retail news in context, analysis with attitude

There is an interesting interview in CFO Magazine with Costco CFO Richard Galanti, in which he makes a number of salient observations about the membership warehouse club. Some excerpts:

• “There were two questions for us at the beginning of the downturn. One, were customers still willing to pay a fee to shop? Two, would they still come to Costco, which is a little farther away from the local supermarket, discount store, or drugstore? In fact, the one thing that increased dramatically over the last 12 or 14 months was the frequency of shoppers. Were people spending less? Yes. Were they more discriminating in terms of what they were buying? Yes. Were categories like jewelry, home furnishings, and bigger-ticket discretionary items the weakest? Absolutely. But whatever the level of sales decline, it was less than it was for traditional retailers.”

• “Years ago, when we stubbed our toe and announced that we were going to miss earnings for a quarter, an analyst put out a report on Costco with the subtitle, ‘It's better to be an employee or a customer than a shareholder.’ [Laughs] Wal-Mart is a great company and gets picked on more than it deserves. Certainly it has a lower wage structure and lower benefits, but that's improved some. We have a different [business] model. It's based on high volume, catering to businesses and more-affluent customers. We've figured out an efficient way that we can pay our people more and still drive down expenses as a percent of sales.”

• “Our average hourly wage in the United States is a little over $19 an hour. Our lowest starting wage in the U.S. is $11. If you're a full-timer, you hit the top of the scale by the end of your fifth year ... If you provide a living wage and affordable, quality health care, you'll get the best employees, which in the long term makes business sense as well.”

• “I doubt if we will ever be in all 50 states, at least not in the next five years ... There are some states that are smaller, where if somebody else is already there, there's not a whole lot of opportunity left. We're not rushing to go to Arkansas, where Wal-Mart is headquartered.
That being said, we think there are still a lot of possibilities to increase penetration in many of the markets that we're in, and we will probably be in two or three more states over the next few years.”
KC's View:
One of the best things you can say about Costco is that it seems to have successfully resisted the siren song of Wall Street, preferring to do the right thing for employees and customers and believe that in the end, this will turn out right for investors. Of course, this works better if you are a long-term investor interested in long-term sustainable value than one interested in the fast profit and the quick flip.

Personally, I think this the responsible approach. It’s that short-term approach that got so many companies into trouble and helped create the financial environment that brought us to the brink of economic disaster.

Maybe we could get Costco CEO Jim Sinegal to run the economy. I might have a lot more faith in government...