Costco has been disrupting retail industry

I will write two articles about Costco. Today is the first one, focusing on a simple introduction.

Super growth stocks are not necessarily in hot industries

Many friends have been telling me that they do not have a circle of competence in the technology field, and technology stocks will rise sharply, this will reduce the possibility of getting rich. In fact, it’s not the case. The reason is very simple. First of all, good companies are rare. If you invest in a few companies that investors are really familiar with for a long time, you will definitely get rich. Moreover, investing in technology stocks, technology changes fast, it is too volatile and may not be suitable for most conservative retail investors. In addition to the article I wrote before, “Discover the possibility of super growth stocks in the civilian production industry“, today’s article can prove to you that super growth stocks are not necessarily in the technology industry. Super growth can also be found in ordinary industries.

Why Costco?

Many friends complained that listed companies on the US stock market are not accessible at all and it is difficult to conduct on-site inspections (shareholders, the company owner always wants to check the warehouse at any time). Fr example, Nike (ticker: NKE), I’m facing the channel of distributors, I don’t know what the company looks like, it’s ocean away in the United States. But I want to conduct due diligence on listed companies as in the case of Holmes, otherwise I will not feel confident to buy its stocks. Well, this company can let you go anytime when you are happy. You can even visit its warehouse. It currently has 14 warehouses in Taiwan. It entered Taiwan in 1997 and it has been 25 years. It is not difficult to find from north to south.

I used Costco (ticker: COST) as an example in Chapter 2, Section 2-3, and Chapter 3, Section 3-1 in my book “The Rules of Super Growth Stocks Investing”, maily to explain the moat of a company. I suggest that friends who are interested, you can take a look at my two analysis on Costco in the book.

Costco’s business

Costco’s business does not need to be explained. It is a traditional warehouse-Costco’s business does not need to be explained. It is a traditional super large-scale hypermarket. It is a typical physical retail industry. Its business includes food, fresh food, e-commerce, clothing, 3C mobile phone and computers, home appliances, consumer finance, and people’s livelihood products. Business. In Taiwan, because of the limited space, we see only a reduced version of Costco. I have actually been to many of the Costco warehouse in the United States. The Costco warehouse in the United States have a lot of people compared to other large supermarkets like Walmart (ticker: WMT), but they are not as crowded in Taiwan, and they have more tricks, not only product items. Each will have a gas station, sell a 10-carat diamond ring, sell private jet services, insurance, and credit loans. The services scope is simply dizzying.

Private label

After filtering, Costco will only sell only 3,000 to 4,000 items in the store, while WalMart has 120,000 to 140,000 items and Amazon (ticker: AMZN) has as many as 600 million items. Even if the products of the manufacturers on the market are not of good value or quality, Costco will simply launch its own brand Kirkland Signature products to replace; the price of Kirkland brand products is more than 20% lower than similar products in the market , And the current revenue of Kirkland brand products has accounted for 1/3 of the revenue of the good market for many years, which proves that these private label Kirkland products are very popular.

Costco Taiwan

It has been 25 years since it entered Taiwan in 1997. It currently has 14 warehouses in Taiwan, from north to south. I went to the Neihu warehouse more than 20 years ago. At that time, there were a lot of people, but it’s not like going to Costco now, which is a national sport of young couples. On holidays, Costco all over Taiwan are not easy to get into, and it’s the same in all warehouse. No wonder the Neihu warehouse used to be the number 2 position of Costco’s global single store sales list (and once the champion) for a long time, but now this laurel is replaced by Costco’s Taichung warehouse. This phenomenon also occurred at McDonald’s (ticker: MCD). McDonald’s Minsheng East Road store in Taipei was once the first place of global single store sales of McDonald’s for many years. It didn’t change until McDonald’s entered China. But the problem is that what is happening in Costco’s Taichung store is right now, not history! This is why Costco open its North Taichung warehouse in 2020.

In fiscal year 2020, the revenue of Costco’s “Taiwan Branch” has approached the NT$100 billion mark, which can rank about 50 listed companies in Taiwan stocks. The year 2000 annual revenue of ASE Semiconductor (ticker: ASX) is NT$103.3 billion, which is just ranked 50th in Taiwan stock market. Among the nearly 800 warehouses of Costco around the world, the Taichung store is the most profitable “store king”. According to the information released by Costco in 2020, the key operating information of the Taiwan branch is as follows:

  • 3.2 million card members
  • Membership renewal rate 95%
  • Annual revenue in 2019 is NT$84 billion, an annual increase of 20%
  • Gross profit margin is 10%
  • Revenue has grown for 23 consecutive years, with losses in the first five years
  • The average order is NT$3,000 per customer transaction, three times that of the industry peer
  • Imported goods account for more than 50%
  • Three warehouse in Taiwan are listed in the top ten sales list of Costco in the world, including Neihu warehouse, Zhonghe warehouse, and Taichung warehouse

China

I once reminded investment friends in Section 4-1 of my book “The Rules of Super Growth Stocks Investing” that the Chinese market is one of the main factors driving the stock prices of listed companies in the US stock market. A considerable proportion of Tesla’s (ticker: TSLA) share price is due to its successful entry into China and the establishment of the company’s most efficient Shanghai Giga factory. There is no other reason; except for the irreplaceability of product production and supply chains (the United States has been working with its allies to get rid if China since the Trump era for six years, which has proved infeasible, which is a fact). No matter how big the US market is, the US is an extremely mature market with limited growth. But China will soon become the world’s largest market. Few US-listed companies will abandon this market, and the chief executives are even more cautious about offending the vast number of consumers in China. The most recent example is James Dimon, CEO of JPMorgan Chase (ticker: JPM), who just made a joke on China, and immediately apologized and admitted his mistake the next day; everyone should know that JPMorgan Chase is not an ordinary company or bank, CEO James Dimon is one of the most recognized leaders in contemporary American financial industry.

U.S.-listed companies are deeply afraid of losing the the Chinese market, , a cash cow and the world #2 marekt. No one will deny this. Unless a very small number of companies decide to abandon this market due to its own special business or cannot enter this market, there should be only single-digit companies in the S&P 500. For example, Facebook (ticker: META) failed to enter China because of his long-term efforts. CEO Mark Zuckerberg believed that his company would never be able to enter China, so he dared to attack China publicly when he testified before Congress. Of course, he also had to pay the price.

Costco’s name in China is different from Taiwan, but the management teams are all from Taiwan Costco. Obviously, the head office hopes to replicate the successful experience of Taiwan Costco. It has opened its first warehouse in China in 2019 in Shanghai, and the second warehouse has been finalized in Suzhou. It is under construction and will open soon. It is currently planning a third warehouse. With the popularity of Costco’s first warehouse, its prospects in China are exciting. In the few days that Costco’s Shanghai branch opened, Costco’s stock price rose by more than 3% for several consecutive days. (Regardless of the price of Costco or the retail industry, it is rare that the stock price of the retail industry has risen by more than 3% every day for many days). Tesla is another example; you can check Tesla’s stock price chart. Without the Chinese market and the Shanghai giga facroty, there would be no Tesla today.

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3 thoughts on “Costco has been disrupting retail industry”

  1. Any views for Costco’s success in China while Walmart and Tesco failed to make headway?

    1. Hi David,
      Glad to have your feedback.
      I plan to talk about this in my future post “Amazon vs Alibaba”. As far as I know, all foreign big retailers shutdown operation in China except Walmart. Walmart keeps shrink their operation in China these years. Unless there is any miricle, Walmart will be the next retailer exit China.
      – Carrefour will retreat from China (2019)
      – Metro China sold to WU Mart(2019)
      – Auchan exit China in 2018, brand changed to RT-Mart China (2021)
      – RT-Mart China sold to Alibaba (2017)
      – Tesco exit China officially (2012)
      – Home Depot close China operation (2012)
      – Walmart
      – Sold online-sales business in China (2016)
      – Closed 80 stores in past 6 years
      – Amazon
      – Closed its China domestic operation (2019)

      You highlight a good point. Costco needs to duplicate its success story in Taiwan, or it will follow these peers. My guess Costco management trust Richard Chang (the ex-CEO of Costco Taiwan, now Asia Pacific VP). To tell the truth, retail industry in Taiwan is same as China, most foreign retailers almost can’t survive here. Althouth Carrefour is the only one alive now, but rumour keep ciculating Carrefour plan to sell to Taiwanese peer. Personally I believe Carrefour will exit Taiwan soon.

      My second thought is based on history. Think about Starbuks, McDonald, Coke, Pepsico and KFC, these well-known big food and retailers gained ground and was all popular in Taiwan 2-3 decads ago, Starbuks, Costco, KFC have their #1 sale stores in Taiwan 20 years ago. All these brands are still popular here although total revenue is less than China. The point I want to say is “there are many similarity including culture, tast, operation model, preference” I belive Costco managment has done some homework on this as well (you might say they find the retailer receipt to success in Taiwan and China should not be same as in US or Europe, and they have it in the hands)

      1. Andy, I share your view about the importance of having a Management team that understands local culture. not familiar about Richard Chang. But read that Former Yum China chairman and CEO Sam Sun was pivotal in the company’s expansion into China.

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