Costco is a wholesale corporation which operates in membership warehouses. These warehouses offer a selection of private and branded label products. The products are usually in the merchandise categories inside the warehouse facilities which are self-service. Examples of the company’s products include tobacco, alcohol, cleaning supplies among others. It has operations in various countries. Its business model is unique in that it requires purchasing of membership by customers in order to shop.
Reward for Investors
This company has seen a share price growth of 100% in the past five years. Consumer membership, managing inventory, and prices as well as employee empowerment are some of the things Costco focuses on. It also warrants a premium valuation (P/E of 28.79). This means that it rewards its investors. The company focuses on bringing the assorted products to the consumers. This is done mainly when the consumers purchase in bulk. Over the past five years, Costco has rewarded the company’s shareholders. It has had an increase in the share price with over 100%. This has also contributed to the growth of dividends in the company over the said period. A special $7 dividend was experienced in the year 2012. The dividend served as a unique payout to investors.
Superior Business Model
Investors in the company have experienced the capital gains over the past five years. This has been made possible by the company’s superior business model. Costco has a unique management style which benefits consumers, employees as well shareholders. This company is at the forefront of consumer good retailers’ due to its business model.
Discount Retails Business
Aside from that, Costco competes with supermarkets, general merchandise retail competitors, and supercenters. These are good examples of regional and national retailers. It also competes with single category competitors though to a lesser extent. The discount retail business happens to be very competitive. Despite this, Costco has retained its leading position.
Operational Efficiency
One of the factors that have enabled the company to achieve this is its superior operational efficiency. The company also has a unique corporate culture, merchandising prowess, and a great management execution.
Economy of Scale
Costco also practices economy of scale and does not rely so much on making a profit from the sale of goods. Instead, it emphasizes more on the profits they derive from membership fees. Costco also relies strongly on other sales of the products and services hearing aid centers, food courts and pharmacies. The company maintains low and consistent pricing in items. This includes caps of 14% for items that are branded. Additionally, the company sustains 15% for private label Kirkland signature items. Expensive marketing and advertising costs are, therefore, not needed.
Bulk Purchases
Another advantage is that the company purchases large amounts of items from suppliers. This in return allows them quantity related discounts. Costco also sells most items in bulk hence saving on cost and fast inventory turnover. This, therefore, allows the company to sell a lot of items at once instead of one item at a time, thus promoting higher sales. By buying merchandise directly from suppliers, it helps Costco to minimize the costs and supply chain problems.