Smaller-Format Urban Stores? Not for Costco, Thanks.

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 and quickly rose to become a regional manager. He moved through various executive posts over the years before becoming president and COO in 2010, and he took over from longtime CEO Jim Sinegal in January 2012.

Wal-Mart and Target are seeing some success with smaller-footprint stores in urban areas. Jelinek explains why no such initiative is on Costco's roadmap.

To watch the full interview, click here.

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Austin Smith: A lot of the bigger retailers out there, companies like Target and Wal-Mart, are chasing customers into their -- the urbanization that we've seen, [City Target] has been popping up, seems to be pretty successful. Wal-Mart's had some smaller locations as well that have exceeded their expectations for success.

As a big-footprint retailer, are you guys looking at a similar strategy? Would you consider moving to smaller formats to catch that urbanization trend?

Craig Jelinek: If you look at -- where we're not exactly in downtown Seattle, we're awful close. We're probably 3 miles from downtown, which works just fine for us. People will come to us and shop.

We want to continue to keep what we do simple. If you start to drift and become complicated, it costs you a lot of money to be complicated. Then what starts to happen? It costs you more goods, your cost of labor -- when I say "cost of labor," your SG&A starts to go up -- and then all of a sudden where you were under 10%, now you start getting up to 11%, 12%, which means you have to start raising your prices to get you there.

At the moment, I don't see us going there. We don't like to be on multi-levels. Even in foreign countries, we have a few where we have two-story shopping, but we don't want that. We're doing everything to get to one-story shopping, no escalators for having to move customers up and down, because, frankly, the escalators break down. They're very expensive to maintain.

What we want to do is, if property is hard to come by, we'll go one-floor sales and maybe have two or three floors of parking, but we want to try to keep everything very simple.

Smith: I've often wondered the dynamic of these multi-level stores. The City Target we went in the other day is, just checking it out, it's three levels. What does the dynamic look like as far as customer behavior? Do people just not make it up to those second and third levels, or is it merely just transporting carts that is a big difficulty?

Jelinek: I think they make it up there, but not as often. I think -- transporting the carts is an issue, but in our business particularly, we're very strong also in the food and sundries part of the business, so you have to go up there with a shopping basket because you're carrying meats and items like that.

I think in our business it's just more difficult to do. We'd just as soon stay away from it. We have found where we do have multi-levels it's considerably more expensive over a year's time to run that business.

Smith: Especially with the huge pallets. I can imagine those just don't translate very well.

Jelinek: Not only -- they don't go by escalator, but you have to take those huge pallets down by storage elevators. There's a big expense to putting pallets in a storage elevator and going up and down.

Smith: Makes a lot of sense.

Jelinek: We've chosen to stay away from that as much as we can.

Smith: Seems like a good choice.


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