Costco Competes With Itself on Price via Unusual ‘Jewelry and Tires’ Product Mix

In an industry that typically compares apples and oranges, it’s not every day you hear a major retailer discuss the relative strength of its “jewelry and tires” sales in the same breath.

But that odd product pairing is exactly what Costco CFO and 38-year company veteran Richard Galanti highlighted last night while discussing the retailer’s fiscal 2nd quarter earnings from its 872 members-only warehouse clubs and increasingly active digital sales, which were up 12.6% following a COVID-fueled 75% jump the year before.

“Stronger departments in eCommerce in terms of year-over-year percentage increases, [included] jewelry and tires, specialty or kiosk items, patio & garden and home furnishings,” Galanti told analysts on the company’s conference call, while also pointing to high-single-digit gains in its largest online category — “Majors” — which consists of electronics, appliances, and TVs.

For a company that sells pretty much everything, including Apple phones and orange juice, low prices are a critical component of getting customers to pay $60 to $120 per year for the right to shop in its stores and website. To that point, Costco’s membership fees rose 10% last quarter, and are now approaching a $4 billion annual source of revenue for the 46-year-old retailer from Issaquah, Washington.

The Fight on Price

With inflation running at 7.5% — the highest level in the company’s history —  the pressure to keep prices and costs down is unprecedented, especially in volatile categories like gasoline, travel and fresh foods, all of which Costco sells.

“We’ve probably been a little later than others in terms of raising [the price of] some things, but we’ve worked with our suppliers to eat a little of [the cost], and we eat a little of it too,” Galanti said. “We don’t just sit around and pound our chests on it — despite these inflationary pressures, we’ve tried to hold where we can,” he added, noting that costs were still rising in a number of areas, but perhaps a bit more slowly than in prior months.

That said, the fight to steal share within the discount warehouse retailing category is intense right now, and also involves competing with non-warehouse players like Walmart and Amazon digitally, at the curbside and for delivery, as well as on price.

At the same time, direct competitors like Walmart-owned Sam’s Club briefly lowered its annual membership fee to $8 last month (from an already cheaper $45) to attract new customers, while small but aggressive BJ’s Wholesale just closed the books on “the best year” in its 38-year history.”

Galanti said Costco is always keeping an eye on its competition and told analysts that despite challenges on pricing and strains to keep products in stock, the company’s competitive position was as strong as ever.

“So when asked the question, ‘Who’s our toughest competitor?’, it’s us,” Galanti said. “If prices come down, if our costs come down, we want to be the first to lower the price, period.”

Changes and Challenges 

To be sure, the list of challenges Costco and its retail rivals are facing is long and complicated, as Galanti rattled off over a dozen different headwinds he’s facing — port delays, container shortages, COVID disruptions, shortages of various components and raw materials, ingredients, supplies, labor costs, truck and driver shortages, packaging and the impact the semiconductor chip shortage is having on certain products.

“Overall, we’ve done a pretty good job of dealing with the supply chain challenges, and I think that is evident in our sales strength,” he said, which rose 16% for the quarter to $50.9 billion.

To alleviate some of the shipping bottlenecks it is facing, Galanti said Costco has chartered seven ocean vessels and containers for the next three years to add flexibility to its cargo solutions, a move that will cover about one-quarter of its shipping needs between Asia and the U.S. and Canada.

Despite the current environment and litany of changes it has faced, Costco has still been able to thrive, with investors bidding-up its stock by 65% over the past year while lifting its market value to $230 billion.