Costco – One up on Inflation

The no-frills, ultra-low-cost warehouse retailer Costco, does everything it can to lower the prices of the products it sells. With the surge in inflation over the last two years, Costco is benefiting from the trend of people wanting to pay the lowest prices possible for goods. Here are some of the strategies Costco uses to keep their prices low.

• Costco keeps a limited inventory of the products it sells. This enables them to sell inventory before they are required to pay for it.
• They also don’t stock too much variety in terms of products, further allowing them to buy in bulk from their suppliers.
• Costco keeps the design of its stores extremely simple, reducing the need to spend much on marketing.
• Costco has an annual membership fee that incentivizes customers to shop more at their stores.
• Costco has built a strong business culture, resulting in low employee turnover. Companies lose out when their trained employees leave. They also offer higher-than-average compensation, which incentivizes employees to stay.

Last week, Costco released their Q3 2024 results. Total revenue for the quarter was $58.5 billion, up 9.1% year-on-year. Costco’s gross margin was 12.5%, far lower than many retailers. Operating income increased by 30.8% to reach $2.2 billion for the quarter. This represented an operating margin of 3.8% for the quarter.

Costco has built a cult-like fanbase among its customers, gaining customers across different income levels. Not only do they sell hotdogs for $1.50 and rotisserie chickens for $5, they also sell gold bars as customers attempt to beat inflation on another front.

Costco is trading at a relatively high multiple. Their price to earnings (PE) ratio is currently hovering around the 50 mark, whereas Walmart is trading at a PE ratio of around 28. Costco operates in an extremely competitive industry with very low margins. Any missteps in their operating activities could cause their bottom line to suffer tremendously.

Walmart is held in the Lunar Capital BCI Worldwide Flexible Fund and by Lunar Capital’s Offshore Portfolio Clients