Costco 2007 Annual Report Download - page 10

BUSINESS OVERVIEW
We operate membership warehouses based on the concept that offering our members very low prices
on a limited selection of nationally branded and selected private-label products in a wide range of
merchandise categories will produce high sales volumes and rapid inventory turnover. This rapid
inventory turnover, when combined with the operating efficiencies achieved by volume purchasing,
efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities,
enables us to operate profitably at significantly lower gross margins than traditional wholesalers, mass
merchandisers, supermarkets and supercenters.
We buy the majority of our merchandise directly from manufacturers and route it to a cross-docking
consolidation point (“depot”) or directly to our warehouses. Our depots receive container-based
shipments from manufacturers and reallocate these goods for shipment to our individual warehouses,
generally in less than twenty-four hours. This maximizes freight volume and handling efficiencies,
thereby lowering our receiving costs by eliminating many of the costs associated with multiple step
distribution channels, which include purchasing from distributors as opposed to manufacturers, use of
central receiving, storing and distributing warehouses, and storage of merchandise in locations off the
sales floor.
Because of our high sales volume and rapid inventory turnover, we generally have the opportunity to
sell and be paid for inventory before we are required to pay many of our merchandise vendors, even
though we take advantage of early payment discounts whenever available to us. As sales increase and
inventory turnover becomes more rapid, a greater percentage of inventory is financed through payment
terms provided by vendors rather than by our working capital.
Our typical warehouse format averages approximately 140,000 square feet; newer units tend to be
larger. Floor plans are designed for economy and efficiency in the use of selling space, the handling of
merchandise and the control of inventory. Because shoppers are attracted principally by the quality of
merchandise and the availability of low prices, our warehouses need not have elaborate facilities. By
strictly controlling the entrances and exits of our warehouses and using a membership format, we have
limited inventory losses to less than two-tenths of one percent of net sales in each of the last three
fiscal years—well below those of typical discount retail operations.
We generally limit marketing and promotional activities to new warehouse openings, occasional direct
mail marketing to prospective new members and regular direct marketing programs (such as The
Costco Connection, a magazine we publish for our members, and coupon mailers) to existing
members promoting selected merchandise. These practices result in lower marketing expenses as
compared to typical retailers. In connection with new warehouse openings, our marketing teams
personally contact businesses in the area that are potential wholesale members. These contacts are
supported by direct mailings during the period immediately prior to opening. Potential Gold Star
(individual) members are contacted by direct mail or by providing membership offerings to be
distributed through employee associations and other entities. After a membership base is established
in an area, most new memberships result from word-of-mouth advertising, follow-up messages
distributed through regular payroll or other organizational communications to employee groups and
ongoing direct solicitations to prospective Business and Gold Star members.
Our warehouses generally operate on a seven-day, 69-hour week. Generally, warehouses are open
weekdays between 10:00 a.m. and 8:30 p.m., with earlier closing hours on the weekend. Gasoline
operations generally have extended hours. Because the hours of operation are shorter than those of
traditional retailers, discount retailers and supermarkets and due to other efficiencies inherent in a
warehouse-type operation, labor costs are lower relative to the volume of sales. Merchandise is
generally stored on racks above the sales floor and displayed on pallets containing large quantities of
each item, thereby reducing labor required for handling and stocking.
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