The Discounter that Undercuts Amazon and Still Comes Out Ahead
Last Friday a William Blair report landed on my desk saying that “Costco (COST) represents one of the best opportunities to invest in the growth of value retailing.” A store visit supports the theory.
A new Costco opened this summer a few miles from my home in Chicago, and everyone in the neighborhood has been talking about it. Constantly. Shoppers are clearly in love with the clean, bright warehouse, and that seems representative. Costco's companywide sales last year were up 14.2% to $87 billion. Same-store sales were up 6% in August and increased 10% in 2011 and 2010. Almost 90% of its members renew each year.
Almost a third of sales came from food, and it's one of the companies (see YCharts) stealing customers from grocery chains like Supervalu (SVU), Krogers (KR) and Safeway (SWY). Crabs are displayed on ice, as though just hoisted from the water. Produce is colorful and chilled. Some customers get downright evangelical about the meat counter.
But this is a discounter, and according to William Blair, it’s one of the few retailers whose prices can beat Amazon’s (AMZN). Many members do research before going to make sure they score deals. Take this blogger, for example – she found Skippy for 11 cents an ounce, organic mac and cheese for 97 cents a box, and extra virgin olive oil for 21 cents an ounce. GoGo Squeez Applesauce Packs are 47 cents a pouch at Costco, she pointed out -- that’s apparently up to a dime cheaper than Amazon, Target (TGT) and Wal-Mart (WMT). That kind of bargain-hunting can put pressure on margins. So how does Costco do on that front?
Respectable. Meanwhile, Costco produces more profits than Amazon does.
People roaming physical warehouses with shopping carts may find it easy to accidentally fill those carts with extra items they didn’t intend to buy... like a suitcase to replace the beat-up one at home, flowers for the kitchen table, or that addictive popcorn mix being sampled.
But Costco also runs a no-frills operation that eliminates unnecessary costs. It buys most merchandise from manufacturers and sends that to a depot (for reshipping within a day) or straight to the warehouse. It has people man the exits and keep shrinkage to less than 0.002% of sales, which it describes in filings as “well below those of typical discount retail operations.” It stocks 3,600 SKUs, which it says is 3% to 8% of the amount carried by competitors. It also won’t accept your Visa (V) or Mastercard (MA) and succumb to controversial swipe fees.
And reminiscent of Apple (AAPL), Costco sells inventory before it has even paid its vendors for it.
That’s all been working pretty well for Costco shoppers -- and investors.
And its PE?