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Costco has closely emulated the basic aspects of The Price Company's
<br />Operations. It purchases directly from manufacturers in volume, so that
<br />merchandise handling costs are reduced by avoiding the charges of traditional
<br />.distributors. Instead of going through multiple steps, products are shipped
<br />directly to the company's warehouses and are stored on the sales floor.
<br />Prices are indicated by signs near the item's display, rather than by
<br />individual ticketing. However, stockkeeping unit numbers are marked so that
<br />computerized check registers constantly track inventory. The company has two
<br />major categories of membership. Wholesale membership is open to businesses or
<br />individuals with a business license, retail sales license or similar evidence
<br />of a business's existence. By paying an annual fee, these customers can
<br />obtain a wide selection of goods from a single source at a lower cost than
<br />that offered by traditional wholesalers. This allows them to buy merchandise
<br />for three purposes: resale, consumption in business or personal consumption.
<br />Examples of wholesale members include service stations, restaurants and
<br />independent professionals, such as dentists or attorneys. Group membership is
<br />available to selected employee groups, who share the characteristics of stable
<br />employment backgrounds, above average incomes and relatively few credit
<br />problems. These include state and local government employees, civilian
<br />federal employees, certain workers in schools, hospitals and financial
<br />institutions and members of credit unions. Group members have historically
<br />paid no annual membership fees but did pay a 5% surcharge over the prices
<br />available to wholesale members. In the Autumn of 1985, Costco introduced two
<br />pai membership programs, and all group members will be required to pay an
<br />annual fee after August 31, 1986.
<br />Costco's merchandising strategy is to offer substantial price savings on a
<br />limited number of items (approximately 3700) but a wide assortment of
<br />products, all of which are high quality national brands. By carrying a
<br />limited number of stockkeeping units (each of which has a favorable return on
<br />investment), Costco can significantly reduce its operations' handling costs
<br />while achieving,attractive returns. The company believes that its membership
<br />only policy enables it to preselect its targeted customers, obtain members'
<br />loyalty and establish a word of mouth network and mailing list to replace
<br />advertising campaigns as a communication method. Furthermore, it reinforces
<br />the wholesale image of exclusivity and reduces the losses from bad checks and
<br />theft. Costco is utilizing its new sources of group membership fee revenues
<br />to lower its prices further, which it believes should enhance its competitive
<br />position and its members' allegiance.
<br />Founded as a limited partnership on February 28, 1983 by Jeffrey H. Brotman,
<br />Chairman and Chief Executive Officer, and James D. Sinegal, President and
<br />Chief Operating Officer, Costco incorporated its business in August, 1983 and
<br />opened its first warehouse in Seattle, Washington in September, 1983. The
<br />company has pursued an aggressive, three -pronged expansion strategy: entering
<br />markets early to preempt competitors; clustering warehouses in larger markets;
<br />and opening units in selected smaller markets. At the end of its first fiscal
<br />year (September 2, 1984), Costco operated seven warehouses. In the year ended
<br />September 1, 1985, the company more than doubled the number of units to 15.
<br />There will be 11-to-14 warehouses added in fiscal 1986 and a similar number of
<br />units in fiscal 1987. Importantly, the two rounders have attracted a deep
<br />team of seasoned managers at the warehouse, central and se►:ior levels, with
<br />experience gained from a broad range of discounters, including other wholesale
<br />clubs. The twenty-one warehouses currently open are located as follows: six
<br />units in Washington; two in Portland, Oregon; three in California; one in
<br />Anchorage, Alaska; one in Reno, Nevada; one in Salt Lake City, Utah; five in
<br />Florida; and two in western Canada. The warehouses range in size from
<br />95,000-to-125,000 square feet of total floor space, with the prototype at
<br />100,000 square feet.
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