Is Costco Approaching U.S. Saturation?

Costco Wholesale Corp. will spend about $3 billion in its new fiscal year on capital projects including about 15 new U.S. stores—figures roughly equivalent to its recent annual building pace.

Speaking in a call reviewing earnings for its fourth quarter and fiscal year, Richard Galanti, chief financial officer for the Issaquah, Wash.-based membership warehouse club, said Costco is eyeing about 25 new stores worldwide in the new fiscal year, which began Sept. 2. Like 2019, its openings will be skewed toward the second half of the calendar year: The company opened 10 new U.S. units and relocated two stores in the recently completed fourth quarter.

Costco now operates 544 U.S. locations.

Asked about longer-term building goals, Galanti was typically pragmatic, acknowledging the roughly 15-clubs-a-year pace could slow to 12 over the next decade. “We keep finding more opportunities, but over time, it’ll slow down,” he said. At the same time, he noted Costco has a buys pipeline for U.S. business centers and that it has continued to find opportunities to make clubs work in trade areas in which it has direct club competitors such as BJ’s and Sam’s, and in infill sites where Costco already has a strong presence but loyal customers who tend to shop more frequently when Costco gets closer to them.

“Thirty years ago, I think the view was you needed about a half a million people to [each] trade area, plus certain number of businesses and all that kind of stuff,” Galanti said, according to a Sentieo transcript. “Today, that number could be as low as 200,000 sometimes. It depends.”

Costco, he added is “probably a little more confident” today that it can enter a market with established club rivals and find business enough for both it and the competition.

An example of the infill phenomenon is Costco’s store in Redmond, Wash., which, when it opened in 2016, joined three other nearby stores that were dividing $800 million in annual sales between them. The Redmond club didn’t affect the typical membership increase figures a new club would, Galanti says, but despite some cannibalization, still rang up $120 million in sales in its first year.

Finally, he said, Costco believes it can make additional clubs work in distinct locations in already established areas such as greater Los Angeles, although the pace of that growth is dependent on finding the real estate first. Costco has about 60 stores in greater Los Angeles today.

“The view is we can have another 15, but they’re all very specific geographies, which are not quite impossible but very difficult,” Galanti said. “We'd be thrilled to get one of those 15 open every couple of years, but you don’t know if that can happen.”

For the quarter, Costco saw total sales improve by 7% to $45.5 billion and adjusted U.S. comps, adjusted for currency and excluding gasoline, improve by 5.2%. For the year, Costco’s sales grew by 7.9% to $149.3 billion, with adjusted U.S. comps gaining by 6.4%.