Inflation. Thankfully, it’s not something Americans have had to worry about for years, but it is rearing its ugly head now. While many retailers are fearing the effects on business, Costco is one retailer saying, “Bring it!”
From April 2012 through February of this year, the 12-month average consumer price index hovered around or under 2.0%. Then it shot up, rising to 2.6% in March and 4.2% in April. The latest 12-month runup in CPI is the largest since a 4.9% increase for the period ending September 2008, reported the Bureau of Labor Statistics.
The Federal Reserve followed immediately with reassuring words: “The Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.”
With the Fed pretty well guaranteeing an extended period of inflation running above 2%, it is going to be bad news for many American households. In a survey conducted late last year by Highland, nearly two-thirds of people surveyed said they are living paycheck to paycheck. And an oft cited study by Nielsen found that even one in four households making $150,000 or more are in the same boat.
Regardless of income, some 60% of adult Americans aged 21 to 62 feel anxious about their personal finances. High levels of stress and anxiety induced by the pandemic, compounded by people’s latest worries that they can’t keep up as prices rise will continue to provide tailwinds for discount retailers that offer more for less.
Perhaps none will benefit more from these fear factors than Costco. Unlike Walmart or the dollar stores which primarily target lower-income consumers forced by circumstances to stretch their dollars, Costco appeals to higher-income consumers who have the discretion to pay $60 to $120 yearly for the privilege of shopping there.
With a carefully curated assortment of major branded consumable goods and its highly regarded Kirkland private label, Costco’s 110 million members enjoy significant savings for everyday necessities offered in bulk sizes to fill pantry shelves.
They also take advantage of opportunistic discounts on clothing, jewelry, health and beauty, electronics, sporting goods, appliances, furniture, home furnishings and other household staples. Gasoline, pharmacy, optical, food courts and travel are ancillary services.
Throughout the pandemic, Costco was a retailer its members could count on with sales rising 9% in fiscal 2020 closing August 30 last year, reaching $163 billion. And it’s done even better since, with net sales up 17.7% year-to-date through the third quarter 2021 to $130.6 billion. Third quarter alone saw a 21.7% spike in sales. It handily beat stock analysts’ expectations.
While the company offered no financial guidance for coming quarters, Costco CFO Richard Galanti predicted during the latest earnings call that price inflation at its selling level will run between 2.5% to 3.5%.
“Inflationary factors abound,” he remarked. “These include higher labor costs, higher freight costs, higher transportation demand, along with the container shortage and port delays, increased demand in various product categories, some shortages of everything from chips to oils and chemical supplies, and, in some cases, higher commodity prices.”
Costco is sitting pretty to mitigate these inflationary pressures. It has successfully kept its shelves stocked by adjusting orders and in many cases, front-loading them to have sufficient inventory in high-demand items.
Its acquisition of logistic network Innovel a year ago, and now called Costco Logistics, has enabled the company to deliver big and bulky high-ticket items to customers in record time, dropping from up to two weeks to between five to seven days. Many of these big-ticket sales came through e-commerce, since the typical Costco store can only display one or two of these bigger items. But dozens can be displayed online.
It’s been a boon to business, with Galanti reporting between 30% to 50% increases across categories including outdoor patio furniture, indoor furniture, mattresses, exercise equipment and televisions.
E-Commerce overall has been on a roll with comparable sales growth of 41.2% in the third quarter and 65.1% year-to-date.
While fellow Forbes.com contributor Walter Loeb suggests that Costco still has work to elevate is e-commerce penetration, digital has helped the company draw in younger consumers who tend to click first, visit second. Galanti noted that same-day fresh food delivery provided by Instacart was a strong draw among the next-generation customers.
At least for now, Galanti says the company is holding the line on its membership prices. But since historically the company has raised membership fees about every five years and it is now in year four since its last increase, it could be coming sooner rather than later.
Though prices may go up a smidge for items like its $4.99 rotisserie chicken and $2.99 bottled water packs, Costco has a lot of flexibility to keep costs down through its strong vendor relationships.
Noting that many CPG companies have announced increases, Galanti said, “We can do as good a job as any given our purchasing power and limited number of SKUs to mitigate [price increases] as best we can. That, on average, our competitors are taking those probably as fast, if not a little faster than us is a positive.”
If inflation continues to run at current 4% and above levels, and Costco can manage its margins to keep prices rising well under that, good days are ahead for both Costco and its customers.