19 Jan

How Costco Is Making the Most of Its International Opportunities

WRITTEN BY Phalguni Soni FEATURED IN Company Overviews

Costco’s international growth opportunities

Costco Wholesale’s (COST) international sales have grown faster than US sales, in part due to their smaller base. Overseas sales grew at a CAGR (compounded annual growth rate) of 11.7% in the last five years compared to 7.2% for US sales.

Costco clocked international revenue (including Canada) of $31.8 billion in fiscal 2015, or 27.4% of total revenue. That’s up from 23.5% of the total revenue in fiscal 2010, and the company is expecting higher sales from international operations in the future.

How Costco Is Making the Most of Its International Opportunities

New openings

Costco has stepped up its pace in opening new warehouses internationally due to inherent growth opportunities. Of the 228 net new warehouse additions over the last ten years, only 122 have opened in the US with the rest spread across its international operations. Presently, the company has operations in Canada, Mexico, Japan, the United Kingdom, Australia, South Korea, Taiwan, and Spain. More warehouse openings abroad are on the way. The company opened 11 overseas warehouses in fiscal 2015 and plans to open ten more this year.

Higher membership rates

Introducing the warehouse club concept has resonated well in international markets where Costco has opened new warehouses. The value-volume proposition posed by Costco and the inclusion of locally sourced merchandise in its product offerings are key membership drivers. As a reflection of the unique proposition offered, Costco’s global membership renewal rates have also been on the rise, from 86% in fiscal 2011 to 88% in fiscal 2015.

Improved profitability

Margins from international operations are also higher, which has benefited the bottom line. That’s partly due to little or no competition from other warehouse clubs, as they’re a relatively newer concept abroad, and partly due to lower employee costs. Costco earned an operating margin of 4.1% from international sales in fiscal 2015 compared to 2.7% from domestic sales.

Costco’s international business has also outperformed other mass merchandisers like Walmart (WMT) and Target (TGT), whose US business has typically been more profitable. In fact, Target has exited from Canada due to the incidence of large losses.

Thus, having a greater proportion of revenue from abroad makes sense for both the top and bottom lines. However, in the short term, the higher US dollar will likely affect Costco’s overseas performance as we discussed in part six of this series.

Costco, Walmart, and Target together constitute ~2% of the holdings in the iShares S&P 100 ETF (OEF) and 1.2% of the holdings in the Vanguard S&P 500 ETF (VOO).

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