Business model of Costco Wholesale

Customer Segments

Costco serves a range of customers through its network of wholesale warehouses. As a members-only service, the Company refers to its customers as members. Costco offers two principal categories of membership:

• Gold Star Memberships, for individual consumers seeking to benefit from the Company’s low prices; and
• Business Memberships, primarily targeted at small and medium-sized businesses – allowing for resale of its goods, as well as individuals that hold a business licences, retail sales licence or other evidence of business ownership.

Costco also offers an Executive Memberships that allows customers to collect points and earn rewards.

Costco’s largest market is its native US, which accounted in 2015 for more than 70% of the Company’s total net sales. The Company, however, also operates membership warehouses in Puerto Rico, Canada, the UK, Mexico, Japan, Australia, Spain, and has majority-owned subsidiary companies in Taiwan and Korea. While the US is likely to remain the Costco’s largest market for the foreseeable future, international sales continue to grow year on year.

Value Propositions

Costco provides value to its customers in the following ways:

• Its low prices, with the Company offering wholesale prices to its members that are typically much lower than traditional supermarkets and grocery stores;
• Its risk-free memberships, with customers able to claim a refund on their memberships at any time if they are not satisfied with the service, as well as being able to return most goods and merchandise in-store for a refund;
• Its Executive Memberships reward scheme, which allows members to collect up to $750 per year in reward points on qualified Costco purchases; and
• Its accessibility and global reach, with the Company providing an online sales channel – including a delivery service – as well as operating an international network of wholesale warehouses exclusively for its members.

Channels

Costco operates a website at www.costco.com, through which it provides information to customers on its activities, locations, rewards schemes and memberships. The Company also operates an online sales channel – available only to customers in the US, Canada, the UK and Mexico – which offers additional products and services that are not necessarily available in-store, including photo processing, pharmacy, travel, business delivery, and membership services. For each of the past three years, online sales have accounted for approximately 3% of the Company’s total net sales for the year.

The vast majority of Costco’s sales are made through its international network of wholesale warehouses. At 30^th August 2015, the Company operated 686 memberships warehouses worldwide, of which 480 were located in the US and Puerto Rico. During 2015, Costco operated 206 warehouses in eight countries outside of the US – Canada, Mexico, the UK, Japan, Australia, Spain, Taiwan and Korea – and has plans to expand its international operations further.

Customer Relationships

Costco makes a variety of products and services available to customer in the US, Canada, Mexico and the UK available on a self-service basis, including many products and services that are exclusive to these markets. Members in these jurisdictions are able to make purchases through the Costco website, organise deliveries and manage their accounts without interacting with members of the Company’s sales staff.

As noted above, the majority of Costco’s sales are made through its physical network memberships warehouses, where customers are able to purchase products on a largely self-service basis, dealing directly with the Company’s sales representatives only at checkout or if personal assistance is required.

Costco provides in-person sales support through its teams of in-store staff, who are on-hand to handle any individual customer queries or concerns. The Company also operates dedicated customer support teams that can be contacted by email, telephone or mail to handle more complex problems or provide advice. These teams are supported by a range of online resources such as guides and FAQs that are available through the Costco website.

Additionally, customers are able to interact directly with Costco through its social media accounts with Facebook and Pinterest.

Key Activities

Costco is engaged in the operation of membership warehouses across the US and Puerto Rico, Canada, the UK, Mexico, Japan, Australia, and Spain, as well as through subsidiary companies it controls in Taiwan and Korea.

The Company’s warehouses generally operate seven days a week, providing a broad range of products, categorized as food, sundries, hardlines, fresh food, softlines, ancillary and other.

Costco also operates an online sales channel that offers members in certain jurisdictions additional products and services, including photo processing, pharmacy, travel, business delivery, and membership services.

Key Partners

Costco has a number of partnerships in place that help to supplement and support its own services. The Company’s most notable partners are its suppliers. Costco maintains direct buying relationships with producers of brand-name merchandise and goods, and does not rely disproportionately on any one supplier.

Recently, the Company also agreed a new credit partnership with Visa, replacing a previous deal with American Express. Under this partnership Visa is the only credit card payment provider accepted at Costco warehouses worldwide.

Costco also maintains partnerships with non-profits as part of its corporate responsibility program, including a partnership with the Children’s Miracle Network; with technology companies, such as with payment solutions provider Elavon; with advertising and branding firms, such as with MG2, and with hotels chains as part of its online travel service offerings.

Key Resources

Costco’s key resources are its network of physical warehouses, its online store and IT infrastructure, its supply chain and network of supplier partners, its logistics and distribution networks, and its personnel.

Cost Structure

Costco incurs costs in relation to the operation of its international network of membership warehouses, the purchase of goods and merchandise, the maintenance of its IT infrastructure, the operation of its logistics and storage infrastructure, the management of its partnerships, and the retention of its personnel.

By far Costco’s largest expense is its acquisition of merchandise across its multiple product categories, which in 2015 amounted to $101.1 billion. The Company also incurs substantial selling, general and administrative costs – including costs associated with the payment of employee salaries and benefits and the payment of rental and utility fees across its facilities – which surpassed 11.4 billion for the year ending 30^th August 2015. Preopening expenses – including costs for startup operations related to new warehouses, development in new international markets, and expansions at existing warehouses – was recorded at $65 million in 2015.

Revenue Streams

Costco generates revenue through the operation of wholesale membership warehouses across markets in North America, Asia Pacific and Europe. Its revenue is divided broadly into two streams:

• Product Sales, comprising revenue derived from the sale of goods and services through the Company’s physical outlets and online stores; and
• Membership Fees, comprising revenue derived from the sale of Gold Star, Business and Executive memberships to customers worldwide.

In 2015 Costco generated total revenue of $116.20 billion, up more than $3 billion on the $112.64 billion recorded by the Company in 2014. The vast majority of this revenue is attributed to sales made through the Company’s various channels, which amounted to $113.67 billion for the year. Memberships fees – with individual members paying between $55 and $110 annually – generated $2.53 billion.