Costco’s fortunes offer vision of Issaquah’s economic future

Costco CFO Richard Galanti is hopeful the local and worldwide market has re-adjusted and ever-more consumers will find value at the member's warehouse club chain.

Costco Wholesale Corp. CFO Richard Galanti flips through a Costco Connections magazine in his corporate office in Issaquah. The lifestyle magazine also serves as the company's primary advertising outlet.

Costco Wholesale Corp. CFO Richard Galanti flips through a Costco Connections magazine in his corporate office in Issaquah. The lifestyle magazine also serves as the company's primary advertising outlet.

As one of the world’s largest retailers, when Costco Wholesale Corporation sneezes, Issaquah catches a cold.

Plunging sales earlier this year and the closing of two Costco Home stores in Kirkland and Arizona had many observers concerned that the economic downturn was taking its toll on the Issaquah-based retail chain.

But despite the economic recession and the dampener on profits, Costco CFO Richard Galanti is hopeful the local and worldwide market has re-adjusted and ever-more consumers will find value at the member’s warehouse club chain.

Sitting in his third-floor office with the door open, the company’s money manager — responsible for managing $71.4 billion in revenue so far in 2009 — is surprisingly down to earth about the Costco’s prospects.

“Over the last year, the market has gone to hell in a hand basket,” he said. “We can’t rest on our laurels.”

First quarter numbers in the run-up to the holiday season are showing signs of improvement. Monthly sales for discretionary non-food items and gasoline have been picking up, boosting profitability.

Meanwhile, Costco has seen an increase in volumes of produce and sundries purchased and members returning more frequently, using the retailer as a form of supermarket. But Galanti — the son of an Atlanta grocer — warned a sudden turn around wasn’t evident in recent numbers from Costco’s 566 warehouse stores.

Instead, he’s just hoping recent results are an indication that Costco and the economy as a whole is moving past the worst of the recession.

“I don’t think anyone thinks the economy is getting better fast,” he said. “For the last few years it was ‘cool’ to consume. Last year, it was ‘cool’ not to.”

Led by Costco CEO Jim Sinegal, the company prides itself on focusing on what it does well: selling what people want at low prices. Galanti said they can do that by keeping margins low, limiting the goods they offer to affordable quality products.

“It’s these basic, simple standards that make us stronger,” he said. “Competition is good for you.”

Getting people in the door to their warehouses doesn’t seem to be a problem despite recent troubles. This year they tallied over 55 million members paying about $50 a year to belong.

Costco doesn’t advertise, choosing instead to keep their fee-paying members and other store visitors apprised of the latest deals and products in The Costco Connection magazine. A combination of lifestyle writing and product placement, the latest issue features an interview with late night television host Jimmy Kimmel. With monthly publication figures of about 6 million copies, the magazine also makes Costco by far Issaquah’s largest print publisher.

The health and wealth of Costco creates some fairly large local ripples here in Issaquah.

About $300 million in goods are sold here and approximately $4.8 million in taxes and levies are paid to the city and the Issaquah School District. They’re frequent renters of the Pickering Barn and help fund the city’s CERT and disaster preparedness programs.

Nearly 3,300 employees work at either Costco’s headquarters or their retail location across the street on Lake Drive.

“Not all our employees live here, but they all commute here and they all spend money,” Galanti said.

Unlike several other Puget Sound corporations with large workforces, Costco avoided lay-offs during the recession, and according to Galanti the company still pays an average of $19 per hour, plus benefits.

Costco is also actively — if without fanfare — involved in the community, taking part in a number charitable organizations and foundations.

Last October, Costco allowed hundreds of high school students to use their offices for the Issaquah Schools Foundation’s annual Calling for Kids fundraising campaign, raising a record amount.

Asked what one of his biggest challenges has been over the years since he was hired in 1992, Galanti focused on learning how to become an effective manager and keeping employees focused on the company’s priorities.

With the focus on price a guiding ethos of the company, Galanti quickly produced an 1960s memorandum from Sol Price, who later founded Price Club, the forerunner of Costco. Price emphasized offering a product as cheaply as possible as the warehouse club’s overarching philosophy.

“Let us concentrate on how cheap we can bring things to people, rather than how much the traffic will bear,” Price wrote.

He used his own blue button-down dress shirt — a Costco private label product — as an example of how the company provides value. The company contracted with a shirt maker to manufacture a limited quantity of one or two types of shirt, marked them up five to seven percent and sold them at a price under $20. They discounted the price as time went on.

“If you want a nice, fancy shirt or french cuffs, then go to Nordstroms or Macy’s. That’s not what we’re about,” he said.

“We sell things like tires and mayonnaise really, really efficiently and we do it with great customer service.”

Since the beginning of the recession, Galanti said the company has actually gained market share from supermarkets and big box retailers and Costco continues to expand within the U.S. and world wide. Plans include opening 15 to 18 stores in 2010 and increasing that number in 2011 above 20.

It currently runs 566 warehouses, including 413 in the U.S. and Puerto Rico, 77 in Canada, 21 in the U.K., seven in Korea, six in Taiwan, nine in Japan, 32 in Mexico and one in Australia.




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