Costco Remained On Track With Growing Membership Base
Due to its attractive business model that allows customers to make bulk purchases at heavy discounts, Costco’s membership base has grown steadily over the past. More than 1.6 million new members joined Costco during the first two quarters of fiscal 2013, and it saw a rise of 19% in new membership signups in the third quarter. During Q4, new membership signups at Costco increased by a healthy 9%, when the overall retail market in the U.S. was going through a rough phase.  Executive member signups also remained strong as more than 250,000 customers joined the warehouse retailer as executive members during the quarter.
Additionally, the membership renewal rates continued to improve which is a promising sign for the company. The business member renewal rate increased to 94% at the end of the fourth quarter from 93.9% at the end of Q3. Renewal rate for goldstar members rose to 89.1% from 88.9%. Although worldwide renewal rates declined slightly, it was mainly due to new membership signups related to new store openings in international markets. The company stated that the renewal rates usually remain low in the start-up years of new stores. 
However, even Costco felt the impact of the edgy retail environment as its membership income increased by only 3% in Q4 fiscal 2013, while it increased by 10% for the entire year. Nevertheless, the growth is still positive, and can pick up in the future as the company continues to expand in the U.S. and more people get familiar with the benefits of shopping at Costco.
Continued International Expansion Will Assist Revenue Growth
With continued expansion, lower direct competition and positive customer response to the unique shopping model, Costco’s international revenues have grown faster than its U.S. revenues. Looking at the average revenue growth for the past four years, we note that Costco’s international revenues have increased by almost 15% annually. In comparison, the annual growth in the U.S. has averaged around 5%. We believe that Costco’s continued expansion in international markets will complement its comparable store sales growth. Ultimately, this will translate into strong revenue growth for the company.
In fiscal 2013, Costco opened 14 warehouse stores in international markets and plans to add another 18 in fiscal 2014.  The retailer also plans to enter Spain next summer, where the retail market is slipping due to economic weakness.  We believe that given the right marketing, Costco can acquire a strong customer base in the region by providing cost saving options. Moreover, demand for essential items such as groceries is quite strong in the region despite the overall retail weakness.  This factor should assist the retailer’s growth, since it earns more than half of its revenues from groceries. 
Opportunity To Expand Online Channel
Costco’s online sales increased by 8% during the fourth quarter despite the fact that the comparable quarter had an additional week.  Currently, the retailer’s online sales account for only 2% of its overall revenues. Moreover, online retail sales in the U.S. and global markets are expected to grow at a compound annual growth rate of 9% and 15% respectively, through to 2017.   This clearly indicates that there is a huge growth opportunity for Costco’s online channel. Moreover, the threat of self-cannibalization is limited due to the fact that 80% to 90% of the products offered on Costco websites are different from its stores.
For its online growth, the retailer launched several android apps during the quarter. It is also launching exclusive e-commerce websites for different markets. Costco started costco.uk last fall and plans to initiate e-commerce operations in Mexico this fall. Although the retailer has a long way to go, it appears to be on the right path to propel its online business.Notes:
- Costco’s Q4 fiscal 2013 earnings transcript, Oct 9 2013 [↩] [↩] [↩] [↩]
- Spain’s retail sales slump stretches to three years, hampering recovery, Reuters, Jul 31 2013 [↩]
- Retailing in Spain, Euromonitor International, Mar 2013 [↩]
- Costco’s SEC filings [↩]
- US Online Retail Forecast 2012-2017, Forrester, Mar 13 2013 [↩]
- Global E-Commerce Sales Forecast & Country Breakdown For 11-17, Retail Analytics [↩]