This 'Warehouse Store' Pioneer Continues to Thrive

It was an idea that revolutionized shopping as we know it...

In the early 1980s, combining retail and storage spaces was a novel thought. But one company was able to think outside the box... and change the retail industry forever.

Back then, many retailers had to obtain and fill warehouses or backrooms, and then pay employees to open boxes and restock shelves. That meant spending a lot of money on commercial space and labor.

But the new "warehouse store" model changed everything. It helped brick-and-mortar stores create an entirely new retail experience. And today's company pioneered that model...

Costco Wholesale (Nasdaq: COST) is the third-largest retail company in the world, behind Walmart (WMT) and Amazon (AMZN). It has 817 warehouse stores worldwide, with the overwhelming majority in the U.S. (565) and Canada (105). There are also 39 stores in Mexico, 30 in Japan, 29 in the U.K., 16 in Korea, 14 in Taiwan, 13 in Australia, three in Spain, and one each in Iceland, France, and China.

Costco's real estate holdings total roughly 119 million square feet, with its warehouse stores averaging 146,000 square feet each. It also employs 275,000 people in 12 countries.

The company has over 111 million cardholders and enjoys a 91.3% membership renewal rate worldwide. In 2021, it earned $3.9 billion in membership fees. Including memberships, Costco earned roughly $192 billion in revenue in fiscal year 2021.

And it does all that at the lowest possible cost for customers...

Costco has – as a Goldman Sachs analyst first said years ago – established "absolute pricing authority." Customers have no doubt that they're getting great prices at Costco.

There are three key reasons why Costco is able to keep its prices so low... and keep customers coming back over and over again.

First, the company doesn't try to be all things for all people, like a Walmart or an Amazon.

Costco offers a narrow selection of supersized merchandise in a wide range of product categories. Walmart and Target have about 140,000 to 150,000 items per store. Costco has nearly 3,800. A typical supermarket has more than 300 different types of cereal. A typical Costco has 12.

By keeping product offerings low, Costco can focus on providing one thing: competitive value – giving members the highest quality at the lowest possible cost.

That's how Costco sells more wine than any other retailer in the world. That's also how it sells more than a billion rolls of toilet paper a year (its best-selling item). That's enough to wrap around the Earth 1,200 times.

Second, Costco's inventory creates a "treasure hunt" atmosphere, especially in luxury goods. And those products move fast. If you see a new Coach handbag on display, you better buy it right then, before it's gone.

Third, the very nature of a membership system assures quality, loyal customers...

Costco turns customers into "members" by charging them an annual fee to get in the door. That's a key part of its strategy for increasing foot traffic.

Membership creates exclusivity... and brand loyalty. One adoring Costco fan, who maintains a Facebook page under the name "Costco Connoisseur," boasts of having visited 244 different warehouses in 37 states and five countries.

Costco's exceptional brand loyalty is also evident in its Net Promoter Scores (NPSs). This industry metric measures a customer's willingness to return for purchases and recommend the company to friends and family. NPSs range from -100 to 100. Anything above 50 is considered excellent.

In March 2021, Costco recorded NPSs above 85 in every major retail category, including "trust" and "company recommendations." Its scores are consistently higher than those of well-known brands like Starbucks, Walmart, and Amazon.

That's a huge reason why Costco performed so well throughout the pandemic. Some product areas even expanded as a direct result of the COVID-19 lockdowns. With the emergence of the Delta variant, the company observed an uptick in demand for toilet paper, cleaning supplies, and other related items.

Strong comparable-store sales figures give further insight into Costco's success. In fiscal year 2020 (which ends in August), those sales grew 8%. Globally in 2020, comparable-store sales increased for TVs (14%), PCs (53%), alcoholic beverages (17%), produce (16%), and meat (21%).

Costco's comparable-store sales continued their powerful uptrend in 2021. For the fiscal year ending on August 29, 2021, Costco's overall sales rose more than 17% and comparable-store sales increased 16%.

This all stems from Costco's fantastic business model, which drives its strong performance. These trends should continue to generate solid returns in the long term.

Sometimes investing is simple.