Costco runs a high-quality, low-priced business model powered by its memberships that draw customers’ loyalty and repeat purchases. Top institutional investors comprise The Vanguard Group, 8.98%, and BlackRock, 6.76%. Top individual shareholders include Craig Jelinek, Chief Executive Officer of Costco, and Charles T. Munger (Warren Buffet partner and co-owner of Berkshire Hathaway).
Costco Origin Story
Here is the story of how this retail behemoth carved out its own niche in what is an extremely competitive market.
Price Club
Price Club was founded in 1976 by Sol Price who, with brother Robert, raised $2.5 million to build a retail store which initially catered to business customers only. This later expanded to employees of local businesses, government, and non-profit organizations.Back then, consumers paid $25 annually to purchase bulk products at discount prices in a basic, warehouse-like environment. Price Club expanded to 94 locations across North America and by 1992, reported revenue of $6.6 billion and profit of $134 million.
The original Price Club store in a converted airplane hangar in San Diego, California, still operates to this day under the Costco banner.
Costco is founded
Costco was founded seven years after Price Club by Jeffrey H. Brotman and James D. Sinegal. The similar warehouse-style retailer was launched to take advantage of strong industry growth and later became the first company to reach $3 billion in sales in under six years.The first store opened in Seattle in 1983, and by the end of 1986, it boasted 17 locations, 1.3 million members, and 3,740 employees.
Merger
Price Club merged with Costco in 1993 after Price himself declined an offer from Walmart to be incorporated into the Sam’s Club chain. The merger was a natural fit for both companies since each had a similar business model and maturity level.The subsequent company became known as PriceCostco, but consumers with a Price Club membership could shop at Costco and vice versa. Around this time, the first locations were opened in the United Kingdom and then in South Korea.
In 1994, Sol and Robert Price left the company to start PriceSmart, a warehouse chain for the Central American and Caribbean markets.
Rebranding
Costco launched its Kirkland Signature private label in 1995 – a highly successful brand emblazoned on everything from batteries to cashew nuts that today accounts for around $58 billion in sales. The Kirkland brand was named after the location of the company’s Washington State headquarters.Three years later, PriceCostco became Costco Companies, Inc., and all remaining Price Club stores were rebranded. The company also introduced its Executive Membership where members could earn a 2% reward on eligible purchases and access additional benefits.
Existing Costco locations retain many of the characteristics of Price Club stores. Each warehouse is sparsely decorated, but the company has remained committed to low prices and also pays its employees an attractive wage.
Deal with Retalix
In 2001, Costco entered into an agreement with Israeli software developer Retalix to install its StoreLine Fuel software in 152 of Costco’s fuel outlets.
Since each Costco outlet had up to 16 unmanned pumps and processed around 2,000 transactions each day, the company needed a robust solution as one of the busiest gasoline sellers in the United States.
The software was also seen as a way to better compete with Walmart and Sam’s Club, which also offered cut-rate prices as part of the so-called “gasoline wars” of the early 2000s.
Three years later, the software was installed in the chain’s 200th fuel outlet. VP of gasoline Paul Latham noted that “Our partnership with Retalix, both as a vendor and technology partner, has provided us with improved functionality and the flexibility to adjust to an ever-evolving model.”
B2B eCommerce
Costco.com for consumers was first launched in 1998, and in April 2001, the company launched its B2B platform. This enabled businesses to order products online with some locations such as Seattle, San Francisco, and Los Angeles offering next-day delivery.
SVP of E-Commerce and Special Order Merchandise Doug Schutt noted that “Costco is not new to the B2B or e-ecommerce environment”, but it was nevertheless acknowledged that the online system would be more streamlined and efficient than the existing process.
Previously, business customers needed to visit warehouses and shop for items themselves or place orders via phone or fax.
Growth
In early 2014, the National Retail Federation (NRF) predicted that retail sales in the United States would grow by 4.1% over the course of the year.
Later in 2014, Costco was named by NRF as the third largest retailer in the country with worldwide net sales of $110.2 billion.
Costco then announced plans to enter China with a store in Alibaba’s Tmall online marketplace. The store, which would initially sell food and healthcare items, would offer a low-cost, low-risk way for the company to assess the potential of the Chinese market.
In 2016, Costco opened 29 new locations around the world – the most in any year since 2007.
Costco Business Center expansion
August of 2017 saw the company open its first Costco Business Center outside of the United States in Scarborough, Toronto, Canada.
Costco Business Centers are similar in format to traditional warehouses but offer products that primarily cater to small businesses and enterprises.
In fact, more than 70% of the products they offer are not found in consumer-focused stores.
To complement its 22 stores in the United States, Costco then opened a second Canadian outlet in Quebec and a third in the Ottawa neighborhood of Gloucester in March 2021.
First Chinese warehouses
Costco opened its first physical Chinese outlet in Shanghai on August 27, 2019. Opening day was attended by so many consumers that the store quickly became too crowded and was shut early.
Police were also called to restore order and manage traffic congestion in the area. Two years later, a second store opened in Suzhou and, in March 2023, a third opened in Shanghai near the Disneyland resort.
Before its construction, this location had already amassed over 80,000 new members.
Short History of Costco
- Costco is a multinational big-box chain of membership-only retail stores that has existed in some form since 1976. Costco is now the fifth most impactful retailer in the world behind Walmart, Amazon, Schwarz Group, and Aldi.
- Costco was founded seven years after Price Club by Jeffrey H. Brotman and James D. Sinegal. With similar business models and at a comparable stage of growth, the two companies merged in 1993 to become Price Costco.
- In 1995, the company launched the successful Kirkland Signature private label brand and changed its name to Costco Companies Inc. in 1997.
Key Highlights
- Business Model: Costco is known for its high-quality, low-priced business model centered around membership-based shopping, which fosters customer loyalty and repeat purchases.
- Top Investors: The top institutional investors in Costco include The Vanguard Group and BlackRock. Key individual shareholders include Craig Jelinek (CEO of Costco) and Charles T. Munger (partner of Warren Buffet and co-owner of Berkshire Hathaway).
- Price Club Origins: Price Club was founded in 1976 by Sol Price as a retail store catering initially to business customers. It expanded to serve employees of local businesses, government, and non-profit organizations.
- Early Growth of Price Club: Price Club expanded to 94 locations across North America and reported significant revenue and profit by 1992. The original Price Club store in San Diego, California, still operates under the Costco banner.
- Costco’s Inception: Costco was founded in 1983 by Jeffrey H. Brotman and James D. Sinegal, with a similar warehouse-style model. It quickly grew to 17 locations with over a million members by 1986.
- Merger of Price Club and Costco: Price Club and Costco merged in 1993 to become PriceCostco due to their similar business models and growth stages. The merger allowed members of both to shop interchangeably.
- Rebranding and Kirkland Signature: PriceCostco became Costco Companies Inc. and introduced the successful Kirkland Signature private label brand in 1995. Kirkland Signature is now a prominent part of Costco’s offerings.
- Expansion and Growth: Costco continued to expand, both in the United States and internationally. It introduced executive membership options and focused on maintaining low prices while providing attractive wages to employees.
- Technology and B2B eCommerce: Costco partnered with Retalix to enhance its fuel outlets’ efficiency using StoreLine Fuel software. It also launched its B2B platform in 2001, enabling online orders for businesses.
- Global Expansion: Costco’s worldwide net sales grew, and it expanded its reach into new markets. It opened stores in China, including Shanghai and Suzhou.
- Costco Business Center: Costco introduced business-oriented outlets, called Costco Business Centers, offering products catering to small businesses and enterprises.
- Continued Expansion: Costco’s growth continued, with new store openings and international expansion, making it a significant player in the global retail market.
- Chinese Market: Costco’s entry into the Chinese market was met with overwhelming response, leading to crowded store openings and high membership sign-ups.
- Retail Impact: Costco is now considered the fifth most impactful retailer globally, trailing behind Walmart, Amazon, Schwarz Group, and Aldi.
- Name and Branding: The company’s name evolved from Price Club to PriceCostco to eventually Costco Companies Inc., marking its growth and changes over the years.
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