Costco 2004 Annual Report Download - page 6

The initial rollout this past year of E-commerce order stations in our buildings brings costco.com to our
warehouse shoppers and enhances our top-notch, special-order kiosk offerings. While saving money on the ba-
sics, our members can choose from a wide variety of value-priced luxury items, whether found while treasure-
hunting the aisles or in special-order kiosks or at our upscale road shows within our warehouses.
As you may know, Costco is one of the largest dealers of fine diamonds in the country, with over 67,000
carats sold this past fiscal year. Likewise, the value we provide in fine wines is unparalleled. In fact, we have
recently expanded our fine wine offering by developing our own Kirkland Signature wine—a full-bodied Shiraz
from Australia’s Barossa Valley—complementing our earlier successes with Kirkland Signature Chardonnay and
Cabernet Sauvignon. As with all of our private label Kirkland Signature products, it represents the highest quality
and best value available.
Our reputation is solidly built on our underlying philosophy of carrying the highest quality national brands
at the lowest possible prices; and even as we expand our Kirkland Signature private label, we continue to develop
relationships with new merchandise suppliers. Our suppliers are our partners in business, and we believe in
establishing alliances with them that enable both of us to prosper. We recently built new direct relationships with
Kitchen Aid, Osh Kosh, Sony Computers, Sony TVs, Godiva, Pioneer, Lane Furniture, Royal Sateen, Samsung,
Levi’s, and FILA. We also have co-brands with Starbucks, Hanes, Foster Farms, Mariani’s, Jelly Bellies, Tyson,
DeLacre, Newman’s and Hanson’s.
All of these merchandise strategies are designed to help us give our members the highest quality and best
values in the marketplace. Exceeding our members’ expectations is our constant goal. We currently have 23.4
million loyal member households, representing 42.4 million Costco cardholders. Member renewals are strong,
running 86% for our membership overall, and 93% for Executive Members. We now have 3.1 million Executive
Members in the U.S. and Canada, who pay $100 a year to take advantage of some 23 Executive Member services
Costco now offers, while receiving a 2% Executive Member reward on their qualified purchases. We have found
that these are our best customers—members who spend higher average amounts and increase their spending each
year.
Of course, as proud as we are of Costco’s achievements in fiscal 2004, we realize that the Company’s bot-
tom line is also very important to you, our shareholders. We have worked hard throughout our Company’s his-
tory to control expenses; and we are extremely pleased to say that, thanks to the success of several initiatives
begun last year, we believe we have made some lasting improvements that will serve the dual purpose of better
expense ratios and improved service to our Costco members.
As you know, we made changes to our health care plans that went into effect in October 2003—changes
designed to bring a balance between rising health care costs and the need to educate our employees on how to be
better health care consumers. Our new plans are expected to increase the percentage employees contribute from
4% to 8% over a four-year period. We have already seen a cost improvement in this area. Nevertheless, our em-
ployee benefits are still the best in our industry, and we will ensure that they remain so.
Our current expansion plans, while still aggressive, should not interfere with our cost-cutting initiatives. We
saw expense improvements in 2004, and we expect more in 2005. Additionally, while we believe Costco has the
lowest inventory shrinkage rate in retail, we felt we could do better; and this year we reduced it even further, ach-
ieving the best results in the Company’s history. By challenging everything we do, we also lowered our operating
expense ratios in our home and regional offices in 2004, and we continue to hold the line on utility costs. Costco
was built on cost-saving efficiencies, and we are committed to continually reducing costs wherever we can
through innovative problem-solving.
A big part of our success stems from our creative and cohesive management team, many of whom have been
working together for more than 20 years at Costco, and for up to 40 years in retail. They are, we believe, the
strongest team in the industry and are highly sought after. We are also aggressively developing new leaders
within Costco’s employee base, and we have a new generation primed and ready to assume management roles as
we expand our business.
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