled its total annual revenues as well as its earnings per share. Of total revenues from fiscal 2001, operations in the United States accounted for $28.6 billion, Canadian operations accounted for $4.7 billion, and all other international operations accounted for $1.5 billion. During the second quarter of fiscal 2002, net sales increased 13 percent compared to the same time period of the previous year. Stocks traded at the beginning of March 2002 for $39 a share, nearly in the middle of the 52-week high of $46 and low of $29.

ANALYSTS' OPINIONS

Based on increased positive performance in the first two quarters of fiscal year 2002, analysts mark Costco stock at under $40 as a strong buy. Analysts viewed the downgrading in Costco stock as more indicative of the overall downturn in the retail industry and, in general, the economy. Positive signs identified by analysts included a 13 percent increase in net sales during the second quarter of fiscal 2002, the approaching end of a promotional 2 percent rebate offered to Executive members, an overall membership renewal rating of 85 percent, and Costco's plans for continued aggressive growth in square footage. The major negative factors affecting Costco included increased expenses from new openings, rising utility prices, and an increase in wages paid to employees. Most analysts believe that Costco holds promise for both short- and long-term growth, and stock prices are estimated to increase to between $50 and $60 a share.

HISTORY

The journey toward the entity now known as Costco Wholesale Corporation began in 1954 when Sol Price created Fedmart, a discount department store for all government employees willing to pay the $2 annual membership fee. The members-only warehouse concept caught on quickly, and within 20 years, Price was operating 45 stores that produced more than $300 million in annual sales. Price's involvement with Fedmart ended in 1975 when he sold the company to Hugo Mann after losing leadership control. The company dissolved seven years later.

FAST FACTS: About Costco Wholesale Corporation

Ownership: Costco is a publicly owned company traded on the NASDAQ Stock Exchange.

Ticker Symbol: COST

Officers: James D. Sinegal, 65, Pres. and CEO, 2001 salary $350,000; Jeffrey H. Brotman, 59, Chmn., 2001 base salary $350,000; Richard D. DiCerchio, 58, SEVP, 2001 salary $429,423; Richard A. Galanti, 45, EVP and CFO, 2001 base salary $429,423

Employees: 92,500

Principal Subsidiary Companies: Costco, whose business market is primarily the Eastern and Western United States and Canada, has a subsidiary that operates in Japan and does business in Mexico, South Korea, Taiwan, and the United Kingdom through joint ventures. Costco Wholesale Industries, a division of the company, operates manufacturing businesses such as special food packaging, optical laboratories, and meat processing.

Chief Competitors: Costco competes against a wide range of the retailers in the consumer market in various products groups, including Wal-Mart, Kmart, Service Merchandise, Home Depot, and Dollar General.

Price then set his sights on small businesses. Partnering with his son, Robert, along with Rick Libenson and Giles Bateman, Price started Price Club. Using $800,000 of his own money along with $1 million contributed by California businesses and $500,000 added by former Fedmart employees, Price opened the first Price Club in San Diego in 1976. Price's vision was to offer a small selection of products to businesses at steeply discounted prices, usually no more than 10 percent above invoice. By targeting small businesses, Price hoped to supplement profits with membership fees. He also wanted to attract financially stable customers, which would reduce costs associated with bad checks and shoplifting.

After the first year of operation, Price Club posted a net loss of $750,000 on sales of $16 million. As a result the company moved to expand its membership by including government, utility, and hospital employees, along with credit union members. Additional stock was sold, primarily to friends, to keep the company afloat another year. By 1978 Price Club had rebounded from its rocky start and was able to expand its operations by opening a second store in Phoenix, Arizona. In the same year, Price helped his other son, Laurence, establish a tire-mounting and battery installation business adjacent to a Price Club store. The shop leased space from Price Club and serviced tires and batteries sold by Price Club.

By 1980 Price Club was operating four stores in California and Arizona and was generating $150 million in annual sales. In the same year, the company went public. In 1984 Price Club expanded to the East Coast, opening two stores in Virginia, followed by a store opening in Maryland in 1986. During this time, Price Club also moved into New Mexico and expanded into Canada, in a joint venture with Canadian retailer Steinberg, with a store opening in Montreal. Because Price Club insisted on owning the land on which it built its warehouses, the company created the subsidiary, TPCR Corporation, to handle its land management and development. Through TPCR, Price Club worked with developers to bring in other retailers to Price Club property sites. Increased competition was offset by increased traffic flow and the rent paid by retailers to Price Club. By 1985 profits had grown to $45 million on sales of $1.9 billion.

In 1986 Price Club purchased A.M. Lewis, a grocery distributor serving Southern California and Arizona. In 1988 it opened two Price Club Furnishings outlets, which served as home and office furnishings stores based on the Price Club warehouse concept. In 1990, Price bought out Steinberg's share of the Montreal store and expansion continued in numerous markets including California, Colorado, and British Columbia. In 1992 Price Club partnered with Controladora Comericail Mexicana to open a store in Mexico City, with a second store opening in the following year. Conditions such as steep land prices, traffic congestion, and increased competition resulted in the closing of two stores on the East Coast in 1992.

Increasingly strong competition from new warehouse membership clubs, such as the Wal-Mart spinoff, Sam's Club, and Kmart's PACE membership club, were challenging Price Club's hold on the warehouse market. Price Club was also facing stiff competition on the West Coast from Costco Wholesale. Costco was formed by James D. Sinegal, a former executive of both Fedmart and Price Club, and Jeffrey H. Brotman, an oil exploration company executive. Basing their stores closely on the Price Club concept, Sinegal and Brotman opened the first Costco in Seattle, Washington, in 1983. Costco went public two years later, expanded into Canada, and became the first warehouse retailer to add fresh foods such as produce, bakery products, and meat. Just five years after its start up, Costco's annual sales reached $2 billion.

As competition increased, Price Club began to experience problems. In 1986 Sol Price was sued by his son, Laurence, for attempting to buy out the tire-service business, then valued at $5 million. The furniture store concept failed, and expansion was slowed by the heavy cost of purchasing land and building warehouse. Other companies pursued less costly and more aggressive expansion programs and, by 1987, Price Club had been passed by both Costco and Sam's. Although both sales and earnings had grown steadily each year, in 1988 Sol Price resigned as head of the company, and was replaced by Robert Price. In 1992 earnings dropped for the first time since 1980.

By 1993 Sam's Clubs were dominating the industry, with nearly half of the market. With Price Club's market value continuing to drop and Costco in fear of being taken over by Sam's, the two companies entered merger negotiations. The result was the creation of Price-Costco Inc., with Sinegal serving as chief executive officer and Robert Price serving as chairman of the board. Price shareholders retained a 48 percent interest in the new company, and Costco shareholders took a 52 percent interest. From the start, the merger did not develop smoothly. Numerous ongoing conflicts arose between Sinegal and Price; continued declining sales only spurred the dissention. In 1994 Price took the commercial real estate operations and several other international assets, all totaled about 10 percent of the PriceCostco's worth, and spun off as Price Enterprises.

Upon Price's departure, Sinegal focused on expansion and international development. In 1997 the company's name was changed to Costco Companies. Online sales were launched in 1998, and by 1999 warehouses had opened in South Korea, England, and Japan. Also in 1999 the company underwent yet another name change, becoming Costco Wholesale Corporation.

STRATEGY

From its first store opening until the present, Costco's basis strategy has remained unchanged: cut costs at every corner in order to provide customers with discounted prices. The stores sell an array of goods, from five-pound bags of rice to televisions and jewelry. Selection within product types is limited, thus reducing the costs of excessive inventory. Every measure is taken to reduce overhead and keep costs low. The warehouse stores are built on cheap industrial land and are void of decoration, products are stocked in bulk on the warehouse floor, sales help is kept to a bare minimum, and there is no advertising budget, except to announce a new store opening.

Rapid expansion has also been become an increasingly important aspect of Costco's overall strategy. In fiscal 2001 the company spent nearly $1.5 billion to upgrade and expand its operations. Of that total, almost $1 billion was used to open new warehouses or relocate existing stores, and $150 million was spent on remodeling efforts. Another $200 million was used to expand Costco's support facilities. In all, Costco opened 39 new warehouses in fiscal 2001, of which 26 were located in new markets. Notably, seven stores began operations in Texas, with positive early results. Along with increasing the number of warehouses, Costco has also increased the average size of its operations from 135,000 square feet to 148,000 square feet.

CHRONOLOGY: Key Dates for Costco Wholesale Corporation

1983:

The first Costco warehouse opens in Seattle, Washington

1985:

Costco becomes a publicly held company

1991:

Completes public stock offering of 3.45 million shares, generating $200 million for expansion and debt reduction

1993:

Merges with The Price Company to form Price/Costco Inc.

1997:

Spins off most non-warehouse assets to Price Enterprises, Inc. and changes name to Costco Companies Inc.

1998:

Begins online sales and operates internationally in Canada, England, South Korea, and Japan

1999:

Re-incorporates and changes name to Costco Wholesale Corporation

2001:

Generates $73 million in e-commerce sales

2002:

Net sales for the first half of fiscal year 2002 top $17.5 billion

INFLUENCES

The major factor influencing Costco is the state of the economy. Retailers are prone to be significantly impacted by any downturn in the economy as consumers cut back on spending, especially on nonessential items. However, despite the recession of the early 2000s, Costco remained on track for significant growth. The company committed to look beyond the recession and be prepared for a re-energized marketplace; however, if economic hard times last longer than Costco anticipates, the estimated annual earnings growth of 15 percent may be difficult to achieve. On the other hand, if the recession ends quickly, Costco will be ahead of many of its competitors who have cut back on expansion efforts due to the slow economy. Another factor influencing the future of Costco is the efforts of its competitors. Sam's Clubs have already infiltrated a large share of the market, both Target and Kmart have plans for aggressive expansion into the wholesale business, and grocery chains such as Kroger and Albertson's are trying hard to attract customers to their supercenters.

CURRENT TRENDS

Rapid expansion plans called for Costco to nearly double in size by 2005. With 32 new stores opening and 7 relocations in 2001, Costco planned to open another 35 to 40 each year for several years. With a presence in 35 states, most new stores will be located in existing markets, as the company has no plans to expand into sparsely populated areas such as North Dakota or Wyoming. Recently entered market areas include Missouri, Minnesota, Ohio, North Carolina, South Carolina, and Tennessee. Because new stores cover more square footage, sales are expected to grow faster than actual store count. Focus on ancillary services has also increased. Nearly 85 percent of Costco warehouses include pharmacies, optical centers, and one-hour photo centers, and the company's goal is to provide these services at all locations. Costco fueling centers are also considered an area of potentially large growth. In 2001, 150 Costco locations included a gas station, and plans called for adding increasing numbers of fuel services to both new and existing warehouses. Another area of significant growth for Costco is online sales. E-commerce sales reached $73 million in fiscal 2001 and were expected to top $100 million by the end of fiscal 2002.

Never before accepting credit cards in order to avoid the administrative costs, in 2001 Costco introduced a partnership with American Express that provided customers with membership to both Costco and American Express in one card. By the end of fiscal 2001, nearly 1.9 million Costco members held the co-branded cards. The Special Order Kiosk program, also introduced in 2001, allows members to special-order certain "big-ticket" items, such as Kohler and Grohe bathroom fixtures, Sealy mattresses, brand name tires, and furniture. In 2002 Costco announced the introduction of a new cash card program. The card can be used for gifts or for returned items.

PRODUCTS

Products categories include groceries, candy, appliances, television and media, automotive supplies, toys, hardware, sporting goods, jewelry and watches, cameras, books, housewares, apparel, health and beauty aids, tobacco, furniture, office supplies, and office equipment. Costco carries national and regional name brand products, including recent contracts with merchandisers Titleist, Levi, Thomasville, Elizabeth Arden, and Sony computers. Costco also carries a line of private label products under the name Kirkland Signature. The Kirkland Signature line includes juice, cookies, coffee, tires, housewares, luggage, appliances, clothing, and detergent. New private label products recently added included baby formula and frozen foods. In 2001 the Kirkland Signature brand of olive oil accounted for 15 percent of sales in the United States. With wine sales of more than $500 million, Costco is the largest wine retailer in the nation; additionally, more than 50,000 carats of diamonds passed into the hands of Costco customers in 2001.

MORE THAN A WAREHOUSE

Costco doesn't just sell bulk candy and discounted housewares; the company offers its members a range of services beyond what is stocked on the warehouse floor. For small businesses that want to accept credit cards, Costco will handle the administration and paperwork. Small businesses can also apply for small business loans, set up a checking account, or set up a retirement account. Companies can even purchase background music through Costco. Special services for individuals include discounted auto sales, auto financing, home and auto insurance, travel packages, long-distance service, and check-printing services. Costco also coordinates special rates for real estate services, financial planning, and mortgage services.

CORPORATE CITIZENSHIP

Costco supports a wide range of national and regional philanthropic endeavors. For example, after the terrorist attacks of September 11, 2001, Costco responded quickly by donating vital supplies to more than a dozen help organizations, including fire and police departments, the Red Cross, the Salvation Army, and Staten Island Relief. The corporation donated $1 million directly to the New York Trade Center Relief Fund and collected donations at its warehouses from members and employees, which totaled more than $3 million. Another $100,000 was donated by the company to the families of those lost at the Pentagon.

GLOBAL PRESENCE

Canada is Costco's largest international market, with 60 stores. Eleven stores operated in the United Kingdom, and 20 stores operated in Mexico. Other international locations include Taiwan (three stores), Korea (five stores), and Japan (two stores). Costco operations have been particularly productive in Canada, Mexico, and the United Kingdom. Growth has been slower in the Asian markets, which can be attributed to several factors. First, the Asian economy has experienced a significant downturn from which it has not fully recovered. Second, the region has a strong tradition of established retail shopping. As a result, Costco has had more difficulty lining up distributors and enticing customers. Finally, in most parts of Asia, households are very small and storage space is limited; therefore, Costco has found it necessary to reduce the size of its bulk items to accommodate smaller purchase amounts.

EMPLOYMENT

Costco seeks ambitious, highly motivated individuals who enjoy the fast-paced environment of the retail industry. Most Costco employees begin their careers at a warehouse, where they learn the details of the Costco business. Careers are also available at the home and regional offices, which employ individuals in the fields of accounting, marketing, buying, graphic arts, journalism, information systems, human resources, and law. Costco rewards its best employees with promotions, with 85 percent of management positions filled from within the organization. Costco offers its employees exciting opportunities, personal and career growth, a friendly and supportive work environment, stability, excellent benefits, and a workplace focused on ethical, legal behavior. ComputerWorld named Costco information systems division one of America's best places to work in information technology in 1999, and Washington CEO chose Costco as one of the top three companies to work for in the state of Washington.

SOURCES OF INFORMATION

Bibliography

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"costco wholesale corporation." hoover's company profiles, 2002. available at http://www.hoovers.com.

"costco wholesale corporation: financials." drug store news, 6 march 2002.

"costco wholesale corporation reports second quarter and year-to-date operating results for fiscal 2002 and february sales results." business wire, 5 march 2002.

desjardins, doug. "costco charts growth plan for fy 2002." dsn retailing today, 11 february 2002.

grant, tina, ed. international directory of company histories, vol. 14. detroit: st. james press, 1996.

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. costco wholesale corporation's primary sic is:

5331 variety stores

also investigate companies by their north american industry classification system codes, also known as naics codes. costco wholesale corporation's primary naics code is:

452990 all other general merchandise stores