Costco has built its business on offering predictably low prices.
The company makes clear that it's not going to spend money in many areas because that would force it to charge more for the items in its no-frills warehouses.
The company offers a very simple proposition to potential customers: Pay $60 for a basic Gold Membership or $120 for an Executive Membership, which comes with 2% cash back up to $1,000 a year, and you get access to the chain's warehouses, which offer low prices.
Related: Walmart has a secret weapon in the war on retail crime
Costco (COST) has also been transparent with members on prices and costs. Chief Financial Officer Richard Galanti, who will step down in March, has been refreshingly honest about inflation while many other companies have leaned on the perception of higher costs as a way to raise prices.
He noted that while the company had expected 1% inflation during the first quarter, the actual number was lower.
"Well, talking to the buyers, we've seen — you know, even during the quarter, we saw the trend toward zero versus the one. But at the end of the day, the buyers are looking at three to six months," he said during the chain's fiscal-first-quarter earnings call.
"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 are down but no giant trend either way. Look, as you know us for a long time, we want to be the first to lower prices."
While Costco generally wants to be the first to lower prices, the chain is not above grabbing wider margins when the right opportunity presents itself.
Image source: Kevork Djansezian/Getty Images
Costco makes more on gasoline than you think
Most Costco warehouses have gas stations that let members fill up for less than what most gas stations charge. In most cases, Costco has the lowest-priced gas in an area, and a member who fills up there regularly can easily offset the price of their membership just in gasoline savings.
That does not mean that Costco always keeps its margins thin on gasoline the way it does on most items it sells. Instead, the chain looks to keep its prices low relative to its competitors.
"You know, the thing about gas is, I think everybody out there that has gas stations, what we have found is we've been able to see improved profitability, not just in the last quarter or two, but over the last few years, the last three to five years, improved profitability in gas because others are making more and we're allowed to make a little more," Galanti said.
Basically, the CFO admits that Costco wants to be a relative bargain when it comes to gas, rather than offering the lowest price possible.
"When we do our competitive price shops on gas, which we do weekly at every gas station we operate with neighboring competitive gas stations, our value proposition is actually increased — increased number of cents per gallon than we've ever seen," he said. "So, that's been, if you will, a win-win for us."
Costco shares guidance on deflation
Making comments on inflation has become a political minefield. If a business leader says that the impacts of inflation have largely gone away, then they run the risk of coming up against what people feel — which can often be very political.
The right wing has long blamed President Joe Biden for gasoline prices, rising housing prices, and inflation without citing the actual numbers. Galanti has always been honest about what Costco has seen when it comes to inflation.
"Most recently, in the last fourth-quarter discussion, we had estimated that year-over-year inflation was in the 1% to 2% range. Our estimate for the quarter just ended, that inflation was in the 0% to 1% range," he said.
During the call the CFO explained why prices have come down on many items.
"A bigger deflation in some big and bulky items like furniture sets due to lower freight costs year over year, as well as on things like domestics, bulky lower-priced items, again, where the freight cost is significant. Some deflationary items were as much as 20% to 30% and, again, mostly freight-related," he added.
Related: Veteran fund manager picks favorite stocks for 2024
