Business Studies Scholarship Program – Costco Wholesale: A Standout in the Saturated Retail Sector

Costco Wholesale: A Standout in the Saturated Retail Sector

Name: John Li
From: Phoenixville, Pennsylvania
Grade: [email protected]
School: Great Valley High School
Votes: 351

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q4 2019 hedge fund letters, conferences and more

Economic Slowdowns are Not a Problem For Costco Wholesale

In the past few months, we have seen stocks across the board plummet. However, Costco Wholesale Corporation (NASDAQ:COST)'s unique wholesale business model makes it well-positioned to overcome bumps in the road, now and in the future. In 2019, Costco’s gross annual profit was a staggering $19.817 billion, a 7.56% increase over 2018. It is not reliant on name recognition to drive revenue, unlike rival Walmart, which runs a costly $3.5 billion per year marketing campaign.

As shown by stores being flooded with customers during this coronavirus outbreak, Costco does not need advertising to attract customers. Its wholesale strategy allows the company to push products at drastically lower prices. With cash flow growth rates 25 percent higher than the industry average, this indicates that Costco has plenty of firepower to push through economic downturns.

Costco Wholesale Revenue From Membership Sales

Regarding store sales themselves, Costco Wholesale Corporation is unique to its competitors in that it is not reliant on product sales for revenue; products are only marked up 15 percent at most, where the industry standard is from 25 to 50 percent. Instead, two-thirds to 75 percent of its profits are made through membership sales. That means even in crises such as the coronavirus, where foot traffic has been cut in half or more in many stores, revenue is not an alarming issue because Costco has a relatively low dependency on foot traffic.

The bottom line is that Costco Wholesale Corporation’s financial projections remain unaffected in spite of the crisis. The EPS forecast for this quarter has remained slightly above $2. Fiscal growth remains at a staggering 9 percent year to date. On the year, stock prices have only decreased by 0.36 percent, despite the markets entering into a bear market; in comparison, Walmart’s stock price has dropped 4.361 percent on the year. Costco has proven its stability during the stock market’s most volatile month in history and shown that it can consistently deliver high dividends for its investors no matter the economic environment.

The Future: International and Online Growth

Costco Wholesale Corporation maintains high growth levels primarily from domestic success; with a 90 percent membership retention rate, Costco’s consistency in the U.S. allows it to effectively focus on a long-term international growth strategy. In fact, in 2019 only 13 percent of its sales came from stores outside the U.S. and Canada, and warehouses were only located in 10 countries outside of North America. With stores finally opening in China in 2019, there is a clear path toward growth.

Costco has the opportunity to dominate the retail sector in China, whose burgeoning middle class represents billions in potential revenue. Costco has already proven its uniqueness overseas; membership retention rates are already over 80 percent, and may near U.S. rates in the near future. This does not even include the many other untapped regions such as the Middle East and the EU. Overall, there is great potential in market expansion for Costco, and there are absolutely no limits for this company can grow to.

As much as Amazon may have dominated internet commerce over traditional retail giants, I believe Costco Wholesale Corporation actually will further grow as it invests in its e-commerce sector. A new focus by management on has provided product diversity; these range from selling name-brand clothes to Super Bowl tickets. Recently, Costco spent $1 billion on Innovel Solutions, a logistics company. This vertical integration will allow Costco to accelerate its introduction of overnight shipping and grocery delivery at minimal costs to the company. New strategies like these will allow Costco to compete in a highly changing market for years to come.

Costco Wholesale: Conclusion

In short, Costco Wholesale Corporation's unorthodox yet very efficient business model has made it a highly regarded company for both its members and shareholders alike. Its ability to innovate and reduce costs has made it an extremely productive company that can not only withstand market volatility and immense competition but also consistently produce high dividends for its investors. Costco will not be going anywhere soon and will continue to dominant the retail sector tomorrow, next week, next month, next year, and for decades to come.