Discretionary, Non-Food Household Purchases Fueling Costco’s Growth

The biggest surprise for Costco
Wholesale Corp. during the ongoing pandemic might well be described as “home and yard loading.”

That means consumers redirecting spending from travel, hotels and dining out to
items like lawn and garden supplies, furniture, exercise equipment, bicycles, cookware and housewares.

Those purchases contributed to a 14% U.S. comparable-store sales increase in the
company’s fourth quarter ended Aug. 30.

“I think we’re a little surprised by the strength in many of these discretionary, non-food categories—things for the house and
big-ticket items,” Executive Vice President and CFO Richard Galanti told financial analysts on a conference call.

Sales of electronics and big-ticket household appliances have been
curtailed by supply issues. One result has been less promotional activity.

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“If you think about TV’s and electronics, those have been such a strong category, not just for Costco, but in
general. The manufacturers haven’t been doing as many promotional things,” said Galanti.

Costco embership revenue—a key competitive differentiator in retailing, because it can help
to reduce in-store prices—rose 5.1% in the fourth quarter and 5.6% for fiscal 2020. U.S. membership renewal rates held at 91% in the past two quarters.

“Importantly, management is
confident around the holiday season based on trends seen over the last three months—with plans to be aggressive into the fall as the MVM returns,” wrote Deutsche Bank analyst Paul Trussell
following the earnings release.

MVM is a reference to the multi-vendor mailings containing coupons that Costco had discontinued—in part because of pandemic-related, product-supply
issues.

The chain continues to build its membership email base because “if you go back three or four years ago, I don’t think we had good email addresses for much more than a third of
our member base. We didn’t focus on that kind of stuff,” said Galanti.

“Today we have well over 60% and growing. We’re doing a lot more to collect and gather those email
addresses and then communicating with them more often—so that’s probably the single biggest, low-hanging fruit.”

Asked about store foot traffic, he added that customers “feel
safe given the safety protocols and mask requirements. The sheer size of the building itself and the width of the aisles— all of those things have helped us in that regard.”

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