case study costco

Costco Case Study: Costco Wholesale Corporation Case Study

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Introduction

Current situation, internal environment, recommendations.

Costco Wholesale Corporation is a membership club founded in 1983 and headquartered in Issaquah, US. The company deals in a variety of merchandise including televisions, computers, camcorders and phones.

In addition, the firm provides services such as website and online solutions, mortgage purchase and financing, business prescription insurance as well as payroll services. The corporation was formed with a mission of offering quality products as well as services to its members at achievable economical prices.

The company’s competitive advantages are the business strategies, customer approach and the diversified trade model.

Strategy elements

Low pricing as well as limited selection of products are the foundation of the corporation’s strategy. Further, Costco’s treasure-hunt merchandising is also an invaluable tactic applied by the firm in operations. Through treasure-hunt merchandising, the company is capable of purchasing high-end products and services on the gray economy from the vendors with the motive of eliminating surplus stocks.

Competitive approach

The company’s price leadership tactic attained through reduced handling and warehouse expenses, the utilization of just-in-time stocking principle and maintenance of in stock has proven invaluable in the reduction of prices and increased purchases.

The corporation also maintains preeminent value packs that contribute hugely in attracting large numbers of customers. The company undertakes minimal promotional activities resulting in minimal number of expenses incurred.

The business model

The firm currently utilizes business model that focuses on the provision of restricted categories of trademarked national stock while anticipating high proceeds from vending as well as prompt stock returns.

In fact, the company’s just-in-time stock, minimal handling of stock, volume purchases as well as efficient delivery channels has enabled the firm to generate higher revenues from its operations. Further, the corporation’s treasure-hunt merchandise has created a process that attracts large number of clients.

The macro-environment

Costco Corporation uses PEST analysis in the examination of the macro-environment in which it operates.

Political aspects

The corporation recognizes the significant roles played by both the political and the legal sectors in ensuring excellent status, success and trust in its operations. As such, the firm adheres to business morals as well as the legal provisions provided by the international business organizations. The company offers goods and services that meet the standards as well as gratifies the customers’ needs across the globe.

Economic aspects

The company’s repute appeals to large number of clients leading to increased sales. Additionally, the firm continues to offer superior goods and services to its clients. Further, the firm has spread remarkably across different states in the globe by opening various businesses causing an increase in its economic power and competitive position over similar firms in the industry.

Socio-cultural aspects

Culture influences the performance and productivity of Costco Corporation in a number of ways. First, the corporation recognizes the worth of its personnel’s ideas and beliefs without prejudice. The company also satisfies its client social assurance by the provision of high quality goods and services.

Technological aspects

The utilization of contemporary technology in businesses ensures efficiency and competitiveness. Costco is at the forefront of utilizing the current progression in expertise to come up with innovative products that suit the needs of the customers. Further, the company’s website enables the clients to familiarize with the firm’s products and services.

Key success factors

The company’s business model is instrumental in defining its achievements. The firm recognizes cultural perspective by seizing opportunities in different locations. In addition, the firm’s circular vision is instrumental in the reinvention of innovations leading to efficient delivery of products.

The corporation’s passion has been imperative in the designing of a collaboration-propelled paradigm enabling innovations of current value models. Moreover, entrepreneurial spirit and working for a purpose is invaluable in sharing ideas that deliver greater achievements.

Costco Strategic Group Map

The company relates with other two competitors including the Sam’s Club and BJ’s wholesale club. The map exhibits the stiff competition that Costco faces in the market from rivals. Based on the business model, all the firms apply low cost and high volumes model. In terms of revenue, Costco leads with $70 billion followed by Sam’s Club $45 billion and BJ”s Club at $10 billion.

Costco’s sales have declined by 6%, Sam’s by 4.5% and BJ by 3.5%. The firms have diversified their stores all over the globe with the Sam’s Club leading with the number of stores at 590 followed by Costco’s 513. BJ Club has 170 stores.

The firms are employing a number of current strategies to gain competitive advantage. For instance, Costco has diversified operations in the global economy while the Sam’s has opened up 20 new locations nationwide. The BJ’s Club focuses on retail shoppers as well as presenting volume groceries.

Porter’s five forces

New market entrants

The corporation has a competitive advantage over rivals due to high barriers of entry into the market, low threats from new firms and diversified products at low-costs.

Competitive rivalry

The company faces stiff competition from other firms such as the Sam’s Club. The firm’s delivery series is effortlessly duplicated leading to enjoyment of economies of scale. Low-cost strategies by many firms have resulted into meager proceeds to the firm.

Supplier power

The firm enjoys good working relations with its vendors who supply large quantities of products at low prices

Purchasing power

The firm enjoys high purchase bargaining power, high concentration and mobility of buyers

Substitutes

There is insignificant pressure of substitute and the customers get towering worth from the economical purchases as well as elevated membership maintenance.

SWOT analysis

The firm maintains devoted and rich clients, towering stock proceeds and consistent return on sales as well as resources together with incredible remunerations policy. All the aspects have enabled increased revenues.

The company diminishing profit levels, weak promotion activities, lack of self-checkouts and the primary focus on the club’s members opposed to the general customers make Costco less attractive to many potential customers.

Opportunities

Higher growth prospects are presented to the firm due to operations in high GDP states, expansion in membership, good repute regarding employee remuneration and societal responsibility as well as the augmenting trademark among the masses.

The firm faces stiff competition from competitors such as the Sam’s Club and BJ Club. Additionally, the firm’s geographical diversification is insignificant compared to the Sam’s Club.

Financial ratios

Liquidity ratios.

The current ratio showed a decreasing trend from 116% in 2010 to 110% in 2012. The quick ratio and cash ratio were 60% and 47% respectively in 2010 and declined to 52% and 40% respectively in 2012.

Profitability ratios

Costco’s profitability ratios have remained constant over the years. For example, gross margin has been at 13%, operating margin at 3% and profit margin at 2%. Return on investments after tax has been increasing from 12% in 2010 to 14% in 2012.

Value chain

The Costco’s CRX program enables clients to obtain inventory requests in time. In addition, the program enables the firm to measure performance and productivity against competitors thereby increases priceless insights in the viable economy.

The system has also provided efficient delivery series solution to the clients through updating stock information, forecasting and demand planning leading to enhanced business operations and reduction in costs.

Key strategic issues

The critical tactical aspects of Costco encompass low prices, limited product lines and selection as well as treasure-hunt shopping experience. In fact, the firm strives to offer quality goods and services to its members at economical costs achievable. The company operates a limited number of products approximated to be 4,000 through volume buying, effective delivery procedures and abridged inventory managing.

The firm should modify its strategies to address the shortcomings in its operations. For instance, the corporation should diversify selections of merchandise instead of limiting choices to only 4000 to expand the customer base.

Secondly, the firm should build many warehouses across the globe to counter the rising number of competitors like the Sam’s Club that may attract a large share of the market. Thirdly, the company should also diversify applied cost and pricing strategies since competitors are utilizing the low-cost tactics.

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Bibliography

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How Costco's Unique Business Model Resulted In Global Success

Table of contents, here’s what you’ll learn from costco’s strategy study:.

• How developing a radically different business model can lead to an industry breakthrough.
• How global expansion can be safely explored when you’re at your very best.
• How to accompany a business model innovation with policies that create a cohesive strategy.
• How managing your competitive advantage requires the evolution of your strategic approach.
• How to respond to market trends without killing your strategic advantage.

Costco is the third biggest retail player in the world - behind only Walmart and Amazon. Yet there is something very unusual about the retail giant. Costco makes way less money per a sold product compared to other retail stores. 

The company’s average   gross profit margin was only around 12% in 2022 . That’s way lower than your average retailer gross margin which ranges from 20% all the way to 50% for department stores. E.g. Walmart’s average margin in 2022 was 24.4% . In fact, Costco even loses about $40 million a year on their $5 roasted chickens alone.

It also doesn’t have nearly as many stores as other big retailers, yet it outperforms everyone but Walmart. Costco has “only” 838 stores around the world, while Walmart has 10,593 retail stores in 2022 , Schwarz Group, the group that owns Lidl and Kaufland, has 13,500 stores , Kroger owns nearly 2,800 stores , and Target owns 1,948 stores .

After all, the company boasts:

• $222.7 billion net sales in 2022
• 314,000+ employees 273,000 employees
• Stores in 13 countries
• 120.9 million worldwide members
• A 93% membership renewal rate in the U.S. and Canada and an 90% renewal rate worldwide

Members - that’s Costco’s secret. Their warehouse retail stores are membership-only and that’s the foundation of their extremely successful business model.

Costco’s story is a masterclass of thinking outside the box and creating win-win scenarios which satisfy customers and employees while achieving the company’s business goals.

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A warehouse club: the birth of a disruptive business model

Costco’s story begins with Price Club which was founded in 1976 by Sol Price and his son Robert Price. The store introduced a brand new concept - a retail warehouse club . In order to shop there, you had to be a member.

At first, Price Club was limited exclusively to business members, who could purchase a wide range of supplies and wholesale items. But after a while, it opened up its membership to employees of local businesses, non-profit organizations, and government. 

One of the people who were instrumental in fine-tuning the new warehouse club concept was Jim Sinegal , the executive vice-president of merchandising, distribution, and marketing. He was previously employed by Sol Price and was familiar with the Price Club business model.

Seven years after the first Price Club store, Sinegal used his expertise to co-found Costco Wholesale with Jeff Brotman, and together they opened the first warehouse in Seattle, Washington in 1983.

In 1993, Costco and Price Club agreed to merge operations since Costco's business model and size were similar to those of Price Club, which made the merger more natural for both companies.

Costco has transformed the retail world as the world's first membership warehouse club for the wider public which accepted non-business members. While the idea of charging people to shop in your store seemed very bold and was not followed by any of the retail giants, it proved to be the right move. It allowed Costco more efficient buying and operating practices while giving the members access to unmatched savings.

Costco’s operating philosophy has always been simple: 

Keep costs down and pass the savings on to our members.

People loved the concept, which resulted in Costco’s stunning rise. By the end of 1984, 200,000 people held Costco memberships and Costco soon became the first company ever to grow from zero to $3 billion in sales in less than six years since its inception.

The annual membership of Costco’s first Seattle store back in 1983 was $25. The cost of a membership nowadays starts from $60, which is around the same as it was back in 1983 once adjusted to inflation.

The merger between Price Club and Costco created  the world's most successful warehouse club . In 1999 the name of the company was changed to Costco Wholesale Corporation and remained as such until this day.

Key takeaway #1: A radically different business model is a preposterously effective business strategy

Costco’s radically different business model was a disruptive innovation in the retail industry.

It created a constant flow of revenue that offered unmatched flexibility that was returned back to its customers. It’s important to note, though, that:

• Costco tested the model with a small circle before it proved successful. It didn’t go into full launch mode without  validation .
• The model is not different for the sake of being different. It included an advantage (e.g. the fixed revenue stream) and a way to turn that advantage into increased customer value (e.g. unbeatable low prices). It was  meaningfully different .

The different business model created a second, unique to Costco, profit model. The company faces the same challenges as any other retail, but its second profit model gives it the flexibility to challenge the conventional way of the industry (like having much lower profit margins). In other words, it offers an unfair advantage like every great strategy.

How Costco safely started its global strategy

Before Costco's international expansion, there was quite some doubt whether the innovative Costco retailing strategies would result in success outside the United States.

There are plenty of failure stories indicating that advantages aren’t easily transferred geographically:

• Target's exit from Canada in 2015
• Tesco's shutdown of its U.S. Fresh and Easy chain
• Walmart's store closings in Brazil in 2016

Being successful in the global market is not a given even for the biggest retail players.

However, Costco's expansion, which began in 2013, succeeded in ways that Target, Walmart, and Tesco failed to do. By   January 2023 , Costco was present in 14 countries outside the US and Puerto Rico.

Costco membership sign ups in the first 8 to 12 weeks of a new store opening overseas are generally 10 times greater than at Costco store openings in the United States. Additionally, the company’s international membership renewal rate was 90% at the end of its 2022 fiscal year.

While many other retail chains open international locations as a defensive strategy in order to shore up declining sales, Costco isn't compensating for domestic weakness. Costco's international expansion came in the middle of high profits in the U.S. market, allowing the company to focus on a long-term international strategy and to test if its business model would be well-received in other markets.

And talk about great reception! In 2017, before Costco opened its doors in Iceland, one out of eight Icelanders had already signed up for membership. On the opening day, search-and-rescue teams were deployed to manage the crowds.

Perhaps even more impressive is Costco’s opening of its first store in mainland China in Shanghai in 2019. On an opening day, 139,000 people got their Costco membership. The store even had to close early on the first day due to traffic jams caused by crowds of shoppers and three-hour wait times just to park .

Key takeaway #2: A global expansion attempt as a growth experiment

Costco’s strategic plan was carefully formed before it was executed.

And the approach had a few critical traits that helped it to succeed where other retail giants failed:

• Costco tested the waters beforehand . Again, validation, then action. Before opening its first store, the company enabled its potential customers to subscribe ahead of time, giving a feel of the potential demand.
• Costco expanded when its US profits were still rising.  That enabled it to take a long-term stance, in case the attempt wasn’t fruitful initially.

Costco’s business model innovation was market agnostic.  The retail giant could transfer the advantages of its innovative approach to any market whose fundamental working principles were the same as the US market.

Now let’s see what exactly makes Costco’s business model so successful.

Understanding Costco’s business model

Costco’s strategy remains at its core a cost leadership approach.

Costco’s mission is “to continually provide members with quality goods and services at the lowest possible prices.”  

This mission statement is directly linked to its business model and strategy. It emphasizes quality and cost leadership , which are two factors that top consumer’s priority charts. While they might seem mutually exclusive, Costco is known for both.

Costco is primarily a big-box store. Such stores achieve economies of scale by focusing on large sales volumes and are meant to be a one-stop shop for customers. Establishments like Costco took “the one-stop shop” a bit further and don’t offer just groceries and store products, but also a food court, optical services, gas stations, tire garages, or photo processing services. 

Big-box stores typically carry items in extra-large sizes and lure customers with the promise of saving by buying in bulk . Costco is no exception - real bargains can be had by purchasing bulk non-perishable items or items with long shelf life.

As a result, Costco’s generic strategy is cost leadership. 

This strategy entails maintaining the lowest prices possible and is used by many retail giants. However, Costco’s strategy incorporates the warehouse club membership business model, which differentiates it from other retailers and enables Costco to offer lower prices than its competitors.

Costco is so effective because its revenue is broadly divided into two streams:

• Product sales , which is revenue from all the sales of goods and services through all Costco’s channels.
• Membership fees , which is revenue from Gold Star, Business and Executive memberships to customers worldwide.

This is a very basic overview of Costco’s general business model. Now let’s go into more details and look at some specific elements - starting with the core of the business model, Costco’s membership.

Costco’s membership: the competitive advantage of Costco’s business model

As said, Costco uses a membership-only warehouse club business model , which means consumers pay a membership fee to access the low-cost products available at Costco stores.

Each member is entitled to issue a free supplementary card to someone living in the same household or to a fellow staff member working in the same company. Non-members may accompany members, but only members are allowed to purchase products in stores. In 2020, Costco had a total of 58.1 million paid members and 105.5 million cardholders .

Costco has two tiers of membership – basic and executive plans for consumers and businesses. Basic plans cost $60 per year, while Executive plans cost $120 per year.

Executive members get an annual 2% cashback on their purchases (up to $1,000 per year). This makes executive membership an enticing offer for people who often shop at Costco and there’s plenty of them. In fact, 45% of members pay $120 for the Gold Star Executive membership.

These membership fees actually represent the majority of Costco's operating profit. Yes, Costco makes most of its money by selling access to affordable products and not by selling those products.

In 2019, Costco made $4.2 billion from membership fees , an increase of 9% from the previous year. Its entire net income for the year was $5.8 billion.

Costco’s membership is also a powerful play on the human psyche. Once a customer pays the membership fee, it treats it like a sunk cost. The investment has been made and now it is time to get value from it. Because of that, customers will make additional trips to Costco to make sure they get value from their investment. 

While other retailers need to worry that a decline in same-store sales will lead to collapsing profits, Costco doesn’t really face this problem. Its profits are mostly dependent on its memberships, which are getting renewed on an extremely high basis (93% in the US and 90% internationally).

Obviously, such high renewal rates aren’t a coincidence. Costco does reinvest the membership fees into low prices for customers and by doing so ensures that everyone wins. We’ll talk more about product prices later on, but now let’s see what kind of people Costco wants for its members.

Target market: suburban homeowners

From the very beginning, Costco targeted relatively affluent and college-educated customers who would understand the value of membership.

A typical Costco shopper is an upper-middle or upper socioeconomic class and has an income of about $93,000 a year. 

But if Costco employs a cost leadership strategy, why does it target relatively wealthy people? Well, while all shoppers like a bargain, Costco’s customers also have the means to buy in bulk, which is the only way one can buy most products Costco stocks.

While the price of an individual product generally is the lowest around, shoppers usually have to buy at least a three-pack, which means that the average transaction total is quite high.

That also explains why the vast majority of Costco stores are located in affluent suburban areas both in the U.S. and around the world. It’s hard to make the most of a Costco membership if you’re renting a small flat as it takes a lot of space to store bulk purchases. That’s why a typical shopper is a suburban homeowner.

Speaking of buying and selling in bulk - that is also an important part of Costco’s business model.

Bulk purchasing

Product quality is a crucial aspect that Costco focuses on for driving growth and maintaining customer loyalty.

Instead of selling a hundred thousand different products as most other retailers, Costco’s merchandise is limited to under 4,000 items (for comparison, Walmart sells over 142,000 SKUs in each of its supercenters). This allows Costco’s procurement team to rigorously screen each product in order to provide the best quality and the best price to members. Each item Costco sells is meticulously selected . As a result, consumers don’t suffer from choice paralysis and can always rely on Costco for selling quality products.

Because of the lower number of options, each option has a higher perceived quality and is more likely to sell, which allows Costco to order more stock and thus lower the product’s price. Remember that Costco is selling most products in bulk packaging, so shoppers can’t buy just one cereal box but have to get 5 or them - which complements Costco’s ordering model.

By selling products in bulk Costco entices customers to buy large quantities of items. The perception of getting a deal often negates the fact that one may not even need all the products. Customers believe they're saving more money by spending more money , which leads them to spend more in the long run. 

According to Perfect Price’s research from 2015 , customers spend by far the most money per shopping trip when visiting Costco compared to other retailers.

Here are the top 10 stores where customers spend the most per shopping trip:

• Costco, $136 
• Sam’s Club, $81 (similar membership model)
• Target, $62
• Stop & Shop, $56
• Wal-Mart, $55
• Meijer, $54
• Whole Foods, $54
• Trader Joe’s, $50
• Kroger, $50 

There’s another part of Costco’s business model we haven’t mentioned yet that makes big purchases less risky.

Costco’s refund policy is essentially a promise for a risk-free investment

Costco has a very liberal return policy where customers can return almost anything they have purchased at any time. Even their membership.

On Costco’s website it says: 

“We are committed to providing quality and value on the products we sell with a risk-free 100% satisfaction guarantee on both your membership and merchandise. ” 

Having such a liberal return policy is almost necessary if you want to entice shoppers to try new products which they can only buy in bulk. If you know you can return anything if you don’t like the first product in the box of ten, you’ll be much more inclined to buy something new.

And yes, members can also claim a refund on their memberships at any time if they are not satisfied with the service, which means anyone can try shopping at Costco risk-free.

There was even a case of a woman who successfully returned a Christmas tree 10 days after Christmas because the tree was dead.

Efficient inventory management and warehouse design

From a logistics standpoint, Costco is one of the most efficient retailers in the world. This is because of two factors: inventory management and warehouse design.

Costco uses its warehouse-style stores as retail and storage spaces in one . It utilizes cross-docking, which means that products from a supplier or a manufacturing plant are distributed directly to the retail chain with marginal to no handling or storage time, which reduces inventory management costs and storage space costs.

Costco also displays goods in their shipping pallets, instead of arranging individual items on shelves, which further reduces inventory costs.

Costco’s warehouses are strategically designed to make restocking as easy as possible . Warehouse design allows forklifts to restock the store, which also makes it easier to rotate seasonal products and enables the treasure-hunt experience. This purposeful design saves both time and costs.

The combination of impeccable inventory management and warehouse design also allows Costco to utilize the just-in-time stocking principle , which is a management strategy that has a company receive goods as close as possible to when they are actually needed.

Once you combine everything mentioned thus far in this chapter, you can see why Costco can cut prices even lower and pass on the savings to their members, thus attracting more membership sign-ups and directly increasing their bottom line.

However, their store design serves yet another purpose.

“Costco doesn’t use any fancy decor or lighting, instead, they make sure that their store resembles a warehouse with exposed beams, pallets, and simple metal shelving,” says Mark Ortiz, a marketing expert and founder of Reviewing This. “This is smart because it tricks the consumer into believing that they are purchasing goods at low prices . Logically, you would think, less money spent on decor equals less overhead cost equals the opportunity to lower your prices.”

The warehouse design is a part of “the Costco Experience”, which Costco is famous for, which shouldn’t be neglected when talking about their business model. Let’s see what the famed experience is all about.

The Costco experience and Costco culture

Shopping at Costco is often called “The Costco experience”.

As offering superior customer experience is the key to customer loyalty, Costco does its best to be an experience in itself. By putting customers first in every choice and innovation, Costco continues to build its loyal customer base 

Consumers go crazy for a deal, and Costco has designed its entire strategy around this core tenet. A good deal “feels like winning,” says Bob Nelson, the senior vice president of financial planning and investor relations at Costco. And Costco would like their members to feel like they’re always winning, even if this means resisting the urge to raise prices and increase profits.

James Sinegal, Costco’s co-founder and former CEO, once talked about how once Costco was selling Calvin Klein men’s jeans for $29.99 a pair. The pants were selling faster than Costco could stock them, and when he bought another shipment for $22.99 per pair, it was ultra-tempting to charge more. However, Costco stayed true to their philosophy of passing the savings to their members and sold the jeans for $22.99 per pair.

Making sure that the customers get the best deal at Costco is an integral part of Costco’s culture.

Besides providing an exceptional shopping experience, Costco is also famous for an employee-focused organizational culture, which we’ll explore later. 

The combination of cost, generous return policy, and satisfied employees resulted in a shopping experience that many customers get addicted to.

It was believed at the company that culture is not the most important thing, but the only way forward . Costco saw promoting its core values as the only recipe for success. Maintaining integrity, passion, motivation, and customer trust is what enables Costco to outdo its competitors.

Shopping features aside, there is something more to Costco that cultivates such a loyal customer base.

"Costco relaxes my soul," says John, the founder of the I love Costco blog. 

"I do love that everyone at Costco appears to be relaxed humans," says Ellinger. "I love overhearing a weird personal conversation between two employees unloading a box and knowing that Costco is a safe space for people to just be people."

Costco also has great food courts which drive visits on their own. And they offer amazing deals, which are even losing them money in some cases.

We already mentioned the $5 roasted chicken, but there’s also the famous hot dog and soda combo for $1.50. It still costs the same as in 1985 when it was introduced and that is a big part of its almost mythical status among Costco’s members. Yes, Costco could make a lot of money by raising the price, but it’s much more valuable if they let it serve as a reminder of Costco culture every time a customer decides to grab a hot dog after a shopping trip.

All this helped the company build an outstanding image among its customers and it’s apparent that it leads to more sales year after year.

Key takeaway #3: Reap the benefits of a business model innovation with a cohesive strategy

Costco’s business model isn’t an isolated difference from its competitors, but one of many distinctly different policies, approaches, and benefits that create a cohesive corporate strategy.

Otherwise, any one of its competitors could duplicate the business model and reap the benefits for itself, rendering Costco competitively exposed. Here some policies that tie well with Costco’s innovative business model:

• Customer filtering. Costco’s subscription model discourages low-income customer groups from becoming members, like students and small household tenants. That ensures a larger average spend per shopping trip.
• Supplier independence.  Since Costco makes most of its profits from its membership fees and has a more exclusive customer base, it doesn’t need a big variety of products. As a result, it can be more picky with its product and supplier selection, increasing its negotiating leverage.
• A loyal culture. Costco has one of the most supportive cultures in the business world. It pays its employees above average, provides rare benefits and powerful leadership initiatives. That’s why it enjoys a triple retention rate than the industry average (90%) and increased productivity. Also, customers feel employee loyalty by having a pleasurable experience while buying.
• A cheap design. Maintaining an industrial decoration keeps operating costs at lower levels and the “I’m getting a bargain” feeling at higher levels.

But does Costco’s strategy produce results? How successful has its business model been during the last few years? We’ll let the numbers do the talking.

Recommended reading:   What is Strategic Analysis? 8 Best Strategic Analysis Tools + Examples

How Costco’s corporate strategy evolves leading to constant expansion

Costco pricing strategy - lower margins, lower prices, high value.

Offering quality products at the lowest prices is as much a part of Costco’s business model as the result of it.

According to Craig Jelinek, Costco's CEO and Director: 

"Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members." 

Unlike most other retailers, Costco’s membership model allows them to focus on strategies for making products cheaper for customers , rather than trying to increase revenue by finding ways to make customers pay more.

Because of its limited range of products, Costco can stay committed to delivering high-quality items at the lowest prices. Because of its efficient inventory management system and constant revenue from membership fees, Costco can keep its gross profit margins lower than most other retailers. Low margins result in cheaper products as Costco passes the savings to their members. 

Kirkland Signature: one of the most trusted private-label brands

When it comes to affordable yet quality products, Costco’s own private-label brand, Kirkland Signature, deserves its own chapter.

In 1995 Costco began the Kirkland Signature. Its mission was to create an item of the same or better quality than the leading brand at a lower price and do so by controlling every element of the item’s creation , including packaging and transportation. 

Costco claims that Kirkland Signature products are high-quality goods at simply excellent prices and openly invites customers to compare any Kirkland Signature product with its brand-name counterpart. The store’s return policy basically guarantees Kirkland’s quality.

Costco prices Kirkland Signature items according to its philosophy and that’s why they are always cheaper than their brand-name equivalents, often by more than 20%.

It’s no surprise that nowadays Kirkland products account for roughly 25% of Costco’s sales and shoppers can find them in virtually any category, from groceries to household products and clothing.

"I am not sure there is another [private-label] brand that has established this level of trust," says Timothy Campbell, a senior analyst at Kantar Consulting.

The success of Kirkland Signature is possible because of Costco’s business model as they have direct contact with lots of manufacturers and their members trust them that they will only choose and offer quality products.

In return, Kirkland Signature has become one of the top reasons that customers are so loyal to Costco. Creating such a strong store brand shows that Costco cares about its customers and wants them to have great products at a great price.

A lot of Kirkland products are actually manufactured under a private label by name-brands just for Costco. 

Select varieties of Kirkland Signature Coffee are actually roasted by Starbucks Coffee Company, Kirkland Signature dry dog and cat foods are made by Diamond Pet Food and Craig Jelinek, Costco’s CEO, said in an interview that Kirkland Signature Batteries are made by Duracell. 

There are many other examples and in each case, Kirkland products are cheaper than their brand-name counterparts.

The treasure hunt experience

If you’ve ever spoken with a Costco member, you’ve probably heard them brag about their latest find at our warehouse. Costco calls those products treasure hunt items , and they’re offered in various departments throughout the year. 

They’re there to make the customers feel the thrill of discovery . The aisles at Costco aren’t labeled, which tempts shoppers to walk down each one. That makes them more likely to encounter what Costco calls its “treasures.” 

“Treasures” make up 25% of Costco’s inventory and they are items that make shopping an adventure. When customers turn the corner they might suddenly find the luxury “surprise” of the week. It’s often something one would expect in upscale department stores, but certainly not in Costco. Surprises like Waterford Crystal, Coach handbags, Omega watches, Andrew Marc, Calvin Klein, Adidas, Chanel, Prada handbags and many more are offered at incredibly low prices. Other treasures include electronics, appliances and other less frequently purchased finds at extremely good prices. These products appear on Costco’s shelves one day, but are gone the next. 

That uncertainty creates a sense of urgency , and means that Costco shoppers don't just buy a pack of gum on impulse - they buy an 80" 3D television or a whole box of fine wine.

The company refers to this strategy as “treasure hunting,” in which Costco shoppers must navigate through the entire warehouse in search of exciting deals and unbelievable bargains. And they know some of the things they can find as they receive a pamphlet filled with coupons and irresistible deals as soon as they walk into the warehouse.

Every Costco warehouse is purposely designed with the necessities at the back of the store, meaning customers have to walk through the rotating items and sales to get their most-needed products and groceries. 

The treasure hunt atmosphere is also a safeguard against online competitors as customers have to go into a Costco store to see what is new and exciting. 

One would think that unlabeled isles, rotating inventory and purposely longer shopping trips would bother customers, but in the case of Costco, it’s quite the opposite. It’s all a part of the famed Costco experience and members enjoy it as they feel that’s how they get the most value for their membership. Instead of a run-of-the-mill grocery trip, Costco becomes an adventure that loyal customers are obsessed with.

Setting up the adventure is made possible by Costco’s inventory management and warehouse design which enables the store to quickly and efficiently rotate merchandise and allows them to grab the best deals their procurement team can find.

The treasure hunt experience is once again something that is enabled by Costco’s business model and at the same time a part of it. It’s also another factor that contributes to Costco’s extremely high customer retention rate.

Customer loyalty

Most consumers take pride in being a Costco member and the company’s high level of customer loyalty is no secret.

The emphasis Costco places on excellent customer experience and the value to their members results in an extremely high membership renewal rate - 93% in the US and Canada and 90% on the global market . 

Costco’s number of cardholders has also been steadily growing - there were 76.4 million cardholders in 2014 and the number rose to 120.9 million cardholders in 2022. Around 66.9 million of them are paying members as each member gets an additional card for their household. These numbers are what makes Costco’s customer retention rate even more impressive.

But Costco’s members aren’t just loyal, some of them are obsessed with the Costco experience. There are websites and blogs solely devoted to people talking about the warehouse. Some of them, like Costco Insider , have huge followings as they review recent deals at the store.

A blog dedicated to the Costco experience

This stable base of members who are making repeat purchases throughout the year is the result of Costco’s business model. There’s another very interesting thing Costco does or rather doesn’t do, in order to keep their profits higher and prices lower.

No advertising

Costco spends next to nothing on advertising and has no official advertising budget. It does send targeted emails to prospective members, email coupons and offers to existing members, but that’s negligible. Considering the huge sums of money most retailers spent to bring customers into their stores, that’s a really unorthodox approach.

How can Costco completely shun traditional advertising and still be successful? There are two reasons.

First, Costco has a product that sells itself . The membership offers great value to those who shop regularly at Costco, and because they’re excited about the deals they get, they spread the word.

Costco’s focus on customer satisfaction helped them create a strong brand and nowadays it’s safe to say that their reputation precedes them and that most of their target market has at least heard of Costco.

Second, spending on marketing to get existing members to shop more wouldn't really help Costco’s bottom line as membership fees are the real driver of profits. You might think that spending heavily to gain more members would make sense, but when you look at the numbers it actually doesn’t.

Spending just 0.5% of its revenue on marketing would wipe out 17% of the company's operating profit. If Costco was to spend 2% of revenue on advertising, as Target does, it would erase nearly 70% of their operating profit. The number of new members they’d get couldn’t possibly cover that loss, so it’s just not worth it.

Costco’s membership model allows them to focus on improving every aspect of the experience that leads to customer loyalty and inevitable word-of-mouth recommendations instead of spending on traditional marketing campaigns. This is one of the company’s core strengths as almost no other retailer can afford to pretty much ignore advertising.

Instead of investing in ads, Costco invests in something that much more directly impacts their members’ experience - their employees.

Higher wages and great employee benefits

Costco is often recognized as being much more employee-focused than other Fortune 500 companies. By offering higher wages and top-notch health benefits, the company has created a workplace culture that attracts positive, high-energy, talented employees.

Costco’s objective is to have motivated employees and reduce the employee turnover rate. And it succeeded as Costco's annual employee turnover is 13% while the industry turnover is believed to be well above 20% annually. The company also cultivates most of its leaders through internal leadership development, which presents an opportunity for professional growth and development.

Costco fosters a culture that is built on employee empowerment. It invests in its employees in order to improve operations and drive profits. Employees are recognized as an asset for the company as they are the ones driving the competitive advantage in the physical retail landscape. Costco doesn’t only provide them with good wages and health benefits but also promotes cultural diversity and inclusion.

This inclusive organizational culture and HRM practices have resulted in extreme popularity along with a strong social image - driving more and more loyal customers into the stores.

Apart from that, the focus of Costco has been on a company culture that promotes constructive criticism, and the philosophy has been ‘leading from the floor’, which means there’s much less micromanagement than in many other similar jobs.

Of course one of the biggest draws is a higher wage, so let’s take a closer look at it.

In early 2019, Costco raised its minimum hourly pay to $15. Its average hourly pay in 2019 was about $17.60 an hour, compared to about $10.88 on average for retailers, according to Payscale. When you add healthcare benefits, you get arguably the best job package in the retail sector.

According to Forbes surveys, Costco is consistently among the 5 top employees on America’s Best Large Employers chart. In 2017, it was even ranked as #1, and in 2021, it is ranked as #4.

How can Costco afford these higher wages and great benefits? Once again, it’s all thanks to its business model. In fact, Costco always had a much higher revenue per employee than other big retailers.

The average Costco employee generates nearly triple the revenue produced by the average Wal-Mart and Target employee and the latest results show, Costco is ranked #1 for revenue per employer in the retail sector, the wholesale industry as well as the general market!

Highly paid, motivated and happy employees help customers enjoy a consistently good shopping experience . That plays a large part when it comes to membership renewal and ensures that Costco’s customers keep coming back. In the end, that’s what matters the most.

Key takeaway #4: Expand your competitive advantages to evolve your strategy

Complacency is a giant killer in the business world.

Large enterprises that rest on their laurels, don’t evolve their strategies, and manage their competitive advantage die.

Costco’s strategy is constantly adapting to market changes. The company keeps finding new ways to take advantage of its unique business model and the policies surrounding it. Here is the list of the policies that no Costco competitor could benefit from implementing isolated:

• Offering premium product options with the lowest market prices.
• Spend zero on advertising and promoting its sales and special offers.
• Offer a treasure-hunt-like experience.

Other policies like its employee extensive support are repeatable but work exceptionally well for Costco.

Recommended reading:   The 7 Best Business Strategy Examples I've Ever Seen

Why Costco’s growth strategy doesn’t follow the norm

Costco is a shining example of how very successful an innovative business model can be and how it can create an environment where everybody wins.

Almost everything we discussed in this study is thought-thru and purposeful innovation - from Costco’s membership model to its warehouse store design. 

Despite its success (or because of it?) Costco never stopped evolving. It expanded its offering to services such as gas stations, pharmacies, beauty salons and travel agencies which generated about 16% of the company’s $166 billion in revenue in 2020. 

It added a food court and if it weren't considered a retailer, Costco would be #14 on the list of the largest pizza chains in the U.S in 2018. They cannot be easily implemented by e-commerce giants like Amazon and as such make Costco more “future-proof” than many other retailers.

Let’s take a look at two interesting examples of how Costco evolved some aspects of its business and  how it implemented its growth strategy.

The art of free samples

Free samples in stores are anything new or groundbreaking, but there’s no brand that’s as strongly associated with them as Costco. 

The company took the promotional activity to the next level and people have been known to tour the sample tables at Costco stores for a free lunch, acquired piecemeal. There are even personal finance and food bloggers who’ve encouraged the practice . 

There are shopper blogs about favorite sample options, and some say the samples are their main reason for coming into the store.

Of course, free samples boost sales of certain products (in some cases even up to 2,000% ), but Costco knows that they also can make the store a fun place to be .

Consider this - Penn Jillette, from the famous magic act Penn & Teller, has even taken his dates to Costco to enjoy free samples on more than one occasion. And he’s surely not the only one.

However, samples don’t just make Costco’s store more appealing, they operate on a more subconscious level as well. As author Robert Cialdini writes in his best-selling book Influence, the Psychology of Persuasion : “One of the most potent of the weapons of influence around us is the rule for reciprocation. The rule says that we should try to repay, in kind, what another person has provided us.”

This means that customers feel a stronger urge to buy something after they sample it and that creates a potent combination for Costco. Even if people come to their stores because trying samples is fun, a variety of psychological mechanisms kick in, compelling them to buy more products over a longer period of time.

The curious case of Costco and e-commerce

Costco actually entered the e-commerce world in 1998 , which shows that they were again quick to evolve and try something new. However, online shopping never became a substantial part of its business model.

As for most other companies, the COVID-19 pandemic changed that to a certain extent. Costco’s e-commerce sales grew by 10% in 2022 .

Costco definitely upped their e-commerce game and also started selling their products via Instacart, which had to hire 300,000 new staff to accommodate the surge in shopping delivery.

Costco now also offers same-day delivery service to its customers located within a 20 minute vicinity. 

While Costco evolved its e-commerce activities, it hadn’t quite recreated the unique in-store experience online. And the interesting thing is, perhaps it doesn’t need to.

Costco’s online margins aren’t as good as their in-store sales and even as foot traffic slowed at some of its competitors, Costco saw their members spending more in stores during the pandemic. That’s why the company opened 16 new warehouses even in 2020.

“Ultimately, we still want our members to come into the warehouse,” CFO Richard Galanti said during a December 2020 earnings call . “When they come in, they see the items and they are more likely to buy some of those items.”

When you think about it, it’s apparent why Costco is more resistant to the rising e-commerce threat. Their members give them a stable income and treat their fees as a cost that makes them come to the store. Costco entices them with the services they offer and the treasure hunting experience which can’t really be replicated. Customers genuinely enjoy being there and they buy in bulk, which means they don’t have to visit the store that often if they don’t want to.

So in the case of e-commerce, it’s not that Costco wouldn’t be willing to further evolve, it just doesn’t make a lot of business sense for them at that very moment.

This already shows that there are some unusual strengths when it comes to Costco’s business model, which means it’s high time to look at Costco’s SWOT analysis.

Key takeaway #5: Study a market trend meticulously to understand how you fit in it

Costco is unlike any other retail player.

Naturally, its business is affected by market trends, but not in the same way as its competitors. Costco’s business model compels its members to go to the store to make their purchases. If Costco tried to make its online experience something like offline, it would kill its advantage.

The company would end up slowly transitioning to a more conventional retail player, lose its competitive advantage, and eventually die.

Instead, it uses its online presence in a complementary way that supports its offline experience and invites members back to the store.

Where initiatives like free samples have a big impact on buying behavior.

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Costco’s SWOT analysis

While there’s certainly a lot to love when it comes to Costco and its business model, there are always things that could be improved. As the SWOT analysis is going to recap a lot of what you already read in this study.

Membership business model

Costco’s membership fees enable Costco to better predict their income, cut prices and ensure customers have an incentive to shop at the store. 

Loyal customer base

Membership card renewal rates of 91% in the US and 88% worldwide show that Costco has an extremely loyal customer base in an industry where it’s very easy to switch brands and retailers. 

Low prices, high quality

Costco’s strategy of stocking high-quality items, which are sold in bulk-size at low-profit margins entices their target customers to become Costco members and to buy more products during their shopping trip. Their own Kirkland Signature brand is also a result of Costco’s philosophy to offer the highest quality products at the lowest price.

Selling in bulk

Costco can keep their margins low because they sell more of the same product compared to other retailers. It significantly increases how much money customers spend during one trip to Costco.

Low operation costs

Costco’s inventory management, warehouse store design and selling in bulk directly from transport pallets keep overhead costs low. 

Passing savings to customers

Costco is not reliant on making huge profit margins in sales and can therefore pass the savings to customers, which encourages loyalty and entices new members.

Costco doesn’t rely on ads to sell their products and doesn’t need to spend huge amounts of money on ad campaigns, which allows them to keep their prices lower than their competitors. Their strong brand name and word of mouth are enough to bring in new members.

High paying retail jobs with generous benefits

Costco takes care of their employees which translates into a better customer experience for their members. Satisfied and motivated employees do a better job and are less likely to leave which results in a low turnover rate.

Flexible inventory

Costco rotates their inventory faster than other retailers which enables them to make the most out of the best deals on the market (e.g. by buying the surplus stock at the lowest prices) and create a treasure hunting experience.

Eco-friendly

Costco’s eco-friendly approach focuses on four main objectives:

• Creating proper waste management systems
• Significantly reducing their carbon footprint
• Changing how they package designs
• Improving energy management systems in warehouses

This is important for eco-conscious shoppers, which a lot of their target customers are.

Limited product selection

While this is a plus for some, it’s indisputable that Costco offers much fewer choices than other retailers and that customers often can’t find more “exotic” products. Therefore, Costco is unable to attract a wider customer base, who want a bigger selection of products in smaller quantities.

Cumbersome transportation and storage

Buying in bulk can be very difficult for people living in cities and storing these products can be tough if a customer doesn’t own a house. 

Aging customer base

Costco has an aging problem . It is mostly attributed to its lack of digital advertising and limited e-commerce. A lot of younger people prefer a quick shopping experience or an online shopping spree, which is not something Costco is known for.

Long lines at the checkout

That’s the biggest complaint of Costco members, which Costco is trying to address with self-service lanes at selected locations.

Wasted food

As consumers are becoming more eco-conscious, it’s starting to bother them that a lot of food from Costco goes uneaten as there’s just too much of it in the one big package the store offers.

Opportunities

Online presence and e-commerce 

Although we said Costco might not need e-commerce as much as other retailers, it’s still an opportunity they can explore to attract new members and increase their revenue.

Social media

Costco could tap into new markets by using social media and social advertising for a fraction of the cost of traditional advertising. Currently, they have 0 tweets on their Twitter accounts and are lacking behind the competition on Facebook.

Global expansion

Costco has shown it can successfully enter new markets, which is an opportunity to expand further. China especially represents a huge opportunity after the success of Costco’s first Shanghai store. 

Reputational damage

Costco relies on its strong brand name more than other retailers and therefore has to retain a strong reputation. Product recalls can seriously damage Costco’s image of a store that provides quality items. Instances such as a rotisserie chicken salad recall in November 2015 due to the outbreak of E. Coli toxin where 19 people were infected make Costco less attractive to potential members.

Data security 

Costco gathers and hands over its customers’ and employees’ information to a third-party cloud service for safekeeping. In an era where people are more and more conscious of cybersecurity, any incident can create a major problem for the company.

Competition and digitalization

A lot of Costco’s competitors are ahead of them when it comes to e-commerce and digital services. While this might not be a problem yet it does represent a threat in the long run if Costco doesn’t evolve and starts losing younger potential members to their competitors.

Why is Costco so successful?

Costco has been so successful because it introduced a new business model, accompanied it with a cohesive strategy, and managed its competitive advantage cautiously.

It’s a company with strong leadership and a powerful culture.

Costco’s unwavering commitment to doing what they feel is the right thing for their members, their employees, their suppliers, and their communities have created a Costco culture and a strong brand with an impressive social image. That’s quite an achievement for a retail company that primarily employs a cost leadership strategy.

Growth by the numbers

As a result, a lot of customers are crazy about Costco. They love the company and have fun going to their stores. It’s not just a shopping trip, it’s a Costco experience - an adventure where members look forward to what treasures they might find. 

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Lessons from Costco on Sustainable Growth

Growing sustainably means doing the right thing for all your stakeholders.

Few companies succeed in growing at a sustainable rate over time. The reason is that leaders give in to the temptation to grow in ways that overlook the customer or they grow more quickly than their organizational capabilities allow. But the leaders of a handful of companies, including Costco and Four Seasons Hotels and Resorts, never forget that businesses are complex systems whose elements are interconnected. That gives them the discipline to reject temptations to grow faster than their organizations can sustain.

Under pressure to grow, leaders often give in to two temptations that can hurt their business in the long term:

• Zeynep Ton is a professor of the practice at MIT’s Sloan School of Management and a cofounder and the president of the nonprofit Good Jobs Institute. She is the author of The Good Jobs Strategy and The Case for Good Jobs: How Great Companies Bring Dignity, Pay and Meaning to Everyone’s Work (Harvard Business Review Press, 2023). zeynepton

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Costco wholesale corp. financial statement analysis (a) description.

A financial statement, ratio analysis involving a high-growth retail company. An individual shareholder in the Costco Wholesale Corp. is trying to evaluate the operational performance of the business she has invested in over the last five years. She seeks to answer two questions: Has Costco become more or less efficient over this time period? And how has it financed its growth? She organizes her analysis into three parts: common-size financial statements, sustainable growth modeling, and benchmarking ratios particular to retail companies. Provides information on developments in mass merchandising in the United States, with an emphasis on discounter retailing over the last 40 years. Costco's performance set in historical context provides the relative background information necessary to make a comparative evaluation between Costco and other industry participants.

Case Description Costco Wholesale Corp. Financial Statement Analysis (A)

Strategic managment tools used in case study analysis of costco wholesale corp. financial statement analysis (a), step 1. problem identification in costco wholesale corp. financial statement analysis (a) case study, step 2. external environment analysis - pestel / pest / step analysis of costco wholesale corp. financial statement analysis (a) case study, step 3. industry specific / porter five forces analysis of costco wholesale corp. financial statement analysis (a) case study, step 4. evaluating alternatives / swot analysis of costco wholesale corp. financial statement analysis (a) case study, step 5. porter value chain analysis / vrio / vrin analysis costco wholesale corp. financial statement analysis (a) case study, step 6. recommendations costco wholesale corp. financial statement analysis (a) case study, step 7. basis of recommendations for costco wholesale corp. financial statement analysis (a) case study, quality & on time delivery.

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Case Analysis of Costco Wholesale Corp. Financial Statement Analysis (A)

Costco Wholesale Corp. Financial Statement Analysis (A) is a Harvard Business (HBR) Case Study on Finance & Accounting , Texas Business School provides HBR case study assignment help for just $9. Texas Business School(TBS) case study solution is based on HBR Case Study Method framework, TBS expertise & global insights. Costco Wholesale Corp. Financial Statement Analysis (A) is designed and drafted in a manner to allow the HBR case study reader to analyze a real-world problem by putting reader into the position of the decision maker. Costco Wholesale Corp. Financial Statement Analysis (A) case study will help professionals, MBA, EMBA, and leaders to develop a broad and clear understanding of casecategory challenges. Costco Wholesale Corp. Financial Statement Analysis (A) will also provide insight into areas such as – wordlist , strategy, leadership, sales and marketing, and negotiations.

Case Study Solutions Background Work

Costco Wholesale Corp. Financial Statement Analysis (A) case study solution is focused on solving the strategic and operational challenges the protagonist of the case is facing. The challenges involve – evaluation of strategic options, key role of Finance & Accounting, leadership qualities of the protagonist, and dynamics of the external environment. The challenge in front of the protagonist, of Costco Wholesale Corp. Financial Statement Analysis (A), is to not only build a competitive position of the organization but also to sustain it over a period of time.

Strategic Management Tools Used in Case Study Solution

The Costco Wholesale Corp. Financial Statement Analysis (A) case study solution requires the MBA, EMBA, executive, professional to have a deep understanding of various strategic management tools such as SWOT Analysis, PESTEL Analysis / PEST Analysis / STEP Analysis, Porter Five Forces Analysis, Go To Market Strategy, BCG Matrix Analysis, Porter Value Chain Analysis, Ansoff Matrix Analysis, VRIO / VRIN and Marketing Mix Analysis.

Texas Business School Approach to Finance & Accounting Solutions

In the Texas Business School, Costco Wholesale Corp. Financial Statement Analysis (A) case study solution – following strategic tools are used - SWOT Analysis, PESTEL Analysis / PEST Analysis / STEP Analysis, Porter Five Forces Analysis, Go To Market Strategy, BCG Matrix Analysis, Porter Value Chain Analysis, Ansoff Matrix Analysis, VRIO / VRIN and Marketing Mix Analysis. We have additionally used the concept of supply chain management and leadership framework to build a comprehensive case study solution for the case – Costco Wholesale Corp. Financial Statement Analysis (A)

Step 1 – Problem Identification of Costco Wholesale Corp. Financial Statement Analysis (A) - Harvard Business School Case Study

The first step to solve HBR Costco Wholesale Corp. Financial Statement Analysis (A) case study solution is to identify the problem present in the case. The problem statement of the case is provided in the beginning of the case where the protagonist is contemplating various options in the face of numerous challenges that Costco Wholesale is facing right now. Even though the problem statement is essentially – “Finance & Accounting” challenge but it has impacted by others factors such as communication in the organization, uncertainty in the external environment, leadership in Costco Wholesale, style of leadership and organization structure, marketing and sales, organizational behavior, strategy, internal politics, stakeholders priorities and more.

Step 2 – External Environment Analysis

Texas Business School approach of case study analysis – Conclusion, Reasons, Evidences - provides a framework to analyze every HBR case study. It requires conducting robust external environmental analysis to decipher evidences for the reasons presented in the Costco Wholesale Corp. Financial Statement Analysis (A). The external environment analysis of Costco Wholesale Corp. Financial Statement Analysis (A) will ensure that we are keeping a tab on the macro-environment factors that are directly and indirectly impacting the business of the firm.

What is PESTEL Analysis? Briefly Explained

PESTEL stands for political, economic, social, technological, environmental and legal factors that impact the external environment of firm in Costco Wholesale Corp. Financial Statement Analysis (A) case study. PESTEL analysis of " Costco Wholesale Corp. Financial Statement Analysis (A)" can help us understand why the organization is performing badly, what are the factors in the external environment that are impacting the performance of the organization, and how the organization can either manage or mitigate the impact of these external factors.

How to do PESTEL / PEST / STEP Analysis? What are the components of PESTEL Analysis?

As mentioned above PESTEL Analysis has six elements – political, economic, social, technological, environmental, and legal. All the six elements are explained in context with Costco Wholesale Corp. Financial Statement Analysis (A) macro-environment and how it impacts the businesses of the firm.

How to do PESTEL Analysis for Costco Wholesale Corp. Financial Statement Analysis (A)

To do comprehensive PESTEL analysis of case study – Costco Wholesale Corp. Financial Statement Analysis (A) , we have researched numerous components under the six factors of PESTEL analysis.

Political Factors that Impact Costco Wholesale Corp. Financial Statement Analysis (A)

Political factors impact seven key decision making areas – economic environment, socio-cultural environment, rate of innovation & investment in research & development, environmental laws, legal requirements, and acceptance of new technologies.

Government policies have significant impact on the business environment of any country. The firm in “ Costco Wholesale Corp. Financial Statement Analysis (A) ” needs to navigate these policy decisions to create either an edge for itself or reduce the negative impact of the policy as far as possible.

Data safety laws – The countries in which Costco Wholesale is operating, firms are required to store customer data within the premises of the country. Costco Wholesale needs to restructure its IT policies to accommodate these changes. In the EU countries, firms are required to make special provision for privacy issues and other laws.

Competition Regulations – Numerous countries have strong competition laws both regarding the monopoly conditions and day to day fair business practices. Costco Wholesale Corp. Financial Statement Analysis (A) has numerous instances where the competition regulations aspects can be scrutinized.

Import restrictions on products – Before entering the new market, Costco Wholesale in case study Costco Wholesale Corp. Financial Statement Analysis (A)" should look into the import restrictions that may be present in the prospective market.

Export restrictions on products – Apart from direct product export restrictions in field of technology and agriculture, a number of countries also have capital controls. Costco Wholesale in case study “ Costco Wholesale Corp. Financial Statement Analysis (A) ” should look into these export restrictions policies.

Foreign Direct Investment Policies – Government policies favors local companies over international policies, Costco Wholesale in case study “ Costco Wholesale Corp. Financial Statement Analysis (A) ” should understand in minute details regarding the Foreign Direct Investment policies of the prospective market.

Corporate Taxes – The rate of taxes is often used by governments to lure foreign direct investments or increase domestic investment in a certain sector. Corporate taxation can be divided into two categories – taxes on profits and taxes on operations. Taxes on profits number is important for companies that already have a sustainable business model, while taxes on operations is far more significant for companies that are looking to set up new plants or operations.

Tariffs – Chekout how much tariffs the firm needs to pay in the “ Costco Wholesale Corp. Financial Statement Analysis (A) ” case study. The level of tariffs will determine the viability of the business model that the firm is contemplating. If the tariffs are high then it will be extremely difficult to compete with the local competitors. But if the tariffs are between 5-10% then Costco Wholesale can compete against other competitors.

Research and Development Subsidies and Policies – Governments often provide tax breaks and other incentives for companies to innovate in various sectors of priority. Managers at Costco Wholesale Corp. Financial Statement Analysis (A) case study have to assess whether their business can benefit from such government assistance and subsidies.

Consumer protection – Different countries have different consumer protection laws. Managers need to clarify not only the consumer protection laws in advance but also legal implications if the firm fails to meet any of them.

Political System and Its Implications – Different political systems have different approach to free market and entrepreneurship. Managers need to assess these factors even before entering the market.

Freedom of Press is critical for fair trade and transparency. Countries where freedom of press is not prevalent there are high chances of both political and commercial corruption.

Corruption level – Costco Wholesale needs to assess the level of corruptions both at the official level and at the market level, even before entering a new market. To tackle the menace of corruption – a firm should have a clear SOP that provides managers at each level what to do when they encounter instances of either systematic corruption or bureaucrats looking to take bribes from the firm.

Independence of judiciary – It is critical for fair business practices. If a country doesn’t have independent judiciary then there is no point entry into such a country for business.

Government attitude towards trade unions – Different political systems and government have different attitude towards trade unions and collective bargaining. The firm needs to assess – its comfort dealing with the unions and regulations regarding unions in a given market or industry. If both are on the same page then it makes sense to enter, otherwise it doesn’t.

Economic Factors that Impact Costco Wholesale Corp. Financial Statement Analysis (A)

Social factors that impact costco wholesale corp. financial statement analysis (a), technological factors that impact costco wholesale corp. financial statement analysis (a), environmental factors that impact costco wholesale corp. financial statement analysis (a), legal factors that impact costco wholesale corp. financial statement analysis (a), step 3 – industry specific analysis, what is porter five forces analysis, step 4 – swot analysis / internal environment analysis, step 5 – porter value chain / vrio / vrin analysis, step 6 – evaluating alternatives & recommendations, step 7 – basis for recommendations, references :: costco wholesale corp. financial statement analysis (a) case study solution.

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Costco Wholesale PESTEL/PESTLE Analysis

Costco Wholesale Corporation develops strategies that address the opportunities and threats identified in this PESTEL/PESTLE analysis. The PESTEL analysis model enumerates the external factors in the firm’s remote or macro-environment that function as business opportunities or threats. Considering these PESTLE factors in strategic planning supports the fulfillment of Costco’s corporate mission and corporate vision , as well as related goals for keeping the market position of the biggest membership warehouse club chain in the United States. This PESTLE analysis indicates that Costco has many options for growth and improvement, based on opportunities in its business environment. However, Costco must develop competencies to protect itself from the threats in the retail industry.

This PESTEL/PESTLE analysis of Costco Wholesale Corporation shows that the company can experience growth through opportunities in most of the dimensions of its remote or macro-environment. The actual business growth achieved depends on how the company integrates the PESTEL factors into its competitive advantages over other retailers, such as Walmart , Home Depot , and Amazon and its subsidiary, Whole Foods . The Five Forces analysis of Costco shows that these competitors are aggressive and impose considerable challenges to the membership retail company.

Political Factors Affecting Costco’s Business

The performance of Costco’s warehouses/stores is partly dependent on the political influences in its remote or macro-environment. In the PESTEL analysis model, this dimension refers to the effects of governmental action on a firm’s external environment. The political factors in Costco’s case are as follows:

• Political stability of major markets (opportunity)
• More complex environmental policies (opportunity)
• Animal rights policies (opportunity)

Costco has the opportunity to grow with minimal political disturbance in major markets. In addition, the company has the opportunity to improve its policies and strategies to exceed the expectations based on environmental and animal rights policies. In this dimension of the PESTLE analysis model, Costco has major opportunities to grow its business.

Economic Factors Important to Costco

Costco Wholesale needs to align its business with the economic situation. This dimension of the PESTEL analysis model covers the external factors that affect firms’ economic viability. In Costco’s remote or macro-environment, the following are the notable economic factors:

• Increasing international trade agreements (opportunity)
• Rapid growth of developing markets (opportunity)
• Slow but stable growth of the American market (opportunity)

The increasing international trade agreements give greater support for Costco to expand its supply chain and warehouses/stores. The company also has the opportunity to establish new locations in developing markets to boost financial performance. In addition, Costco can improve its growth and stability in the U.S. even though economic growth remains low. In this dimension of the PESTLE analysis model, Costco has opportunities for further growth. It is worth noting that these economic trends align with the opportunities noted in the SWOT analysis of Costco , which also identifies the business strengths that the company can use to take these opportunities. As a result, the retailer develops its strategic approaches with consideration for these economic factors in the PESTLE analysis. These same PESTLE factors influence the formulation of Costco’s generic strategy for competitive advantage and intensive strategies for growth .

Social/Sociocultural Factors Influencing Costco’s Business Environment

Sociocultural issues impact the remote or macro-environment of Costco. In the PESTEL analysis model, this dimension identifies the social or sociocultural external factors that affect consumer and employee behaviors. In Costco’s case, the following are significant sociocultural factors:

• Increasing demand for business social responsibility (opportunity)
• Animal rights trend (opportunity)
• Environmentalism (opportunity)

Based on the external factor of the increasing demand for business social responsibility, Costco has the opportunity to improve its corporate social responsibility programs to strengthen its brand image and consumer perception. Also, Costco has the opportunity to improve customer satisfaction by implementing policies and strategies for better animal rights and environmental performance. In this dimension of the PESTLE analysis model, the retailer has major opportunities to satisfy customers and interest groups. The ability to address these social trends is supported through Costco’s company culture (work culture) , which represents human resource awareness about the social context described in this PESTLE analysis of the retail business.

Technological Factors in Costco’s Business

Costco Wholesale’s remote or macro-environment is subject to the effects of technologies. This dimension of the PESTLE analysis model deals with the influence of technologies and technological innovation on firms. In Costco’s case, the following are significant technological external factors:

• Increasing e-commerce transactions (opportunity)
• Increasing business automation (opportunity)
• Rapid rate of technological innovation (opportunity)

Costco has the opportunity to attract a larger market share through enhanced e-commerce. In addition, the company can implement new automation technologies to increase its business efficiency, which should translate to savings and better financial performance. Also, Costco can innovate in terms of other technological applications, such as in information processing, knowledge management, and HR training. This dimension of the PESTEL analysis model shows that Costco has technological opportunities to improve its business processes.

Ecological/Environmental Factors

As a retailer, Costco needs to consider the effects of ecological concerns on its remote or macro-environment. In the PESTLE analysis model, this dimension refers to the ecological conditions that influence business performance, such as through supply chain performance or market growth. In Costco’s case, the following are the main ecological external factors:

• Climate change (threat)
• Low-carbon lifestyles (opportunity)
• Collapsing bee colonies (threat)

Climate change threatens Costco because part of the business sells fruits and vegetables, which are dependent on optimal climate conditions. Also, the retail business can adapt its product mix to satisfy the changing lifestyles of consumers. Adapting the product mix can improve the success of Costco’s marketing strategy and the corresponding market mix (4Ps) . Moreover, the issue of colony collapse disorder (CCD) affects bees and, in turn, the supply of food products that Costco sells. However, the company cannot do much about this specific threat of CCD. In this dimension of the PESTEL analysis model, the retail company must consider adjusting its strategies to strengthen its supply chain. These ecological trends are integrated into Costco’s corporate social responsibility strategy , which accounts for the environmental impacts of the business, the interests of stakeholders, the objective of sustainability, and the goal of corporate citizenship. These considerations reflect the ecological situation examined in this PESTEL analysis of the warehouse club company.

Legal Factors

Legal systems impose requirements on Costco. This dimension of the PESTLE analysis model shows the effects of laws or regulations on firms’ remote or macro-environment. Some of the important legal external factors in Costco’s case are as follows:

• Changing employment laws (opportunity)
• Tax reforms (opportunity & threat)
• GMO regulations (opportunity)

Costco has the opportunity to improve its employment practices to exceed the requirements of employment laws. Also, Costco can adjust its policies and strategies to optimize its performance despite tax reform issues. In addition, the company can impose new policies that require more accurate GMO labeling for its food products. This dimension of the PESTEL analysis model shows that Costco can change its business practices to exploit legal opportunities.

Recommendations – PESTLE/PESTEL Analysis of Costco Wholesale

Costco has many opportunities to improve its processes, increase its financial performance, and grow its business. However, this PESTEL analysis also shows that the retailer needs to address a number of significant threats. To address the threat of climate change, the company can expand and further diversify its supply chain. Costco must also expand its business in high-growth economies to exploit the opportunities linked to their rapid economic growth.

• Costco Wholesale Corporation – Company Profile .
• Costco Wholesale Corporation – Sustainability .
• Costco Wholesale Corporation – Form 10-K .
• Martinez-Contreras, R. M., Hernandez-Mora, N. C., Vargas-Leguizamon, Y. R., & Borja-Barrera, S. M. (2022). PESTEL Analysis and the Porter’s Five Forces: An Integrated Model of Strategic Sectors. In Handbook of Research on Organizational Sustainability in Turbulent Economies (pp. 292-314). IGI Global.
• Theeb, K. A., Mansour, A. M. D., Khaled, A. S., Syed, A. A., & Saeed, A. M. (2023). The impact of information technology on retail industry: An empirical study. International Journal of Procurement Management, 16 (4), 549-568.
• U.S. Department of Commerce – International Trade Administration – Retail Trade Industry .
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Case Study UT Star Icon

The Costco Model

How can companies promote positive treatment of employees and benefit from leading with the best practices? Costco offers a model.

Costco is often cited as one of the world’s most ethical companies. It has been called a “testimony to ethical capitalism” in large part due to its company practices and treatment of employees. Costco maintains a company code of ethics which states:

“The continued success of our company depends on how well each of Costco’s employees adheres to the high standards mandated by our Code of Ethics… By always choosing to do the right thing, you will build your own self-esteem, increase your chances for success and make Costco more successful, too.”

In debates over minimum wage in the United States, many commentators see Costco as an example of how higher wages can yield greater company success, often pointing to competitors such as Walmart and Target as examples that fall short in providing for their employees. Other commentators do not see Costco’s model as being easily replicable for different types of businesses, citing wages as only one of many factors to consider in companies’ best practices.

Costco tends to pay around 40% more and provides more comprehensive health and retirement benefits than Walmart and Target, saving large amounts in employee turnover costs. The company resists layoffs, invests in training its employees, and grants them substantial autonomy to solve problems. U.S. Secretary of Labor Thomas Perez stated:

“And the remarkable loyalty that [employees] have to [Costco cofounder Jim Sinegal] is a function of the fact that he categorically rejects the notion that, ‘I either take care of my shareholders or my workers.’ That is a false choice.”

While few disagree with the benefits of fair treatment of employees, some commentators credit the success of Costco to its broader business model that favors higher productivity, not employee satisfaction. Columnist and economist Megan McArdle explains:

“A typical Costco store has around 4,000 SKUs [stock keeping units], most of which are stacked on pallets so that you can be your own stockboy. A Walmart has 140,000 SKUs, which have to be tediously sorted, replaced on shelves, reordered, delivered, and so forth. People tend to radically underestimate the costs imposed by complexity, because the management problems do not simply add up; they multiply.”

Furthermore, McArdle notes that Costco mainly serves as a grocer rather than department store and caters to a generally affluent customer base in suburban areas.

Discussion Questions

1. How does Costco, as described, match up to the “best practices” explained in the video? Where does Costco fall short? Where does Costco succeed?

2. Walmart pays its employees substantially less than does Costco, even though the two companies often compete head-to-head. How can Costco stay in business when it pays up to 40% more to its employees than its direct competitors?

3. What do you think are the most important practices for a retail company to pursue to foster an ethical environment for workers and consumers? Why?

4. A stock analyst criticized Costco, saying: “Costco continues to be a company that is better at serving the club member and employee than the shareholder.” Do you think this a fair critique? Why or why not?

5. Another analyst complained that Jim Sinegal “has been too benevolent. He’s right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden.” Again, do you think this a fair criticism? Why or why not?

6. Is a company that does not follow the Costco model a “bad” company? Explain.

Related Videos

Ethical Leadership, Part 2: Best Practices

Psychological research provides guidance as to how leaders can create a workplace culture that encourages ethical behavior by employees.

Bibliography

Unselfishness: The World’s Most Ethical Company & Why Collaboration Works http://www.rohitbhargava.com/2012/05/unselfishness-the-worlds-most-ethical-company-why-collaboration-works.html

How Costco Became the Anti-Wal-Mart http://www.nytimes.com/2005/07/17/business/yourmoney/how-costco-became-the-antiwalmart.html

Connecting the Dots Between Leadership, Ethics and Corporate Culture http://iveybusinessjournal.com/publication/connecting-the-dots-between-leadership-ethics-and-corporate-culture/

Why Be an Ethical Company? They’re Stronger and Last Longer http://www.bloomberg.com/news/articles/2009-08-17/why-be-an-ethical-company-theyre-stronger-and-last-longer

Labor Secretary Thomas Perez Says More Employers Need To Follow Costco’s Example http://www.huffingtonpost.com/2013/10/29/thomas-perez-costco-minimum-wage_n_4174249.html

Costco’s Profit Soars To $537 Million Just Days After CEO Endorses Minimum Wage Increase http://www.huffingtonpost.com/2013/03/12/costco-profit_n_2859250.html

Why Can’t Walmart Be More Like Costco? http://www.thedailybeast.com/articles/2012/11/26/why-can-t-walmart-be-more-like-costco.html

Why Costco and Other Warehouse Club Retailers Matter http://www.lek.com/sites/default/files/lek-why_costco_and_other_warehouse_club_retailers_matter.pdf

Ethical Leadership: A Primer on Ethical Responsibility in Management http://www.wiley.com/college/sc/scherm/ethicsfinal.pdf

Firms of Endearment: How World-Class Companies Profit From Passion And Purpose http://www.worldcat.org/title/firms-of-endearment-how-world-class-companies-profit-from-passion-and-purpose/oclc/70167640

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Team 1 -Costco Wholesale Corporation Case Analysis

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Charles Courtemanche

Indus Foundation International Journals UGC Approved

The purpose of this study is to identify and compare the Business strategies and Business models adopted by two big discount retailers in the United States which are Target Corporation (" Target ") and Costco Wholesale Corporation (" Costco "). The study also examines the characteristic of the competitive environment in which both companies operate in. The SWOT analysis shows that the discount retail industry is highly competitive and is affected by key strategic factors as Technology improvement, innovation in product design and promotion, employee welfare, internet, multi-channel distribution and communication. Target follows an Integrated Cost Leadership and Differentiation strategy expressed in its promise of " Expect More, Pay Less ". It provides high quality, trend-forward merchandize with lower margin. Target achieves its strategies with core co mpetencies and resource such as superior guest experience, corporate culture, systems, strong supply chain, technology infrastructure, innovation, and disciplined management approaches. On the other hand, Costco adopts a Cost Leadership strategy. It uses economies of scale to buy in bulk at low cost and pass the discount to the customer. Costco achieves its strategy with core resource and competencies that include efficient supply chain management, pleasant shopping experience, strong bargaining power, motivated highly paid employees.

Murray Rice

Yeh, YunLung. The Global Expansion of Transnational Retailers: A Case Study of the Localization Strategy of Costco in Taiwan. Master of Science (Applied Geography), December 2010, 95 pp., 21 tables, 10 illustrations, reference list, 39 titles. This research focuses on the global expansion of the transnational retail industry. Globalization is a phenomenon experienced by many industries in the present global economy.

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Costco: What Does A Future Without Multiple Expansion Look Like?

• Costco continues to outperform expectations, with the stock having another year of significant outperformance.
• The company is lagging behind Walmart in e-commerce and advertising, which could have supported the peak multiple.
• The future for Costco likely relies on EPS growth rather than multiple expansion, with the sustainability of the current multiple in question.

Costco Wholesale Corporation ( NASDAQ: COST ) ( NEOE: COST:CA ) continues to prove its doubters wrong, with the stock on pace for another year of significant outperformance.

Even Costco's biggest bulls are likely questioning how much more can this multiple expansion story last, with the stock trading at 52 times forward earnings.

We're here to answer two questions. Is this multiple sustainable? And what does a future with no multiple expansion look like?

Let's dive in.

Brief Overview Of Costco & The Business Thesis

I started covering Costco in October last year with a Buy rating. At the time, the company was trading slightly below 40 times forward earnings, and I argued it was a fair multiple considering Costco's unique quality.

As a business, you'll have a hard time finding many flaws in Costco. The number of members continues to grow while renewal rates are reaching new highs by the day. The company continues to offer immense value and a differentiated shopping experience.

Costco is essentially unstoppable, as it consistently outgrows its peers while having the strongest footprint expansion story in the industry.

The only problem with Costco is that everybody knows about Costco:

The stock returned more than 9x over the last decade, which is more than 3.5x better than the S&P 500 ( SPY ) and nearly double the Invesco QQQ Trust ETF ( QQQ ).

In addition, as you can see in the above graph, there hasn't really been a period of underperformance from Costco, meaning that every time the market goes down, Costco goes down a little less, and every time the market goes up, Costco goes up much more.

As a result, I'm sure many frustrated investors waited a long time to pull the trigger just to then buy at a higher price or missed the stock's rise altogether.

Finding Flaws In The Costco Machine

Costco's last quarter was business as usual, with net sales growing 9.1%, driven by comp growth of 6.6% (6.1% traffic, 0.5% ticket). Membership income grew 7.6%, as paid members grew by 7.8%, maintaining renewal rates of 90.5% worldwide and 93.0% in North America.

Margins improved slightly, and two warehouses were opened in the quarter. Once again, Costco beat consensus estimates.

Costco Q3'24 Presentation

There's only one area where I think Costco might be lacking, and that's digital. If it weren't for the company's extremely rich valuation, I would not consider this to be a relevant point of discussion following another quarter of impeccable results.

According to estimates , Costco has a 1.5% market share in the space, which is way behind Walmart Inc. ( WMT ) at 6.4%. Setting Amazon.com, Inc. ( AMZN ) as the overwhelming leader aside, there are many competitive advantages for omnichannel players like Costco and Walmart, specifically in groceries, and closed-loop advertising.

Walmart has been investing and building its digital business for years, and it has a very successful and fast-growing advertising business. Costco is very much behind, and with a much smaller footprint of 606 stores in the U.S., compared to Walmart's 5,208, it doesn't enjoy the significant proximity tailwind.

Unlike Walmart, I find Costco's physical business much more core to its value proposition to members, who enjoy the shopping experience in the warehouses. However, e-commerce and advertising could be a very significant driver of accelerated growth, and in the case of advertising, higher margins.

Costco is highly likely to succeed in digital over time, and its brand is so strong that it won't lose too many customers because of being late. Still, it would be much easier to justify its valuation if there was higher certainty and near-term upside on the digital front.

Calculating The Multiple Contraction Risk

It is no secret that Costco has seen its multiple expand sharply, as the rise in the stock price wasn't driven by significant EPS upward revisions. One of the main reasons I downgraded Costco to a Hold, back in May, was exactly that.

Generally speaking, I don't base my evaluations or investment theses on multiple expansion, especially with a company that's already trading at an all-time peak.

I do take into account what I define as 'Multiple Contraction Risk' which essentially seeks to quantify the downside in case of changing sentiment.

Let's use my Buy decision in Chipotle Mexican Grill, Inc. ( CMG ) as an example. When I first bought Chipotle, it was trading at 40 times forward earnings. At that point, I estimated its multiple contraction risk at ~12%. I knew that mature slow-growing QSRs trade at multiples in the ~25x range. Considering Chipotle should grow EPS at around a 20% annual pace for the foreseeable future, I estimated that a 35x multiple would be a bottom.

With that in mind, even if Chipotle's multiple contracted those 12%, one year of holding the stock at a 20% EPS growth rate would net a 5% return.

Created and calculated by the author.

Let's apply the same concept to Costco. At $863 a share, Costco is trading at 52.5x CY24 earnings. We know that stable retailers like Walmart Inc. (WMT) typically trade in the 22x-28x range, while companies with a strong subscription business that has 90%+ renewal rates could easily fetch a 40x multiple even if they don't grow too fast.

To me, a trough multiple for Costco would be in the 35x range, factoring in its expected 10% EPS growth trajectory and its extremely resilient business model. However, I'll use 40x, just so it'll be less controversial.

Evidently, that is approximately the median multiple for the past five years:

This means that Costco has a Multiple Contraction Risk of nearly 24%. Unlike Chipotle, the company's expected growth is far from offsetting this risk, as it will take three years of EPS growth to break even if the multiple does contact.

The great thing about buying companies with a low Multiple Contraction Risk is that you leave ample room for an expansion surprise, which is what many Costco shareholders have been benefitting from over the past years.

I do not find it feasible going forward. Therefore, assuming the multiple stays where it is at best, EPS growth becomes the main story.

EPS Growth Will Drive Valuation Going Forward, Is It Enough?

Let's assume that Costco's multiple is fair and will remain at this level. It's worth noting that I find that to be an optimistic assumption.

Under that assumption, EPS growth will be the sole driver of valuation going forward. By the way, Costco's net income is essentially in line with its free cash flow, so for those who prefer relying on FCF, this is still relevant.

Current consensus estimates expect Costco to grow EPS at an HSD%-LDD% rate. Breaking that into parts, we should see revenue growth of around 7%, driven by comps and footprint expansion, and a gradual margin improvement due to scale and membership fee increases.

To me, those numbers make perfect sense and I see no reason to diverge from the consensus here.

Therefore, the stock should net around a 10% annual return through dividends and EPS growth if, and that's a big if, it maintains the current multiple.

Costco's valuation has been viewed by many as too high for a long time. When the stock was trading in the 40x range, I argued that it was actually undervalued.

Today, with the stock at 52 times forward earnings, I have to join the too-high group. I estimate Costco's trough multiple could go as low as 35x, reflecting a 34% Margin Contraction Risk.

The problem with peak multiples is that they leave very little room for further expansion, and expose you to significant risk in case of a mishap.

While Costco rarely has mishaps, I still find the risk/reward situation unattractive. Therefore, I reiterate Costco at a Hold.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Costco is up 32% in 2024: could the stock-split candidate hit $1,000 per share by the end of the year.

Large- and megacap stocks have performed well in 2024. Retail giant Costco (NASDAQ: COST) hasn't missed the party with the stock up 32% year to date. Its chain of membership warehouse clubs is gaining market share in the United States and putting up strong growth across its in-person and e-commerce operations, impressing investors.

At $863 per share as of this writing, it could be a future stock-split candidate. Will the stock reach $1,000 by year-end, and is it a buy at these prices? Let's investigate.

Strong growth and an incoming price hike?

The COVID-19 pandemic was a boon for retailers such as Costco. Revenue growth accelerated, pushing annual sales from $150 billion to $200 billion over just a few years. But unlike other retailers, Costco did not face a pandemic growth hangover. In fact, the company has continued to post strong growth and recently surpassed $250 billion in annualized sales.

The bottom line has followed suit with earnings per share ( EPS ) up close to 100% in the past five years. This strong growth has investors speculating a price hike is incoming for Costco's membership program. A membership currently costs $60 or $120, depending on the tier. There are well over 100 million members, and the company hasn't raised its membership price since 2017. Costco typically raises membership fees every five years or so, meaning the company is overdue for a price hike.

With high profit margins on the memberships themselves, a price hike could help Costco continue to grow its EPS over the next five years as well.

Forget $1,000 per share -- focus on valuation instead

It will require a 16% gain for Costco's share price to breach four-figure territory. Since the stock has already climbed by twice this amount in the first half of 2024, I don't doubt it's possible for Costco to surpass $1,000 before the end of the year.

Such a high stock price also makes Costco a stock-split candidate. Investors have recently seen Nvidia and Chipotle go through the process, and Costco's last stock split was in 2000.

But investors shouldn't focus on either of these things. Stock splits do not matter over the long term. A stock split just means there are more share of the same company available in the market. The actual stock price does not matter; what matters is valuation.

And Costco's valuation has been climbing for years. It currently has a price-to-earnings ratio (P/E) of 53, close to an all-time high and well above its long-term average of 27.

At these levels, investors have very high expectations for Costco's future growth.

Avoid Costco stock (for now)

Costco is a great business. Even with $250 billion of trailing-12-month sales, the company was able to grow comparable sales 6.5% in its fiscal 2024 third quarter (ended May 12).  E-commerce sales were up 20.7% year over year. Earnings should continue to rise too, thanks to its track record of slow-and-steady growth.

But that's the issue: slow and steady. Costco is not a hypergrowth stock, but it's valued like one with a P/E ratio of more than 53.

Forget the stock split. Forget the potential for shares to reach $1,000 in the near term. It doesn't matter how great a business is if you have to pay too steep a premium to buy it: Price matters.

Should you invest $1,000 in Costco Wholesale right now?

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Costco Is Up 32% in 2024: Could the Stock-Split Candidate Hit $1,000 per Share by the End of the Year? was originally published by The Motley Fool

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Costco to Raise Membership Fees for First Time in 7 Years

Costco will raise its annual membership fees in the United States and Canada for the first time in seven years.

Effective Sept. 1, in those countries, the retailer is adding $5 to the cost of its Gold Star (individual), Business and Business add-on memberships and adding $10 to the price of its Executive Memberships, Costco said in a Wednesday (July 10) press release .

These changes will increase the price of those memberships from $60 to $65 and from $120 to $130, respectively, according to the release.

“The fee increases will impact around 52 million memberships, a little over half of which are Executive,” Costco said in the release.

In another change announced Wednesday, the maximum annual 2% Reward associated with Executive Membership will increase from $1,000 to $1,250, per the release.

About 80% of Costco’s warehouses are in the U.S. and Canada. Among the 882 warehouses it operates, 609 are in the U.S. and Puerto Rico and 108 are in Canada, according to the release.

The membership rate increases are Costco’s first since June 2017, CNBC reported Wednesday.

Costco typically raises its rates about every five and a half years, but it held off for about seven years this time because consumers have been dealing with high inflation, the report said, citing comments made in the past by company executives.

One of the retailer’s rivals, Walmart -owned Sam’s Club , last raised its membership fee in 2022 after leaving the fee unchanged for nine years, according to the report.

A Costco executive said in May that the company was mulling raising its membership fees .

Speaking May 30 during the retailer’s quarterly earnings call, Costco Executive Vice President and Chief Financial Officer Gary Millerchip said: “It is still a case of when we increase the fee rather than if we increase the fee. But we are still evaluating those considerations to determine what the right timing is.”

Millerchip said during the call that it had been more than five years since the company raised its membership fee — and it has historically done so every five years — and that its membership renewal rates have been good.

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Costco raises membership fees

WAREHOUSE SHOPPING

Costco shoppers will see their membership fees go up for the first time since 2017, the company said Wednesday, betting the move will boost profits without turning off its loyal customer base. Starting Sept. 1, Costco Gold Star, Business, and Business add-on members in the United States and Canada must pay $65 for annual memberships, up from $60. Executive members will have to pay $130, a $10-per-year increase. The move will affect 52 million members, “a little over half of which are Executive,” Costco said in a news release. Executive members are offered up to $1,000 in rewards for their purchases. The maximum rewards will increase to $1,250 with the fee hike, the company said. — BLOOMBERG NEWS

INTERNATIONAL

EU accepts Apple’s promise to open ‘tap to pay’ to rivals

The European Union on Thursday accepted Apple’s pledge to open its “tap to pay” iPhone payment system to rivals as a way to resolve an antitrust case and head off a potentially hefty fine. The European Commission, the EU’s executive arm and top antitrust enforcer, said it approved the commitments that Apple offered earlier this year and will make them legally binding. Regulators had accused Apple in 2022 of abusing its dominant position by limiting access to its mobile payment technology. — ASSOCIATED PRESS

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Delta profit down

Americans are traveling in record numbers this summer, but Delta Air Lines saw second-quarter profit drop 29 percent due to higher costs and discounting of base-level fares across the industry. The airline is also predicting a lower profit than Wall Street expects for the third quarter. Shares tumbled 8 percent before the opening bell Thursday before closing down nearly 4 percent. Shares of other carriers were dragged down as well. Delta said Thursday it earned $1.31 billion from April through June, down from $1.83 billion a year earlier. Revenue rose 7 percent to nearly $16.66 billion — a company record for the quarter. That is not surprising to anyone who has been in an airport recently. The Transportation Security Administration screened more than 3 million travelers Sunday, a single-day high. Delta’s results showed a continuing divide between passengers who sit in the front of the plane and those in economy class. Revenue from premium passengers jumped 10 percent — about $500 million — but sales in the main cabin were flat with a year earlier. — ASSOCIATED PRESS

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Pfizer developing weight-loss drug

Pfizer is moving forward with a weight-loss pill as the drug maker seeks to crack the multibillion-dollar market for obesity medications and mount a comeback from its post-pandemic malaise. The once-daily treatment, called danuglipron, will progress to a mid-stage study in the second half of this year, Pfizer said Thursday, having cleared a scientific hurdle in a small study. The next trial will be designed to find an ideal dose of the pill, Pfizer said, and the drug will move into the final stage of development if it succeeds. — BLOOMBERG NEWS

PepsiCo’s earnings drop as demand for chips and soda slips

PepsiCo reported higher-than-expected earnings in the second quarter but customer demand for its snacks and drinks continued to slip. North American demand for Pepsi’s Frito-Lay snacks was “subdued” during the quarter, and sales volumes dropped 4 percent. Chairman and CEO Ramon Laguarta said Thursday that the company plans to amp up deals and advertising in the second half of this year. High prices are a big reason for the lower sales. The average US price for a 16-ounce bag of potato chips hit $6.63 this year, according to data from the Federal Reserve. PepsiCo said Thursday that customers have grown more value-conscious and are shifting to less expensive store brands or shopping at discount stores. — ASSOCIATED PRESS

Citigroup to pay hefty fine over data-quality management

Citigroup will pay almost $136 million in fines to US bank regulators over issues related to data-quality management and risk controls. The Federal Reserve said Wednesday that its penalty was for Citi violating an enforcement action from 2020. The bank will pay $61 million to the Fed and about $75 million to the Office of the Comptroller of the Currency. Citi didn’t admit to or deny the regulator’s allegations. The bank is “taking steps to correct the violations” and to come into compliance, the Fed said. In October 2020, US regulators ordered Citi to pay a $400 million penalty after persistent problems with its risk controls. Citi said in a statement that it was making good progress in addressing regulators’ demands, but that it hadn’t been fast enough in data-quality management. — BLOOMBERG NEWS

Costner’s gamble doesn’t pay off

Kevin Costner’s audacious experiment seems to have failed. Costner tried something rare this summer, releasing the first chapter of his western saga “Horizon” — which he directed, starred in, co-wrote, and partly financed — in theaters across the country on June 28. The plan was for the second chapter in the sprawling story to be released six weeks later. But thanks to paltry box office returns, that plan has been scuttled. On Wednesday, New Line Cinema, a subsidiary of Warner Bros., said it was canceling the theatrical release of “Horizon: An American Saga — Chapter 2,” which was scheduled to debut in theaters on Aug. 16. The first chapter, which cost $100 million, made $11 million in its opening weekend and has generated just $22.6 million overall. Costner planned for the saga, about the settling of the West after the Civil War, to consist of four chapters, and tickets to the first two chapters were made available at the same time. Those who bought tickets to the second “Horizon” film would be able to receive a refund. — NEW YORK TIMES

Germany to ban Huawei components from 5G networks

Germany will bar the use of components made by Chinese companies Huawei and ZTE from core parts of the country’s 5G networks, in two steps starting in 2026, the nation’s top security official said Thursday. Germany, which has Europe’s biggest economy, has long mulled what to do about components made by Chinese suppliers in its new-generation cellphone networks. Chancellor Olaf Scholz’s government last year drew up a strategy for relations with China that refers to a “systemic rivalry” with the Asian power and a need to reduce risks of economic dependency, but highlights Berlin’s desire to work with Beijing on challenges such as climate change and maintain trade ties. The strategy drew criticism from Beijing. Scholz visited China in April on his second trip to the country since he took office at the end of 2021. — ASSOCIATED PRESS

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Costco increases membership fees: Here's how much each tier will cost

Prices on just about everything continue to tick upward for U.S. consumers post-pandemic, from airlines passing on airfare and baggage price hikes to offset fuel costs to restaurants upping the cost of various food items and meals.

Now, beloved big box retailer Costco is making some pricing adjustments as well.

Costco announced in its June sales report on Wednesday that starting Sept. 1, 2024, it will increase annual fees for its bifurcated membership options.

For U.S. and Canada Gold Star, Business, and Business add-on members, there will be a $5 increase, bringing the annual fee up to $65.

How Costco, grocery membership fee hikes impact consumer buying decisions

Annual fees will also increase for Executive Memberships from $120 to $130 -- the primary membership of $65, plus the Executive upgrade of an additional $65.

These fee increases, according to Costco, will impact around 52 million memberships, a little more than half of which are Executive level.

The maximum annual 2% Reward that Executive Members receive will also increase from $1,000 to $1,250.

Costco operates 882 warehouses, including 609 in the U.S. and Puerto Rico, 108 in Canada, as well as e-commerce sites.

Guggenheim analyst John Heinbockel previously predicted that Costco was close to increasing its annual membership fees back in 2021.

"As is well known, Costco has increased its annual membership fee every five and a half years by $5 to $10," he wrote in a research note at the time, predicting that "the Gold Star fee" would eventually rise "to $65 from $60 while the Executive membership would move to $130 from $120."

Costco increases membership fees: Here's how much each tier will cost originally appeared on goodmorningamerica.com

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House bill would require proof of citizenship to vote, Costco hikes membership fees and USA beats Canada in basketball friendly

The yodel newsletter: get caught up on this morning’s news.

Good morning, all. It’s National Slurpee Day, so consider cooling off with a free frozen 7-Eleven drink . Now, on to the news.

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The house’s proof-of-citizenship voting law, explained.

The Republican-controlled House passed a bill that would require U.S. voters to show proof of citizenship to cast ballots in federal elections. It’s unlikely to pass the Democrat-led Senate.

Background: The bill is based on GOP claims that Democrats are encouraging migrants to vote. Democrats have called it unnecessary, because noncitizen voting isn’t allowed at the state or federal level and can be punishable by law . [AP]

Voter fraud: Researchers have noted that it’s rare for noncitizens to illegally register and cast ballots in federal elections. One study found just 30 suspected cases out of 23.5 million. [The Hill]

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Rep. Alexandria Ocasio-Cortez introduced articles of impeachment against Supreme Court Justices Clarence Thomas and Samuel Alito for what she called “unchecked corruption” in the court. [Yahoo News]

💰 Costco membership fees

Costco announced that it’s raising its basic membership fee from $60 to $65 starting Sept. 1. The increase, the retailer’s first since 2017, will affect 52 million customers. [CBS News]

📺 ‘Golden Bachelorette’

ABC revealed that the inaugural season of The Golden Bachelorette will premiere on Sept. 18. It will be led by former Golden Bachelor contestant Joan Vassos, who left the show early. [GMA]

WHAT’S HAPPENING TODAY

⚾ In MLB, the Red Sox and the Athletics play again at 7:10 p.m. ET on the MLB app. [NBC Sports]

🏆 The 2024 ESPY Awards air at 8 p.m. ET on ABC. Here’s what Serena Williams said about hosting the show. [GMA]

🦈 Shark Week continues with the special “ Monster of Oz ” at 8 p.m. ET on Discovery. [Yahoo Entertainment]

📺 Season 18 of The Real Housewives of Orange County premieres at 9 p.m. ET on Bravo. [People]

☀️ And don’t forget to: Read your daily horoscope . Play the Crossword . Check the forecast in your area.

TODAY IN HISTORY

In 1960, Harper Lee released the novel To Kill a Mockingbird , which went on to win a Pulitzer Prize and become a classic of modern American literature. [AP]

3 QUESTIONS

...about fly me to the moon.

The rom-com Fly Me to the Moon , starring Channing Tatum and Scarlett Johansson, hits theaters tomorrow. I asked entertainment reporter Kelsey Weekman, who got a first look at the movie, what she thought of it.

Lily: So, what’s this film about?

Kelsey: It’s quite the plot: After the moon landing is deemed too important to fail, the White House calls on a marketing pro to help film a staged version — just in case it does.

Lily: Do you think it’s worth a watch?

Kelsey: If you like fast-paced, screwball comedy and amazing fashion, I think you’ll appreciate it. It’s not award-worthy, but I thought it was a fun two hours!

Lily: Is it just me, or does it feel like space movies are having a moment?

Kelsey: I think they totally are! The Emma Roberts-led film Space Cadet , which is like Legally Blonde but for astronauts, came out a week ago on Prime Video.

What else is worth watching? Check out Kelsey's picks in The It List.

FEEL-GOOD MOMENT

Mike and Judy McNamara went viral after word got out about their quest to visit every Texas Roadhouse restaurant in the U.S. To date, they’ve hit 434 locations. What do they love most about the chain? “It’s good food,” Mike said. [USA Today]

Have an excellent day. See you tomorrow!

💡 P.S. Before you go, your daily advice: Taking an at-home test for allergies or blood sugar? Experts warn they may not provide reliable results . [Washington Post]

About The Yodel: The Yodel is a morning newsletter from Yahoo News.

If you start your day with The Yodel, you can keep up with weather, national news, politics, entertainment and sports — in four minutes or less. Sign up .

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MYNORTHWEST NEWS

Costco membership fees increasing for first time in 7 years

Jul 11, 2024, 7:01 AM

Customers wait in line to order below signage for the Costco Kirkland Signature $1.50 hot dog and soda combo. (Photo: Patrick T. Fallon, Getty Images)

(Photo: Patrick T. Fallon, Getty Images)

BY FRANK SUMRALL

MyNorthwest Content Editor

Starting Sept. 1, the cost of a Costco membership will increase by $5 to $10, marking the first time membership fees have jumped in seven years.

Costco’s Gold Star membership is set to go from $60 to $65, while the Executive membership will swell from $120 to $130.

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“The fee increases will impact around 52 million memberships, a little over half of which are Executive,” Costco stated in a press release announcing the policy change.

Of the 882 warehouses Costco currently operates, this pricing model will impact the 717 warehouses located in the U.S. and Canada. There is no confirmation the membership pricing has changed for Costco locations in other countries it’s housed in, including Mexico, Japan, the United Kingdom, South Korea, Australia, Taiwan, China, Spain and France.

The increased membership fees also means the maximum annual 2% reward that comes with the Executive Membership will go from $1,000 to $1,250.

The days of Costco’s leniency with non-members visiting its stores have waned over the last few years. Earlier this year, the retail giant announced it was restricting food court access to just card-carrying members. While the food court was never intended to be used by the outside public, it used to be a place where customers wouldn’t have their memberships regularly checked.

No more freebies : Costco cracks down on food court access

Revenues from membership fees were up 7.6% in the third quarter of fiscal 2023, according to Fox Business , with membership fees making up 1.9% of the company’s total revenue for the fiscal year.

In its published June sales report , Costco reported $24.5 billion in net sales in June 2024 — up 7.4% from 2023.

Frank Sumrall is a content editor at MyNorthwest. You can read his stories  here  and you can email him  here .

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Column: Pharmacy middlemen claim to keep prescription prices low. In fact, they’ve cost consumers billions

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In 2022, an executive of a big pharmacy middleman firm acknowledged the noxious reality of its business model:

It was designed to massively overcharge customers by steering them to its affiliated or “preferred” pharmacies or its home delivery subsidiary.

Referring to a generic version of Gleevec, a leukemia drug taken by nearly 200,000 patients, the executive noted in an internal memo that “you can get the drug at a non-preferred pharmacy (Costco) for $97, at Walgreens (preferred) for $9000, and at preferred home delivery for $19,200.... We’ve created plan designs to aggressively steer customers to home delivery where the drug cost is ~200 times higher.”

PBMs are not lowering prices for drugs used by patients to treat severe diseases like prostate cancer and leukemia.

— Federal Trade Commission

The executive concluded, “The optics are not good and must be addressed.”

What that memo described, according to a new report from the Federal Trade Commission , is standard operating procedure among the nation’s largest pharmacy benefit managers, or PBMs.

Get the latest from Michael Hiltzik

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Originally devised in the 1960s as intermediaries helping health insurers process claims, steering doctors and hospitals to the cheapest drug alternatives and giving insurers greater leverage in negotiations with drug manufacturers, they soon became just another special interest in America’s fragmented healthcare system.

Thanks to a wave of consolidation and growth of healthcare conglomerates, the FTC says, the three largest PBMs manage nearly 80% of all prescriptions filled in the U.S. They have accumulated enough power to profit “by inflating drug costs and squeezing Main Street pharmacies,” driving the independents out of business.

Once posed as an answer to high drug costs, they’re today at the hub of a system that drives up drug prices for consumers.

Column: CVS and Aetna say their huge merger will be great for consumers. Here’s why you should be skeptical

The CEOs of drug retailer CVS and health insurer Aetna were marvelously in sync Sunday when they jointly announced their companies’ $69-billion merger deal.

Dec. 4, 2017

Starting in the 1990s, some of the biggest PBMs were acquired by drug companies, creating conflicts of interest that led to federal orders for divestment.

Then came a wave of mergers and acquisitions within the PBM universe, followed by acquisitions by insurers and pharmacy companies — CVS acquired Caremark, then the biggest PBM, in 2007 and UnitedHealth merged CatamaranRx, then the fourth-largest PBM, into OptumRx in 2015.

Between 2000 and 2021, 39 individual healthcare companies — drugstore chains, health insurers, managed care firms and PBMs — all coalesced into three healthcare behemoths, Cigna, CVS and UnitedHealth.

CVS Health Corp. owns not only the Caremark PBM, which controls 34% of the prescription market, but the insurance company Aetna and about 9,000 retail drugstores.

Cigna Group, which has a prescription market share of 23%, owns the mail-order PBM Express Scripts and the Cigna insurance company. UnitedHealth Group is the largest U.S. health insurer and owns 1,000 walk-in health clinics as well as physician groups; through its OptumRx PBM, its prescription market share is 22%.

Along with Humana, the fourth-ranked PBM with a market share of 7%, those conglomerates produced combined revenue of $456 billion in 2016, 14% of national health spending. Today, they collect more than $1 trillion in revenue, or 22% of U.S. healthcare spending.

Despite the predictably anticompetitive effects of these mergers and acquisitions, not a single one was challenged by antitrust enforcement agencies, says the FTC — one of the antitrust regulators asleep at the switch.

Among the stratagems employed by PBMs to boost profits, the FTC says, is steering health plans and patients to their own affiliated pharmacy chains.

Some patients have discovered that their drugs won’t be covered by their insurers unless they buy them at specified pharmacies, the result of deals the PBMs have made with insurers, including those with which they share a parent. But the customers may have to pay more out of pocket at the affiliated pharmacies than they would at an independent.

Column: How ‘price-cutting’ middlemen are making crucial drugs vastly more expensive

Diabetes doctor Irl B.

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The FTC staff found that for “specialty prescriptions” — a designation the PBMs place on certain drugs, often without explanation — 55% were filled at affiliated pharmacies. The same ratio didn’t occur with prescriptions under Medicare’s Part D prescription coverage, because federal law requires that those prescriptions can be filled at almost any licensed pharmacy. Only 22% of Part D prescriptions were filled at PBM-affiliated pharmacies. That suggests that PBMs may be steering patients to their pharmacies where that’s not forbidden by law.

The statistics were drawn from submissions by two of the three top PBMs, which are unidentified. The third didn’t submit the necessary data.

The FTC also touches on a relatively new wrinkle in drug pricing — rebates by drugmakers to PBMs in order to gain preferential positions in drug formularies.

The agency says its review of contracts between manufacturers and PBMs shows that some drug companies promise PBMs higher rebates if the latter exclude competing drugs from their formularies — including generic versions that are chemically identical to the brand-name products — or require prior authorization before covering the rival drugs.

Indeed, the FTC is reportedly preparing to sue CVS, Cigna and UnitedHealth over their PBMs’ tactics in negotiating rebates with drugmakers, specifically for insulin. The cases are still in the planning stage and their timing isn’t known.

Predictably, the big PBMs and their lobbyists find much to dislike in the FTC report, which the agency describes as an interim staff report, part of an investigation launched in 2022.

A spokesperson for Cigna’s Express Scripts criticized the report for “blatant inaccuracies” (but didn’t offer specifics in an email to me). A spokesman for CVS blamed drugmakers for high prescription prices, stating that an FTC effort to “limit the use of PBM negotiating tools would instead reward the pharmaceutical industry.” Optum didn’t reply to my request for comment.

J.C. Scott, president of the Pharmaceutical Care Management Assn., the PBM lobbying arm, accused the FTC of advancing “pre-determined conclusions ... irrespective of the facts or the data.”

Column: How Walgreens, CVS and Rite Aid tried to take over healthcare — and failed

The pharmacy chains have discovered that taking a larger role in the healthcare system than simply dispensing prescriptions and selling over-the-counter notions is more complicated and costlier than they expected.

Oct. 25, 2023

Drawing from more than 1,200 comments submitted by stakeholders in healthcare and by other members of the public, the agency outlined a host of methods PBMs are accused of using to benefit their affiliated services, block patient access to inexpensive generics and pocket discounts that should properly go to customers.

The FTC also mined lawsuits, including a 2023 case the state of Ohio filed against Express Scripts , charging that the PBM exploits its knowledge that “Ohioans in need of medication, particularly life-saving medication, will pay the asking price. The choice is binary — pay or suffer.”

Drug manufacturers capitulate to the PBMs’ rebate demands, the lawsuit says, to avoid being dropped from the PBMs’ formularies, the rosters of drugs that they’ll cover. “Patients pay more, manufacturers get less, and the PBMs profit. Handsomely.”

PBMs have been the targets of drug industry participants for years — sometimes fingered by drugmakers or insurers to deflect accusations that they’re responsible for prescription drug inflation.

It may be true that all those entities share the blame for high prices. Over the last couple of decades, however, all have become tentacles of the same octopus. The consolidation of drug chains, physician groups, insurers and PBMs into conglomerates has made it much harder to identify responsibility for drug inflation.

Contracts between PBMs and unaffiliated pharmacies, the FTC says, are “opaque, complex, and conditional, making it challenging to understand what pharmacies will ultimately be paid for any given drug.” The result is that smaller, nonchain pharmacies may get pushed out of the market, “leading to higher costs and lower quality services for people around the country.”

The FTC report offers two case studies involving generic cancer drugs in which the agency says PBMs reimbursed their affiliated pharmacies more for prescriptions than unaffiliated pharmacies, yielding nearly $1.6 billion in gross profits from 2020 through mid-2022 for those affiliated pharmacies over the national average of those drug costs.

The drugs are a generic version of Zytiga, a treatment for prostate cancer, and a generic for Gleevec, a drug for leukemia. The high reimbursement rates for druggists dispensing those drugs may “translate into high out-of-pocket costs for patients,” the FTC says. In other words, “PBMs are not lowering prices for drugs used by patients to treat severe diseases like prostate cancer and leukemia.”

Magnify the gains on those two drugs by the potential profits the PBMs may be extracting from the entire spectrum of prescription pharmaceuticals, and the toll becomes breathtaking.

“It appears that PBMs are having the commercial health plans and Medicare Part D prescription drug plans they manage pay their affiliated pharmacies rates that are grossly in excess” of national average prices or prices paid to unaffiliated pharmacies.

No one escapes the consequences of this sort of market manipulation. The internal transactions, largely hidden from the public and regulators, may distort the statistics that health plans submit to the government to show they meet the coverage standards required by the Affordable Care Act, allowing the conglomerates to “game” the rules, the FTC says.

They may drive up healthcare costs for self-insured clients such as large companies, which may pare back health coverage for their employees as a result.

They can raise co-pays for patients, lead to cutbacks in the availability of coverage for some drugs, or prompt patients to ration their prescriptions, risking their health to save money. To the extent they affect Part D, they may drive up government spending.

To quote the Ohio lawsuit, PBMs were created as a counterweight to perceived profiteering by Big Pharma. But once they “grew powerful enough to themselves extract exorbitant fees ... the solution became the problem.”

The FTC says it issued its interim report because several PBMs haven’t provided the agency with the information they’re required to submit, hindering its ability to complete its investigation.

At the very top of the report, the FTC warns that the firms better come across “promptly,” or they’ll be taken to court. The FTC should start suing now, because the PBMs’ apparent code of silence raises a familiar question: What must they be hiding?

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Pulitzer Prize-winning journalist Michael Hiltzik has written for the Los Angeles Times for more than 40 years. His business column appears in print every Sunday and Wednesday, and occasionally on other days. Hiltzik and colleague Chuck Philips shared the 1999 Pulitzer Prize for articles exposing corruption in the entertainment industry. His seventh book, “Iron Empires: Robber Barons, Railroads, and the Making of Modern America,” was published in 2020. His forthcoming book, “The Golden State,” is a history of California. Follow him on Twitter at twitter.com/hiltzikm and on Facebook at facebook.com/hiltzik.

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