The price of Costco Wholesale (COST 0.83%) stock has more than quintupled in the last decade. Here are five reasons it's been so prosperous throughout its history and why the retail stock is still a buy for patient investors with plenty of time to sit on it.
1. Big discounts and low markups
Costco is, first and foremost, a customer-centric business. The company works diligently with its vendors to acquire goods at the lowest possible prices and pass the savings on to customers. Not only that, Costco caps its markups at 15% maximum -- and most of its items are only marked up by 11%. Compared to other retailers who typically mark up their products by 25% to 50% (and up to 300% for wine), Costco sacrifices on its margins to keep customers happy.
2. Membership fees
Costco's steady membership fees helped to stabilize revenues and raked in $3.9 billion in 2021 -- 80% of the total profit earned for the year. Not only does charging membership fees help Costco keep prices down, but it also fosters brand loyalty and helps retain customers.
There are over 50 million active Costco members, and the company boasts a 90% renewal rate. Costco fans are among the most loyal out there, sharing their thoughts on Costco blogs, forums, and Facebook groups.
3. No advertising budget
Costco doesn't spend money on ads. Aside from sending mailers to current and potential members, the warehouse retailer spends next to nothing on marketing. In comparison, Costco's competitor Target spends over 2% of its revenue on advertising, and Walmart spends roughly 0.5%.
If Costco were to spend 0.5% of its revenue on marketing as Walmart does, it would eliminate over 19% of its profits. If Costco were to match Target's 2% of revenue, this would equate to a staggering 78% reduction in profits.
4. Costco takes care of its employees
While retail can be a tough gig for employees, Costco puts in extra effort to keep its workers happy. The company seems to understand the importance of employee retention and that a business is only as strong as its people. On average, Costco pays nearly double the wages that Walmart does, and the majority of Costco employees receive health benefits.
Costco employees also benefit from the company's 401(k) matching, paid time off, advancement opportunities, and four free annual memberships for themselves, friends, and family.
5. Low rate of theft
Lastly, one overlooked advantage Costco holds over other retailers is its low rate of theft. Keeping tight control over shoplifting has helped Costco keep its loss down to only about 0.12% of sales -- about $235 million for fiscal year 2021.
Because of the way Costco stores are laid out and with employees reviewing customer receipts as they exit the store, Costco is not an ideal place to shoplift. In comparison, Walmart has reported that it loses approximately $3 billion annually from theft.
Warren Buffett vs. Charlie Munger
Stock legend Warren Buffett sold his entire stake of Costco stock in 2020 when the stock reached new highs. Buffett expected the bulk retailer's stock to slump in the years following its historic run-up. However, the Oracle of Omaha was a little premature on that exit, and Costco's stock surged another 50%+ after he liquidated his holdings, reaching an all-time high of over $600 per share.
Perhaps Warren Buffett underestimated Costco a little. Had he held, his holdings would've gained another $860 million in value over the following two years.
On the other hand, billionaire Charlie Munger, Buffett's partner at Berkshire Hathaway and the main reason Buffett took a stake in Costco to begin with, still holds his personal Costco stock -- over $90 million worth. He also still sits on Costco's board of directors.
While Munger stated he's not buying additional Costco stock at this time, he also said he never thinks of selling. Munger believes Costco will "be an absolute titan on the internet" and will remain a strong company for the foreseeable future.