Annual Report 2017
2017 Annual Report
A commitment to quality and value at 746 locations and on Costco.com
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Contents Tribute to our Chairman..............................2 Letter to Shareholders.................................3 Business Overview......................................4 Financial Statements..................................19
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Farewell to our Co-founder and Chairman The Costco family was profoundly saddened by the unexpected death of Jeff Brotman, Costco’s co-founder and Chairman of the Board. A man of quiet strength and personal integrity, Jeff along with partner, friend and co-founder Jim Sinegal, helped direct the Company with a vision and passion unparalleled in the retail industry. Jeff was born in Tacoma, Washington, to a family of retailers, where he learned the business by following the strict ethics and practices his father established in his own clothing stores. Jeff went on to earn two degrees from the University of Washington, and later lead numerous UW boards and initiatives Jeff was Costco’s Chairman of the Board for more than 33 years. In addition to his duties as Chairman, Jeff was deeply involved in the Company’s real estate endeavors, driving Costco’s expansion efforts worldwide. Jeff believed strongly in and worked tirelessly toward giving back. He was especially proud of the Costco Scholarship Fund, which has raised millions of dollars for underrepresented minority students, and made it possible for them to attend the University of Washington or Seattle University. Together with his wife Susan, Jeff was involved in and supported myriad organizations in the community. Simply put, Jeff was dedicated to making the world a better place. Jeff’s outstanding commitment to business, civic, and philanthropic causes, combined with his natural leadership and genuine warmth, created an immense and lasting impact.
He is greatly missed. 4
Do the right thing. It is a philosophy embedded in our culture; one that was established and cultivated by our co-founders. Although we lost one of these great leaders this past year, members of our leadership team and beyond realize the key to long-term success is not high margins; rather it is how you treat, engage, and include people: our members, our employees and our suppliers alike. Thus our commitment to our core values will remain strong in Jeff Brotman’s legacy and we will continue to offer the highest quality and best value to our more than 90 million loyal members, who recognize our leadership in the market. By focusing on these values, we achieved another strong financial performance in fiscal 2017. Net sales for the 53-week fiscal year totaled $126.2 billion, an increase of nine percent from $116.1 billion in the 52-week 2016 fiscal year, with a comparable sales increase of four percent. Net income for the 53-week fiscal year was $2.68 billion, or $6.08 per share, compared to $2.35 billion, or $5.33 per share, in the 52-week prior year. Revenue from membership fees increased eight percent to $2.85 billion.
Dear Costco Shareholders, Our Kirkland Signature™ brand is now recognized around the world, and is
synonymous with high quality and great value. In 2017, Kirkland Signature sales exceeded $35 billion, as we expanded our offerings in apparel, sporting goods, fresh food and organic food items. Organics are a fast-growing
Craig Jelinek, President and Chief Executive Officer
category in both fresh and grocery, and our buyers are dedicated to growing the available selection. In certain merchandise initiatives centered on low prices, quality and sustainable merchandise, we have pursued increased vertical integration. We are currently under construction on a meat plant in Illinois, and we recently broke ground on a poultry plant in Nebraska. Since its inception, our business has been to grow our membership and drive the value proposition that keeps members returning to the warehouse. Improving sales, comps, and member shopping frequency reaffirm that brick-and-mortar continues to be strong. Yet we recognize that technology has changed the retail landscape, now enabling us to connect with our members through multiple channels. We strive to create an easy, efficient and engaging way for members to shop with us in our warehouses and online. Maintaining our commitment to providing exceptional service and value to our members when shopping online, improvements were made in merchandise offerings, site functionality, search capability, checkout, and delivery times. As the year comes to a close, I extend my appreciation to the 239,000 employees and over 90 million members worldwide who help make Costco the undisputed leader in membership warehouse clubs. I thank you for your continued trust in and support of Costco, and wish you and your families a joyous holiday season, and a happy, healthy, and prosperous New Year. 5
The Art of Merchandising The art of merchandising, that instinct of knowing what products will sell and how to present them, has been lost on a generation
of buyers armed with impossible amounts of data and an aversion
to risk. One of the last bastions of merchandising where science hasn’t fully overtaken art is Costco.
Part of the appeal of shopping at Costco is the wide selection of products you can find under one roof. In a single trip, warehouse members can shop for groceries, TVs, tires, furniture, jewelry, toys, clothing, and a whole lot more. But within that huge selection of categories, your choice for individual products is extremely limited at Costco in relation to other retailers. In fact, the company carries less than 4,000 items in an average store, compared to 80,000 at a typical Target or 150,000 at a Wal-Mart Supercenter. We have a policy of carrying a lower number of products than traditional grocery stores. The benefit of having fewer SKUs (stock keeping units) is twofold. First, having fewer products to order, track and display means cost savings for Costco. Our warehouses stores’ space is limited and is packed to the ceiling with goods. A larger product selection would result in larger warehouse stores and more man hours required in order to organize, ship and negotiate prices for the products. The second reason that we limit SKUs is to increase our purchasing power. By having a limited retail space, suppliers must bid for Costco shelf space to get their products sold. This competition drives down the price and, since the supplier knows that the competition between brands will be almost nonexistent, the suppliers are willing to give Costco a better price to be the only ketchup or toothpaste brand in the store. This lower price ultimately brings in more consumers looking to purchase the products for less money than they would spend at a traditional store.
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Our Employees Are Our Most Important Asset Our employees are the most satisfied with their compensation and benefits than those at any other company. We beat other popular workplaces like Apple and Starbucks and broke the stereotype that attributes start-ups and tech companies with the top marks in pay and benefits. We are not just know for bulk items and quality services. We pay our employees a living wage. In 2016, we raised its minimum wage for employees to $13.50. That’s higher than the federal minimum wage of $7.25 and the $11.50 minimum wage in Washington, where we’re based. Our employees—including hourly, part-time and full-time Costco workers—also enjoy a slew of benefits, including health care, dental care, 401k programs, life insurance, stock options and more.
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Everyone’s Covered
Yes, we’ve raised our membership fees, but with the savings
we deliver to shoppers—especially those with large families— will offset the modest price increase.
Many shoppers, particularly those with large families, are likely to save enough over the course of a year to offset the $60 cost Costco offers significant discounts on its pharmacy items for members. If you or your family are in a position that you require a lot of prescription medicines, then a Costco membership can be one of the most valuable investments you’ll make. Diapers, wipes and formula are some of the other products that prove most cost-effective, and bulk-buying obviously means parents need to take fewer trips to the store. Costco also offers items other big-box stores do not, including gasoline, and even car rental discounts and vacation packages through Costco Travel, which is available to all members. Tires, wine, movie tickets, Nutella, gift cards, Extra Virgin olive oil and pure vanilla extract are some of the best deals at Costco.
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Aggressive Expansion We are expanding our business centers, stores aimed specifically
at its small business customers, showing an increased commitment to this segment of its base
To begin with, the centers stock a large selection of high-quality products aimed at small business owners such as those who own restaurants and convenience stores. The company claims more than 70 percent of the items available at the centers are unique compared to those found at a conventional Costco warehouse. The company delivers to most businesses within the greater Atlanta, San Diego, Las Vegas, Phoenix, Puget Sound, Salt Lake City, and San Francisco Bay metropolitan areas. Orders less than $250 (before tax) are charged a $25 delivery surcharge. Business hours, from 7 a.m. to 6 p.m., Monday-Friday, are also designed to be more convenient for businesses to make purchases. Businesses can place their order by 3 p.m. and receive next-business-day delivery in most areas. For restaurant owners, business centers are more appealing because of the larger volumes of merchandise available, compared to what is available at a regular Costco warehouse.Select locations have a Print & Copy Center to cater to the businesses’ printing and promotional needs. The biggest difference between the business centers and Costco’s traditional locations is space. The size of the business centers averages 115,000 square feet while a regular warehouse averages 150,000 square feet. The Costco business centers also have half the number of parking spaces but generate higher check averages. Costco unveiled its first business center way back in 1992 in Hayward, California. Over the next 10 years, the company opened just three more centers. Since 2009, however, We’ve added five additional locations.
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30 Years of Miracles Currently, over 600 Costco locations in participate in a fundraising campaign for their local Children’s Miracle Network Hospital. Every May, Costco participates in a monthlong Miracle Balloon Campaign at all wareho`uses in the United States and Canada. The annual Miracle Balloon Campaign is the primary source of the fundraising effort made by Costco and its partnership with Children's Miracle Network Hospitals.
Members are
invited to make a donation at the time of checkout and encouraged to write their names on the balloons, which are often displayed at the front of the warehouse. Regional golf tournaments, a corporate match, and other creative fundraising activities increase the fundraising total.
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Where D Donatio “Did you know that every minute, Children’s Miracle Network
Hospitals provide $6,500 in charitable care to help save kids’
lives? That amounts to approximately $3.4 billion in charity care
annually. Thanks to corporate partners like Costco, who have
been helping us raise funds for sick and injured children for 30 years, donations stay within local communities and member children’s hospitals use the funds however they need them most—like funding critical treatments and healthcare services or providing pediatric medical equipment and charitable care.”
—John Lauck President and CEO, Children’s Miracle Network Hospitals
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Do Your ons Go?
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Sales: High and Rising Costco is consistently outperforming competitors like Wal-Mart and Target. We have reported quarter after quarter of great financial results. Meanwhile, Wal-Mart and Target are grappling with a lull in business. We have a simple strategy for winning — concentrating on driving sales.We believe that if sales are good everything else will take care of itself. While Wal-Mart and Target pour money into marketing, We have a no-frills approach and doesn't advertise. The company also sells a limited number of items. Despite Costco's large store volume, we sell a fraction of the items as Wal-Mart. Selling fewer items increases sales volume and helps drive discounts. Our focus on driving sales also helps explain why we offer better pay and benefits than competitors.
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Memberships: The Foundation of Our Success Our
members
may
utilize
their
memberships at any of our warehouses worldwide. Gold Star memberships are available to individuals; Business memberships are limited to businesses, including individuals with a business license, retail sales license or comparable evidence. Business members have the ability to add additional cardholders (addons). Add-ons are not available for Gold Star members. Effective June 1, 2017, we increased our annual membership fees in the U.S. and Canada for Gold Star (individual), Business and Business add-on by $5 to $60 per year. The Executive membership fee increased from $110 to $120 (annual membership fee of $60, plus Executive upgrade of $60), and the maximum annual 2% reward, which is earned on qualified purchases and can be redeemed only at Costco warehouses, increased from $750 to $1,000. Our annual membership fees in our Other International operations vary by country. All paid memberships include a free household card. Our member renewal rate was 90% in the U.S. and Canada and 87% on a worldwide basis in 2017. The majority of members renew within six months following their renewal date. Therefore, our renewal rate is a trailing calculation that captures renewals during the period seven to eighteen months prior to the reporting date.
Of 90,300 Total Cardholders:
55+45 78+22 55% Paid members
45% Household cards
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22% Business, including add-ons
78% Gold Star
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