Costco to keep expanding as rival Sam's Club struggles

Costco announced last month that it plans to boost capital spending in fiscal 2015 by 25% - 35% in order to open 31 new warehouses and relocate four others, and increase spending on remodeling activities. Costco CFO Richard Galanti said capital spending for 2015 will total about $2.6 billion, compared with $2 billion in fiscal 2014.

Of the 31 new warehouses (compared to 30 opened in 2014), 19 are planned for the U.S.

For fiscal 2014, Costco's net income increased 0.9% to $2.1 billion, with net sales up 7.1% to $110.2 billion.

While Costco's results continue to be strong, rival Sam's Club, a Walmart subsidiary, is struggling.

"The divergence from Costco is striking," according to an analyst at the Cowen Group who was discussing Sam's Club for a Huffington Post story earlier this year. "They're basically in the same business, but apparently they're not in the same business."

In the story referenced above, analysts said the reasons for Costco's success and Sam's Club's struggles may include the following:

• Even though Sam's Club stores are more upscale than Walmart, Sam's may be relying on customers who need food assistance, and with the decline in government assistance, poor consumers are cutting back on spending. In addition, Costco explicitly targets customers with more money, so its shoppers may be more resilient in times of economic uncertainty and less price sensitive.
• Costco customers are incredibly loyal, and their Kirkland brand may have a lot to do with that. According to an analyst quoted in the Huffington Post story, Costco uses the Kirkland brand to sell quality products at an affordable price, creating brand - and Costco - trust. And as for membership, which accounts for about 75 percent of the company's operating profit, the renewal rate is nearly 90 percent. The free samples and $1.50 hotdogs don't hurt, either.
• Costco probably has better leverage with suppliers than Sam's, because the quality and popularity of the Kirkland brand allows Costco to sell its own version of a product if suppliers don't meet its demands.

Reporter uncovers reasons for Costco's success

President Obama visited a Costco in Maryland yesterday to shake hands with people and do whatever else Presidents do when they visit the suburbs and stop traffic. On a related note, Harriet Edleson from US News & World Report spoke recently with a number of Costco members, company executives and retail analysts to get the inside story on what attracts 72 million members and results in $103 billion in annual sales. And she didn't disrupt traffic at all!

Harriet came up with "seven things you should know."

• If you want brand names for less, you'll find them at Costco.
• When you go abroad, you can still shop.
• Quality at the lowest price means value. (Costco's typical markup is 10%, compared to 20% or 30% at other food retailers.)
• If you buy an item by mistake, you can bring it back for a cash refund.
• Kirkland is made for Costco. (Twenty percent of all items in a Costco warehouse are sold under the Kirkland name.)
• Food is key.
• Hot dog and soda is a winning combination. (Costco sells 109 million hot dog and soda combinations per year at $1.50.)

For the complete story, click here.

An added note - about a year ago I watched a CNBC special on Costco, and the key fact that stuck with me was that the company generally breaks even on everything it sells, which leaves the membership fee as pure profit. That's 72 million members paying anywhere from $55 to $110!