What's Costco's Pricing Secret?

In the following video, the Fool's Austin Smith chats with Craig Jelinek, Costco's new CEO. Jelinek joined the company as a warehouse manager in 1984. He quickly rose to become a regional manager and then moved through various executive posts over the years. He became president and COO in 2010 and took over from longtime CEO Jim Sinegal in January 2012.

There's a simple reason Costco can bring consumers lower prices even than Wal-Mart. Jelinek explains and gives examples of other companies he admires in the retail space.

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Austin Smith: I wonder if you could explain the dynamics, in terms of purchasing power, that allows you guys to continually offer the lowest prices for consumers. Because technically, on paper, it would look like Wal-Mart or [Amazon.com] might be able to out-purchase you, but you guys are able to consistently provide a more affordable product in many instances. I'm wondering if you could explain that disconnect.

Craig Jelinek: Well, keep in mind it's not always how you purchase goods. You've got to purchase goods, and you purchase at the best possible price, right?

Now, when you look at our sales per item, they're much greater than Amazon or probably Wal-Mart, because we only have less than 4,000 items, where if you look at our competitors they have substantially more items; maybe eight or 10 times more than the 4,000, where the math doesn't work in terms of sales.

With that being said, we think we can bring efficiencies to a supplier which allows us to sometimes buy a certain item at a better price, but also our SG&A, which is what it costs us -- our administrative costs -- is less than 10%.

There's probably nobody close to us in terms of SG&A in the retail environment, that has a better SG&A than we do. If you look at Wal-Mart they're probably about 18%, and I think Amazon is probably at 22%, 23%, although they both have other means of margin revenue coming in.

But it's just as important to be efficient, to lower your expenses, because then you can work off of less margin in terms of selling merchandise.

Smith: Makes sense.

Are there any retailers -- in the broader space at all -- that you really admire, that you see and you say, "Wow, they really got it right," or "I admire their operations"?

Jelinek: I think Amazon's done a good job in terms of building a brand with their customer service. I think they've done a very good job of that. I think Whole Foods has got their niche, in terms of quality merchandise, and I think Trader Joe's is a company that pays very good wages. They've got limited selection and they've got great quality merchandise, and they've got a great reputation out there with the suppliers, so I think they've done a very good job.

Even a company called Aldi, which is starting to come to the U.S. -- they're a private company, but they're a very simple operation that cuts a lot of overhead out, and they've been very good at bringing merchandise to the market at a very low price.

Smith: You've got to appreciate that, then.

Jelinek: Absolutely. That's the name of the game.


Read/Post Comments (8) | Recommend This Article (13)

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  • Report this Comment On August 11, 2013, at 6:36 PM, ce185 wrote:

    And they do it without screwing over their employees- go figure.

  • Report this Comment On August 11, 2013, at 7:47 PM, TYPEONEGATIVE wrote:

    Uhhhhh, charging people $35-50 for a membership, many of which are hardly used

  • Report this Comment On August 11, 2013, at 8:20 PM, JP4baking wrote:

    that was a Good touchy feely story about Costco... how about doing a true story about Costco,

    the dark secret of Costco profits, and how they cheat and scam there Vendors to make a profit. ask him how Costco food department/buyers forces there vendors to market the hell out of there own product turn in the recipe in the sake of safety for costco customers, we pay the big bucks to sample it and than have to add a very expensive 10 different colors to our boxes and labels so if the product I developed and marketed is a great success with in 2 years in Costco stores, if Costco has the means and capability to duplicate your product or idea, they will than in turn discontinue your product and they start selling your

    product/idea in there private label, using a cheap black and white label with a cheap white box which brings down the price of the product, remember we food vendors do all the work, we did all the marketing, development we paid for all labor and training just to get this to be a great success only to have Costco use it vendors as a Bait and switch.. they are watching to see if the product is a great success only to see it gone in 2 years... and than they copy it and they sell it super cheap with no marketing because i did it for them.. and this has not happened to me 5 times with Costco.. so i no longer do business with this so call profit of a scam COMPANY.

  • Report this Comment On August 11, 2013, at 8:46 PM, JP4baking wrote:

    that was a Good touchy feely story about Costco... how about doing a true story about Costco,

    the dark secret of Costco profits, and how they cheat and scam there Vendors to make a profit. ask him how Costco food department/buyers forces there vendors to market the hell out of there own product turn in the recipe in the sake of safety for costco customers, we pay the big bucks to sample it and than have to add a very expensive 10 different colors to our boxes and labels so if the product I developed and marketed is a great success with in 2 years in Costco stores, if Costco has the means and capability to duplicate your product or idea, they will than in turn discontinue your product and they start selling your

    product/idea in there private label, using a cheap black and white label with a cheap white box which brings down the price of the product, remember we food vendors do all the work, we did all the marketing, development we paid for all labor and training just to get this to be a great success only to have Costco use it vendors as a Bait and switch.. they are watching to see if the product is a great success only to see it gone in 2 years... and than they copy it and they sell it super cheap with no marketing because i did it for them.. and this has happened to me 5 times with different products, .. so i no longer do business with this so call profit of a scam COMPANY.

  • Report this Comment On August 11, 2013, at 9:23 PM, respondee wrote:

    I have heard this complaint about Amazon and Walmart plus there are probably many more. Their business practices are objectionable.

    PLEASE learn the difference between "there" and "their" if will help you sound more professional.

  • Report this Comment On August 12, 2013, at 2:43 AM, Rick85015 wrote:

    Compared to Walmart. They are Saints.

  • Report this Comment On August 12, 2013, at 3:06 AM, Rick85015 wrote:

    Since I live so close to Costco. Buying my gas there. My membership is paid in my savings in a very short time. I have had a membership for at least 20 yrs. Never had a bad trip there. Great People, Great Service. I also have Sams Card. Can't say the same. Plus I think being closed on the Holidays. To give the Employees time with their Familes is great

  • Report this Comment On August 12, 2013, at 3:31 AM, vtsidha wrote:

    Costco is like every place else...They don't always have the best price. You have to shop around to get the best price.

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