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Costco keeps prices down as its business grows

Costco president and ceo Jim Sinegal refutes the notion that the retailer could raise prices slightly and consumers wouldn't notice, as was suggested at last week's Goldman Sachs Global Retailing conference.

"The reason customers shop with us is for our quality and that we drive such a hard bargain. We could start to raise prices, but in my view that's a mistake for our business in the long term."

He added, "We bring goods to market at the lowest possible price — it's that simple."

Costco is also known for quality, he said, whether it's fine wines, chickens or other categories. Though it has a strong private-label program, 85 percent of its merchandise is national brands. "That's what we're known for — highly-sought-after brands." Within the past year, Costco has added new direct relationships with such manufacturers as Nautica, Ralph Lauren Home, Royal Sateen and Kitchen Aid.

With 394 warehouses averaging $102 million in sales and 135,000 square feet each, Costco will add 59 units within two years, though the majority will be in existing markets, said Richard Galanti, executive vp and cfo.

Costco also just opened its second two-story unit in the U.S., in Port Chester, NY. A two-story unit is essential where real estate is scarce, Sinegal said. "It's a costly way to do business" but necessary if it wants to get into those markets.

Costco's website has also performed well, he said, and is unique in that it is profitable. In 2000, the website had sales of $52.9 million, which increased to $76.5 million the following year. For 2002, sales will increase 86 percent to $142 million. "We've built ourselves a very nice business here," said Sinegal.

Costco also recently replaced its paper gift certificates —previously a $50 million business — with electronic cash cards. "We expect we'll at least triple that business based on early returns."

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