Costco Making Steady Progress In The UK

Latest accounts filed by Costco’s UK division show the business continuing to make progress despite the competitive trading conditions.

For the 52 weeks to 30 August 2015, Costco UK’s turnover rose 7.1% to £1.9bn with around half this growth coming new warehouses in Hayes and Sunbury.

The group said that membership sales remained strong, boosted the introduction of an online renewal system, along with various marketing initiatives. The remainder of the sales rise came through merchandise sales, helped by an increase in promotional activity. The main drivers of sales growth were its core food and sundries departments with tobacco, grocery and confectionery said to have been particularly strong. However, as a consequence of increased sales via its separate online business, sales of major electronic equipment in its warehouses declined.

The group also highlighted the tough competition from cash & carry businesses, supermarkets and the discounters. Costco said it had responded by stepping up its value proposition with regular vouchering, discounts and maintaining its EDLP strategy on its basic categories in food and sundries.

Despite the competitive pricing pressure, Costco saw its gross profit increase from £49.2m to £56.2m, helped by improved inventory and category management. Operating profit came in at £17.5m (2014: £17.2m) and pre-tax profit rose to £17.8m (2014: £17.2m).

The group, which now has 27 outlets in the UK, said it believed the market was large enough for it to continuing opening 1-2 new warehouses a year. A new site is under construction in Wembley with others in the planning stages. Meanwhile, following the opening of two petrol stations last year to add to its one existing site, Costco said it planned to open in other locations in the coming months.

Costco also revealed that sales in the first quarter of its new financial year (to 22 November 2015) was ahead of the previous year, boosted by promotional offers.

NAM Implications:
  • Given its operating margin of 0.9%, Membership Warehouse-clubbing is clearly not a game for amateurs…
  • Meaning that Costco is unlikely to suffer any real threat from UK wholesalers
  • Leaving Walmart’s Sam’s Club as the only potential competitor
  • …and with UK population numbers setting a Club-saturation level of 50 outlets, some scope for a UK complement to Asda?