September 12, 2006 5:49 PM PDT

Costco: Where tech changes, but hot dog prices don't

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August 31, 2006
SAN FRANCISCO--At Costco, everything is big.

The warehouse retail giant in its 2006 fiscal year, which just ended, sold more than 1.5 million TVs and $300 million worth of digital cameras on end-cap displays, said CEO Jim Sinegal. It also filled 26.3 million prescriptions, sold 2 million pairs of glasses, printed more than a billion photos and served up 63 million hot dog and soda combinations. The combo sells for $1.50, which has been the same price for 18 years.

"Forty-seven million people have Costco membership cards," Sinegal said during a presentation at the ThinkEquity Partners Growth Conference taking place here this week.

And let's not forget groceries. In the same time period, the chain sold $500 million worth of seafood around the world, 28 million rotisserie chickens in the U.S. and Canada, and accounted for 11 percent of the organic milk and 40 percent of the Tuscan olive oil sold in the states during the same time period. It also sold $805 million worth of wine, a figure that included $390 million of fine wines.

"We are the largest wine merchant in the country," Sinegal said.

Overall revenue for the chain for the first 52 weeks of fiscal 2006 (which ended Sept. 3) came to $57.8 billion, although the company cut the earnings forecast for the entire year. The average sales per store come to more than $125 million a year. The chain now has 487 stores and an online operation that accounted for $880 million in revenue the last fiscal year. Over the next 10 years, Sinegal thinks it's possible to double the size of the business.

Costco myths and facts
The retailer, which is now fifth in the U.S. and seventh worldwide, in some ways thrives on surprise. In the public mind, the chain is associated with blue-collar or middle-class shoppers. In reality, the average Costco shopper in the U.S. has an average annual income of $72,000, higher than the $59,600 average for the nation as a whole. Over 50 percent of the women and men in the top 10 percent income bracket shop at the chain.

As a result, the merchandise and brands sold at the store can take an upward tilt. In fiscal 2006, it sold over 96,000 karats worth of diamonds, as well as a $252,000 necklace sold recently at a store near the home office.

The store also doesn't sell as much of its Kirkland brand as you might think. Kirkland products only account for around 18 percent of sales. Sony, which many said wouldn't sell through Costco, has sold TVs there now for the last several years, Sinegal said. DeWalt, the fancy tool brand created by Black and Decker, turned down the chain for years. DeWalt is now sold at Costco.

Another little surprise is that the company really doesn't want to offer consumers too much at once. Instead, the store tries to limit the number of unusual deals and juggle the merchandise on display at any given time, according to. That way, shoppers don't overload.

"There is a treasure hunt atmosphere," said CFO Richard Galanti. "Whether its Callaway golf clubs, Prada handbags or a $12,000 tree house."

Galanti also emphasized that the store pays employees well. The average wage is in excess of $17 an hour. Contributions to health plans come to less than 10 percent. In all, the store has 125,000 employees.

So what's next? More stores, both in the U.S. and overseas. An opening at a store in 2005 in Chung Ho in Taiwan brought in throngs of shoppers. The mayor got booed during his speech because people wanted to start shopping, Sinegal said.

But where do they get those strange deals, like heavily discounted plasma TVs from Thailand or every season of Little House on the Prairie in multi-box DVD sets?

"It's the art form," said Sinegal.

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12 comments

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Hotdog combo
was overpriced 18 years ago.
Posted by volterwd (466 comments )
Reply Link Flag
Pay $50 annually for the ambiance of a warehouse
Who cares about their hot dogs? Why should consumers have to pay to shop in a warehouse? Where does the minimum of $2.35 billion annually in membership fees go? Is that how they can pay an average of $17 per hour? It doesn't go to the decor or shopping experience. Just think how it would be if all stores charged dues like Costco. Would you like that? The practice is contemptible. Costco treats customers like criminals and people can't get enough. The "Gestapo" checkpoint as you leave is ludicrous. "Show me your papers!" Again, what if all stores searched your cart upon leaving, would you go back? Costco's not smart enough to figure out a way to keep people from stealing at the checkout without forcing you through this gauntlet. How about the fact that they don't bag your stuff? Environmentally friendly, or just cheap? The goods are of better than average quality, but so what? The employees are some of the least helpful clerks I've come across, they would fit right in at the post office. They act like they're doing "you" a favor to serve you. There's no question that Costco targets wealthy people who don't care about fees. Poor people aren't good enough, i.e., big spenders, so Costco doesn't bother targeting them. Let these riff-raff peons have WalMart, right? What a great business model, charge people money for absolutely nothing and treat them like crap. I'm in their demographic, but I don't need them.
Posted by tjmile (3 comments )
Reply Link Flag
OTOH about Costco
I like Costco, and the employees at the one near me are very friendly and helpful. They are even nice as they check our reciept on the way out (a practice that I don't love but that goes quickly enough--there is almost never more than one person ahead of me--that it doesn't affect my day).

So why do I pay $45 a year to shop in a warehouse? There are certain things I like to buy in bulk for the convenience, such as toilet paper. The prepared foods, cheeses and produce are good quality at a very good price. For electronics, the return policy can't be beat--I returned a phone that stopped working after a year, without a recipt, no problem. The sampling is nice too, so I can taste before I buy.

Yes, there are some over-the-top expensive things, but you can save on everyday items. Do I save more than $40 a year? Yep. And if my $40 helps subsidize a higher wage and health insurance for a store worker, is that so bad?
Posted by its_betty (1 comment )
Link Flag
Re: Pay $50 annually for the ambiance of a warehouse
Well, their yearly fee is a bit high, but overall, I don't believe
they're a bad store in the least.

I have no problem with their employees being paid fair wages
and having decent health care.

I'll agree that I do NOT like the checkpoints as you exit. BJ's
Wholesale Club does that also and it's irritating as all heck.
Especially when you actually have to stand in line waiting for
them to check your cart.

Overall though, I like them.

Charles R. Whealton
Charles Whealton @ pleasedontspam.com
Posted by chuck_whealton (521 comments )
Link Flag
"Show me your papers!"
How many times have you ever arrived home after shopping to find that the product you purchased is not in your posession?. There are several reasons for the door check. First to make sure that you have everything you paid for and second, you have paid for everything. Cashiers make mistakes and this is a way to catch the mistakes before you leave the wharehouse, and get upset with Costco. Theft is a big factor as many people hide small product in big boxes. The check point approach benefits everyone. People who dont want to be checked are the people who are stealing from costco. enough said, thankyou,
Costco employee
Posted by tmwltrs (1 comment )
Link Flag
@tjmile - ive been a costco member for years, and years before when it was Price Club. I've been stopped due to discrepancies numerous times on my way out the door by those "gestapo" checking my papers. It has ALWAYS gone like this: "you were charged for 3 guacamoles but I only see 2 in the cart"
"did you get your ($42) book of stamps? No? Well I'll run back to the register for you"
"you have 13 bottles of wine on the receipt but only a case....oh there's the stray on the bottom of the cart"
Posted by hugethorn (1 comment )
Link Flag
re: COSTCO
SO many strong opinions and so little research or knowledge... First of all, let me say that I have no connection to Costco other than as a shopper and one person I know who works there. Costco makes much of their profits from the membership fees. This allows them to use a MUCH LOWER MARKUP on their products than most other stores. In addition, anyone who runs a business with employees knows that employee turn-over is a substantial expense, both in dollars directly, and efficiency and continuity indirectly. Costco is probably one of the best and most respected employers in the country. Costco employees tend to stay with the company longer, know their jobs better, and have a personal stake in the satisfaction of their customers. Yes, on a particular item on a particular day, you might find a lower price elsewhere. But, factor in their consistent high quality, liberal return policies, and helpful staff, and I have no quarrel with the small membership fee and the three second delay as they glance at my cart when I exit. Heck, these days I can save the membership fee in a couple of months at the gas pumps alone. I'm a fan!
Posted by inquiringlee (1 comment )
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