A ‘key ingredient’ in Costco’s cost-savings strategy

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Costco‘s (COST) focus on value over selection positions the bulk retailer for a strong performance amid the economic upheaval of COVID-19, says one analyst.” data-reactid=”17″>Costco‘s (COST) focus on value over selection positions the bulk retailer for a strong performance amid the economic upheaval of COVID-19, says one analyst.

“Costco concentrates its buying power on a small number of items, featuring roughly 3,700 stock-keeping units versus about 75,000 to 80,000 at Target or what we estimate as about 140,000 at Walmart supercenters,” Morningstar analyst Zain Akbari wrote in a note to investors.

“This creates outsize purchasing leverage that we believe is a key ingredient in delivering the values Costco offers, augmented by a robust private-label offering,” he added.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Limiting product variety as measured by stock-keeping units (SKUs) is a strategy highlighted earlier this year.” data-reactid=”20″>Limiting product variety as measured by stock-keeping units (SKUs) is a strategy highlighted earlier this year.

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Additionally, Costco’s warehouse format helps to keep internal distribution costs down by reducing the number of times products get shuffled around from delivery to sale. Akbari argues Costco has more “real-estate efficiency” than Walmart (WMT) or Kroger (KR).” data-reactid=”32″>Additionally, Costco’s warehouse format helps to keep internal distribution costs down by reducing the number of times products get shuffled around from delivery to sale. Akbari argues Costco has more “real-estate efficiency” than Walmart (WMT) or Kroger (KR).

“Offering customers a select assortment of high-value merchandise in a low-frills environment delivers several benefits that allow Costco to continually hold prices down and leverage its warehouse infrastructure,” said Akbari.

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The analyst also points to Costco’s membership renewal rates as a point of strength.

“Costco’s membership format exhibits strong customer loyalty, with renewal rates holding steady around 90% in a variety of economic environments and despite Amazon’s growth,” wrote Akbari.

The analyst says Costco is “well differentiated,” highlighting the company’s in-store prepared food offerings and fuel, which help create a steady stream of repeat visitors.

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<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at&nbsp;@ines_ferre.” data-reactid=”51″>Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at @ines_ferre.

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