Costco Home poised to revolutionize high-end furniture

DSN Retailing Today, Jan 6, 2003 by Doug Desjardins

KIRKLAND, WASH. -- Before the dust had even settled on the Dec. 5 grand opening of Costco Home in Kirkland, Wash., Costco cfo Richard Galanti was already fielding questions about the future of its venture into home furnishings.

"We blew away our estimates for first weekend sales, but that was just the first weekend, and its way too early to tell," said Galanti during a Dec. 12 conference call with analysts. "It's just a test right now, but we're creating good relations with manufacturers and we could see it expand to other locations."

Costco executives aren't expected to discuss plans for Costco Home until late spring, but the early results indicate its home furnishings outlet is a hit with members in the Seattle area. "We did two to three times the business we anticipated in our first four days and sold about 25% of the merchandise we had in stock," said Costco Home general manager John Ostmeier. "Our biggest problem right now is replenishing our inventory."

The 105,000-square-foot pilot store is a cross between a typical warehouse club and a traditional home furnishings store, with elegant bedroom and dining room sets displayed in a high-ceilinged warehouse with a concrete floor. The store carries a mix of merchandise focused on high-end brand name furniture and decor, including Lexington, Lane, Viking, Ralph Lauren, Howard Miller and Waterford.

Costco hopes to set itself apart from other retailers in the home furnishings sector by offering lower prices and quick delivery of products to customers, a trick not easy to pull off in a slow-turn business. "Anything you see on the floor you can take home with you," said Ostmeier. "Our goal is to speed up the transaction and come as close as we can to providing instant gratification."

Keeping inventory in ready supply is a problem for many home furnishing retailers and it's not unusual for customers to wait several weeks for a delivery. Costco hopes to avoid that by stocking high-turn items that its manufacturers will be able to replenish.

"We're going with the old 80-20 rule where 20% of a company's product drives 80% of its sales," said Ostmeier. "So, whenever possible, we're going with products in that 20% category because the manufacturer is more likely to have it in stock."

Home delivery is handled by a private contractor that charges $97 for moving and assembling up to three pieces of furniture to customers within a 50-mile radius. Costco also makes it easy for customers to handle their own deliveries. "We cleared a space in our parking lot for vans and trailers that customers can rent for $20 if they want to do their own delivery," said Ostmeier.

Offering high-quality products at low prices has been Costco's recipe for success in its warehouse clubs and it's using the same formula at Costco Home. Ostmeier said margins would be slightly higher at Costco Home, but in the same range as warehouse clubs. "We have a larger staff than a typical store, so the margins are a little bit higher, but not by much," said Ostmeier. "We have margin guidelines that we're instructed not to exceed."

Home furnishing retailers typically turn higher-than-average margins. In its most recent SEC filing, the 103-store Haverty Furniture chain reported gross profits as a percentage of sales of 48.2% for its quarter ended Sept. 30, 2002.

Costco executives said they will evaluate the performance of Costco Home for about six months before they discuss any plans for expansion. Ostmeier said that if the chain decides to roll out additional stores, they would probably start with strong markets close to home.

"We know the markets we'd like to go into and it would probably start on the West Coast in places like the Bay Area," said Ostmeir. "There are some select markets where the demographics are right and where we have a strong membership base."

Analysts who track the company see great potential for Costco Home, especially if it can keep its margins down. "I'm sure you're going to see them offering products at prices nobody else can touch," said David Lichtman, an industry analyst for Merrill Lynch. "And it's a market where margins are ripe for the taking, especially if most retailers are operating on 40% margins and Costco is down around 20%."

Lichtman expects home furnishing manufacturers to be more than willing to help Costco make the store format work. "Any manufacturer would salivate at the scale of sales Costco would generate if this concept rolls out." said Lichtman.