Costco’s Ancillary Services Outlook Improves

by Trefis Team
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Costco (NASDAQ:COST), which competes with Wal-Mart’s (NYSE:WMT) Sam’s Club and BJ’s Wholesale Club (NYSE:BJ), is the second largest retailer in the US.  It is also the largest retailer in the warehouse club category with revenues of about $70 billion in 2009.  Like other warehouse club retailers, Costco charges its customers membership fees  in exchange for heavy discounts on a wide variety of merchandise.

We attribute about 10% of Costco’s stock value to ancillary services like in-store food service, one-hour photo centers, optical dispensing centers, pharmacies, gas stations, hearing-aid centers, printing/copy centers and car washes.  These services encourage customers to shop more frequently.

Revenues from these services declined in 2009 after a period of sustained growth. In 2009, a weak economy combined with fuel price deflation to exert downward pressure on Costco’s average revenue per ancillary business unit.

Outlook looks positive on rising gas prices

Gasoline sales are important to Costco’s ancillary business revenues, so gasoline price increases should boost sales. U.S. fuel prices are expected to rise through the end of 2010, according to projections by the U.S. Energy Information Administration (EIA). Regular grade gasoline prices are expected to average about  $2.81 per gallon in 2010, an increase of about $0.45 over 2009 averages. Retail diesel prices are expected to average around $2.94 per gallon in 2010, up from an average of about $2.63 in August and September 2009.

Opportunity to expand in-store services

Costo has a significant opportunity to boost revenues by expanding its ancillary service offerings. By the end of 2008, 96% of Costco warehouse stores had food courts, optical dispensing centers and one-hour photo centers. Pharmacies were present in 87% of the stores. Gas stations and hearing aid centers existed in about 60% and 55% of the warehouses, respectively. Print/copy centers and car washes had very low warehouse penetration.

You can see the complete $49.76 Trefis price estimate for Costco’s stock here.

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