Costco Ramps Up Private Label

ELLIOT ZWIEBACH

ISSAQUAH, Wash. — Costco Wholesale Corp. here said last week it intends to introduce additional canned and packaged goods under its Kirkland Signature label over the next few months.

Richard Galanti, executive vice president and chief financial officer, declined to pinpoint the specific items the company will offer, “but we're prepared to try everything.”

He said the company would be more specific about its plans in future conference calls.

“We tried a private-label mayonnaise two or three years ago, and a peanut butter, and underwhelmed everyone, so not everything works,” Galanti said. “But most things do work, and not a whole lot is sacrosanct in terms of branded goods. We want to offer both, but we want to show the quality of what we offer, and if we can get shoppers to be loyal to the KS brand, that's great long term.”

Costco's goal is to grow private-label sales to 37%, which “will take some time,” he said.

Galanti made his remarks during a conference call to discuss financial results for the third quarter and 36 weeks that ended May 9. For the 12-week quarter, net income rose 45.7% to $306 million, while sales climbed 12.3% to $17.4 billion. Comparable-store sales, excluding gasoline inflation and the strengthening of foreign currencies, increased 4% overall and 3% in the U.S. alone.

For the year to date, net income jumped 22.3% to $871 million, while sales were up 9.7% to $52.7 million, and comps, excluding gas inflation and foreign exchange, rose 3% overall and 2% in the U.S.

Galanti said all product groups in the fresh foods and sundries category showed positive comps for the quarter, mostly in the mid- to high-single-digit range. Costco anticipates “very modest” inflation over the next six months, he said — in the range of 1% to 2%.

Average transaction size at Costco rose more than 6% during the February-April period, Galanti said, while average frequency was up more than 3.5%. “People are spending a little more on food but a little less overall on high-ticket items like TVs,” he explained.

“If there's any silver lining in this horrible economy over the last year and a half, it is that the warehouse clubs in general, and Costco in particular, have been recognized as the extreme-value proposition for fresh foods. People are shopping with us more frequently than they used to, and some of that is coming from … the supermarket business.”

Asked if Wal-Mart Stores' price rollbacks were having an impact on Costco, Galanti replied, “We haven't seen any impact, but historically we are less impacted by what Wal-Mart does vs. what Sam's Club is doing. Right now, Sam's is taking a very small number of items down dramatically, and we take our prices down with them.”

Costco has opened one store in the fourth quarter in St. John, in New Brunswick, Canada. Five more are planned: two in Canada; one in Oregon; one in Queens in New York City; and one in the United Kingdom.

Q3 RESULTS