Costco Gets Tough on Suppliers

ELLIOT ZWIEBACH

ISSAQUAH, Wash. — Costco Wholesale Corp. here is telling suppliers who maintain high prices that it may consider eliminating some brands if they don't offer relief, Richard Galanti, executive vice president and chief financial officer, told investors last week.

“We don't have to carry three brands of an item,” he said. “However, we see opportunities for manufacturers who are willing to help our members.”

Galanti also said penetration of private-label items is escalating rapidly, rising to 22% in the food and sundries categories at Costco. “Where we might normally see increases of one-half to one basis point in private-label penetration during the first 24 weeks of the year, we've seen penetration of 300 basis points in that period this year,” he said during a conference call to discuss financial results for the second quarter and first half, which ended Feb. 15.

According to Galanti, Costco began sacrificing margin for price late last year after watching its comparable-store sales fall from 5% in September to 2% in October to 1% in November. “We're prepared to sacrifice margin when comps are going in the wrong direction,” he explained.

“Bringing margins down first is the way we operate, and though we are a for-profit company, we believe we'll be better served as we come out of this economy because of the things we're doing now.

“We will continue to be aggressive on prices, and as commodity prices continue to fall, we will try to grow our bottom line. But we will do whatever is necessary relative to competition, because we believe the customer gets it and is more value-conscious than ever before.”

For the second quarter, net income fell 26.9% to $239.7 million, while total revenues dropped 0.7% to $16.8 billion. Comparable-store sales, excluding gasoline deflation and foreign exchange, rose 4% in the U.S., 8% internationally and 5% overall.

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