Monday, March 25, 2013


Costco has been in the news[1] lately  with regards to their passive aggressive stance on "donating otherwise unsalable produce to food banks", to wit, they don't. This has left advocates of food "trash to treasure" baffled but more importantly frustrated to the point of abandoning the effort.

Let's look at some explanations that go a bit beyond "cold hearted corporate assholes" and perhaps explain a bit of what is going on. This will be rambling and for those who really couldn't give a shit one way or the other this is a good time to read Dilbert or People Online.

Costco is a publicly traded company (NASDAQ:COST) which returns value to investors by capital appreciation and dividends. Relative to Walmart Costco stock sells at a premium with a P/E of 24 compared to Wally World's 15 while the dividend rate is less than one half at a little over 1%. Net income is 2% of total revenue which is to say that Costco is profitable and margins are razor thin. In the recent issue of Better Investing an analyst observes that Costco makes their money on membership fees and not on products.

How does Costco do this...maintain a profitable operation, gain and retain members and garner the approval of the stock market while enduring a competitive environment offering a near-zero margin? The do two things. They treasure their brand and they are efficient.

Anyone who has shopped at Costco and either of the two major competitors (Sam's or BJ's) knows immediately there is a noticeable difference in product quality and offerings and in general presentation and operation. Costco product lineups do not smack of surplus that wouldn't sell in the main stores and Costco constantly evaluates products for inclusion in their Kirkland private label offerings. Stores are clean, consistently laid out and product presentation is top notch with store associates ensuring product is properly in its place.

Many Costco products compete with online offerings and their supply chain must be every bit as cost effective to the customer as FedEx or UPS as they also bear the burden of sales tax. And it is, with container shipments going from port to store in 24 hours. They move product and they move it quickly and efficiently. This is no less true of fresh food than blenders and televisions. Customers rarely find produce after the sell-by date with only a superficial glance required to ensure quality is a consistent as always.

They've done this by building a corporate culture that values and rewards brand and efficiency. They attract, hire, train and retain intelligent hardworking employees. Management is clearly incented to maintain high quality and efficient operations in their area of responsibility.

And here is where it wraps back around to free food. In an efficient operation "otherwise unsalable food" is called "waste". Efficient operations ALWAYS look to improve efficiency and finding alternative uses for waste is not directly supportive of that goal. To the extent that donating the waste product of operational inefficiencies mitigates the negative feedback required to drive down the waste in the process it is in fact a bad thing. A corporate culture that detests operational inefficiencies needs no explicit statement to prevent these donations and no policy that "leaves it up to the store management" will result in donations.

Many a Volvo-drivin' Birkenstock-wearin' Good Earth activist[2] will see disposal of any recoverable food as waste heaped upon waste and is probably offensive to their sensibilities. It is presumably quite frustrating to knock on their door, make your presentation and get zero results. Perhaps there is another door.

What if these advocate/activists became "shareholder activists[3]"--stockholders often present shareholder proposals voted on by the entire shareholder community and items of merit garnering wide support will become corporate policy. It may be no more effective than previous attempts but given Costco's recent stock performance and if you believe that is an indicator of future performance[4] then you will at least get a bit of lucre for your troubles. You could use that to buy food for the food bank.

[1] After Maureen Downey's latest faux pas regarding Nancy Jester's blog we at The Other Dunwoody are now convinced that the "legitimate" Fourth Estate has abdicated leaving the blogosphere to take up the slack. And so it shall.
[2] Volvo has probably been replaced by "Prius" and it is a mystery why that has not been supplanted by "Leaf", but then again, the whole Volvo thing is a mystery.
[3] This is in no way meant as a stock recommendation and individual judgment should be applied to any stock purchase.
[4] Of course there is no reliable indicator of future performance or we'd all be rich.