Three things we learnt from Costco’s results

Date : 08 October 2014

Costco delivered an impressive performance in the final quarter of the year. Total revenue increased 9.3%, comp store sales were up 7% and net income rose 13.0%. As the retailer focuses on its new financial year, we take a look at what’s shaping its strategy.

1 Increasing capital expenditure
Over the last two years Costco has picked up the pace of new store openings, with 30 new sites in the last financial year, 17 of which were in the US. The retailer is planning on a similar run rate in 2014/15, with 31 new units, 19 of which will be in the US. In addition, it is also investing in relocating four stores. As a result, capital spending will increase significantly to between $2.5bn and $2.7bn, up from $2.0bn in the last full year.

While many global retailers are scaling back their new store plans, Costco’s relatively conservative historical rate of new store openings, less reliance on online retailing, and high sales densities, mean that there is significant headroom for it to continue developing its store estate, including in the US. Expect to see it up the run rate to 30-35 new sites in future years.

2 Investing in ecommerce
Costco ecommerce sales came in at just under $3bn for the year, around 2.7% of sales. Comp sales in ecommerce were up around 19% in the fourth quarter and the full year. With operations currently in the US, UK, Canada and Mexico, it plans to be in two additional markets by the end of its new financial year.

While online is less of a priority for the retailer, it is an area which it has been investing in over the last two years. This has included new technology, broadening the offer and improving its ecommerce supply chain. One of the more interesting aspects of its operations is the test which is currently in place with Google Shopping Express in San Francisco, Los Angeles and New York. This model, which enables it offer its range of store-based grocery products online, will also allow Costco to expand at pace and build on the strong growth which is currently being achieved. Importantly it is also driving membership sign-ups.

3 Targeting younger shoppers
Costco has put a number of initiatives in place to target younger shoppers. Recently it offered membership through Living Social, which included free products and a coupon to save money online, it started to re-stock Apple products and has broadened its range of organic products.

These initiatives are helping Costco to grow its membership base, and build appeal with Millennials in particular. This is a key demographic target for the retailer and will support its broader goals to increase the proportion of grocery and private label items sold. Expect to see further initiatives in the future which will help it target this group, including the expansion of its ecommerce partnership with Google.

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.