Company Interview: Costco Wholesale Corporation - Richard Galanti, CFO And Senior Vice President
March 29, 2010 - The Wall Street Transcript has just published Retail Report offering a timely review of the Retail sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Richard Galanti joined Costco Wholesale Corp. in 1984 as Vice President, Finance, and became Senior Vice President and CFO in 1985. Subsequent to the merger of The Price Company and Costco in 1993 to form PriceCostco, Mr. Galanti became Executive Vice President and CFO, a position he continues to hold today. Previously, Mr. Galanti was in investment banking with Donaldson, Lufkin & Jenrette Securities Corporation, New York, where he provided a variety of financial-related services to both public and private corporate clients. Mr. Galanti received his MBA from the Stanford University Graduate School of Business and his B.S. in economics from The Wharton School, University of Pennsylvania.
TWST: Given the competition for budget-conscious consumer dollars right now, tell us what differentiates Costco from its competitors, both online and offline?
Mr. Galanti: First and foremost, pricing and quality. In our brick-and-mortar operations, which is 98% of our $75 billion in annual sales, we are the low-price leader and the extreme value retailer across the various merchandise categories that we sell. Our average markup on merchandise is about 11%; this compares to 20% to 25% at supermarkets, 30% to 35% at home improvement retailers and 50% to 100% at traditional mall retailers. Online, which for Costco (COST) is approaching $2 billion in sales annually, our markup is even lower than the 11% figure. The original premise of Costco, both 26 years ago when we started and also today, is selling high-quality products and services at the lowest possible prices to our members. We are the extreme value proposition. We feel it works well in prosperous times and in these tougher times, we feel it's worked well in a little different way. Certainly over the last year and a half, since fall of 2008, when the economy started getting hammered, we, like all retailers, saw continued relative strength in food and sundries, health and beauty aids, and fresh foods areas - purchases that are generally considered non-discretionary.
On the more discretionary non-foods side, we saw weakness. Generally speaking, the more discretionary and the bigger the price point, the weaker the business was. I think what differentiated us was even within all those respective categories, traditional retailers, whether it was apparel or automotive or sporting goods or office, whatever traditional retail sales were down in their respective category, we fared better than that. If the retail jewelry stores at malls were down 30% to 40%, we were down 15% to 20%. Our "minuses" were not as bad. And we still had our members coming in on a more frequent basis than ever before. We believe that what drove our members back was certainly the basics of food, and sundries and the like. We sell great merchandise at the lowest possible prices. More than half of our business is food and sundries, and that certainly drove people into Costco on a more frequent basis. In the last 15 to 16 months, since the economy declined back in the fall of 2008, we've actually seen the shopping frequency of our members increase to a level never seen before.
If you go back for the last 10 or 15 years, our average frequency was generally in the 0% to 1.5%-plus range, up. In the last year and a half, we've seen it in the 3%-plus to 5%-plus range increase over the prior year. So while still small numbers, it can make a difference when you're talking about 30 million-plus member households. One question that people had when the recession first hit was, "Are people really going to go to Costco? It's a little further out, and I can't get out of there without spending at least $300 because I buy all this other stuff." The fact of the matter is that great prices and great values on basics is what drive people to Costco as well. So I think the big thing that differentiates us - and it hasn't changed over the last 25 years - it's the lowest average markups across a lot of categories on great-quality merchandise.
TWST: As the economy improves and consumers spend more freely, what strategic plans do you have in place to retain new members who signed up as a result of the recession?
Mr. Galanti: We will stick to the strategy that has served us well in good times and bad, and that is sell the best-quality goods at the lowest possible prices - period. I might add, one thing that I believe has made us a strong retailer during these tough economic times has been our ability to procure a variety of additional high-end brands that previously were unavailable to us. In the fall of 2008, when traditional high-end retailers were cutting back on merchandise commitments, we became a viable option to take that merchandise. Many of those manufacturers are now selling Costco direct for the first time.
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