Costco Hurt by Discounts?

Costco has been a bright stop in the recession.

It makes sense that the wholesale club has done well when consumers are cutting back, buying in bulk and looking for deals as businesses everywhere are laying people off and credit is tight.

But the company’s second-quarter results might have revealed a chink in its armor. Earnings were down $90 million from the prior-year quarter, or 27%, and same-store sales fell 3%, Costco’s first comparable-sales dip since 1994, says one article.

Price cutting, as well as a decrease in fuel costs, are the main culprits in the damage to Costco’s earnings.

So another big irony comes forth in this economy: A company that has built an empire on high-quality goods at low prices and has so far succeeded in the recession because of that formula is now getting hurt because it’s selling things too cheap.

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10 Responses to “Costco Hurt by Discounts?”


  1. 1 Derrich March 5, 2009 at 9:53 am

    Perhaps it was a result of this short-lived reduction in prices?: “Margins in foods and non-foods were also negatively affected by increased pre-holiday seasonal markdowns…”

    Gas and non-food margins have been hurting the Company for awhile now. And the exchange rate between from the UK locations is super low. Ouch.

  2. 2 G Joyner March 5, 2009 at 10:21 am

    BJ’s gave away freee 60 day memberships in at least two quarters of 2008. They drove incremental business by exposing loyal COSTCO (and other non-member)customers to their stores. Any sales generated by that move could be a direct hit to COSTCO revenue figures. I became a COSTCO memeber becuase they did the same thing several years ago. I also took advantage of the BJ’s offer and spent there on several trips – because I was there. May not renew, but the free membership certainly cost COSTCO some of my personal business in the short term.

  3. 3 Alex March 5, 2009 at 10:36 am

    Costco is a great store, but you cannot expect a retailer to profit in this economy unless they are selling crap at dirt cheap prices (re: wal-mart), and if dollars are going to wal-mart it means fewer dollars are going to other retailers (eg, costco, target, etc) that have been hurt in this economy. Not only do people want to save cash, they are not shopping for high-ticket items. Even if the costco margin on a $300 watch is thin, no one is buying the $300 watch.

    One area I would keep an eye out on is costco wages – they are one of the highest paying retailers out there- and store managers make upwards of 80k+ which is unheard of in retail – i wonder if these will fall in this economy – thoughts?

  4. 4 Ladislao March 5, 2009 at 3:17 pm

    Hey Alex, I agree with you, BUT Costco is the ONLY retail outlet (and Sam’s Club is starting to change their policies to more closely match Costco) that if you’re not happy with any product NO MATTER what the issue you can return it for a full refund. With the exception of TV’s, Camcorders, PC’s, Digital Cameras & iPods. But they do have a 2 year concierge policy after one full year (total 3 years) to repair or FULLY replace your product with the same or BETTER item. All other items you can return ANYTIME !!! For a $100 a year for an executive membership that’s WELL WORTH IT !!! That (to me) is INSURANCE !!! Why, let me give you some examples:

    – Microwve oven – 4.5 years old – broke down and got it replaced with store credit at the price I bought it for (AND they STILL had the records of WHERE & WHEN we purchased it – isn’t that amazing !!!) and bought another one !!!
    – Dryer – broke within a 1.5 of owning it.
    – All in one Tool Box with Tools – 6 years old – a few tools broke – Again, replaced with store credit at the price I bought it for and bought another one !!!
    – Also, we have a digital camera and TV that we bought BEFORE their policy changed and you know what they said? We will STILL honor it – because they have a grandfather clause built into the new policy

    I love Costco for what they do and stand for (at least when it comes to warranty policies). Hopefully they are still an upstanding company with everything else they’re doing. So far I’m happy with their service, so if I have to spend a bit more for the item, like a watch (which by the way I returned 3-4 of them because after a few months I didn’t like the feel of ones that I bought) SO BE IT. AGAIN, IT’S WORTH IT !!! You’ll NEVER have to buy another watch, dryer, microwave, tool set, shelving unit, vacuum, shirt, etc. AGAIN !!! Unless of course they change their policy…

  5. 5 EXECUTIVEPAY March 5, 2009 at 6:52 pm

    Alex,
    You need to be more worried about Executive Pay and less worried about workers pay.

  6. 6 Alex March 6, 2009 at 10:12 am

    executive pay is right – i agree 100%. But pay has got to decrease across the board for executives – but who will make that decision? Boards are too friendly with the execs, and boards decide executive compensation. You’re telling me that a guy making $1 instead of $10 will be less capable? And we cant find enough go-getters out there that will accept a $1M salary instead of $10M?

    also to Ladislao: i am a member of costco and i absolutely love their store – but i’ve never returned anything!

  7. 7 Frank March 6, 2009 at 3:40 pm

    Profit margin is what declined, as measured as a percentage of gross revenues. Price reductions drove higher volumes with a lower profit percentage, and thus the temporary erosion in profit margin. Costco’s pricing actions might help reinforce ongoing customer loyalty to the store and bode well for the future.

  8. 8 EXECUTIVEPAY March 7, 2009 at 2:38 pm

    Shareholders need to make that decision. Shareholders should have a vote on each executive’s salary. No executive should make more than 20 times the average worker’s salary. We existed in the 1950’s that way in the US, Europe exists that way, today. Afterall, executives are merely employees with a flair for corporate politics, no more, no less.

  9. 9 Ladislao March 9, 2009 at 2:41 pm

    Alex –

    WELL NOW YOU CAN !!! You have that right as a member. That is what you paid into as a member. I know some people may look at it as “abusing” the system, but they not only have it in their policy BUT they have it PRINTED on a board in black and white at the Returns Desk, then if you are not satisfied (for whatever reason) as long as you bring everything back that came with the item and it is their policy, then you have every right to return it for at least store credit. That to me, is the BEST policy I have EVER seen from any store BAR NONE !!! Now they could stop that policy or at least put more restrictions on what type of items they will not allow to be returned, and that’s okay. That is their right too. I’m just grateful they have such a policy, because that IS the MAIN reason why I shop there; even IF their prices are a bit higher. That to me is MY INSURANCE that I can use to bring it back over and over again. Again, YOU CAN’T BEAT THAT !!!

  10. 10 Jack March 12, 2009 at 8:50 am

    Ladislao,

    Your are right but you are violating the spirit of the Costco policy on returns when you focus on the gotcha potential inherent in that generous warranty. Shame on you for your lousy attitude to a great retailer and your intent to beat them at every turn.


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