Costco has taken some very extreme steps to protect its low prices.
That included operating its own shipping fleet during the darkest days of the covid pandemic when the company experienced supply chain problems. Those efforts might be the biggest step any retail chain took to control prices during that high-inflation period where the supply chain became very constrained.
CFO Richard Galanti, who will step down from that position on March 14, explained what the warehouse club had done during its earnings call for its 2023 fiscal third quarter.
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"As many of you know, two years ago, we initially leased three ships and thousands of containers to help mitigate some of the significant overseas freight challenges that we were experiencing. Later, we added four additional vessels and several 1,000 additional containers with commitments made for up to three additional years," he shared.
Handling its own shipping wasn't just a question of controlling prices, it was also about keeping its stores well stocked.
"Procuring these ships and containers was integral to us being able to stay in stock for our members during those challenging times. It also allowed us to do so initially at a lower cost in the market rates at that time," he added.
Costco (COST) only wound down its shipping program in late 2023 when shipping and freight markets improved, according to the CFO.
And while that's an extreme example of working to keep costs low, Costco also bought a chicken farm in order to keep its famed $4.99 rotisserie chicken. The warehouse club also has buyers famous for working with vendors to find ways to take cost out of items in order to buy them at the best prices possible.
The warehouse club also has a secret pricing weapon that Galanti rarely talks about. In his final earnings call before retiring, however, he offered some insight.
Image source: Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images
Costco has a big way to save members money
Costco pioneered the house brand as being something more than a low-quality generic. Kirkland Signature, the warehouse club's signature brand was never about fancy packaging.
Its products look like old-school generics in very basic boxes. The contents, however, rival name brands. Kirkland Signature has credibility with Costco customers. They know that when they substitute a name brand for the warehouse club's house brand they're getting a quality product.
Packaging name-brand products under its house brand label has been a positive for the company, according to Galanti. He made it clear that Kirkland Signature allows the warehouse club to "get better deals, which means lower prices," he said during the company's first-quarter earnings call on Dec. 15, 2023.
He noted that when inflation was at it highest the company "saw probably the biggest increase in penetration of KS at Costco," he said.
Costco uses its house brand in a number of ways, In some cases, it simply knocks off name brands in areas like over-the-counter medicines. In other cases, the chain partners with name brands to offer Kirkland Signature products like whisky or wine where customers expect a certain level of quality but won't know the company producing the product.
It's a recipe where Costco customers can be comfortable buying Kirkland Signature because they know the company has sourced it from high-end providers. That allows them to comfortably buy these cheaper products which saves them money and keeps them loyal to the warehouse club.
Costco has good news for customers
Costco has been one of the few retailers that has been extremely open about inflation. Galanti has shared that the warehouse club has largely seen the effect of inflation disappear.
"Well, talking to the buyers, we've seen, you know, even during the quarter, we saw the trend toward zero inflation versus the one. But at the end of the day, the buyers are looking at three to six months. They have, on the fresh food side, commodities-wise, they haven't seen a lot. There are a few things that are up and a few things that are down but no giant trend either way," he said.
Galanti has talked in the past about how Costco has, in some cases, taken lower margins in order to not raise prices, With inflation hovering around zero, he has some good news for members.
"Look, as you have known us for a long time, we want to be the first to lower prices," he said.
The retailer has also been working to force its vendors to acknowledge that inflation has fallen.
"We're out there pressing our vendors as we see different commodity components come down and, certainly on the non-food side, as we saw shipping costs come down, things like that," he added.
Costco's efforts have paid off in another way. Shareholders are delighted. The stock rose 44.6% in 2023 and is up 13.6% so far in 2024.
The company will report fiscal second-quarter earnings after the market close on March 7.
