Viewpoints

Costco Gearing for Decade of Growth, Innovation

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Costco has a history of exceeding expectations. Its original business plan in the early 1980s, a period of trial and error for membership warehouse clubs, was to reach 12 outlets, according to an online interview. Today there are 572 Costco outlets.

The company is now a bit less humble in forecasting its growth, and it has quite a plan for the next decade, as outlined by Costco veteran Tim Rose, senior vice president, Food and Sundries, at the recent Grocery Manufacturers Association Executive Conference in Colorado Springs. Here are three areas he pointed to:

  • • Fresh Foods: Today fresh foods accounts for about $9.5 billion in sales and more than $1 billion in profit. In the next 10 years the company forsees $26 billion in sales, $2.0 billion net margin, and new innovations and in-store presentation.

  • • Kirkland Signature Private Label: This segment, launched in 1992, has about 15% SKU penetration (all products including nonfood) and 20% savings to members compared to brands. In the next 10 years the company hopes to reach 25% SKU penetration and 25% savings to members versus brands.

  • • Pharmacy: Today there are 513 pharmacies with $3.8 billion in sales, $200 million in profits, and 32 million scripts filled last year. In the next 10 years the company anticipates adding 200 pharmacies that will bring the totals to $7.5 billion in sales, $500 million in profits, and 50 million scripts.

What's nice about its projections is that Costco leaves room for flexibility. For example, the ambitious private label growth plans are “goals, not imperatives.”

Costco wisely makes sure to avoid straying too far from its proven business model. In referring to private label growth, Rose added, we “know that major brands will always be what Costco is about.”

However, Costco will continue to be a tough negotiator on pricing because getting the best deals for members is a hallmark of its model. Rose urged brands launching innovative new products to avoid the temptation to recoup investments by significantly ratcheting up prices right away.

Costco is a company still run by its co-founder, Jim Sinegal, and is known for retaining employees. So not surprisingly it also retains much of its personality and culture, which is mostly a good thing. At times the need for new initiatives clashes with the low-cost culture, such as when the discussion turns to local marketing related to demographics and ethnicity. Rose said Costco will pursue that kind of local marketing to some extent, but “it's a fine line if you want to continue to be the low-cost operator, so you have to be selective and disciplined.”

It's a safe bet Costco will continue to exceed expectations. One recent example was a Kirkland Signature beer introduced about six months ago. Costco thought it might pull in about $10 million a year in sales. But it was praised in the media and its popularity increased. As it turns out, it will record about $35 million in sales. That's the kind of result that no longer surprises longtime Costco observers.

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Contributors

Julie Gallagher

Julie Gallagher’s delicious foray into coverage of the food industry was purely accidental. With a background in technology, she joined Supermarket News as associate editor of its Technology...

Mark Hamstra

Mark Hamstra is the editor of the Retail/Financial section of Supermarket News covering mergers and acquisitions, quarterly earnings reports, executive changes and other significant events and trends...
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