Costco looks to enter two new markets in 2017

Date : 30 September 2016

We review Costco’s fourth quarter and full year performance and its plans for the year ahead, including two new market entries.

Full year revenue rises to $116.1bn

Costco delivered a solid performance in the fourth quarter, broadly in line with Q3. In Q4, net sales increased by 2.1% to $35.7bn, with comparable store sales (excluding fuel and currency impacts) up 3%. As has been the trend for the year, Canada continued to lead the way with comparable store sales up 5%. Net income increased by 1.6% to $779m. For the full year, Costco’s total revenue, including membership fees, increased by 2.2% to $116.1bn, cementing its position as one of the leaders in global retailing. Ecommerce sales increased by 13% in the quarter.

Canada, Mexico, Spain and the UK lead the way internationally

While the year did not finish as strongly as it had started for Costco, the retailer saw slightly positive average transaction and shopping frequency for the quarter. Canada, Mexico, Spain and the UK delivered the strongest performances during the quarter within its international segment. On a category basis, food and sundries remained negative for the quarter, although this was primarily driven by a 21% decline in tobacco sales. Excluding this, food and sundries would have been up 3%. Produce and deli were the strongest departments within fresh foods, with meat seeing continued deflation.

Enhancing membership value with new cash back rewards program

A key development in the final quarter was the transition from Costco branded American Express cards to Citi Visa cards in the US. The retailer sees this as an important initiative in enhancing member value, with cash back rewards doubling from 1% to 2%. This is particularly beneficial for Executive Members, who already receive 2% cash back, as this will give them a 4% reward on most purchases. Executive Members continue to be a key focus for Costco; while they account for one third of the customer base, they account for two-thirds of purchases where Executive Membership is available. The transition to the new Citi Visa cards is progressing well, with conversion, usage and new sign-ups ahead of internal expectations.

Opportunities for growth in existing markets

Costco plans on opening 29 new locations in the current financial year, with most these, 17, opening in the US. The retailer continues to see significant opportunities in the US, particularly in medium sized markets, and in markets where it faces more direct competition. Previously both of these would have been less of a priority, but the retailer has seen its clubs perform well as it has expanded into smaller cities, and in areas where its competitors have historically been more dominant. This year it also plans on opening four new Business Centres, bringing its total to 15, including its first in Canada.

Rapid expansion in Canada

Canada will be a major focus for Costco this year with seven new units opening, its most rapid pace of opening in the country for several years. Costco Canada has been delivering comp sales growth of 5% to 9% for the last few years, providing the retailer with the confidence to continue expanding, with the potential to open over 100 units in the country. While there is likely to be some element of sales cannibalisation, Costco expects overall sales to grow as existing customers will shop more frequently as they will be closer to the clubs. The retailer also expects to open its first outlets in France and Iceland in 2017.

Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage on Costco globally. He is also responsible for shaping IGD's research program across North America. Contact Stewart at [email protected] for further insight on the region.