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? 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.

2 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. 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.

3 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. 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.

4 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: 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; 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.

5 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. 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)

6 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]KrogerColruytAldiAlbe rtsonsWal-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. Under the current regulatory environment in Australia and NewZealand an American-style food and drug combo is illegalSource: WBC; FMI; Coriolis analysis10 Understanding CostcoCostcoPOSITIONINGThe wholesale club store format is positioned as having a lower shopping frequency and less range than a conventional supermarketMajor supermarket-type retail store formats by positioningmodelHypermarket/SupercenterI ncreasingRangeDecreasingShoppingFrequenc yFood & Drug ComboWholesaleClub StoreCash & CarrySupermarketMetro StoreConvenienceIncreasingShoppingFreque ncyWarehouseStoreDecreasingRangeExtended -RangeDiscountLimited Assortment11 Understanding CostcoCostcoA DIFFERENT SHOPPING EXPERIENCES hopping at Costco is a different experience from shopping at other stores I had begun to have a disturbing feeling that everybody in the Bay Area belonged to the Club but me.

7 While I am out at the No-Price-2-Hi store, paying full retail, they're out there in their minivans, loading up on cassette tapes and frozen When we arrived at the huge windowless warehouse, I looked around, riveted, at the stereos, cookware, film, watches, jewelry, liquor gift sets, razor blades, tires, socks, sheets, grabbed an oversized orange cart and headed into the crowd. Some people were pushing industrial pallets, piling toilet paper and pancake mix and cases of Kahluaon them as if it had been announced that all buying everywhere in the world would cease in 15 minutes. I began to throw things into my cart, at first slowly, then faster and faster. My list forgotten, I lobbed in everything I saw that I have ever used: a 24-pack of film, a lifetime supply of tampons, 100 plastic tumblers, champagne, couch throws, Christmas wrap, Reeboks I didn't even try Everybody I saw was doing the same thing.

8 It was as if we were all ScarlettO'Hara in Gone With the Wind, whispering, As God is my witness, I'll never pay retail for toilet paper again. Veterans say it's dangerous to let people go to the Price Club alone the first time out. A gallon jug of maple syrup, the novices think. What a good idea. A case of gallon jugs of maple syrup -what an even better idea. Lara Adair, Reporter, San Francisco Chronicle, December 1989 The oversized carts match the oversized purchases, but sometimeseven they are not big it's institutional-sized ketchup or jumbo cereal, there's never just one can, box, bottle or carton; two or three or four are packed together. There's never just one kilogram of meat in a carrots are purchased in five-pound 500-millilitre tub of those hot little feta-stuffed red jalape os is $ balsamic vinegar, one litre for $ this point, I am becoming embarrassed to admit this sort of wretched excess and feel compelled to say it doesn't happen often.

9 The warehouse club is, after all, an American concept. It was nurtured and flourished in that ultimate land of plenty, where conspicuous consumption is more apt to be a club prices are hard to beat. But you can't get everything on your shopping list. You end up buying stuff you don't need lots of it. You walk out spending more than you expected to. Susan Sampson, Food Writer, Toronto Star, November 200312 Understanding CostcoCostcoDOCUMENT OVERVIEWThis report is structured into the following five sections:1. Targetsan upmarketcustomer3. World-class:how to beat Wal-Mart4. The basicsof selling toCostco2. The product of a fierceevolution5. The future:where to next?13 Understanding CostcoCostcoSECTION 1: TARGET MARKETThe first section of this report looks at Costco s target customer which, different from most discounters, is small businesses and high income households The richer people are, the more they like to save.

10 Sol Price, Founder, Price Club, December 19882. The product of a fierceevolution1. Targetsan upmarketcustomer3. World-class:how to beat Wal-Mart4. The basicsof selling toCostco5. The future:where to next?14 Understanding CostcoCostcoMEMBERSHIP OPTIONSC ustomers have to pay an annual membership fee of at least US$45to shop at CostcoCostco Membership structure and fees$, actual, 2004 Type of Membership# ofMembersAnnual CostKey detailsExecutive Gold Star Membership$100As individual plus:Executive members receive an annual 2% reward on most Costco purchasesQualify for additional benefits from service providersBusiness Membership$45 Business identification required when applyingLicensed businesses, nonprofit organizations, government agencies, farmers & ranchersCan start shopping at 10am rather than 11am (Monday to Friday)Includes a spouse card; additional business membership cards cost $35 eachExecutive Business Membership$100As business plus:Executive members receive an annual 2% reward on most Costco purchasesQualify for additional benefits from service providersGold Star(Consumer) Membership$45 Individuals who do not qualify for business membershipIncludes spouse : various Costco 10K; Coriolis are 2 million total executive members who account for 25% of salesNo breakout by type (consumer vs.)