CPG Prices Falling: Costco

Costco Wholesale Corp. said last week CPG manufacturers are starting to reduce prices, possibly in reaction to rising private-label sales. According to Richard A. Galanti, executive vice president and chief financial officer, The branded companies are not passing all the savings back yet, but we're starting to see them do so, which is the right thing to do and it's great for customers.

ISSAQUAH, Wash. — Costco Wholesale Corp. here said last week CPG manufacturers are starting to reduce prices, possibly in reaction to rising private-label sales.

According to Richard A. Galanti, executive vice president and chief financial officer, “The branded companies are not passing all the savings back yet, but we're starting to see them do so, which is the right thing to do — and it's great for customers.”

He suggested the CPG actions may be in response to the 300-basis-point increases Costco has seen in private label penetration relative to brands during the current fiscal year — increases Galanti pegged at 10% to 15%, compared with normal increases of 0.50% to 0.75%.

“That increased penetration of private label is equal to the decline in the sale of those branded items,” Galanti pointed out.

“But within the last four weeks we've had indications that prices are coming down,” with liquid soap prices dropping 6% to 10%; plastic utensils coming down 7% in March and another 6% in June; and branded water dropping 7% in April.

Galanti made his remarks during a conference call with investors to discuss financial results for the third quarter, which ended May 10. Net income fell 29% to $209.6 million in the quarter and 19.6% to $711.8 million for the year to date, while sales fell 4.8% to $15.5 billion in the quarter and 0.7% to $48 billion for the year to date.

Comparable sales fell 7% overall and 5% in the U.S. for the quarter, and 3% overall and 1% in the U.S. for the 36-week period.

Fresh foods and the food and sundries categories are driving sales and shopping frequency, Galanti said, with comp sales of fresh foods slightly positive, led by meat and produce sales in the low double-digit range.

Q3
RESULTS

Qtr Ended 5/10/09 5/11/08
Sales $15.5B 16.3B
Change -4.8%
Comp-store -7%
Net Income $209.6M $295.1M
Change -29.0%
Inc./Share 48 cents 67 cents
36 Weeks
Sales $48.0B $48.4B
Change -0.7%
Comp-store -3%
Net Income 711.8M $884.9M
Change -19.6%
Inc./Share $1.62 $1.99