Understanding Costco

1 Understanding COSTCOJune 2004 Coriolis Research Ltd. is a strategic market research firm founded in 1997 and based in Auckland, New Zealand. Coriolis primarily works with clients in the food and fast moving consumer goods supply chain, from primary producers to retailers. In addition to working with clients, Coriolis regularly produces reports on current industry topics. Recent reports have included an analysis of Retail Globalization: Who s Winning and answering the question: Will selling groceries over the internet ever work?

2 The lead researcher on this report was Tim Morris, one of the founding partners of Coriolis Research. Tim graduated from Cornell University in New York with a degree in Agricultural Economics, with a specialisation in Food Industry Management. Tim has worked for a number of international retailers and manufacturers, including Nestl , Dreyer s Ice Cream, Kraft/General Foods, Safeway and Woolworths New Zealand. Before helping to found Coriolis Research, Tim was a consultant for SwanderPace and Company in San Francisco, where he worked on management consulting and acquisition projects for clients including Danone, Heinz, Bestfoodsand ConAgra.

3 The coriolisforce, named for French physicist GaspardCoriolis (1792-1843), may be seen on a large scale in the movement of winds and ocean currents on the rotating earth. It dominates weather patterns, producing the counterclockwise flow observed around low-pressure zones in the Northern Hemisphere and the clockwise flow around such zones in the Southern Hemisphere. It is the result of a centripetal force on a mass moving with a velocity radiallyoutward in a rotating plane. In market research it means Understanding the big picture beforeyou get into the details.

4 PO BOX 10 202, Mt. Eden, Auckland 1030, New ZealandTel: +64 9 623 1848; Fax: +64 9 353 1515; email: CostcoCostco My secret is so simple that I m reluctant to speak openly about it for fear of appearing stupid. I sell things as cheaply as I can. Sol Price, founder, Price Club, March 19853 Understanding CostcoCostcoTABLE OF to Future?171-New Concepts188-International Growth1954 Understanding CostcoCostcoCOSTCO PROFILEC ostco is a $ billion company that operates wholesale club stores in seven countriesCostco profile (as of FY 2003)Name: Costco Wholesale CorporationCEO/President: James D.

5 SinegalOwnership:Public (Nasdaq: COST)Address:999 Lake , WA 98027 United StatesTelephone:+1 (425) 313 8100 Total sales:$42,546m1 Sales CAGR (98-03) Income:$1,157mOperating Income CAGR (98-03) Income assets: $13,192mROA (OI/TA) # of employees:103,000 Sales/employee:$404,786# of stores:407 / 430 inclMexico Sales/store/week:$2,010,300 Operating Income/store/week:$56,045 Supermarket market share in home country:8%Percent of sales outside home country (ex Mexico)23%United States (318)1 Canada (62)Mexico (23)2 United Kingdom (15)Wholesale Clubs (396)Home Furnishings (1)Countries (7)Store FormatsStore FasciasCostcoSouth Korea (5)Japan (4)Taiwan (3)1.

6 Includes membership fees; 2. Includes three stores in Puerto Rico; 3. 50% joint venture with ControladoraComercialMexicana5 Understanding CostcoCostcoCOSTCO CORPORATE STRUCTUREW hile Costco operates 430 units in seven countries, North America accounts for the bulk of turnoverCostco international sales and structureUS$, millions, FY2003 Costco WholesaleCorporationSales: $42,546mWesternEuropeSales: $1,400mAsiaPacificSales: $790mNorthAmericaSales: $40,356mUnitedKingdomSales: $1,400m1 Units: 15 Previously a joint-venturenow fully company-ownedUnitedStates2 Sales: $35,119mUnits: 318 CanadaSales: $5,237mUnits.

7 62 MexicoSales: $775mUnits: 2350% joint-venture notincluded in group turnoverJapanSales: $260mUnits: 4 SouthKoreaSales: $330mUnits: 5 TaiwanSales: $200mUnits: : $250m1. Reported as 879m; 2. United States includes three Puerto Rico storesSource: Costco annual report; various published articles; Coriolis analysis and estimates6 Understanding CostcoCostcoCOSTCO UNITED STATES UNITS BY STATEIn 2003 Costco operated 318 units in the United States, concentrated in the coastal population centers 3984526622294241353438631164161311175111 3112313 Costco units by state in the US # of units.

8 FY20033 PuertoRico7 Understanding CostcoCostcoCOSTCO GLOBAL UNITS BY COUNTRYTo date Costco has entered six additional countries: Canada, Mexico, the United Kingdom, Japan, Korea and Taiwan307612135315 Costco units by country # of units; FY20038 Understanding CostcoCostcoCOMPANY ORIGINC ostco is the product of a merger between Price Club, the originator of the wholesale club, and Costco , the greatest imitatorDevelopment of key players in the wholesale club industry# of units; FY2003 Costco31995 FedMart1954 Price Club1976 Price/Costco1993 Costco1983 Name changeSam s Club1983 Founded by Sol PriceFounded by Sol and Robert PricePriceSmart1994 MergerFounded by Jim Sinegal1and Jeffrey BrotmanSpin-off 50% owned by Price familyWalMart1962 Sold to WalMart1992 Founded by Sam WaltonFounded by Sam WaltonPace Club1983 Acquired by Kmart 1989BJ sClub1984 Founded by Henry Haimsohn2 Spun off into Waban 1989 Spun off into separate company1997 Founded by ZayreDepartment Stores1.

9 Jim Sinegal was an ex-FedMartand Price Club employee; 2. Henry Haimsohnwas an ex-Price employee; 3. Price/ Costco changed its name to Costco in 1995 9 Understanding CostcoCostcoDEFINITIONSC ostco is a wholesale (or membership) club store, a high-volume, limited range store format AverageSizeAverage WeeklySales ($A)AverageNumberof SKUA verageWeekly Sales/m2 Global SegmentLeaderAustralasian Example$133$200$115$150$135$190$110$110$ 3007-Eleven$125 TescoMetro7-ElevenWoolworthsMetroColesWa rehouse Store4,000-7,000m2$900,00010,000 Cub orWincoPak N SaveFranklinsAldi[Illegal]1[Super Kmart][Cost-U-Less]

10 KrogerColruytAldiAlbertsonsWal-Mart or CarrefourCostcoCampbell sMetro/Makro3,00013,00020,0003,000+800-1 00040,00080,0004,00012,000-25,000 Convenience Store200-300m2$40,000 Metro Store800-1,200m2$200,000 Hypermarket/Supercenter10,000-19,000m2$1 ,500,000+Wholesale Club Store10,000m2$3,000,000+Cash & Carry7,000-8,000m2+$1,000,000+Supermarke t2,000-4,000m2$350,000 Extended-Range Discount1,000-2,000m2$200,000 Limited Assortment Discount600-1,200m2$150,000 Food & Drug Combo5,000-6,000m2$600,000 Definitions of major supermarket-type retail store formatsselect variables1.