"We sell 30-pound containers of mayonnaise," Costco
The retailer of pianos, coffins, and, yes, 30-pound jars of mayonnaise -- along with hundreds of other goods in bulk -- has managed to continue growing during the recession, impressively avoiding any layoffs in the process.
How does Costco stay ahead of competitors such as BJ's Wholesale Club
Barriers to growth in a recession
The lackluster real estate market has been an impediment for Costco, making it difficult for the company to open stores in new locations. "I thought there would be plenty of real estate opportunities to go out and grow the business, but they've been tough to come by, because in many instances nobody knows who owns the land anymore." Sinegal told us that Costco tried to broker a deal for a major shopping center in Virginia, but both the developer and the bank went broke: "So now that deal will probably die."
Sinegal also said that Costco has also struggled with deflation. The weakening dollar has pushed international business results down 8% in U.S. dollars for the first 11 months of the fiscal year. Results were up 9% in local currency terms.
Likewise, gasoline has been a big drain on Costco. Gas sales have skidded by nearly $2 billion since last year. However, the point of comparison is more pronounced, since the price of gas was around $4 per gallon last year. Additionally, as fuel prices have fallen, Costco has lowered prices. "We did our best to try to lower prices for the consumers," Sinegal said, "which is why good companies not only find a way to thrive, but to build market share during tough times."
Sinegal on pricing
Sinegal observed that as commodity prices have come down, so have retail prices. He noted that the consumer has become a lot smarter about what she or he buys:
You're seeing that the private label is becoming much more important across the country. [It's] not just in Costco, where our Kirkland Signature is very popular, but in Kroger
(NYSE:KR)and Wal-Mart (NYSE:WMT)and in every retailer across the country because oftentimes people realize you're going to get the same product in a private label package that you would get from a brand product.
For example, Costco sells Kirkland Signature detergent for $13.99 and Procter & Gamble's
(NYSE:PG)Tide Liquid at $20.99, and there's a good chance that consumers will purchase the less-expensive product.
Though food prices have declined now that fuel prices have fallen, Sinegal said he thinks we're rotating through that; he expects we'll see prices come back up a bit at some point. That said, he doesn't think hyperinflation is on the horizon: "I don't see anything at the moment that would suggest we're going to have super-inflation. The products we're bringing from overseas are pretty much holding their own in pricing, and so I don't have any fears of super inflation at the moment."
Economic metrics for measuring success
Each industry and company has different metrics it examines to measure its success. For Costco, the primary metric is sales -- something Sinegal looks at every morning. "We all view it as a top-line company," he said. That said, Sinegal also looks at ratios such as membership sign-ups, the frequency of customer visits, and how much people are purchasing -- or what he calls the "size of the basket."
This year, the size of the basket is down because of deflation on food items and gas, along with fewer purchases of more frivolous items such as jewelry. However, Sinegal said the frequency with which customers are shopping with Costco is the highest it's ever been. "As things turn," he explained, "they'll start to buy again."
Interested in more from Jim Sinegal? Follow the links below for an expanded conversation with the CEO.
Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. Wal-Mart and Costco are Inside Value picks. Costco is also a Stock Advisor recommendation. The Fool owns shares of Costco and Procter & Gamble, which is also an Income Investor pick. The Motley Fool has a disclosure policy.