Wednesday’s earnings warning by warehouse club Costco (COST) surprised the market because it provides additional evidence that more affluent customers are also adversely affected by economic difficulties. Chief Financial Officer Richard Galanti said that energy and supplier costs are rising faster than Costco is able to pass through to its customers, and he sees little relief from inflation going forward.
According to Bank of America research, the average annual income of Costco members is $85,000 versus average U.S. income is $67,000. Costco operates about 500 stores in the US, Canada, and five other countries, but according to JPMorgan, 42% of its sales are in California – one of the states most adversely affected from the housing/credit downturn.
Food inflation is hurting Costco the most as 60% of the club’s sales are supermarket items. Costco recently raised the price of rotisserie chicken from $5 to $6.00. 400 of its stores sell gasoline at below competitor’s prices, also affecting their bottom line.
I think Costco and its competitors – BJ’s Wholesale Club (BJ) and Sam’s Club (WMT) are going to have to make many adjustments to their operations and merchandise to remain profitable as I believe warehouse shopping is a waning trend.
The first thing about warehouse club shopping is you have to pay an annual membership fee in order to shop there. Both clubs have different levels of membership. BJ’s membership starts at $45 and Costco’s at $50 per year, according to their websites. This is a brilliant marketing concept. Since people have to pay to shop there, they’re going to buy a lot of items and visit frequently just to make their membership cost worthwhile. However, in tougher economic times, shoppers are more likely to sit down and calculate how much they’re actually saving by shopping at the warehouse, after factoring in membership and the additional gas cost to get there. Any savings realized fueling up at Costco is probably lost in the extra gas used to get there and back.
Warehouse clubs are usually stand alone stores in suburban locations that are not normally close to major residential neighborhoods, so people will probably use more gas to get there. This can make it less convenient to combine shopping trips and errands as another way to conserve gas. If the cost of gas is an issue, that means less visits which brings into question the value of membership.
Because Costco in particular caters to a more affluent customer, some of its most profitable items are discretionary merchandise that it purposely stocks in limited quantities for a limited time to entice members to make more frequent visits to “catch” all the bargains. With the cost of gas, many members won’t be able to visit as frequently and do not have the money to buy these products.
Warehouse clubs sell items in bulk quantities, so even if members are saving money, they are shelling out a lot of money up front. Warehouse clubs could see a drop in renewals and new memberships as customers cannot afford/have maxed out their credit limits to spend say $300 at one visit.
As I wrote last year, the transit of Saturn in Virgo from September 2007 to July 2010 would see the demise of SUVs/big vehicles, as well as McMansions. As customers downsize to small cars and smaller homes, they don’t have the capacity to haul bulky purchases home. And where do you store all these bulk items in a smaller space?
The stock charts of BJ’s and Costco have many similarities; both face the challenging effects of transiting Saturn in Virgo. Saturn in Virgo brings inflation to goods and services needed for daily living. This influence limits the ability of these companies to increase their earnings, along with their ability to expand. (Costco said it will open fewer stores in 2009.) Both stocks look to continue on a primarily downward trend, particularly in October. Costco’s stock chart looks worse than BJ’s because transiting Pluto in Capricorn will begin affecting Costco’s progressed* Venus and natal Neptune next year. Costco will need to transform its business model.
Disclosure: I have never been a member of a warehouse club. No stock disclosures.
*A predictive method that mathematically calculates the planets forward in time.
BJ’s Wholesale Club: July 29, 1997. Costco: December 5, 1985