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Costco Grabbing More Grocery Share

Warehouse retailer details strength in food comps in Q1
Gina Acosta, Progressive Grocer
Shoppers await their orders at a Costco Wholesale outside of Paris, France.

Costco Wholesale is seizing more grocery share as inflation-wary consumers look to curb spending on food-at-home.

During the company's first quarter earnings call on Dec. 8, CFO Richard Galanti said the retailer is seeing sales strength in food and sundries.

"Food and sundries is everything from canned beverages to crackers and cereal, and sundries, of course, paper goods and cleaning supplies and the like. And we're seeing strength in those areas," he said.

[Read more: "How Costco Leverages Loyalty to Drive Growth"]

Within food and sundries, however, fresh food comps were down as the company battles cost pressures, according to Galanti. 

"For the last couple of years, it's been particularly strong, and it's come down a little bit. In addition, we are looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories, mostly in the protein area and a little bit in the bakery area," he said.

Galanti elaborated on the company's strategy for holding the price on some fresh foods.

"We want to be the most competitive, and we can drive a lot of volume. And again, we're in it for the long term," he said. "Fresh is one of those unique areas where prices on many items do change almost weekly on some of those items. If not sooner, if not more quickly. And so, our buyers are always looking at the supermarket ads, as well as the other warehouse club ads, what the pricing is, and we react to that. But part of it is also consciously keeping the price on the chicken at $4.99 and keeping the price on the hot dog. All those things go into that equation as well. We know that that can be a driver of business. In our view, people notice those price differences."

Non-food comps were also down during a quarter in which the company saw weakening customer traffic both in its physical stores and online.

Costco earned $1.36 billion, or $3.07 a share, in the quarter, compared with $1.32 billion, or $2.98 a share, in the prior-year period. Revenue rose 8% to $54.44, from $50.36 billion a year ago. Same-store sales rose 6.6%, but e-commerce sales declined 3.7% in the quarter.

Galanti indicated the company's e-comm metric would have been positive with the inclusion of Instacart sales.

"Not included in the e-commerce number is our sales through same-day delivery for fresh foods with our partners like Instacart, which are fulfilled in our warehouse. Our e-comm comps would have been in the positive low single digits," he said.

During the period ended Nov. 20, Costco said customer traffic increased 2.2% in the United States but average transaction size was up 6.9% during the first quarter. Costco had warned in its November sales update that it was seeing weaker traffic going into Thanksgiving holiday.

"We still think anything that's even in the low single digits is great," Galanti said. "We feel good  very good about where our renewal rates are and then the loyalty that our members have. And we're pretty good at keep trying to figure out ways to get them in. We're doing  we do online emails that are in-line directed for hot items to come in only available in store."

Costco reported membership fee income at $1 billion in Q1. That's $54 million or 5.7% higher than last year's reported number of $946 million.

In terms of renewal rates, at first quarter-end, the U.S. renewal was 92.5% compared to 92.4% a quarter ago.

Costco ended the first quarter with 66.9 million paying household members and 120.9 million cardholders, both up 7% versus last year. At Q1 end, paid executive memberships were right at 30 million, an increase of 904,000 during the 12 weeks or 75,000 a week during the first quarter.

Galanti mentioned the retailer plans to increase its membership fee at some point in 2023.

In the first quarter, capex was approximately $1.06 billion.

"And our estimate for the entire fiscal year is capex of somewhere in the $3.8 billion to $4 billion range," Galanti said.

The company plans to open as many as 24 clubs in fiscal 2023.

"In the first quarter, the net of that 24 included seven. We plan three more in Q2, four in Q3, and 10 in Q4. In the first quarter, four were in the U.S., and one each was in Korea, our first in New Zealand, and our first in Sweden."

As for the goal five to 10 years from now?

"Probably to get it closer to 30 net," Galanti said. "And probably, by five years from now, it's 50-50 U.S.-elsewhere versus elsewhere. We'd like to add five to that 24 in the next few years to go up a little bit higher."

Issaquah, Wash.-based Costco has more than 550 locations and is No. 3 on The PG 100, Progressive Grocer’s 2022 list of the top food and consumables retailers in North America.

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