US warehouse club operators like Costco will have to brace themselves for more difficult trading in the near term
One of America’s most loved shopping formats, the warehouse club, has been suffering. The format’s reliance on big-ticket, slow-moving items such as flatscreen TVs, jewellery and furniture has negatively affected both top and bottom lines, particularly in the case of market leader Costco, which relies on these categories to generate nearly a third of its sales.
After a decade of compounded annual sales growth in the 11% range, Costco’s net sales dropped 2% to $69.89bn (£44.13bn) for the 2009 financial year, while like-for-like sales were down 4% (-2% in the US and -8% for Costco International). Even if we were to strip out negative impacts from fuel deflation, domestic like-for-like sales would have risen just 1%, which is still a marked reduction from the high single digits Costco has previously delivered.
On the international front, the retailer suffered from weak foreign currencies, particularly in Canada, the UK and Korea, yet succeeded in opening its first store in Australia - a market with great potential.
Costco actually started out the recession as quite a resilient player, as shoppers recognised the savings to be had by buying groceries in bulk. The retailer’s pay-to-shop value proposition and consistently low prices - Costco’s policy is to keep all SKUs at a maximum 14% mark-up - has led to an extremely loyal member base.
However, that loyalty has been tested recently as consumers curtail discretionary spending: what were once slow-moving goods have now become dust-collecting items.
Costco should find some consolation in that its competitors have reported equally dissatisfying results. For its second quarter, BJ’s Wholesale Club reported that like-for-like club sales decreased 7.7%, while both like-for-likes and earnings were down between 4% and 5% for Walmart-owned Sam’s Club.
The warehouse club operators will have to brace themselves for more difficult trading in the near term, as it will take some time before consumer spending on big-ticket items picks up once again.
The all-important Christmas trading period should provide a slight glimmer of hope for Costco, thanks to its focus on offering high-quality, value-led goods. But, due to the nature of its assortment, Costco’s performance will not fully recover unticonsumers are ready to start buying Coach bags alongside their Cheerios.