Costco 2012 Annual Report Download - page 11

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 process 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
slightly 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 are not elaborate
facilities. By strictly controlling the entrances and exits of our warehouses and using a membership
format, we have limited inventory losses (shrinkage) to amounts well below those of typical discount
retail operations.
Marketing and promotional activities generally relate 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 emails from costco.com
and costco.ca, and handouts) to existing members promoting selected merchandise. These practices
result in lower marketing expenses as compared to typical retailers.
Our warehouses generally operate on a seven-day, 69-hour week, open weekdays between
10:00 a.m. and 8:30 p.m., with earlier weekend closing hours. 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, thereby reducing labor required for
handling and stocking.
Our strategy is to provide our members with a broad range of high quality merchandise at prices
consistently lower than they can obtain elsewhere. We seek to limit specific items in each product line
to fast-selling models, sizes, and colors. Therefore, we carry an average of approximately 3,300 to
3,800 active stock keeping units (SKUs) per warehouse in our core warehouse business, as opposed
to a significantly higher number of SKUs at discount retailers, supermarkets, and supercenters. Many
consumable products are offered for sale in case, carton, or multiple-pack quantities only.
In keeping with our policy of member satisfaction, we generally accept returns of merchandise. On
certain electronic items, we typically have a 90-day return policy and provide, free of charge, technical
support services, as well as an extended warranty. Additional third-party warranty coverage is sold on
certain electronic item purchases.
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