Costco targets Northeast for opening of six clubs - membership warehouse store chain - Discount Industry Annual Report: part 2: Chain Profiles - company profile

Discount Store News, July 16, 1990

Costco Targets Northeast for Opening of Six Clubs

KIRKLAND, Wash. -- Costco Wholesale Corp. will participate in the assault on the Northeast this year with the first of six clubs opening in West Springfield, Mass., this fall.

Like other warehouse club chains, Costco has identified the Northeast for expansion. So far, the Kirkland, Wash.-based chain has targeted Massachusetts, Connecticut and New York for expansion. The planned units follow the chain's new regional office which opened last September in Massachusetts.

So important is Costco's move into the Northeast that a new management team was created to guide the expansion. At the helm of the Northeast operation is Franz Lazarus, senior vice president of operations.

When Costco arrives in Massachusetts later this year, it will feature the company's newest prototype, complete with a greatly expanded fresh food department.

At Costco's annual meeting in January, club president Jim Sinegal officially proclaimed the company's test of fresh food departments a success and said the chain would roll out the new program to all its stores by the end of 1991, including the clubs it plans to open in the Northeast.

At the time of the announcement, Sinegal called the fresh food program--meat, produce, deli and bakery--a value-added feature for club members and a profitable undertaking for Costco. Costco started testing fresh meat and produce, deli and bakery in 1987.

To accommodate the newly expanded departments, Costco added an average of 20,000 square feet to its clubs, bringing the unit size to about 120,000 square feet. By the end of this fiscal year, Costco expects to operate fresh food departments in 55 of its locations. A complete chainwide roll out is planned.

Beside fresh food, Costco said it also would expand the number of optical centers and pharmacies in the chain, to 13 and 40 respectively, from six and 17, respectively.

Overall, Costco will add approximately 100 new sku's this year through continued upgrading and increasing of its selection of jewelry, books and videos, apparel and consumer electronics. Despite these increases, the chain will record a net loss of about 100 sku's, to 3,400 from 3,500, according to chairman Jeff Brotman. The reduction is due to the chain's continued process of refining its merchandise offerings.

Accomodating Requests

Reacting in a timely fashion to merchandise requests by either adding or paring inventories to accommodate sales activity and customer/vendor requests has been cited by some Costco observers as one of the company's many strong points.

In January, Costco announced that it would no longer sell automobiles since the five Puget Sound clubs that were selling Hondas were not performing well. Honda, reportedly, was not pleased with the pricing.

On June 16, Costco closed three west Florida locations, Tampa, Clearwater and Plam Harbor, and in the fourth quarter will close its Lauderhill, Fla., warehouse in conjunction with a new warehouse opening in nearby Delray Beach, Fla.

Costco's 1989 sales, ended Sept. 3, 1989, totaled $2.943 billion, up 48 percent from 1988's $1.99 billion. Comparable store sales rose 25 percent for the 12-month period. Operating income for the year was $55.5 million, up 78 percent from the $31.1 million recorded last year.

Costco opened 13 new warehouses during fiscal 1989, all in existing markets. In addition, the wholesale club chain opened nine pharmacies, two optical shops as well as 24 fresh food departments.

In fiscal 1990, Costco's plans included opening 12 new warehouses and the continued expansion of in-house pharmacies, optical and fresh food departments.

So far for fiscal 1991, which begins in September, Costco's plans to crack the Northeast beginning with the West Springfield location, and a total of 10 to 14 warehouses overall.

So far, it appears that the Northeast expansion program is the cornerstone of the company's fiscal 1991 program. To finance the Northeast expansion and help fund growth in other markets, late last year Costco initiated a public offering of 2.5 million shares of stock. In 1989, it also boosted its bank credit line from $150 million to $250 million to help fund its expansion.

Las spring Costco called for the redemption of its convertible subordinated debentures to allow the then 53-unit warehouse club chain to improve its balance sheets, company chief financial officer Richard Galanti told DSN. By taking a $108.5 million outstanding bond and prompting conversion of the debt to common stock, Galanti said Costco was able to reduce its debt, increase equity and save money on yearly interest payments. He said Costco was able to make the move at that time because its stock was trading about $5 above the $18 redemption price of the debentures, making the conversion to stock especially favorable for bondholders.