Is Costco Broken?


By looking at its stock price, trading right around all-time highs, you would never suspect that Costco Wholesale may not be quite what it once was.

To suggest otherwise is heresy on Wall Street, especially if you throw in the company’s fortress-like balance sheet and cash flow statements. And let’s not forget that dividend.

But for retailers, you also have to look same-store sales — usually defined as sales of stores open more than a year. And at Costco , if you go back more than a year — and strip out the impact of gas inflation and foreign currencies — sales have been on a slow bleed for more than a year, slipping to 5 percent last month.

Add back gas and foreign currency, and they’re in freefall — a disappointing 3 percent last month, a quarter of where it was a year earlier. And while renewal rates remain robust, in the past quarter there was a pronounced deceleration in shopper frequency.

All of which raises the question: Is Costco broken?

Remember, we’re talking about one of the best companies in America and certainly one of the greatest retailers in the world. With only a few exceptions, its revenue growth going back to the early 1990 has been in the double-digits. Part of that is the result of a steady stream of new store openings in the U.S. and abroad, rising membership fees and uncanny customer loyalty.

But even a company as good as Costco isn’t immune to forces beyond its control.

And if not broken, the question you’ve got to ask: Has something outside of macro economic forces changed just enough to affect the company on the margin?

In this case, I believe the “on the margin” is something more intangible: A shift in demographics — more specifically, the aging McMansion baby boomer population that has evolved into downsized empty-nesters

This is a theory I concocted in part because I am one of them. The very notion of this lit up my Twitter, Facebook, and Google+ accounts when I floated the idea there recently.

The reason is simple: As almost anybody in our increasingly non-exclusive but continuously growing club (confirmed by Census Bureau stats) can say: We simply don’t buy as much at Costco as we used to. My wife and I maintain the Costco membership we have had since we first signed up in 1991 at the San Ramon, Calif., store. But our kids are out of the house and we just don’t need as much stuff — certainly less stuff in bulk.

Everytime I go to the local Costco in Norwalk, Conn., I keep trying to calculate if the $55 membership fee is really worth the hour-plus it takes out of a Saturday or Sunday in driving time, maneuvering the horrific parking lot, and the highlight for any Costco member: Playing check-out line-roulette.

While there don’t appear to be any demographics studies specific to Costco to prove my point, Costco’s affable CFO, Richard Galanti, told me that it’s “something we talk about internally.”

While he doesn’t believe the demographic shift has impacted the company “yet,” he acknowledges that “as things change, we will have to change with it. We have to keep reinventing ourselves.”

Which is something that Costco has done exceptionally well, especially as the Internet has taken a significant toll on plenty of other big-box retailers. While the recent numbers from Costco have been disappointing, “they’re still pretty darned good,” said retail consultant Jan Kniffen of J. Rogers Kniffen WWE in Greenwich, Conn., who still considers the stock a “buy.”

Kniffen agrees a demographic shift is having an impact on retailing, but trying to pinpoint the impact is harder. “It’s much like the gradually heating water that finally boils the frog,” he said.

Still, Colin McGranahan of Bernstein Research, one of the few bearish analysts on Costco, who rates the stock an “underperform,” said there is certainly “some data that shows Costco is running out of steam,” in the U.S., which accounts for 73 percent of revenue.

Kniffen concedes it could be something as simple and obvious as the “lack of new business formation.”

Others point to increased competition by dollar stores online and off, the increase in membership fees (it’s more than double from when we became members, though renewal rates would suggest otherwise), and a slide in food inflation, which drives the top line of all food retailers.

All of which may be true, but so is the growth of empty-nesters.

Is Costco broken? Maybe not. It certainly will be growing internationally — a centerpiece of its growth story. But one of its challenges would appear to be to find a way to keep up its real growth as those of us who were once its core customers move on.

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