A Brief Primer on Costco's Distribution Network
Where stores are warehouses, and warehouses are depots...
By revenue Costco is the third largest retailer in the US after Walmart and Amazon. It’s a big employer too, but its workforce is much smaller than that of these other retail giants, due to its somewhat unique warehouse retailing model. They only have about 600 stores, as opposed to Walmart’s 4,600, Target’s 2,000, or Home Depot’s 2,000.
It might not seem at first glance like there’s much to Costco’s distribution network, as they give the appearance that they offer their membership direct access to it through their wholesale warehouses. And indeed, in some cases suppliers send their goods directly to their stores (which Costco refers to as “warehouses”), eliminating the intermediate entities that are typically part of a retailer’s supply chain.
But it would be better to think of Costco as curating the experience of “getting behind the scenes” for its 120 million members (⅓ of the US population) rather than as actually providing unmitigated access to a wholesale network. Typical supermarket product markup is somewhere between 25-50%; Costco’s is around 15%. It can afford the low markup because a) it’s collecting membership fees, and b) it doesn’t need to do much of the traditional work of a supermarket.
In addition, unlike a typical “warehouse,” Costco’s warehouses have a limited range of goods carefully selected by the company. The typical Costco warehouse will only have around 4,000 SKUs, whereas a supermarket might have over 30,000.
And many of its products are part of their own private label, Kirkland Signature, which was introduced in 1995 to replace the many and diverse individual private labels that Costco had developed up to that point. In 2021, Kirkland Signature generated $59 billion, about ¼ of Costco’s overall revenue. That’s more revenue than Nike, McDonald’s, or Kellogg’s.
As with all of our distribution network primers, this one comes with a map of Costco’s Distribution Network. If you have any updates to this map, please don’t hesitate to email us at ontheseams.newsletter@gmail.com.
Regional Depots
Costco maintains a network of 24 Regional Depots around the country, which from what I can tell are pure cross-docking facilities, made quite simple by the facts that a) storage can be handled at individual warehouses and b) no transloading is necessary, i.e., it’s all full pallets.
I’m uncertain as to the percentage of goods that flow through Regional Depots v. that which goes directly to warehouses, but according to this 10-K, the receiving and processing of goods “primarily” goes through the Depots before arriving at warehouses. Kirkland Signature works with a wide range of manufacturers all over the country and the world, and they’re absolutely taking advantage of a centralized distribution network.
Costco operates both “dry” (for non-perishables) and “wet” (for perishables) depots. The latter are sometimes referred to as “chill” depots. Most of the dry and wet depots are co-located. I’ve listed the square footage for many of their cold storage facilities in the map, which I found here. Here’s a glimpse at the basic operation in their Tolleson, AZ Regional Depot:
Notice the four-pallet electric jacks zooming about. In some facilities, they have five-pallet jacks, and supposedly they are working with the lift truck and forklift manufacturer Hyster on a six-pallet electric jack.
“Costco Logistics”
Costco adapted quite late to the e-commerce world, only stepping into it in October 2017 with their launch of CostcoGrocery. They’ve also partnered with Instacart and Uber for same-day deliveries.
In March 2020, Costco purchased Innovel Solutions for $1 billion. Innovel came with a workforce of 1,500 people, 11 fulfillment centers, and over 100 last-mile facilities, specifically for big and bulky items. Innovel has since become “Costco Logistics,” one branded arm of Costco’s logistical operations as a whole.
Costco Logistics handles about 85% of the company’s LTL shipments for e-commerce delivery. Most of that is for bulky items like major appliances, but I think its fulfillment center facilities are being used as direct-to-consumer two-day fulfillment operations for smaller items as well. There’s scant information about facility differentiation within Costco Logistics, but my guess is that the DDC facilities provide this service, whereas their smaller MDO facilities are part of their broader Market Delivery Operations.
MDO was first pioneered by Home Depot, and it looks like Costco just copied their program. The basic idea is that instead of going through their stores, bulky items like major appliances are received from suppliers at specialty MDO facilities, and are then delivered directly to consumers from there, sometimes with white glove service. At a new warehouse in Fresno, Costco is dedicating a portion of the facility (47,000 square feet) to the MDO, while the rest (roughly 200,000 square feet) is open to the public. I can imagine this basic strategy becoming commonplace for the traditional retailers trying to compete in the e-commerce space with their “stores as last-mile facilities” strategy.
Great info. Any idea on what their cost of distribution/cross docking is on a percent basis?