Costco enhances services to boost market position - membership warehouse store - Discount Industry Annual Report - company profile

Discount Store News, July 4, 1988

Costco Enchances Services to Boost Market Position

SEATTLE -- Looking to enhance its niche in the competitive membership warehouse club industry, Costco recently opened two California locations, each with a deli, fresh meat department, scratch bakery and an expanded produce selection.

Located in the San Francisco Bay Area and greater Los Angeles market, the two warehouses each boast 125,000 square feet--about 25,000 square feet larger than a typical membership warehouse club--in order to accommodate the additional merchandise.

Costco first began testing the expanded food selection in a Seattle site last year, and while the concept has been placed in the two additional sites, it is still in a test phase, said company chief financial officer, Richard Galanti.

The expansion into the latest areas allows Costco to test the concept in three major markets, Galanti noted. He said additional warehouses opened later this year and some current warehouses could be expanded to include the additional food products. Under its present test mode, the concept is operating on a "so far, so good" basis, Galanti said.

Currently, Costco operates 43 warehouses, a total the company reattained with three openings this spring after having closed the same number in the Midwest in May.

Costco operated the three Midwest sites for over a year, but decided in April to abandon the unprofitable locations and concentrate on its successful markets. According to Galanti, Costco did not give up the Midwest casually, having first tried several different and expanded marketing techniques to draw more business.

Since the closure, Indianapolis-based Wholesale Club announced it is planning to open in one of the former Costco sites this fall.

Costco plans to open four additional sites by the end of its fiscal year in August, and the company expects to have about 52 warehouses by December and some 62 by the end of the following year, according to Galanti.

Of the new sites already opened this year, the only one outside California places Costco in a new market--Honolulu. Costco is the first membership warehouse club to enter the 50th state, so the company's initial ads not only announced the opening but explained the concept.

While adding a new market this year, Costco is also continuing to roll out its pharmacy departments. The company currently operates pharmacies in 18 warehouses and expects to have them in 23 to 25 by December. In order to reduce personnel costs, Costco is initially operating the pharmacies in its West Coast locations.

Costco has also experimented with optical centers, with four currently operating, but there are no immediate plans for this department's expansion.

The most recent financial results for the company showed its sales had climbed to $875 million after its first six months of fiscal 1988, an increase of some 58 percent over the same period in the previous year. Net income of $10 million during the first six months was also up substantially over the previous year's total of $1.69 million.

At the same time these results were reported, Costco also announced the launching of its preferred member credit card, following in the steps of other warehousers like PACE, Buyer's Club and Price Savers.

Initiated first in the Pacific Northwest, the card was rolled out in all warehouses last month, is available only to business and Gold Card members and costs $15.

Seattle First National Bank, the card's sponsor, isn't charging Costco a merchants' fee.

PHOTO : Costco ranked No. 3 among warehouse clubs with 43 stores and $1.4 billion in revenues

PHOTO : ($1.37 billion in sales, $30 million in membership fees).