Costco 2010 Annual Report Download - page 10

BUSINESS OVERVIEW
Forward-Looking Statements
Certain statements contained in this document constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. They include statements that address
activities, events, conditions or developments that we expect or anticipate may occur in the future.
Such forward-looking statements involve risks and uncertainties that may cause actual events, results,
or performance to differ materially from those indicated by such statements. See Risk Factors, page
14, for a discussion of risks and uncertainties that may affect our business.
General
We operate membership warehouses based on the concept that offering our members 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 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,
eliminating many of the costs associated with traditional multiple-step distribution channels. Such
traditional steps 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 sell inventory before we
are required to pay many of our merchandise vendors, even though we take advantage of early
payment discounts when available. To the extent that sales increase and inventory turnover becomes
more rapid, a greater percentage of inventory is financed through payment terms provided by suppliers
rather than by our working capital.
Our typical warehouse format averages approximately 143,000 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 (shrinkage) to less than two-tenths of one percent of net sales in the last
several fiscal years—well below those of typical discount retail operations.
We generally limit marketing and promotional activities to new warehouse openings, occasional direct
mail to prospective new members, and regular direct marketing programs (such as The Costco
Connection, a magazine we publish for our members, coupon mailers, weekly email blasts from
costco.com, and handouts) 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 business
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 membership
offerings 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 employee groups, and ongoing direct solicitations to prospective members.
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