Why Costco Delays Price Hikes on Muffins
Delaying the inevitable is rarely an admired tactic, but Costco
does just that when it comes to raising select food prices in an inflationary
On a conference call last week for its second quarter ended Feb. 13,
management noted that although overall gross margins in the quarter grew to
12.6 percent from 12.5 percent year-over-year, fresh foods were down 10 basis
points, primarily due to commodities price inflation. On the call, Richard
Galanti, the club’s chief financial officer, said fresh foods’ margin dip reflected
the fact that Costco tends "to hold pricing as long as we can," particularly
on key small business items, as well as some items in the food court, bakery
and the deli.
As an example, Mr. Galanti pointed to a 15-pack of muffins costing
$5.49. He said Costco sells a "heck of a lot of those to restaurants and
businesses and convenience stores" for resale. To support those small
business members, Costco is willing to realize lower margins for several weeks
or a few months before finally bringing prices up 30 cents to 50 cents to get
back to regular margin.
"That’s not a competitive issue other than we want to protect the prices
to the members who are buying these items," said Mr. Galanti.
that the 15-pack muffin package has held that price seemingly "forever" also
leads to the delayed price increase. In that same manner, despite rises in
the cost of cheese and other ingredients that have impacted the profitability
of pizza, Costco isn’t planning on soon changing its $10-for-an-18-inch-pie
deal, or $1.99 a slice, in its food court.
Mr. Galanti also noted that Costco is also
able to hold prices on certain items because overall margins "have been
quite good" partly due to
its decision to change its electronics returns policy two years ago. Vendors
are supplying some promotional support in the form of enabling additional buys
at the old price for a limited period. Costco’s strong private label assortments
also provides some leverage in price negotiations.
Nonetheless, Mr. Galanti
said with inflation continuing in the low- to mid-single digits range in fresh
foods and in the low-single digit range in food and sundries, Costco has been
passing along price increases on most items, particularly traditional supermarket
items such as tin foil, paper goods and cereals. And with inflation appearing
likely to only increase over the year, the chain will inevitably have to raise
prices across the board.
"Ultimately, you’ve got to pass on cost increases, but we want to hold
in longer and particularly on those business items like the 15 packs of muffins," said
- Costco Wholesale Corporation Reports Second Quarter and Year-to-Date Operating
Results for Fiscal Year 2011, and February Sales Results – Costco Wholesale
- Costco Wholesale Management Discusses Q2 2011 Results – Earnings Call Transcript – Seeking
- On the Call: Costco’s CFO on passing along costs – Bloomberg Businessweek
- Costco, BJ’s Post Solid Results Aided By Membership – The Wall
Discussion Questions: What do you think of Costco’s move to selectively delay price increases? What should guide any decisions around the timing and extent of price increases in inflationary periods?