Costco 2010 Annual Report Download - page 6

Our Company focus remains unchanged as we continue to be the dominant warehouse club operator,
with over 60 million loyal members. Bolstered by a strong member renewal rate (over 87%) and an
expanding Executive Membership base, our membership fee revenue totaled nearly $1.7 billion in
2010. Our Executive Membership program (which represents approximately one-third of our total
membership base) is so important because it strengthens our bond with our highest-volume members.
Executive members shop more frequently and spend more each trip than our Gold Star members.
At its core, Costco is a company of exceptional merchants and operators, and it is our dedication to the
efficient sourcing, shipping, displaying and selling of quality goods and services that makes Costco the
company that it is today. We are constantly monitoring the unique qualities of each country where we
operate, capitalizing on opportunities, adjusting and enhancing our product mix, and adding new items.
Our merchandise suppliers are our partners in business, and we continually seek to add top quality
vendors to our ranks. We have recently established direct relationships with Nautilus, O’Neill
(children’s and men’s apparel), Hansgrohe, Petit Bateau, Rosetta Stone, Gucci watches, and Bose,
along with several others.
While continuing to highlight and add to the national brands we carry, our Kirkland Signature brand is
an increasingly important adjunct to our product mix and enhances member loyalty. Introduced in
1992, today it represents 15% of our items and 20% of our sales. We have many Kirkland Signature
items in each of our merchandise categories, and believe we have the capability of eventually building
our sales penetration of Kirkland Signature products to approximately 30%. Do not interpret this to be
an abandonment of the quality brand name products we provide to our members – these will always be
a major element of our product selection.
Our extensive cross-dock depot system enables us to increase efficiencies of merchandise handling
and distribution and significantly reduces the net landed cost of an item at the warehouse. We now
have depots in almost all of our countries, and in fiscal 2010 over seventy percent of our goods in
North America went through one of our 34 depots, with a total volume approaching $50 billion. Our
depot system is the key element of our supply chain, and is unmatched in providing cost-effective and
nimble distribution everywhere we operate.
There are many aspects to keeping overhead costs low in a company the size of Costco, and we work
diligently at all of them all of the time. Controlling operating costs (SG&A) is a constant focus for us,
and we are pleased that these expenses as a percent of sales decreased in 2010 after an increase in
2009 (which reflected rising costs, particularly in health care benefits). We will continue to emphasize
cost controls and expense reduction in 2011. This is an area of our business with which we are not
satisfied and one that requires much improvement.
Our inventory shrink results continued at an all-time low in 2010 – at less than 15 basis points of sales.
Also, reducing the costs of merchandise returns has been a focus for some time, and we continue to
see positive results from the policies we implemented a few years ago. These costs reached a six-year
low in 2010; and we believe we have achieved a good balance between our return policy and member
satisfaction.
While Costco does not enter “competitions”, we are nevertheless very proud when we are singled out
for recognition; and this year we received a number of accolades. Among them was the naming of
Costco as the 21st most admired and respected company in the world by Fortune Magazine – one of
only two retailers to make the top 25.
When we look back over the last decade and consider all the many innovations and successes that we
have had at Costco, we give credit to our employees for their vision and hard work that took innovative
ideas and made them into realities. Many of the products and services that drive our sales today were
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