Retailers

Five Reasons Costco’s Sales Are Among the ‘Strongest in Retail’

CFO Richard Galanti talks pandemic surprises and a hesitancy to embrace e-commerce
Photograph: Shutterstock

Costco Wholesale Club’s success this year, and recently announced special cash dividend on its stock of $10 per share—amounting to an aggregate payment of approximately $4.4 billion (payable on Dec. 11)—wasn’t a forgone conclusion at the start of the pandemic, which favored traditional supermarkets and one-stop shops over specialty retailers and warehouse stores.

“Our strong balance sheet allows us to pay this dividend, while preserving financial and operational flexibility to continue to grow our business globally. Costco will continue to be in a financial position to take care of our employees, enhance the value of the Costco membership, and create shareholder value over the long term,” said Richard Galanti, EVP and chief financial officer of Costco, in a release. The special dividend marks Costco’s fourth in eight years.  

Earlier this month, Galanti discussed the warehouse chain’s pandemic journey during Morgan Stanley’s virtual Life After COVID Thematic Conference, for which Refinitiv StreetEvents provided an edited transcript. From the biggest surprises to the latest in the membership model, here are five ways the warehouse chain has thrived in 2020.

1. Patio Furniture Proves Pandemic Surprise

In April and May, sales at Costco warehouses were down and the membership-based retailer was preparing for the “worst case” if sales of discretionary nonfood items and bigger-ticket items took a serious dive.

“To our pleasant surprise, we saw a lot of that pickup,” said Galanti, during the Morgan Stanley conference. “People weren’t buying tickets to concerts, weren’t going out to eat, weren’t getting on airplanes or cruise ships or going hotels,” but they were spending on things for the home. Costco initially thought it would need to cut back on orders in March, but then found it was scrambling to keep everything from patio furniture to small-electrics and domestics in supply in June and July.

2. Bigger Is Better

In a pandemic, as shoppers try to socially distance as they visit stores less frequently, but stock up on food and beverages when they do, Costco has ticked a lot of boxes for consumers during COVID.

“So, your sales growth on a percent basis has been among the strongest in retail, probably in the top five of the companies we cover. On a dollar basis, it may be in the top three,” Morgan Stanley’s Simeon Ari Gutman told Galanti.

Costco’s trademark bulk offerings and category breadth, along with the massive square footage of its stores has undoubtedly contributed to its success during the pandemic.

“Again, I think we’ve been fortunately well-positioned through this,” Galanti responded. While Costco, like most grocers, put purchase limits on certain items such as beef, pork and poultry, three giant packages of brisket from Costco is good deal more product than three packages of meat at a traditional supermarket. And as a retailer that carries a wide variety of goods in addition to food and beverage, Costco not only took business from restaurants and foodservice operations, but also shopping malls (many of which were shuttered at the start of the pandemic), he explained.

“Certainly, particularly in the last few months, our shopping frequencies have come back and the basket is bigger, implying that there’s market share,” said Galanti. “When we look at … the industry data by product and category, we’re doing pretty darn well against that. And again, I think it starts with getting into the building. I think the safety protocols, the fact that our buildings are relatively voluminous or big … you feel a little safer when it’s a 12-foot aisle and a 24-foot ceiling than when it’s an 8-foot aisle and 16-foot ceiling.”

3. Membership in the Time of Amazon Prime

While the pandemic and social distancing has somewhat curtailed Costco’s ability to encourage shoppers to upgrade their memberships, and competition from Amazon with its Amazon Prime memberships intensifies, Galanti said the warehouse chain is holding its own.

“Analysts would report eight or nine years ago that 20% of U.S. Costco members had Amazon Prime. A year later, it was 32%. A year [after that], it was 48%. And at the end of the day, I think we’ve all learned that they’re not mutually exclusive,” said Galanti. “They both perform a good function. And so, we feel good about what we’ve done so far and [what] we’re continuing to do.”

4. E-Commerce Isn’t Everything

Speaking of e-tailer giant Amazon, how does Costco intend to compete in e-commerce? Costco partners with Instacart to offer some delivery, but the company isn’t convinced that online ordering, click-and-collect and delivery is the future of warehouse stores.

“We’re not everything to everybody,” Galanti asserts. “And we’re still reluctant to do the buy online and pickup in store other than [with] a few bigger-ticket [and] small-sized items, like jewelry.”

In fiscal 2019, Costco’s e-commerce represented about 5% of sales and for fiscal 2020, its about 6% for the year, but annualizing at 8% since COVID, reported Galanti. “Add to that Instacart, which we don’t include in e-commerce because they’re coming into our … warehouses to buy, that’s another whatever, $2 billion or $3 billion. I mean, it’s meaningful, but it doesn’t have to be 35% or 25% [of the business] or whatever everybody thinks. And so, I think it’s a model that has worked for us.”

And while Galanti isn’t saying "never" to embracing e-commerce more fully in the future, he did say, “At this juncture, we’re not looking to do some of the things that others are doing.

5. Fresh Food Fuels Success

Costco’s robust sales have also been driven by “some unusual things,” says Galanti, particularly with regard to fresh foods, an area of the store where profitability has traditionally been tempered by shrink and labor issues.

“Spoilage went greatly down and labor productivity went up a lot, both of which directly enhanced margins in fresh foods, which is a nice piece of our business,” noted Galanti, who said the boost in fresh “more than offset some of the negatives,” such as temporarily closing its optometry and hearing aid centers, reducing its food court business and losses to its travel departments.

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