Costco’s cool: It’s not flashy but competent success is never dull

Michael Dukakis, the US presidential candidate in 1988, had a reputation for being dull and competent. Someone even quipped that Dukakis’ idea of excitement was “rearranging his sock drawer”.Some of the world’s best retailers are led by individuals with exactly the same qualities. So when Costco’s chief financial officer Gary Millerchip talks investors through the company’s financial results, he loves to get down in the weeds about what the company is doing to save its members money and stay at the summit of global retailing. You won’t hear many fluffy generalities and marketing cliches; rather, you are treated to nuts and bolts, prosaic examples of what, in Costco’s world at least, is just so cool.So, you learn that the food department is benefiting from the introduction of more international foods, like fried tofu kimbap, and there are deep discounts on foil, macadamia nuts, Spanish olive oil and two-pack baguettes. You also learn that bulky items sold at Costco’s warehouses in Asia are now being produced and shipped locally instead of being shipped from the US, so, for example, paper towels can be sold at a lower price in Asia because of savings on shipping costs. We learn that some items, like eggs, have been in short supply and that shipping in the Red Sea is still a pain point. This is detailed stuff, reflecting the truly customer-centric nature of the company. It’s dull, very dull, but it’s brilliantly competent at the same time.Number 3 and getting betterLast Thursday, results were announced for the company’s fourth quarter and fiscal year ending September 1, and they continue to reflect Costco’s success in staying at the top of its game by being down in the weeds. Costco maintains its ranking as the third-largest retailer on the planet, after Walmart and Amazon. For its 2024 fiscal year, the company racked up revenues of US$254.4 billion, up 5.0 per cent from last year.Net sales in financial year 2024 increased 5.0 per cent (adjusted for changes in gasoline prices and foreign exchange rates) to US$249.6 billion. Same-store sales increased by 5.9 per cent, with an accelerating trend toward the end of the year: fourth-quarter same-store sales came in at +6.9 per cent. Stores located outside the US and Canada delivered superior same-store sales growth of 8.4 per cent for the full year and 9.3 per cent for the fourth quarter.Membership fees kicked in another US$4.8 billion for the year, an increase of 5.4 per cent from financial year 2023. Net income rose 17 per cent, to US$7.4 billion.Sales growth lately has been driven by increased foot traffic, while average transaction value has been slightly down. However, the transaction value metric is distorted by deflation in gasoline prices and foreign exchange movements. Without these latter two factors, the average ticket was up. CEO denies new openings are skewed toward internationalCostco now operates 891 member warehouses, of which 177 are located outside the US and Canada, including 75 in four Asian countries. The company added 29 new warehouses and relocated one in 2024. It has warehouses in 14 countries in Asia, including Taiwan, Japan, Korea and China. CEO Ron Vachris hasn’t conceded that international will be the growth engine going forward. He told investors last Thursday that Costco was striking a good balance between domestic infil and expanding in international markets.Newer stores in the US are markedly less productive than those opened a decade or more ago, since their trade area overlaps with existing ones. The average productivity of stores opened over the past four years has been consistently below US$200 million because of sales cannibalism. Costco’s leadership doesn’t mind a bit.Membership fees increased September 1 Household memberships at the end of the year amounted to 76.2 million, up by more than 7 per cent from last year. Executive memberships totalled 35.4 million, up over 9 per cent from a year ago. So even small increases in the fee have a material effect on revenue, and after months of speculation, Costco finally increased its annual membership fee for the first time in seven years, effective the beginning of September. Individual and business memberships rose by US$5, to US$65, while executive memberships increased from US$120 to US$130. The renewal rate was 93 per cent in the fourth quarter in the US and Canada, and 91 per cent worldwide. Given Costco’s relatively affluent demographic, it is unlikely that the increased membership fee will discourage renewal.E-commerce and technologyE-commerce sales were up by 16.2 per cent for the year, and 19.5 per cent in the fourth quarter. The top growth categories online were appliances, gold and silver bullion, home furnishings, and gift cards. Downloads of the company’s mobile app leapt by nearly 30 per cent, site traffic was up 8 per cent and average transaction value 5 per cent. E-commerce has never been Costco’s strong point and is still well under 10 per cent of sales, despite the fact that the number of SKUs offered online is two-and-a-half times what is available in-store.From a broader technology perspective, Costco is right on the ball. After running a pilot in Europe, the company is now rolling out membership scanning devices at store entrances in the US. The devices check a member’s physical or digital membership card and match it with photo identification to ensure that the visitor is the actual member and not another person piggybacking on the real member. Visitors who are non-members must accompany a valid member. The member will be notified if the card has expired so that it can be renewed at the membership counter prior to shopping, rather than at the register when checking out. This in itself is a nuanced bit of customer-centricity: someone is likely to be a lot less frazzled if the news is delivered at the entrance prior to shopping rather than at checkout. Besides, it speeds up the checkout process because the card doesn’t need to be scanned at the register. The scanners also seem to be generating revenue for the company by boosting membership and eliminating piggybacking.True to its down-to-earth style, Costco’s management does not provide forward guidance and Vachris has said, with typical modesty, that he isn’t good at predicting the future. So all we can expect from Costco is just more dull, rock-solid competence.