Costco Pressures Suppliers for Lower Pricing

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 some relief, Richard Galanti, executive vice president and chief financial officer, told investors yesterday.

"We don't have to carry three brands of an item,” he said in a conference call discussing second-quarter results. “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.

For the quarter, which ended Feb. 15, 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. For the 24-week half, net income declined 14.9% to $502.2 million, while total revenues rose 1.4% to $33.2 billion and comps, excluding gas and foreign exchange, rose 3% in the U.S, 8% abroad and 4% in total.

Second-quarter earnings were negatively impacted by a variety of factors, Galanti said, “primarily centered around overall weak economic conditions, particularly by the continued weakness in nonfoods sales and related margins. Results were also hurt by lower year-over-year gasoline profits and lower reported international profits [resulting from] the significant strengthening of the U.S. dollar.”

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