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Who doesn't enjoy a trip to Costco Wholesale Corp. (Nasdaq: COST)? Where else can you get a vat of peanut butter, have your pharmacy prescription filled, buy some fresh produce, and hunt for the latest bargain high-end merchandise – all while snacking on $1.50 hot dog combo?
Costco benefits consumers because it provides certainty that they are getting the best possible bang for their buck.
For investors, it offers a retail model that separates it from its peers – and effectively boosts profits.
Simple Shopping Experience
One of the ways Costco keeps costs down and keeps customers satisfied is that it avoids the trap of trying to be a "place for everyone." You know when you step into a Costco store that you will find very limited but quality choices.
An average Costco has only 4,000 different items in stock. In comparison a typical Wal-Mart may have as many as 40,000 different items of inventory.
Having just a few carefully chosen items allows Costco to get superior pricing from its suppliers because the supplier can mass produce for Costco alone – thereby reducing costs for everyone.
Of these 4,000 choices, only 3,000 appear consistently on a daily basis. The remaining 1,000 is where the fun begins with bargains, or as Costco terms it, "treasure hunting."
Costco can have the highest-quality Persian rugs on sale one week, but they'll be gone the next. In their place you may find designer-label handbags or name-brand furniture. The variety and mystery of these sale products keeps members coming back.
In fact, the loyalty of its membership is a key reason for investing in Costco stock.
The Benefits of Loyal Members
Costco's "members only" set-up charges annual fees ranging from $55.00 to $110.00. Its loyal membership acts as a built-in cushion that allows Costco to deliver roast chickens for under $5.00 and offer super deals that are occasionally sold at a loss.
Currently Costco has 69 million members and the membership renewal rate is a very robust 85% worldwide and nearly 90% in the United States.
Therefore, as an owner of Costco stock, the ebb and flow of sales from quarter to quarter does not carry as much weight as it might with another company. Membership expansion and renewals are just as important.
In the most recent quarter Costco's financial results (compared to a year ago) showed a 3.2% increase in membership fees to $716 million as compared to a year ago. Furthermore, the just-completed fiscal-year membership fees were up 10.2% to $2.3 billion.
So what is Costco doing to increase its membership base?