Costco Aims to Add New Units, Streamline Efficiency

MINA WILLIAMS

BELLEVUE, Wash. — Costco Wholesale Corp. said it plans to improve its financial picture in 2007 by boosting warehouse unit numbers and stripping out operational inefficiency, executives said at the company's annual shareholder meeting here last month.

Jim Sinegal, president and chief executive officer, told the audience that on average each warehouse is grossing $129 million annually, which he said compares favorably with rivals Sam's Club and BJ's. Sinegal cited the company's 87% membership renewal rate in 2006 — the highest on record for Costco — and 26.5 million card-holding households contributing $1.2 billion in cash fees as a strong sidebar to the company's $59 billion in annual sales.

Costco said in 2007 its goal is to add 32 to 35 warehouse stores, and in 2008 it will build 35 to 40 more. The company has 341 U.S. sites under consideration. It currently has 504 units in 38 states and eight countries, making it the fifth-largest retailer in the United States and seventh in the world. The company also has holdings in Canada, the U.K., Asia and Mexico.

Sinegal pointed out that securing sites with strong potential is the key to Costco's growth. Sales have grown from $19 billion in 1996, giving the company a 10-year compounded growth rate of 12%, and a 7.8% average growth rate in comparable sales. Top sales days of $1.7 million have been reached by units in Burbank, Calif., and Honolulu.

“The hallmark of our business is offering high-quality, branded products, augmented with private label,” he said. “Our pricing authority is the No. 1 goal, bringing goods to the market at the lowest price.”

The diversified retailer said it sold $1.8 billion worth of televisions in 2006, and moved more than $3 million in Coach bags in just six weeks. Holiday champagne sales were $30 million. However, Sinegal said Costco will continue to rely on its signature offerings — meat, seafood, rotisserie chickens, gasoline and hot dogs from the food court to contribute to high customer satisfaction ratings and revenue.

The company is deepening its sourcing of produce to include the global market. Starbucks-roasted Fair Trade coffee has been introduced, and Sinegal said this item has captured 30% of Costco's whole-bean sales. Online business, through Costco.com, has grown to more than $1 billion, a 58% growth rate.

A car wash is being tested in a Seattle unit. Sinegal said that the $7.99 service is being used by 352 cars per day and that 75% of the water is being recovered. A second car wash is being eyed in California.

Another ecologically friendly move is the installation of solar panels on roofs, currently being piloted at two California units.

Boosting pharmacy efficiency is one of the next operational challenges Sinegal said the company will tackle. Currently, the stores are filling 26 million prescriptions; he projected that number will rise to over 30 million as the company deepens its central prescription fill center.

Logistical efficiency has been a strong contributor to the bottom line, Sinegal said. “Our Kirkland laundry detergent is illustrative of how we reduce the cost of goods. We concentrated the product to get more items on the pallet and more on trucks.”