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Dive Brief:
- Costco Wholesale CFO Gary Millerchip said Thursday that the company’s “goal is always to be the first to lower prices” where it sees opportunity to do so, noting on the retailer’s fiscal fourth quarter earnings call that it dropped its prices on several of its store brand items during the 16-week period ended Sept. 1.
- During the latest quarter, Millerchip said the Issaquah, Washington-based warehouse club retailer cut the prices on such items as Kirkland Signature macadamia nuts to $13.99 from $18.99, on 3-liter KS Spanish olive oil to $34.99 from $38.99, and on KS baguette 2-packs to $4.99 from $5.99, according to a Seeking Alpha transcript of the call.
- At the same time, inflation remained “effectively flat’ in the quarter across core merchandise, with a “slightly inflationary” environment around food, sundries and fresh food, he said. There’s a “mixed view” on commodities, with items like corn, flower and sugar being “deflationary,” whereas he said there was more inflation on such items as butter, cocoa, eggs, and cheese.
Dive Insight:
Millerchip’s comments on pricing come about a month after Vice President and Democratic presidential nominee Kamala Harris went on the offensive against the rising cost of groceries. As part of her broader economic plan, Harris said she would enact the first federal law against price gouging by food suppliers and grocery stores, CBS News reported, as grocery costs have jumped 25% since January 2020.
Costco did not immediately respond to a request for comment. Morningstar Equity Analyst Noah Rohr said he doesn’t think Millerchip’s comments or the company’s ambition to lower prices are a result of the recent public scrutiny on pricing — though it’s possible they’re feeling some pressure — but rather that the approach is part of the company’s long-time emphasis on maintaining or widening its price gaps with competitors.
In general, Costco tends to price lower than competitors because it sells products in bulk quantities and controls costs, Rohr said in an email response to sister publication CFO Dive’s questions. For example, its selling, general and administrative expenses are about 9% of sales, whereas that ratio for such companies as Walmart and Target is about 20%. In addition, he said Costco typically earns a gross margin on unit sales of 11% compared to the 20%-30% range where most retailers’ margins land.
So, while it’s tough to say how Costco pricing compares because much will depend on competition, region and product category, “I think Costco’s pricing is fair and, in most instances, its low-price value proposition is superior to that of its peers,” and worth the membership, Rohr said.
In its fourth quarter, the company reported net sales rose 1% to $78.2 billion year-over year, while net sales for its fiscal year rose 5% to $249.6 billion. During the quarter ended Sept. 1, the company opened 14 new warehouses including 10 in the U.S. and had 35.4 million in paid executive memberships at the quarter’s end, up 9.6% from the year-earlier, Millerchip said on the call.
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