A ‘key ingredient’ in Costco’s cost-savings strategy

Costco's (COST) focus on value over choice positions the mass retailer for strong performance amid the economic upheavals of COVID-19, says an analyst.
"Costco focuses its purchasing power on a small number of items with around 3,700 storage units compared to 75,000 to 80,000 at Target or around 140,000 at Walmart supercenters," wrote Morningstar analyst Zain Akbari to investors.
"This creates an oversized leverage effect on purchasing that we believe is an integral part of delivering the value that Costco offers, complemented by a robust private label offering," he added.
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Limiting the variety of products as measured by storage units (SKUs) is a strategy that was highlighted earlier this year.
A buyer views a television show in a Costco warehouse in Robinson Township, Pennsylvania on Thursday, May 14, 2020. (AP Photo / Gene J. Puskar)
In addition, Costco's warehouse format helps keep internal sales costs low by reducing the frequency with which products are mixed from delivery to sale. Akbari argues that Costco has more "real estate efficiency" than Walmart (WMT) or Kroger (KR).
"Offering a select range of high-quality goods to customers in a low-frills environment offers several advantages that allow Costco to keep prices low and leverage warehouse infrastructure," said Akbari.
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The analyst also points to the extension rates of Costco membership as a strength point.
"Costco's membership format has strong customer loyalty. Renewal rates are constant in a variety of economic environments and, despite Amazon's growth, are around 90%," Akbari wrote.
The analyst says Costco is "well-differentiated" and highlights the in-store dining options and fuel that help generate a steady stream of returning visitors.
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Ines covers the US stock market from the floor of the New York Stock Exchange. Follow her on Twitter at @ines_ferre.
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