How Costco will make the most of coming inflationary pressures
Inflation. Fortunately, it’s not something Americans have had to worry about for years, but it is now raising its ugly head. While many retailers fear the effects on business, Costco is one retailer that says, “Bring it on! ”
From April 2012 to February of this year, the 12-month average consumer price index hovered around or below 2.0%. It then skyrocketed to 2.6% in March and 4.2% in April. The latest 12-month rise in the CPI is the largest since a 4.9% increase for the period ending September 2008, the Bureau of Labor Statistics reported.
The Federal Reserve immediately followed with reassuring words: “The Committee will aim to achieve inflation just above 2% for a period of time so that inflation averages 2% over time and inflation expectations long term remain well anchored at 2%. ”
With the Fed roughly guaranteeing an extended period of inflation topping 2%, that will be bad news for many US households. In a survey conducted late last year by Highland, nearly two-thirds of those polled said they lived paycheck to paycheck. And an oft-cited Nielsen study found that even one in four households earning $ 150,000 or more is in the same boat.
Regardless of their income, some 60% of American adults between the ages of 21 and 62 feel anxious about their personal finances. The high levels of stress and anxiety induced by the pandemic, compounded by the latest worries of people that they cannot keep up as prices rise, will continue to provide favorable winds for discount retailers who offer more for less.
Maybe no one will benefit more from these fear factors than Costco. Unlike Walmart or dollar stores which primarily target low-income consumers forced by circumstances to spend their money, Costco appeals to high-income consumers who have the discretion to pay $ 60 to $ 120 per year for the privilege to shop there.
With a carefully selected assortment of consumer products from top brands and its popular private label Kirkland, Costco’s 110 million members enjoy significant savings on daily necessities offered in bulk to fill pantry shelves.
They also take advantage of opportunistic discounts on clothing, jewelry, health and beauty, electronics, sporting goods, appliances, furniture, home furnishings and other basic household items. Gasoline, pharmacy, optics, food courts and transportation are ancillary services.
Throughout the pandemic, Costco was a retailer that its members could count on with sales up 9% in fiscal 2020, which ended August 30 of last year, reaching $ 163 billion. And it’s been even better since then, with net sales up 17.7% year-to-date through the third quarter of 2021 to $ 130.6 billion. The third quarter alone saw a 21.7% increase in sales. It far exceeded the expectations of stock analysts.
While the company has offered no financial guidance for the coming quarters, Costco CFO Richard Galanti predicted in the latest earnings call that price inflation at its selling level would be between 2, 5% and 3.5%.
“Inflationary factors abound,” he noted. “These include higher labor costs, higher freight costs, higher transport demand, as well as container shortages and delays in ports, increased demand in various categories of goods. products, some shortages of everything from shavings to oils and chemical supplies, and, in some cases, higher raw material prices.
Costco is well positioned to mitigate these inflationary pressures. He has managed to keep his shelves stocked by adjusting orders and, in many cases, loading them ahead of time to have a sufficient stock of high-demand items.
Its acquisition of the Innovel logistics network a year ago, and now called Costco Logistics, has enabled the company to deliver bulky and bulky items to customers in record time, from two weeks to five to seven days. Many of these large sales were made through e-commerce, as the typical Costco store can only display one or two of these larger items. But dozens can be posted online.
This has been a boon to business, with Galanti reporting increases of 30-50% across all categories including outdoor patio furniture, indoor furniture, mattresses, exercise equipment and TVs.
Overall, e-commerce has been on a roll with same-store sales growth of 41.2% in the third quarter and 65.1% year-to-date.
While Walter Loeb, another Forbes.com contributor, suggests that Costco still has work to do to increase e-commerce penetration, digital has helped the company attract younger consumers who tend to click first and then to visit second. Galanti noted that same-day fresh food delivery provided by Instacart was a strong draw among next-generation customers.
At least for now, Galanti says the company is staying the course on its membership prices. But given that historically the company has increased membership fees roughly every five years, and now is the fourth year since its last increase, it could happen sooner rather than later.
While prices can go up a bit for items like its $ 4.99 roast chicken and $ 2.99 bottled water packs, Costco has a lot of flexibility to keep costs down thanks to its strong relationships. with suppliers.
Noting that many CPG companies have announced increases, Galanti said, “We can do a job as good as any given our buying power and the limited number of benchmarks to mitigate. [price increases] as best we can. That on average, our competitors probably take them as quickly, if not a little faster than us, that’s a positive point. “
If inflation continues to hit current levels of 4% and above, and Costco can manage its margins to keep price increases well below, good days are ahead for both Costco and its customers.