Costco Coming Clean?

Warehouse-club retailer entering car wash market in Seattle

SEATTLE -- Costco Wholesale Corp. is opening its first car wash, signaling its intention to pursue that profit center, said the Seattle Post-Intelligencer. The first unit will be at a store in the Sodo district of Seattle.

We should open in March or April, and it will be our first entry in that business, said CEO Jim Sinegal, who told the newspaper that a wash will cost $7.99, including a tire shine, undercarriage washing and a full body wash. Obviously, we are doing this with the intention that would have the ability to do some volume.

That means Issaquah, Wash.-based Costco will be able to wash a lot of cars at once, using many fast conveyor-driven machines that are designed to require as little of Costco's labor as possible, said the report. The company tried it once before, 2-1/2 years ago in Federal Way, Wash., but problems halted the effort. It never opened, added the report.

I am hopeful that I can get it done in my career, Sinegal joked to the Post-Intelligencer; he said he did not know if the Sodo warehouse had secured final construction approvals.

Costco's entry into any category almost certainly promises to squeeze the bottom line for those already in that business, whether it is groceries, gasoline or car washes, said the report.

Competitor Victor Odermat, president of the Seattle-based Car Wash Enterprises Inc., which owns the Brown Bear Car Wash chain, told the paper that he welcomes Costco's competition, which he said improves his own business by getting more people to pay to wash their cars. Our biggest competitor is the driveway washer, he said.

And the company has definite plans to open six more locations on Chevron sites it owns in Bainbridge, Kent, Puyallup, Olympia, Poulsbo and Fife. Odermat said the company was planning to change its current prices, which range from $6.99 to $12.99 for three tiers of service.

He added that the nuts and bolts of operating a conveyor-driven carwash could prove too much for Costco. I can recall that Marathon Arco and Shell all tried conveyorized car washes and had to give them up because they were too labor intensive and high maintenance, said Odermat, whose company operates 19 shops with conveyor-driven wash machines. It all depends on how many problems you wantconveyorized carwashes are more productive, but also have a lot of problems.

Meanwhile, earlier this month, Costco said first-quarter profit rose 12%, helped in part by sales of gasoline, according to a Bloomberg report. Net income climbed to $215.8 million, or 45 cents a share, from $193.2 million, or 40 cents, a year earlier, the -based company said today in a statement distributed by Business Wire. Revenue rose 12% to $12.9 billion.

Costco benefited from buying gasoline daily as prices declined, allowing the company to sell fuel for less than competitors.

Comparable-store sales rose 9%, exceeding the 8.1% gain of Wal-Mart Stores Inc.'s Sam's Club. Comparable sales growth at Costco has averaged 7.5% in the previous four quarters. At Sam's Club and BJ's Wholesale Club Inc., sales growth has averaged 5.1% and 4.1%, respectively, during the same period. Results at Sam's Club and BJ's include gasoline sales. Costco excludes it. Costco has 471 stores. Sam's Club has more than 500 and BJ's has 157.

Costco carries less than a day's supply of gasoline, making it more vulnerable to wholesale price increases, according to Sinegal.

In April, the company lowered its third-quarter and full- year profit forecasts because of rising fuel prices. Costco keeps retail prices at or below those offered by local stations to bring customers to its warehouses, Sinegal said.

Also, Costco is challenging Washington's three-tier regulatory system for distributing beer and wine, the Post-Intelligencer said in a recent separate report. Washington's system requires that both distributors and producers mark up the price of the beer and wine they sell by at least 10% above cost, ensuring a uniform cut of beer and wine sales to both producers and distributors.

Sinegal said Costco brought the suit against the Washington State Liquor Control Board because Washington laws constitute a restraint of trade, preventing the retailer from using cost-cutting strategies such as negotiating directly with out-of-state wineries for better prices.

A spokesperson for the Washington Beer & Wine Wholesalers Association, which has taken up the case on behalf of the Liquor Control Board, told the paper that deregulating beer and wine distribution would be a direct squeeze, running small independent wineries and breweries out of business as well as the distributors, which would hurt the consumer.

The wholesalers association has long argued that removing government protection of profit margins and the distribution industry in Washington would limit consumer product choices. That's nonsense, Sinegal said. If you look at all the other states that don't have these kinds of antiquated laws, you'll find the selection is just fine and that consumers have lots of choices and much better prices.

A U.S. Supreme Court decision in May found that laws in Michigan and New Yorkwhich prohibited out-of-state wineries from shipping directly to consumers within their borderswere anti-competitive. Costco wants the court to apply that decision to Washington, where in-state wineries can sell directly to retailers, while out-of- state wineries have to sell through a licensed in-state distributor.

Washington law allows in-state wineries to sell directly to retailers, bypassing the three-tier system. But out-of-state wineries have to sell their products at a 10% margin to distributors, who then are required to mark up the prices another 10% to get the wine on retailers' shelves.

The Liquor Control Board filed a brief with the court that proposed eliminating all direct shipment of wine and beer to retailers if Costco won its case. That caused the Washington Wine Institute, a lobbying group for the wine industry, to get involved. It filed a brief with the court that called the liquor board's proposal crippling to Washington's burgeoning wine industry.

A trial is set for March 2006, said the report.