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Costco, Part II 

I made good on my promise to visit a Costco warehouse store during my vacation. It was as good as my big-spending daughter had advertised. The Kansas City store (plunked down in a revitalizing center city neighborhood, not a lilywhite suburb) was clean and attractive, with wide aisles and well-ordered stacks of goods. We had only a short amount of time to ogle huge chunks of French cheese, bottles of fancy Veuve Clicquot champagne for $36, a couple dozen perfect long-stem yellow roses for $12, a $12,000 diamond solitaire, HDTVs of every size and description and some appealing produce. But so much for consumerism. After my column went to press for last week, I got a return call from Costco’s chief financial officer, Richard Galanti. Galanti talked at length about his company, the market leader in warehouse stores. His fervor matched the enthusiasm I later encountered from Kansas City employees. They have reason to be happy — the company pays 92 percent of their health insurance, an average annual pay of $35,000 and welcomes unions. My important question was about Costco expansion in Arkansas. “There are no current plans,” he told me. But there’s hope. In the original warehouse concept, he said, chains wanted a half-million people in a compact trade area. Now they’ve figured ways to make the formula work in relatively large trade areas with 150,000 to 175,000 people. Costco isn’t deterred by Wal-Mart’s presence. The company opens about 30 stores a year, three-quarters of them in markets where Sam’s has long been established. Costco’s aim at higher income customers is a niche that is hard for Sam’s Club to exploit without leaving some of its base audience behind. Galanti said Costco averages about $120 million annually in sales per store, versus $66 to $70 million at a Sam’s. “We’re either getting a lot more people or selling a lot of higher-end goods or both. I think both.” Costco has no loss leaders. “We don’t sell below cost,” Galanti said “But we don’t mark anything up more than 14 percent.” This means, he said, that Costco has created “pricing authority.” That is, “our members trust us so much they don’t even price compare. They know we’re going to give a great deal.” Employees know a deal when they see one, too. Galanti recounted the company’s decision to increase the employee share of health insurance costs from 5 to 8 percent. Insurance costs were increasing at twice the rate of sales increases, but not being passed along to employees. CEO James D. Sinegal finally agreed that some amount had to be passed along. “But I can remember vividly him shaking his finger at us and saying don’t come back to me with a formula that says if health costs go up by X, we’re going to raise employee contributions by X.” Instead, he directed officers to shop for the best deal, but always ask the question, “What can the employee afford?” The small increase on employees was phased in over three years. “You have to pay a fair wage and provide quality benefits at a reasonable cost,” Galanti said. “It coincides with our premise that if you get better employees who stay longer, that’s good for business. Could we pay a dollar less per hour and have the same low turnover? Maybe. But we’re not going to try. We realize people have to make a living.” Please, Costco, come to Little Rock.
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