Costco has a very different relationship with its customers than most retailers. Because people have to pay a membership fee to shop at the chain's warehouses, the retailer and its members are essentially on the same team.
While Walmart (WMT) and Target (TGT) certainly work to offer shoppers low prices, they also want to deliver the highest profit margin possible. Those two chains and major grocery players including Amazon (AMZN) and Kroger (KR) all have to balance value and the bottom line.
DON'T MISS: Costco Shares Interesting Membership News
Costco (COST) has to worry less about its bottom line because about two-thirds of its profits come from selling memberships. That means that the company and its members have the same goals. Both want low prices and the warehouse club works tirelessly to deliver that.
During the pandemic that meant Costco eating some of the cost of higher prices -- whether they were due to supply chain issues or supply chain issues -- rather than passing them onto customers. In those days, supply chains were tight as all of America seemed to need the same thing at the same time.
That was perhaps most notable when it came to toilet paper as shelves were bare because people used the bathroom more at home once they stopped going to work and school. It's not that we used more toilet paper, we just had to wait for production to shift to making the kind we use at home from the kind we used at the office.
Shortages, of course, lead to higher prices and the end of discounts, since you don't need to have a sale on items people have to buy. Those issues went well beyond toilet paper and Costco CFO Richard Galanti had good news on something that will impact members looking to make a major purchase during his comments in his company's second-quarter earnings call.
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Costco Sees Better Deals In Key Categories
When schools went to remote learning and a lot of adults had to work from home. demand skyrocketed for electronics. Every house seemingly needed more laptops and many wanted a new, bigger television. That demand pushed those products to higher prices and meant that traditional discounts were simply not there.
Galanti sees those pressures getting better.
"The big thing is, is working with the suppliers. Using electronics as an example, these are anecdotal stories. But during -- while sales were very strong for two years during COVID and supply chain challenges were still there, there were virtually no promotional things. There's now more promotional [deals[, he shared.
Costco has a reputation for working over its suppliers to get the best prices possible. That's happening right now, according to the CFO.
"We have -- our buyers are out there making sure that we're getting every promotional penny that's out there and being on top of that with our suppliers. That's part of what we do, but that's been more of a focus. Yes, we focus on the categories that are growing. Examples would be like apparel, which is very strong for us right now," he added.
Costco Puts Members Over Margin
While Galanti talks a lot about Costco working to keep prices down, even if it means accepting a lower margin, he provided an actual example of that during the call.
"In terms of core margin on their own sales, our core-on-core margin, if you will, it was lower year over year by 26 basis points," he said. "Most major departments, in general, were down, with fresh foods being down a little more than others. We're continuing to hold or drop prices where we can due to drive traffic and improve our competitive advantage."
That may become less necessary soon as Galanti noted that inflation has also started to come down.
"It continues to seem to improve somewhat. Recall back in the fourth fiscal quarter, which ended last August, our estimated year-over-year price inflation was 8% for that prior fiscal year. During Q1, the estimate on a year-over-year basis was about -- came down to 6% to 7%. In Q2, we estimate that the equivalent year-over-year inflation number has come down to 5% to 6% range and even a little lower than that toward the end of the quarter according to the buyers," he added.
