The Costco model

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Costco issues a warning that its earnings aren't going to be as good as expected.  You would think that a company that specializes in helping people save money by buying in bulk would be rolling in the green stuff, but apparently Costco was making a tidy profit off of gasoline, and the price drop has really hurt them.  There's also the fact that many of their goods are fairly high end items that people have cut back on, like furniture and clothing; presumably those items have a better margin than an eight-pound box of spaghetti.

This recession may really challenge Costco's business model.  The company has built itself around being the upscale warehouser--paying premium wages to its workers, while carrying premium products.   You really don't want to be the high-cost provider in a deflationary environment--at least, not as long as wages remain sticky.  It's also less broadly distributed, centering itself near relatively affluent areas.  In most cases, that's a good place to be.  But so far, the recession has taken a disproportionate toll on those with substantial assets.

(Obligatory notation that it is still better to be a laid-off ibanker than a single mom whose shifts at Wendy's just got cut back.  But the contraction in incomes at the top has been greater, proportionally, which means those people will be cutting back more than downmarket consumers.)

To be fair, Wal-Mart has also lowered earnings guidance, but it seems to have weathered the last few months better than Costco has.


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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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