“Because It’s the Right Thing to Do.”

A veteran CFO discusses the finer points of bottle design and why paying higher wages makes sense. An interview with Richard Galanti, EVP and CFO of Costco Wholesale Corp.

In 1984, Richard Galanti was a young investment banker at Donaldson, Lufkin & Jenrette when a Seattle-area start-up retailer invited him to become its vice president of finance. He is now starting his 27th year as finance chief of Costco Wholesale Corp., which has become the nation’s third-largest retailer, with fiscal 2009 revenues of $71.4 billion. Costco is a warehouse club; some 55 million people pay an annual fee to shop at its 566 locations in the United States and abroad. They buy goods, frequently in bulk, ranging from apparel and appliances to food, electronics, jewelry, and more.

But Galanti, who turns 54 in March, isn’t the only old-timer at Costco. Co-founders Jim Sinegal and Jeff Brotman, for example, are still at the helm as CEO and chairman, respectively. Indeed, turnover is generally low among Costco’s 147,000 employees. That’s because the company’s compensation and benefits are far more generous than those of its main rivals, Sam’s Club and BJ’s Wholesale Club. Costco’s shoppers are loyal, too: the member renewal rate in 2009 was 87%. (That loyalty pays dividends: in 2009, membership fees contributed just 2% of total revenue but 86% of operating income.)

Thanks to Costco’s concern for the welfare of its employees — and, increasingly, for the health of the environment — many people regard the company as the good guys of retail. Is Costco too good to be true? We recently talked with CFO Galanti to find out.

In December Costco reported growth in same-store sales for the first quarter of its fiscal year. How did the business hold up during the recession?

There were two questions for us at the beginning of the downturn. One, were customers still willing to pay a fee to shop? Two, would they still come to Costco, which is a little farther away from the local supermarket, discount store, or drugstore? In fact, the one thing that increased dramatically over the last 12 or 14 months was the frequency of shoppers. Were people spending less? Yes. Were they more discriminating in terms of what they were buying? Yes. Were categories like jewelry, home furnishings, and bigger-ticket discretionary items the weakest? Absolutely. But whatever the level of sales decline, it was less than it was for traditional retailers. As apparel stores at the mall were down 10%, 20%, and 30%, we were down 5%. As jewelry chains were down 20%, 30%, or 40%, we were down 10% and 15%.

Given that success, do you plan to expand from your current 40-state base?

Yes, but I doubt if we will ever be in all 50 states, at least not in the next five years. First of all, there are three players in our industry. While there are many cities around the country where there are two or three players and we profitably coexist, it’s always good to be first, because once the second guy comes in, customers may say, “I’ve already joined one of those clubs and I don’t need another one.” There are some states that are smaller, where if somebody else is already there, there’s not a whole lot of opportunity left. We’re not rushing to go to Arkansas, where Wal-Mart is headquartered.

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