Costco Email Response Re: Oklahoma City

[writerranger]

I had emailed Costco about Oklahoma City locations a few weeks ago and got a canned response that was worthless. I replied with a request for a serious response and got one:

Sorry about the auto-reply. I know how frustrating that can be and hope I can address your question. Oklahoma City is a market Costco has looked at on several occasions. The last analysis that was recently completed again showed the lack of demographic qualities that Costco looks for in new locations. I can tell you that several of our newer Texas locations also showed the same kinds of trends until 2004. We hope Oklahoma can be added to the Costco family soon. Thank you for your interest and again, my apologies for the delayed response and the earlier auto-reply.

Seems like we hear this a lot. Do you think the "demographic qualities" is meaning the relatively low median income? This is another example of why Oklahoma must be more aggressive in landing company HQ, plants, research facilities, etc. that can provide a better job picture than call center after call center.

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[Pete]

He or she is probably politely avoiding the liquor sales issue, which no doubt has a lot to do with their decision.

They are in much smaller markets all over the U.S. Why else wouldn't they be in OKC?

I'm sure they just don't look at salaries because that's only part of the disposible income equation. Certainly, people in OK can support all types of retail.


FWIW, I absolutely love Costco. They do a fantastic job and also pay their employees well, which comes through when you do business with them.

[writerranger]

I'm with you Mailbu on your sentiments of Costco. I was thinking it was more of a ratio kind of thing. You are very right about the wine sales. That has GOT to be a factor - spoken or unspoken to the public.

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[Pete]

I was just in Bozeman, MT and they have a Costco there for crying out loud! That's a city that isn't any bigger than Enid and the whole state has less than a million people, with most of them nowhere near Bozeman. And salaries and disposible income in that area is not that great.


The ones in Cali have big liquor departments and like all other areas of the store, offer great deals.

Not only on wine, but spirits and beer as well.

[mranderson]

He or she is probably politely avoiding the liquor sales issue, which no doubt has a lot to do with their decision.

They are in much smaller markets all over the U.S. Why else wouldn't they be in OKC?

I'm sure they just don't look at salaries because that's only part of the disposible income equation. Certainly, people in OK can support all types of retail.


FWIW, I absolutely love Costco. They do a fantastic job and also pay their employees well, which comes through when you do business with them.

Can you say the Wal-Mart owned Sam's Club?

[Easy180]

Are you saying they won't come here because Sam's Clubs are already here?

From what I've read it seems that Costco beats Sams at the warehouse club game

[mranderson]

Are you saying they won't come here because Sam's Clubs are already here?

From what I've read it seems that Costco beats Sams at the warehouse club game

Yes. Just because one company is larger in sales than another does not automatically mean they will go into a market. Sam's would kill Costco in Oklahoma City because Sam's IS a Wal-Mart subsidiary. Just look at the Oklahoma City furniture market. Same idea.

[Midtowner]

Why would it help that Sam's is a Wal-Mart subsidiary? That's not even close to being a cogent statement. Put some reasoning behind what you're trying to say.

Why would Sam's be so much more successful than Costco due to its status as a Wal-Mart subsidiary?

My understanding of Costco is that it is competitive with Sam's in terms of price, service, etc.

[Pete]

Costco is in plenty of the same markets as Sams.

And there is a great back-lash against Wal-Mart these days that only helps Costco.

[Easy180]

As of three years ago when I researched the two for a class...Costco was the envy of Sam's and their profit margin was significantly higher..Sam's top brass couldn't figure out how Costco could beat them especially with their highly efficient inventory systems...The biggest advantage Costco has over Sam's is their ability to sell high dollar high profit luxury items

I think they would do very well here...Most people I know would kill for any alternatives to Walmart/Sam's Clubs in Oklahoma

[Pete]

Here's a great article on Costco from the NY Times. I paste it in it's entirely because I think their site requires registration.

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How Costco Became the Anti-Wal-Mart Rick Bowmer/Associated Press

Some 60 feet away, inside Costco's cavernous warehouse store here in the company's hometown, Mr. Sinegal became positively exuberant about the 87-inch-long Natuzzi brown leather sofas. "This is just $799.99," he said. "It's terrific quality. Most other places you'd have to pay $1,500, even $2,000."

But the pièce de résistance, the item he most wanted to crow about, was Costco's private-label pinpoint cotton dress shirts. "Look, these are just $12.99," he said, while lifting a crisp blue button-down. "At Nordstrom or Macy's, this is a $45, $50 shirt."

Combining high quality with stunningly low prices, the shirts appeal to upscale customers - and epitomize why some retail analysts say Mr. Sinegal just might be America's shrewdest merchant since Sam Walton.

But not everyone is happy with Costco's business strategy. Some Wall Street analysts assert that Mr. Sinegal is overly generous not only to Costco's customers but to its workers as well.

Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder."

Mr. Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands.

Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco's customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers' expense. "This is not altruistic," he said. "This is good business."

He also dismisses calls to increase Costco's product markups. Mr. Sinegal, who has been in the retailing business for more than a half-century, said that heeding Wall Street's advice to raise some prices would bring Costco's downfall.

"When I started, Sears, Roebuck was the Costco of the country, but they allowed someone else to come in under them," he said. "We don't want to be one of the casualties. We don't want to turn around and say, 'We got so fancy we've raised our prices,' and all of a sudden a new competitor comes in and beats our prices."

At Costco, one of Mr. Sinegal's cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent. In contrast, supermarkets generally mark up merchandise by 25 percent, and department stores by 50 percent or more.

"They could probably get more money for a lot of items they sell," said Ed Weller, a retailing analyst at ThinkEquity.

But Mr. Sinegal warned that if Costco increased markups to 16 or 18 percent, the company might slip down a dangerous slope and lose discipline in minimizing costs and prices.

Mr. Sinegal, whose father was a coal miner and steelworker, gave a simple explanation. "On Wall Street, they're in the business of making money between now and next Thursday," he said. "I don't say that with any bitterness, but we can't take that view. We want to build a company that will still be here 50 and 60 years from now."

IF shareholders mind Mr. Sinegal's philosophy, it is not obvious: Costco's stock price has risen more than 10 percent in the last 12 months, while Wal-Mart's has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19.Mr. Dreher said Costco's share price was so high because so many people love the company. "It's a cult stock," he said.

Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco's workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

"He has been too benevolent," she said. "He's right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden."

Mr. Sinegal says he pays attention to analysts' advice because it enforces a healthy discipline, but he has largely shunned Wall Street pressure to be less generous to his workers.

"When Jim talks to us about setting wages and benefits, he doesn't want us to be better than everyone else, he wants us to be demonstrably better," said John Matthews, Costco's senior vice president for human resources.

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Peter Yates for The New York Times

Costco's strategy of using plain spaces to sell products in bulk at deep discounts has won over many customers, said Jim Sinegal, Costco's chief executive.

With his ferocious attention to detail and price, Mr. Sinegal has made Costco the nation's leading warehouse retailer, with about half of the market, compared with 40 percent for the No. 2, Sam's Club. But Sam's is not a typical runner-up: it is part of the Wal-Mart empire, which, with $288 billion in sales last year, dwarfs Costco.

But it is the customer, more than the competition, that keeps Mr. Sinegal's attention. "We're very good merchants, and we offer value," he said. "The traditional retailer will say: 'I'm selling this for $10. I wonder whether I can get $10.50 or $11.' We say: 'We're selling it for $9. How do we get it down to $8?' We understand that our members don't come and shop with us because of the fancy window displays or the Santa Claus or the piano player. They come and shop with us because we offer great values."

Costco was founded with a single store in Seattle in 1983; it now has 457 stores, mostly in the United States, but also in Canada, Britain, South Korea, Taiwan and Japan. Wal-Mart, by contrast, had 642 Sam's Clubs in the United States and abroad as of Jan. 31.Costco's profit rose 22 percent last year, to $882 million, on sales of $47.1 billion. In the United States, its stores average $121 million in sales annually, far more than the $70 million for Sam's Clubs. And the average household income of Costco customers is $74,000 - with 31 percent earning over $100,000.

One reason the company has risen to the top and stayed there is that Mr. Sinegal relentlessly refines his model of the warehouse store - the bare-bones, cement-floor retailing space where shoppers pay a membership fee to choose from a limited number of products in large quantities at deep discounts. Costco has 44.6 million members, with households paying $45 a year and small businesses paying $100.

A typical Costco store stocks 4,000 types of items, including perhaps just four toothpaste brands, while a Wal-Mart typically stocks more than 100,000 types of items and may carry 60 sizes and brands of toothpastes. Narrowing the number of options increases the sales volume of each, allowing Costco to squeeze deeper and deeper bulk discounts from suppliers.

"He's a zealot on low prices," Ms. Kozloff said. "He's very reticent about finagling with his model."

Despite Costco's impressive record, Mr. Sinegal's salary is just $350,000, although he also received a $200,000 bonus last year. That puts him at less than 10 percent of many other chief executives, though Costco ranks 29th in revenue among all American companies.

"I've been very well rewarded," said Mr. Sinegal, who is worth more than $150 million thanks to his Costco stock holdings. "I just think that if you're going to try to run an organization that's very cost-conscious, then you can't have those disparities. Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong."

There is little love lost between Wal-Mart and Costco. Wal-Mart, for example, boasts that its Sam's Club division has the lowest prices of any retailer. Mr. Sinegal emphatically dismissed that assertion with a one-word barnyard epithet. Sam's might make the case that its ketchup is cheaper than Costco's, he said, "but you can't compare Hunt's ketchup with Heinz ketchup."

Still, Costco is feeling the heat from Sam's Club. When Sam's began to pare prices aggressively several years ago, Costco had to shave its prices - and its already thin profit margins - ever further.

"Sam's Club has dramatically improved its operation and improved the quality of their merchandise," said Mr. Dreher, the Deutsche Bank analyst. "Using their buying power together with Wal-Mart's, it forces Costco to be very sharp on their prices."

Mr. Sinegal's elbows can be sharp as well. As most suppliers well know, his gruff charm is not what lets him sell goods at rock-bottom prices - it's his fearsome toughness, which he rarely shows in public. He often warns suppliers not to offer other retailers lower prices than Costco gets.

When a frozen-food supplier mistakenly sent Costco an invoice meant for Wal-Mart, he discovered that Wal-Mart was getting a better price. "We have not brought that supplier back," Mr. Sinegal said.

He has to be flinty, he said, because the competition is so fierce. "This is not the Little Sisters of the Poor," he said. "We have to be competitive in the toughest marketplace in the world against the biggest competitor in the world. We cannot afford to be timid."

Nor can he afford to let personal relationships get in his way. Tim Rose, Costco's senior vice president for food merchandising, recalled a time when Starbucks did not pass along savings from a drop in coffee bean prices. Though he is a friend of the Starbucks chairman, Howard Schultz, Mr. Sinegal warned he would remove Starbucks coffee from his stores unless it cut its prices.

Starbucks relented.

"Howard said, 'Who do you think you are? The price police?' " Mr. Rose recalled, adding that Mr. Sinegal replied emphatically that he was.

If Mr. Sinegal feels proprietary about warehouse stores, it is for good reason. He was present at the birth of the concept, in 1954. He was 18, a student at San Diego Community College, when a friend asked him to help unload mattresses for a month-old discount store called Fed-Mart.

What he thought would be a one-day job became a career. He rose to executive vice president for merchandising and became a protégé of Fed-Mart's chairman, Sol Price, who is credited with inventing the idea of high-volume warehouse stores that sell a limited number of products.

Mr. Price sold Fed-Mart to a German retailer in 1975 and was fired soon after. Mr. Sinegal then left and helped Mr. Price start a new warehouse company, Price Club. Its huge success led others to enter the business: Wal-Mart started Sam's Club, Zayre's started BJ's Wholesale Club and a Seattle entrepreneur tapped Mr. Sinegal to help him found Costco.

Costco has used Mr. Price's formula: sell a limited number of items, keep costs down, rely on high volume, pay workers well, have customers buy memberships and aim for upscale shoppers, especially small-business owners. In addition, don't advertise - that saves 2 percent a year in costs. Costco and Price Club merged in 1993.

"Jim has done a very good job in balancing the interests of the shareholders, the employees, the customers and the managers," said Mr. Price, now 89 and retired. "Most companies tilt too much one way or the other."

Mr. Sinegal, who is 69 but looks a decade younger, also delights in not tilting Costco too far into cheap merchandise, even at his warehouse stores. He loves the idea of the "treasure hunt" - occasional, temporary specials on exotic cheeses, Coach bags, plasma screen televisions, Waterford crystal, French wine and $5,000 necklaces - scattered among staples like toilet paper by the case and institutional-size jars of mayonnaise.

The treasure hunts, Mr. Sinegal says, create a sense of excitement and customer loyalty.

This knack for seeing things in a new way also explains Costco's approach to retaining employees as well as shoppers. Besides paying considerably more than competitors, for example, Costco contributes generously to its workers' 401(k) plans, starting with 3 percent of salary the second year and rising to 9 percent after 25 years.

ITS insurance plans absorb most dental expenses, and part-time workers are eligible for health insurance after just six months on the job, compared with two years at Wal-Mart. Eighty-five percent of Costco's workers have health insurance, compared with less than half at Wal-Mart and Target.

Costco also has not shut out unions, as some of its rivals have. The Teamsters union, for example, represents 14,000 of Costco's 113,000 employees. "They gave us the best agreement of any retailer in the country," said Rome Aloise, the union's chief negotiator with Costco. The contract guarantees employees at least 25 hours of work a week, he said, and requires that at least half of a store's workers be full time.

Workers seem enthusiastic. Beth Wagner, 36, used to manage a Rite Aid drugstore, where she made $24,000 a year and paid nearly $4,000 a year for health coverage. She quit five years ago to work at Costco, taking a cut in pay. She started at $10.50 an hour - $22,000 a year - but now makes $18 an hour as a receiving clerk. With annual bonuses, her income is about $40,000.

"I want to retire here," she said. "I love it here."

[Kerry]

The problem with OKC demographics is that the city is so big the numbers get dilluted. On Wikipedia there is a statement that says OKC is 621 sq miles but only 244 sq miles are urbanized. This fact alone drop population density by 66%. The reality is OKC just doesn't look good on paper beasue it is so large.

OKC should de-annex everything outside the current urbanized area.

[Karried]

Kerry, good point..

We had Costcos everywhere in CA and I think that Sam's Club is extremely similar in product selection and prices. Maybe that is one of the determining factors when Costco chooses a location.. the proximity of the competition.

[mranderson]

Why would it help that Sam's is a Wal-Mart subsidiary? That's not even close to being a cogent statement. Put some reasoning behind what you're trying to say.

Why would Sam's be so much more successful than Costco due to its status as a Wal-Mart subsidiary?

My understanding of Costco is that it is competitive with Sam's in terms of price, service, etc.

That was not a rational question. Think about what I said.

[Midtowner]

What you're alleging seems to be that Costco cannot compete because Sam's is a Wal-Mart company. Is that right?

If so, explain how it couldn't compete here, but manages to do so just fine elsewhere?

[Omaha Cowboy]

FYI-Costco will be opening a location in Omaha (122nd and Dodge St area) in 2007..And there are several Sam's Club locations in metro Omaha..

I guess I don't understand how Omaha falls within an approved demographic commensurate with a location opening..While Oklahoma City dosen't?..

Very Puzzling..

..Ciao..LiO....Peace

[Midtowner]

FYI-Costco will be opening a location in Omaha (122nd and Dodge St area) in 2007..And there are several Sam's Club locations in metro Omaha..

I guess I don't understand how Omaha falls within an approved demographic commensurate with a location opening..While Oklahoma City dosen't?..

Very Puzzling..

..Ciao..LiO....Peace

This is the case all over the country apparently. Sam's and Costco are competing for the same customers. What Costco is telling OKC is that they don't even want to try and compete.

[In_Tulsa]

I know that two years ago Costco was in Tulsa looking for a site off of I-44 and Yale that land sold to someone else. I don't know if they are trying somewhere else.

[Pete]

This is just like Whole Foods...

Developing every other market before considering OK due to our crazy liquor laws. I'd do the same thing if I was them.

[soonerguru]

Costco isn't afraid of Sam's Club. No way. They would kick Sam's Club butt if they were to enter OKC, Tulsa and Norman.

There may be a perception that we are a Wal-Mart first town, and the fact that Wal-Mart uses us a test market and plans to open something like 30 SuperCenters in OKC probably kills our chance to get a meaningful retail mix here.

Cue all of the Wal-Mart apologists to lecture me on free enterprise.

[jbrown84]

It sure seems to me that if its such readily available information that our population density is skewered by rural land in the city limits, these companies would notice that. Surely they look at more specific numbers for the smaller area around a potential location, which would obviously show much more favorable figures. I wish she could actually TELL us what demographic figures she means, because I see no legit reason.

[jbrown84]

Oh I saw something on the news about lawmakers wanting to allow wine in grocery stores and the mom and pops are upset about it. What's this about?

[Midtowner]

jbrown -- the liquor store lobby is very much opposed to competition from liquor stores in wine sales which make up a large portion of their sales.

[BDP]

It sure seems to me that if its such readily available information that our population density is skewered by rural land in the city limits, these companies would notice that. Surely they look at more specific numbers for the smaller area around a potential location, which would obviously show much more favorable figures.

Eventually they do, but it's an opportunity cost thing. They usually don't have enough resources to expand to every market that would be a good fit at the same time. So if they are slated to open, say, 30 stores in a fiscal year, they compare the stats to pick those sites. OKC's are often skewed by the low density figures, so it gets passed over. Eventually they saturate the markets that look good on paper. In order to keep up growth figures, they begin to look deeper. Eventually OKC comes back into the fold. OKC can be a good market, but you have to look closer and, unfortunately, they don't look closer until they have to. That's why we get so many chains on the downside of their life cycle.

the liquor store lobby is very much opposed to competition from liquor stores in wine sales which make up a large portion of their sales

And it's totally understandable. The problem with simply allowing wine in grocery stores is that it kills the local liquor stores. If they are going to change these laws, they need to really change them. They need to let liquor stores sell whatever they want at whatever temperature they want and let them have more than one location if they want. We really just need to open the market on every level and lift all the archaic restrictions on all the vendors. There really is no reason for government to pick and choose what kind of retailers are going to sell us what kind of legal goods.

[Easy180]

Bdp..You are correct...Wife works for a large natl bank and the potential new branches get put on the backburner when corporate sees how quickly they breakeven on branches in Arizona, Chicago etc

They will eventually run out of the more attractive sites and get down to the last page and build in Oklahoma ...May have come a long way, but still aren't one of the first states large retail companies look at for sure...except Wal Mart unfortunately