Here’s What Will Drive Costco’s Growth In The Future

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Aggressive international expansion, establishing a strong online presence and ensuring that the strong membership renewal rate continues are the key growth drivers for Costco (NYSE:COST). The company began its international expansion in 2013, which led to a significant increase in revenues. This expansion is expected to be completed by 2017 and should drive future growth. Costco’s unique membership-based model with strong renewal rates provides a competitive edge. While currently  90% of memberships are renewed overall, the company’s ability to ensure that this rate is maintained will be key for future growth. The company has increased its spending on technology and upgraded its systems while establishing a strong online presence which should boost revenues in the future.

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International Expansion

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In 2013, Costco commenced its plan to expand its operations globally by opening 150 warehouse clubs with a specific focus on previously untapped international markets. [1]. This was a strategic move to ramp up growth given that the company was already doing well in the domestic market, generating 7% year-on-year growth between 2010 and 2014. We expect Costco’s international warehouse club count will reach approximately 280 by the end of our forecast period. Accordingly, we expect the company to be more focused on international expansion over the next three years.

International markets hold a strong potential for square footage growth since warehouse clubs penetration is lower in these markets compared to the U.S. In Mexico, club warehouse penetration is 1.8 warehouses per 1 million residents compared to 4 warehouses per 1 million residents in the U.S. This indicates a greater opportunity in international markets which should drive growth for the company.

Digital Channel

Costco sales through the online channel for the fiscal year 2015 were $3.5 billion, up 20% from last year.  This is 20 times faster than store sales as comparable sales grew by 1% in the last fiscal year. The company has made significant upgrades to its technology to establish an online presence. E-commerce sales are booming, indeed, as online sales in the U.S. are projected to grow at a CAGR of 9.5% between 2013 and 2018.  Accordingly, we believe that a strong online presence will be key for Costco’s growth. The company had been lagging behind in e-commerce sales due to legacy systems which were developed in-house. Increased capital expenditure for a technology upgrade should show results in the long term and boost revenues for Costco.

Members Loyalty

Costco is a “Warehouse Club”, where membership is necessary to make purchases in bulk. The annual membership is priced at $55 and due to this entry barrier, the model is suitable for high income households who have storage capacity for bulk purchases. Members can avail themselves of several benefits, including discounts that Costco offers. The membership renewal rates are also strong with 91% U.S. memberships being renewed and an 87% renewal rate globally. Costco has seen tremendous growth in membership in the past few years with 4.2 million members joining in fiscal year 2013 and 2 million new memberships in the fourth quarter of FY 2014 alone.

We believe a high rate of membership renewal is a strong indicator of customer loyalty and is a key driver of growth for Costco.

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Notes:
  1. Costco Plans 150 New Stores In 5 years, Supermarket News, May 2013 []