Costco Bull's Rebuttal
by Yi-Hsin Chang ([email protected])

Next time I go to Costco, I'm picking up an etiquette book for Rick. (You do know they carry books, right, Rick?) For the record -- and I'm considering suing Rick for libel for maligning my good name here -- I don't eat Spam (or Doritos, for that matter). In fact, I've never even had a single bite of Spam in my life. The truth is, Rick's account of my Costco experience, and that of other upstanding Fools, is about as accurate as his depiction of Costco itself. Obviously, Rick doesn't have enough facts to plug the holes in his argument, so he has resorted to personal attacks on the masses of Costco faithful.

For the record, I resold a few non-perishable items (i.e., freezer bags and paper towels) to Dayana (TMF School) at cost to free up some valuable storage space. Not only was this very Foolish for me and for Dayana, it would be lauded on the Fool's Living Below Your Means message board. My husband and I have had no problems finishing most of our Costco purchases. The few perishables we've had to throw away were so cheap that we still saved money because we would've spent the same amount for much less product at a typical grocery store. Case in point: You can buy a five-pound bag of bananas at Costco for $1.79; for that price, you can only get about three pounds of bananas at $0.59 a pound at your local supermarket.

Rick's main "argument" against Costco seems to be that the warehouse club industry has "hit a brick wall," and that Costco is a "fad" that will "get squeezed out" by the grocery stores of the world. I must say, Rick is TOTALLY out to lunch on this one.

First of all, as Dale (TMF Ralegh) pointed in his recent Industry Snapshot on warehouse clubs, the industry is expected to generate $50 billion in revenues this year in the U.S. and Canada, up 4.4% from $47.9 billion last year. For fiscal 1998, ended August 30, Costco sales jumped 11% to $23.83 billion from $21.48 billion, with comparable warehouse sales up an impressive 8%. Operating income, excluding charges, increased roughly 22% year-over-year. These growth numbers are outstanding not only for this sector, but for retailers in general.

As I mentioned before, Costco is far from saturating the market, seeing as most Americans (namely in the country's mid-section) don't even live near a Costco -- yet. Contrary to the numbers Rick cited, Costco plans to open six to seven (not four to five) new warehouse clubs, net of relocations, before the holiday season. Opening 20-some warehouses that average around 129,000 square feet a year can hardly be viewed as "sleepy" growth.

The company expects to spend $700 million on capital expenditures in fiscal 1999, a 53% increase from the $458 million the company spent in the 12 months ended May 10 of this year. Not only is the company able to grow, but it's able to do so without sucking up tons of cash. While net income before charges for the trailing 12 months through the third quarter was $427 million, net cash flow from operations was $732 million. After taking care of investments in new operations, Costco generated free cash flow of more than a quarter of a billion dollars during that period. No wonder the company can afford to announce a three-year $500 million share repurchase program.

As for Costco being a "fad," Rick's ignorance is definitely showing here. A retailer that's thrived in the Seattle area -- where Costco is based -- for 22 years, can hardly be called a "fad." If anything, it's an institution. Since Rick felt free to air our past private online discussions in this Duel, I'll just say that he admitted he hadn't been in a Costco in three years -- so much for research. Plus I'm definitely NOT "slumming it" when I go to Costco, since most of my purchases usually run along the lines of filet mignon, Veuve Clicquot, wine, caviar, freshly squeezed orange juice, fresh fruits and vegetables, and Kellogg's Smart Start cereal. Because of Costco, my husband and I are able to eat well at an affordable price.

Finally, the idea that supermarkets like Kroger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KR)") else Response.Write("(NYSE: KR)") end if %> and Safeway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> are formidable adversaries to Costco is simply laughable. Traditional grocery stores simply can't compete with Costco when it comes to low prices, nor do they offer the incredible selection of bulk items you can find at Costco. They're simply not in the same league. What's more, unlike supermarkets, Costco's biggest customers are small business operators who spend thousands there a week, not individual consumers like me who try to stay under $100 a week.

Costco has also opened a warehouse with no walls: Costco Online, where you can choose from an initial list of 400 products, from computer software for $40 to a 3.02 carat round diamond for $91,999. Costco is also offering such services as auto and homeowner insurance, mortgage and real-estate services, and long-distance phone services on and offline.

I love Costco. I could live there. Frankly, I just can't wait 'til Costco starts pumping gas at my nearby store.

(By the way, for those still worried about the Year 2000 problem, even after reading my five-part series, Costco is the ideal place for stocking up your pantry for that doomsday scenario.)

Next: The Bear Responds