Costco sees an upside to down economy

The stagnant economy has Costco Wholesale customers gravitating toward basics like food, jeans and T-shirts.

But they also like the occasional deal on high-end Tumi luggage and Coach handbags, Costco CEO Jim Sinegal said Friday to a group of retail buyers and wholesalers at Pacific Market Center's Winter Gift & Home Accessories Show.

"It's kind of confusing, but consumers are smart, and they know when they see a value," he said.

The down economy has given Costco some opportunities for luxury-item deals, including the chance to sell prime-grade meat that used to go almost exclusively to restaurants. With people eating out less often, said Sinegal, "there are not as many steaks being sold in restaurants, and we're selling them."

Still, Costco is suffering along with much of the retail world. Sales rose just 3.7 percent last quarter and net income was up less than 1 percent to 60 cents a share.

Last month, the Issaquah-based company warned that analysts' expectations for a second-quarter profit of 75 cents were "on the high side."

Sinegal said more customers than before are buying Costco's private-label Kirkland brand. Kirkland sales represent just under 20 percent of Costco's business, he told the audience.

In an interview afterward, Sinegal said he expects that figure to reach 25 percent in the next few years. Some private-label items, such as olive oil, are so popular that Costco no longer carries a name-brand alternative, he said.

The number of television sets sold at Costco is up more than 50 percent, Sinegal said, but they're priced so low that the chain has not seen a lot more money from those sales.

He credits the low prices with driving those sales, but said customers also could be making different lifestyle choices.

"It could be people saying that home entertainment is more important now than ever," Sinegal said.

His speech drew a comment from Arthur Tauber, of Avanti Linens, who sold decorative towels to the warehouse chain Price Club in the 1970s, when Sinegal worked there before co-founding Costco. The two chains merged in 1993.

Tauber remembered the company as "cold and dingy, and I had to wait on a wooden crate," he told Sinegal. "I didn't think you'd make it, but clearly you made it."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com