The warehouse club’s CFO explains how the company has profited from the struggling economy (and why it’s good for members).
In many ways, Costco (COST) – Get Costco Wholesale Corporation Report was built for the pandemic.
The membership-based channel focuses on meeting basic customer needs, but it is not married to any particular packaging or brand names.
When you join the Warehouse Club, you know that what’s on its shelves is going to change, and you might need to take home 12 rolls of Brawny Paper Towels instead of the Bounty two-pack. (PG) – Get the Procter & Gamble Company (The) report you might buy on a normal trip to the grocery store.
This understanding made it easier for the channel to adapt when the covid-related lockdowns started and people couldn’t/didn’t leave their homes very often.
Members weren’t buying in bulk just because that was how they got the best deals; they were doing it because it made sense to buy cereal, toilet paper and other necessities in large quantities during a pandemic.
Bad timing for the world in many ways created a perfect storm for Costco. CFO Richard Galanti spoke about it at the channel’s press conference call for fourth quarter results.
“And in a perverse way, even though none of us ever wish covid on anyone, from a bottom line perspective, although it’s had a negative impact on some businesses, it’s had a positive impact on many other of our businesses. And we seem to keep some of that market share“, said Galanti.
Tough economic times could be good for Costco members
While many Costco items are still in demand, sales of larger items fluctuate and demand patterns have been disrupted by the pandemic.
This led to Costco, along with rivals Walmart (WMT) – Get the report from Walmart Inc. and target (TGT) – Get the target company reportto end with too much inventory on some expensive items.
Walmart and Target both overbought on TVs because demand slumped due to a mix of cautious people and many Americans upgrading their TVs during the pandemic. Costco isn’t immune to these issues, which in the past have led to even better deals for customers, but Galanti doesn’t seem overly concerned.
I remember the one in 2008, 2009, at the end of that year, which went from a recession to the Great Recession. It lasted four or five years. And that — the moment we got into it — and it was pretty quick when that happened, we saw, like, a downturn in seasonal things, which were, like, barbecue grills and patio furniture and things like that. Big ticket, those kinds of big ticket items have slowed down.
And if I go back to my notes I’m sure we talked about the fact that we had x million extra dollars in markdowns just to get through this thing so we didn’t let it hang around after the first of the calendar year.
Broadly speaking, however, the CFO sees the tough times as a positive driver for the warehouse club.
“Generally, one of the positive points of our model [is] we did well in good times and bad. And in good times, of course, people have money to spend. And in bad times, people want to save,” he added.
Costco bets on value
The warehouse club has seen its membership grow steadily during the pandemic and it has managed to retain most of those members as conditions improve.
“We felt we had built some additional market share during that. So I think overall we’ve found – and I think the good news is that even in bad times we don’t consider ourselves not like having to be as conservative as maybe others might be,” Galanti said.
The CFO says the price of an item is not the issue. It’s more about the overall value proposition.
“We’ve generated value at greater value and higher prices. If we’re going to be a little conservative, fine, but [we’re going to] move forward on the principle that we offer the best value possible,” he added.
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This story was originally published October 10, 2022 8:56 a.m.