The Business Model of Costco. Costco Wholesale Corp. has over 800 stores in the United States. You may find co-op stores all over the world in Costco locations. It is also has a sizable online store. For a limited range of name-brand and private-label goods, the company’s warehouses provide cheap pricing, usually in bulk.
Customers may also buy warehouse access memberships to make purchases. Costco buys directly from manufacturers, limits store hours, and employs as little staff as possible by stocking goods on huge racks above a self-service sales floor to keep costs low.
What products does Costco have to offer?
Costco sells a variety of goods under several headings, such as:
• Food and Sundries
• Toughness (such as major appliances, electronics, and hardware)
• Fresh Foods
• Soft lines like apparel and tiny appliances
• Associated (which includes gasoline and pharmacy products)
Members’ dues provide a modest source of income for the business. Discount retailers like Target Corp. (TGT) and Wal-Mart Inc. (WMT), as well as big-box competitors like B.J.’s Wholesale Club Holdings Inc., are significant competitors of Costco (B.J.).
KEY TAKEAWAYS; How Costco Makes Money?
For all we know, Costco is a wholesaler with membership warehouses and an online store offering cheap products. It is estimated that fresh foods would increase at the quickest rate, followed by hard goods like hardware and large appliances. International Operations is the fastest-growing business sector. In the second quarter of 2021, the e-commerce industry recorded a comparable sales growth of 75.8%.
The Financial Situation of Costco Wholesale
Costco’s revenue and net income rose year over year in the second quarter of the fiscal year 2021, which ended on Valentine’s Day (YOY). A 14.6 percent YOY rise in total sales brought in a total of $44.8 billion. To $971 million, yield increased by 2.5% year-over-year (including net income from non-controlling interests). 3 The company reported a year-over-year increase in comparable e-commerce sales of 75.8%.
In the second quarter of 2021, sales of foods and sundries increased by 17%. It contributes 40% of Costco’s revenue, making it the largest significant source of revenue for the company. On the other hand, fresh Foods and Hard Lines grew the quickest, with YOY sales growth of 23.1% and 22.6%, respectively.
Sales were also accounted for by Fresh items (14%) and Hardlines (19%). Soft lines had a 20.3% increase in revenue or 12% of total revenue. A decrease in sales of 9.1% was reported in the Ancillary and another product category, accounting for 14% of total revenue. 5
Aside from membership fees, Costco discloses how much money it makes. For the most part, membership fees make up a much smaller percentage of the full payment. The company’s membership fees accounted for $881 million in Q2 F.Y. 2021, or around 2% of overall income.
There will not be any advertising to speak of.
Most businesses invest a lot of money in marketing to get customers into their stores. Wal-Mart, for example, is known to be thrifty when it comes to advertising, spending just around 0.5% of its revenue on marketing expenses. Wal-Mart is undoubtedly one of the most prominent marketers globally, with 2012 advertising sales exceeding $2,400 million. More than 2% of Target’s revenue is spent on advertising.
When it comes to money, Costco spends nothing. This non-profit sends mailers to prospective members and discounts to existing members as a goodwill gesture instead of advertising funds.
Advertising’s Negative Effects
How does Costco manage to avoid employing any traditional marketing methods at all? A combination of two elements is at work here. One of the first things you should know about Costco is that a product sells itself. If you’re a frequent Costco shopper, the membership is a great value, and regular retailers cannot match Costco’s pricing.
The company’s bottom line will be unaffected by boosting the frequency with which existing members visit the store via marketing since membership fees are the company’s primary source of income. Additionally, spending much to acquire new members is ineffective.
If Costco spent just 0.5% of its sales on marketing, its operating profit would fall by 17%. Even if Costco spent 2% of its sales on advertising, it would lose 70% of its operating profit, as Target does. Continuing would be pointless, in my view.
Inexpensive Prices Lead to Increased Productivity
Costco pays its employees favorably compared to similar businesses. As of January 2019, the minimum wage has risen to $15 an hour. When comparing the hourly wages of merchants and employees, Payscale shows that merchants make $10.88 on average per hour. Costco employees, for the most part, are covered by a group health plan.
Costco’s Commercial Divisions How Costco Makes Money
Costco’s business is broken down into three reportable segments: U.S. Operations, Canadian Operations, and Other International Operations. Results are broken out geographically and by revenue and operating income.
United States Operations
Costco’s activities in the United States account for the majority of the company’s revenue, making this the most critical of the three reportable divisions. Operations generated $32.1 billion in total revenue in Q2 F.Y. 2021, increasing 12.6% year over year.
The segment’s operating income fell by 3.8% year over year to $790 million over the same period. Seventy-two percent of Costco’s sales and 59 percent of the operational profitability were accounted for by our activities for quarter two of the current financial year (2021).
Costco’s Canadian operations, although smaller than those in the United States, are nevertheless a significant part of the company’s overall revenue. This segment’s total revenue was $6.0 billion during the second quarter of 2021, up 14.7 percent year on year. Canadian Operations also reported $236 million in operating income for the third quarter, a 16.8% year-over-year increase. Costco’s Canadian Operations contributed 13% of overall sales and 18% of operating profits in the most recent quarter.
Operations in Other Countries
As a bonus, Costco is present in several countries in addition to the United States and Canada. The Other International Operations section includes nations like China, Iceland, and all of the above. In addition, Other International Operations produced $6.6 billion in sales for the second quarter of 2021, up 24.9% year over year.
Aside from that, Other International Operations generated $314 million in operating income in 2021, up 29.2% year-over-year. As a result, this business unit has the fastest revenue and operating income growth rates of any company. The company’s sales and operating income account for 15% of total revenue and 23%, respectively.
What Has Changed Recently at Costco? How Costco Makes Money
CEO W. Craig Jelinek of Costco stated on February 25, 2021, that the company might raise its beginning pay from the $15 an hour it offered in 2019 to $16 an hour. Costco workers make an average of $25 per hour. He said that paying more excellent salaries “doesn’t represent a charity,” but rather represents a significant competitive advantage for his company. It benefits us by reducing staff turnover and increasing productivity.