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Does Costco have a youth problem?

March 10, 2014

On last week's fiscal second-quarter conference call with analysts, Costco officials noted that the company is taking several steps to reach a younger demographic. These include bringing in more organic foods, testing same-day delivery with Google Express, and social media outreach.

Asked directly in the Q&A session how Costco was trying to "get younger people into the warehouses," CFO Richard Galanti cautioned investors that Costco wasn't making any major changes to reach Millennials.

"We're not going to do anything rash but we're also not going to have our head in the sand here," stated Mr. Galanti.

Many of the steps also offer some appeal to all ages. For instance, Costco is increasing organic offerings, which Mr. Galanti described as a "big business" and "growing fast" with the chain able to show "a better savings on those bigger ticket price point items." Since stocking organic beef, the chain is able to reach many existing members who never bought beef from Costco. But Mr. Galanti said organic fans "tend to be a little younger."

A Seattle Times article noted that Costco's bulk buying better serves suburban homes with garages and ample closets rather than urban locations where the young are congregating. McAdams Wright Ragen analyst Dan Geiman, remarked, "You're not going to stick big vats of mayonnaise and big stacks of toilet paper in a small apartment."

But Mr. Geiman said the organic push and any increased online presence could help.

"Anything you can do to lower the age of your target market is going to be a positive in the longer term," he said.

Besides the organics push, Costco's minimal online presence, especially given its spot as the world's fourth largest retailer, received some media attention. Some analysts are questioning how vulnerable Costco is to losing sales to Amazon Prime.

According to Internet Retailer, Costco's e-commerce sales represented only a little more than two percent of its total sales in it fiscal 2013 year. To boost the business, Costco recently added apparel and some health and beauty care items to its online offerings, is better coordinating online with in-store merchandising, and started shipping out of three depots instead of one.

Around social media, Costco's Facebook page has 1.1 million likes versus
22.7 million for Target and 34.5 million for Walmart. Its Twitter page is inactive with no followers versus 1.08 million followers for Target and 465,000 for Walmart.

FINANCIALS:     [NASDAQ:COST] [ ]

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