What Makes This Retailer So Addictive?

Warehouse retailer has some of the lowest margins in the business, because the membership fees it charges shoppers allow the company to earn a tidy profit while still passing on incredible savings to its members.

Costco's low prices haven't just benefited customers: Shares have walloped the market, returning 11,000% over the past two decades. However, with prices near their all-time high, is the ride over for Costco investors? To answer that, we've compiled a premium research report with in-depth analysis on whether Costco is a buy right now, and why. Today, you can get a sneak peek into how this world-class retailer keeps its members happy. It's not just that members get great deals on good products, but the shopping experience itself has been carefully constructed: There are only a small number of items, which prevents customers from feeling too overwhelmed, and store managers strive to make shopping at Costco feel like "treasure hunting." Here's more, from our premium report:

The decision to focus on a small number of items means that Costco's buyers need to act not only as hard-nosed negotiators, but as curators who can make decisions about what shoppers want for them. While this could be a liability, a tight understanding of the company's customer base has allowed Costco to turn its overall lack of selection into an advantage.

About three-quarters of what Costco sells are what the company calls "triggers," important staples like soups, cereals, and toilet paper, of which Costco is the world's largest vendor. Dependably low prices and high quality for these items keep members returning. Filling out the rest of Costco's shelves, however, are "treasures": extraordinary deals on unexpected items like cashmere sweaters, plasma TVs, prime Wagyu beef, and even diamonds. Buyers often order large quantities of these items when conditions allow for unusually low prices, but once the items fly off the shelves, they might be gone forever, to be replaced next week with whatever else strikes a buyer's fancy. Combined with Costco's lack of signage or obvious "departments," wandering the store looking for toilet paper can feel like roving for treasure, and is a big part of the reason that the most common complaint from Costco shoppers is that they spent more money than they had intended.

Reliable earnings, wide moat
Put together, Costco's guarantee of good value as well as a shopping experience carefully designed to be enjoyable instead of stressful is a potent combination. In November 2011, Costco raised the price of its annual membership fee by 10%, to $55 for households and $110 for businesses. A year later, there has been no appreciable pushback from customers, as North American renewal rates actually increased to nearly 90%. Costco plans to raise membership fees slightly every five or six years, and it appears that members are all right with that.

Costco also books the revenue from membership sales in a lump sum, representing four quarters of income. This, combined with Costco's remarkably high renewal rate, gives investors very good earnings visibility. Since shoppers are unlikely to pay for multiple club memberships, Costco has a strong advantage in keeping competitors at bay. With a strong track record of growing same-store sales, and a plan to open 25 to 30 new stores per year for the near future, Costco Wholesale is on track to continue its market-beating performance.

We hope you enjoyed today's sneak peek. Our premium research report also digs deep into the opportunities Costco is looking to exploit, as well as risks the company faces. You'll also find reasons to buy or sell, a look at the company's management team, and the Foolish bottom line on Costco. Best of all, the report keeps investors informed with a full year of analyst updates. To keep reading, just click here to get your copy today.

The article What Makes This Retailer So Addictive? originally appeared on Fool.com.

Fool contributor Daniel Ferry owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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