Costco has become the latest hot topic for dinner conversations, but not because of its business model or leadership. Costco members have a strong loyalty to the brand and cannot help talking about their shopping trips and unique product finds. While the company is getting ready for a new CEO, that likely won’t impact consumer behavior as membership renewals sit at 94%.
Memberships Drive Profits
Total Costco sales in 2022 hit a record high of $227 billion, up 17% from 2021. The company has over 125 million members, 7.8% more than the previous year, with an average annual income of $128,000. Membership fees accounted for about 72% of the profits in 2022. Gasoline has small margins but drives loyalty through the frequency of visits from its members.
The company has not raised its membership price (currently $60 for regular and $130 for executive membership) since 2017. Still, in the September earnings call, when asked about a possible increase in membership price, Richard Galanti, director, executive vice president, and chief financial officer, said, “It is a question of when, not if.” Galanti was not specific about when an increase would be rolled out.
Wide Diversity Of National Brands
Costco has a high portfolio of brands across many product categories. Selling products in bulk with shallow assortments allows the company to offer product selections that typically have a higher turnover. Social media posts on TikTok have created a cult-like following with over 2.6 billion views using #costcofinds, driving increased engagement with the brand.
With high turnover, the company offers very low pricing and minimal discounting on goods. Since the company is not reliant on one vendor for a significant share of its revenue, it minimizes its business risks of being out of stock or impacted if a vendor cannot deliver goods. The company has also invested more in its private label brand, Kirkland Signature.
Kirkland Signature Brand Drives Loyal Shopping
Sales penetrations by the company’s private label brand continue to grow as Costco adds more Kirkland Signature product offerings. In 2021, Kirkland Signature represented about 25% of total revenues versus 20% in 2011.
The private label brand includes many categories of goods encompassing over 350 products and has built high credibility with members. Costco’s private-label products have a positive impact on gross margins. Warehouse clubs operate on thin margins, typically between 10 to 11%. Adding more private-label products helps profitability. Kirkland Signature products offer members lower-priced options than national brands, and during the previous year’s inflationary pressures in the U.S., more members shifted to store-owned brands. In 2022, new Kirkland Signature items included BBQ pellets, women’s jeans, reformulated dog food, sauté pans, and fresh mini cakes.
Executive Changes Coming Soon, But The Company Is Staying The Course
The current CEO of Costco, Craig Jelinek, who has been at the helm since 2012 when he took over the position from the company’s founder, James Sinegal, will be stepping down at the beginning of next year. Successor Ron Vachris, current president and chief operating officer since February 2022, will be taking on the role of president and chief executive officer effective January 1, 2024. With his longevity with the brand, the company is poised to make a seamless transition. Jelinek and Vachris have been working together for the past twenty-one months to prepare for the leadership change. Vachris has worked for Costco for over forty years, starting as a forklift driver and according to the company, has subsequently served in every significant role related to Costco’s business operations and merchandising activities.
“Costco has a very strong culture and a deep bench of management talent,” said Craig Jelinek. “I have total confidence in Ron and feel that we are fortunate as a Company to have an executive of his caliber to succeed me.” Craig will remain with Costco through April 2024, serving in an advisory role and assisting Ron during the transition. Members can expect the same in-store club experience, including Kirkland Signature brands expanding to new product categories, popular national brands offered at low prices, and a treasure hunt of finds catered to local environments.
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