Key Development: Fending off increased competition, introducing new products.
What's Next: Leading the chain through ambitious growth plans.
Competitive pressure from Wal-Mart is no worse than it's ever been, according to Jim Sinegal.
"Wal-Mart is a very formidable competitor," said Sinegal, Costco's down-to-earth chief executive officer. "We respect them and we compete with them in virtually every market in which we do business. The only country where we don't compete with them is Japan. We also compete with Target, the supermarkets, Sears. They don't keep us awake at night."
Nevertheless, there are obvious signs Wal-Mart Stores is working harder than ever to make its Sam's Club division more competitive with Costco. Earlier this year, for example, Sam's Club started selling private-label red wines. The move was aimed directly at Costco, the country's No. 1 wine retailer, industry observers noted.
"No one wants to be the one Wal-Mart has as its target," said Patty Edwards, managing director at San Francisco-based Wentworth, Hauser & Violich, which owns shares of Issaquah, Wash.-based Costco. "That's one of the biggest challenges they've faced on the competitive landscape."
To date, Costco has done a good job fending off Wal-Mart. At the end of 2004, Costco operated 449 locations around the world, totaling just under $51 billion in sales, whereas Wal-Mart's Sam's Club division had 641 stores, with just under $43 billion in sales, according to international sales estimates from Warehouse Club Focus, Foxboro, Mass.
Gasoline is a major part of Costco's business. Volatile prices hurt the retailer's gross margins this year. Company officials in May announced that third-quarter and full-year earnings would fall short of Wall Street's projections, due to lower-than-expected gross margins that resulted from gasoline-price fluctuations.
"Gasoline has been a problem since the 1960s and '70s," Sinegal said. "I don't suspect that's going to change."
Costco, with 456 stores, plans to open seven or eight new warehouses before Aug. 28, which marks the end of fiscal year 2005 for the company. Beyond that, Sinegal sees plenty of opportunity for growth through opening new warehouses.
"I don't think it's unreasonable we could double that over a number of years, over the next 10 years," he said.
Real estate could make growth challenging. Finding the right location for new club stores has become more difficult in recent years, Edwards noted.
"Real estate and opening new stores is a much bigger task today than five years ago," she said. "It used to be they could find land and open a store in nine months. Now it takes 2 1/2 years."
New product lines create a treasure-hunt experience for Costco shoppers. For instance, in the spring, the company announced plans to roll out cosmetics, in a partnership with Borghese Cosmetics. Costco's eclectic assortment -- from caskets to canned food -- keeps the hunt interesting. For Sinegal and his team, the tricky part is keeping the format fresh and profitable.
"You never know what it is they're going to do next," Edwards said. "To continue to come up with something new and exciting is a huge challenge. He obviously revels in that."
Sinegal is not a textbook chief executive. He's been known to answer his own office phone, and it is unusual to spot him wearing a tie.
"I don't wear them to work," he said. "Back in New York, talking to analysts and investment bankers, I'll wear a tie and suit. I have [worn them] to my children's weddings, too."
