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.

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.