Costco Wholesale Corporation (NASDAQ: COST) sells a wide variety of products through its membership warehouses. The company sells both branded and private-label products, including packaged foods, beverages, appliances, electronics, and health products. Its warehouses feature bakery, deli and produce departments. As of Oct. 29, 2015, Costco operated 690 warehouses in the United States and in other countries. The company's earnings per share (EPS) was $5.34 for the trailing 12 months as of April 8, 2016. Its market capitalization was $66.28 billion as of the same date. Costco operates several key subsidiaries that drive sales and profits for the business.
Costco operates a subsidiary that produces dozens of products under the Kirkland Signature brand name. The company offers many groceries and packaged food items through this brand, including organic milk and organic coconut water. Costco’s sales of organic products were over $4 billion in 2015, and a growing percentage of the organic sales are Kirkland-branded items.
During 2015, the company introduced many new Kirkland brands for apparel and cookware, including Cole Haan shoes and Brown Jordan patio furniture. By operating its own brand, Costco can meet the changing needs of its customers and control the product designs, costs, and pricing. Because Costco has more control over these factors, the company can sell these products at a higher profit margin than comparable products supplied by a vendor.
During 2015, Costco generated $3.4 billion in e-commerce sales. That total was a 20% increase from the prior year and represents online sales in the United States and other countries. Costco was able to grow e-commerce sales by improving its ability to distribute products to customers. The company added depot distribution points in several countries, which means orders can be delivered to customers faster. Costco uses its relationships with in-store product vendors to add more online product offerings. It uses in-store marketing and promotions to encourage shoppers to buy products online, which has increased sales of jewelry, electronics, and appliances. As of 2015, Costco was selling 200 products to online shoppers in China, including products from the Kirkland product line.
Delivery is an important factor for customers who buy online. Costco has partnered with outside companies, such as Google Express and Instacart, so its products can be delivered through these e-commerce delivery businesses. All of these efforts are important because they help Costco make two types of sales to the same customer. A shopper may buy products in-store and online. Costco can increase the average dollar amount sold to a single customer using online sales. The company gets a higher return from its marketing efforts and increases revenue without adding more physical warehouse locations.
Costco refers to several types of businesses as ancillary, including gasoline stations, pharmacies, optical and hearing aid centers, and travel. Profits and sales increased during 2015 in nearly all of these businesses. The company operates over 490 gas stations. While gas sales declined during 2015, Costco believes gas stations are a critical tool to draw new customers into its warehouses. If customers buy gas or pick up a prescription at a Costco warehouse, they are more likely to spend time shopping there. These ancillary businesses help drive total sales for Costco’s core product lines, such as food and sundries like snack foods and beverages. These two product lines represented over 43% of Costco’s 2015 sales.
Co-Branded Credit Cards
In 2015, Costco signed a co-branded credit card agreement with Citibank N.A., which authorizes Citibank to be the exclusive card issuer for Costco. When a customer uses a Costco Visa card, Costco earns a royalty on purchases made by the cardholder. This agreement allows Costco to earn royalty income when its customers use the credit card inside and outside of its warehouses.