A Wholesale Icon All Around the World (COST)
You see the founder of Costco (NASDAQ: COST), Jim Sinegal, worked for Sol Price, the founder of Price Club. Sinegal then teamed up with Jeffrey Brotman, a lawyer and part of a retail family in Seattle. They followed the model that Price Club began, big box stores where it was membership only and offered low prices are bulk items.
In 1985, they took the company public. That meant plenty of capital to expand the business beyond its Pacific Northwest roots. By 1993, they bought Price Club as part of that expansion.
Today, COST has more than 880 warehouses around the world. It has 574 in the US, 107 in Canada, 40 in Mexico, 31 in Japan, 29 in the UK, 16 in Korea, 14 in Taiwan, 13 in Australia, 4 in Spain, 2 each in France and China, and 1 in Iceland.
That’s a pretty strong growth path in about 37 years. The fact is, however, that within those decades, the stores haven’t changed that much. They have a signature footprint, and they not only appeal to families, but there are a number of businesses that rely on COST for their products and services.
Some of these stores are Costco Business Centers. They carry many of the items that the typical consumer Costco carries, but they specialize in products for enterprises and don’t carry items like jewelry, clothes, media, and automotive goods. As a matter of fact, 70% of the items in the Business Centers aren’t available in the consumer-oriented stores.
Source: WL Butler
Also, remember that all members pay at least a $60 annual membership fee. Given the significant discounts on the products COST sells, it’s pretty easy to make that back in a trip or two.
COST isn’t like Netflix (NASDAQ: NFLX) or AMZN. Each person needs a membership to buy products. While this may not be hyper-policed, it can be an issue when it’s time for checkout, since you have to present your card to the cashier and he/she checks the person on the card.
For $120, you can get an Executive Membership, which gets you a household card, which is handy if you have kids in school that may want to buy for their roommates or just pick up coffee or sweatpants. The card has other perks as well.
Those membership fees are solid, guaranteed revenue every year. The massive amount of business COST does every year – more than $195 billion in revenue in 2021 – means it can cut deals with suppliers of its house brand products and deliver incredible quality. For example, COST is one of the largest wine brokers in the US. That means it can find great wineries that can sell significant volumes to COST, which COST can then sell to its member at a fraction of the cost, if they were under private labels.
That same aspect works with all COST house brands, but COST also sells top brand name goods as well. The company is laser focused on providing quality and quantity. There isn’t a tradeoff, and that’s why the company continues to grow.
Source: The Motley Fool
Those lines are headed in the right direction and the amazing thing is, given the fact that most of its business remains in-store, there’s hardly a blip during the pandemic. If you think those graphs of the past five years are impressive, check out this price graph since 2009.
COST certainly got hit earlier this year, but now it’s one of the big winners in a rising inflation environment.
Food trucks and restaurants that use their products are getting squeezed but COST can maintain its pricing since it’s such a big buyer. Consumers can buy what they need and store some away if things get worse instead of better for them. This strategy has been working for four decades, and it looks like it won’t be changing anytime soon.
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