Tuesday, May 6, 2008

Costco's source of low marketing expenses

Here is an extract from Costco's 10-K statement for 2007:

We generally limit marketing and promotional activities to new warehouse openings, occasional direct mail marketing to prospective new members and regular direct marketing programs (such as The Costco Connection, a magazine we publish for our members, and coupon mailers) to existing members promoting selected merchandise. These practices result in lower marketing expenses as compared to typical retailers. In connection with new warehouse openings, our marketing teams personally contact businesses in the area that are potential wholesale members. These contacts are supported by direct mailings during the period immediately prior to opening. Potential Gold Star (individual) members are contacted by direct mail or by providing membership offerings to be distributed through employee associations and other entities. After a membership base is established in an area, most new memberships result from word-of-mouth advertising, follow-up messages distributed through regular payroll or other organizational communications to employee groups and ongoing direct solicitations to prospective Business and Gold Star members.

I wanted to check the marketing expenses as a proportion of net sales for Costco and its main competitors. I was not able to do it directly because none of them report exclusive marketing expense, but they report SG&A expenses that include marketing expenses. Here's each player's SG and A as an allocation of net sales:

Costco - 9.8%
Walmart - 18.8%
Target - 22.3%
BJ's Wholesale - 7.9%

Since BJ's is in the east coast only, I have never been to its store, so I don't even know how they work. I am still working on identifying the factors for difference in S,G and A between Costco and BJ's.

PS: I can't believe Blogger doesn't allow ampersand character in its blogs. One more reason why I like MSN Spaces better. :-)