Meat retailer of the year: Costco[R] Wholesale: high-quality products at the lowest-possible...

There's only one retail warehouse club store chain in the United States where members can buy a diamond ring worth more than $30,000 or a baby-grand piano--and then buy a fresh USDA Choice beef tenderloin that tastes like a million bucks: Costco.

Costco Wholesale Corp., Issaquah, WA, Meat Retailer magazine's 2003 Meat Retailer of the Year, not only has a growing meat business featuring an impressive variety of high-quality, value-added beef, pork, lamb, and poultry products for its almost 40 million members, it also has a strong food-safety program in place.

Costco sells a mind-boggling array of products ranging from perishable food to appliances, wine to automotive supplies, and clothing to office equipment, just to mention a few--and all products are "100-percent satisfaction guaranteed."

Meat and poultry play a prominent role in the continuing success of this powerhouse chain, which is the third-largest supermarket retailer in the country superceded only by Kroger and Wal-Mart, and the largest warehouse club store in the world. Currently operating 418 warehouses worldwide, including 309 in the United States and Puerto Rico, Costco reported net sales of $41.70 billion for the 52-week fiscal year ended August 31, 2003--a 10 percent increase from the prior fiscal year.

What's driving Costco's financial success is consistently providing its members with high-quality products at substantially lower prices.

"Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing, and accounts receivable," explains Jim Sinegal, Costco president and chief executive officer. "We run a tight operation with extremely low overhead, which enables us to pass on dramatic savings to our members."

Fueling the meat machine

Behind the reins of Costco's successful meat operation is a team of talented corporate managers and local staff.

"We report to Tim Rose, senior vice president of fresh foods," says Charlie Winters, vice president of Costco's fresh meat operations. With Costco since 1987, Winters is credited for creating the company's fresh meat program.

"Our goal is to deliver quality products at the very lowest price," he adds.

Winters and Jeff Lyons, vice president/senior general merchandise manager of fresh foods/corporate foods, report to Rose; fresh meat operations managers report to Winters, and merchandising managers report to Lyons. Winter's right-hand man is Chris Ostrander, assistant general meat manager/director meat operations. Seventeen regional meat/service deli supervisors are stationed throughout the country at regional buying offices.

Each warehouse store manager is responsible for hiring the warehouse meat manager, meat wrappers, and other department employees with the assistance of the regional meat supervisor.

"That supervisor is going to be the hands-on trainer in conjunction with the warehouse," Winters says. "Warehouses in a particular region report to that area's regional vice president of operations."

The fresh meat department at each warehouse is highly efficient, but is staffed "lean and mean," says Andy LaRose, regional meat/service deli supervisor, Midwest Region, Oak Brook, IL. The average meat department consists of a meat manager, three meat cutters, and maybe four part-time people who help wrap meat or work the counter, he says.

"We offer only forty [fresh meat and poultry] items--not one-hundred and forty," he adds.

But don't let the modest number of meat items and cutters fool you when it comes to volume of products sold.

"We sell more than six-hundred million pounds of meat a year, and our business continues growing annually," Winters says.

Costco's USDA Choice beef-products category is the flagship of its fresh-meat department.

"Our steak category is extremely strong," LaRose says. "Our top-five steaks are beef tenderloin, New York strip, top loin, boneless sirloin, and ribeye."

"We concentrate on the top-ten items in the meat department, and that's true in every department," Winters says about the company strategy of not trying to offer all things to all people. "I'm sure there's no one else in the country that comes close to our volume in boneless loins, tenderloins, and New York strips. We're very big users of loin and rib meat; that's what our members want."

Costco also sells more than 150 million pounds of Kirkland Signature [its private-label brand] 88-percent lean ground beef annually, reported a Beef magazine article earlier this year. Costco operates a ground beef processing plant in Tracy, CA, where it manufactures fresh ground beef, frozen patties, and Kirkland Signature meatballs that are distributed to warehouses in the United States and Mexico. Each warehouse regularly monitors ground beef fat content to ensure it meets specs.

Other top-sellers include boneless, skinless chicken breasts; boneless pork chops; and a variety of cuts through its Australian lamb program.

Costco's deli department is adjacent to its fresh meat department. It is usually staffed by one manager, three or four full-time staffers, and seven or eight part-time employees. Deli products include value-added items like fresh chicken pot pie ready-to-bake, Oriental chicken salad, flank steak with portabella and bacon, fresh meat loaf, and chicken enchiladas. Few deli items are pre-cooked.

"I don't think prepared meals are where the sales are, and no one has been really successful there," Winters says. "We're much more successful in our service-deli area with a prepared entree that's ready to grill like the prepared flank steak. It's a very simple, high-quality meal. There's a big quality difference in cooking a fresh product as an entree versus re-hydrating a precooked item."

Rotisserie chicken is another hot seller for Costco. Approximately 40,000 a day are sold system wide.

"It's not safe to be a chicken around here," Winters jokes.

Members can also buy a wide range of upscale, prepackaged meat and poultry products such as bacon, ham, sausage, and sliced luncheon meat from refrigerated cases located near the deli department--or a variety of meat and poultry products featured in Costco's frozen food cases.

When it comes to product quality, Costco is hard to beat. Kevin Coupe, editor of MorningNewsBeat.com, Darien, CT, tells Meat Retailer how a leading consumer food magazine recently took a Boston chef from his four-star restaurant to a local Costco because he had never been to one.

"The guy went bananas in the meat department," Coupe relays. "Not only did he say the meat was as good or better than what he was getting from his distributor, but it was also significantly cheaper."

Making the cut

Costco offers few case-ready products.

"What has made us so successful is the product we're cutting for our members, not pre-packaged goods," LaRose says.

Fresh boxed meat (primarily boneless) is delivered on average three times a week to Costco warehouses.

"We're constantly turning over the inventory, which gives the member a fresher product," LaRose says.

While attending the grand opening of a new Costco warehouse near Detroit, MI, LaRose pointed out to Meat Retailer that all fresh meat in the counter was cut earlier that day.

"We put a pack date on each package," he adds. "We'll give it three days shelf life, but we will pull it if it hasn't been sold within two days before it goes out of code." The meat is packed in a tray with a shrink over wrap.

Some suppliers have a very positive affect on Costco's product mix. Costco's Swift brand boneless pork loin, for example, is the result of an investment Swift made in this product line.

"Swift was interested in developing a better package so they built the [custom shrink-wrap] packaging machines--they invested in the equipment," Winters says.

Costco warehouses open at 10 a.m., but contrary to industry tradition--meat cutters do not start before 7 a.m.

"The reason they don't start cutting earlier is we want members to see what we do through the windows we have behind our meat counter looking into the cutting room," Winters says.

Each Costco cutting room has four cutting tables. All red meat, except for tenderloins, steaks, and stew, are mechanically tenderized. And each cutting room has an automatic wrapper, auto labeler, and a grinder with a huge 10-horsepower motor to help make the high-volume operation more efficient.

Costco buys from major national as well as local suppliers, and it strives to establish long-term relationships with its vendors.

"We use all the major brands in the country to source economically; certainly, price is a big factor," Winters says. "But we don't want to bone products; we want to produce pounds of finished product. We challenge vendors to drive out costs while at the same time giving us higher-quality products. These demands--such as taking the strap off of New York strips--aren't just good for us; they're good for the entire industry."

"We want the product as wrap-ready as possible when we get it," Ostrander adds.

Costco members indicate what products they want to buy, and this drives the meat department's product mix. Members do this verbally or by dropping notes inside a box located near the warehouse exit.

Throughout the years, members have also told Costco what they don't want to buy, Ostrander says. "We also keep track of every item, and if it falls below our benchmark (average sales for the category), it's gone," he adds.

Enhancing food safety

When asked to list Costco's points of difference from the competition, Winters mentions its focus on consistency and quality first.

"We are continuously challenged to create a better value for the members," he adds. "If we do that, we get more membership income and more shops. This is what drives our sales."

But he and others also point to Costco's commitment to food safety as another major selling point. An article published in Food Safety Magazine earlier this year focuses on Costco's food-safety commitment.

"Because food safety is a part of the culture at Costco and part of our everyday business, we've been able to develop a very successful, structured program that is unique in its simplicity--given how big the total operation is and that we employ 100,000 people," said R. Craig Wilson, assistant vice president, food safety and quality assurance, in the article.

Costco's food-safety program addresses four areas:

* Food-safety operations in the warehouse club buildings, which involve a unique use of sanitation standard operation procedures (SSOPs) and Hazard Analysis and Critical Control Points (HACCP) developed to work in a retail setting.

* Knowledge-building, food-safety vendor audits.

* A company-wide, food-safety training program.

* A proactive quality-assurance function that focuses on scientific and technical expertise on both the food safety and quality of foods manufactured, repackaged, or supplied to the company.

Costco's extensive vendor audit program is considered by many of its suppliers to be one of the best vendor operation auditing programs in this part of the food industry, the article stated. These audits involve visiting a vendor's facility. A category-focused expert from the Costco buying staff examines all documentation for that company's given industry and then ensures manufacturing processes follow the documentation.

An exit review is conducted by the auditor with the vendor, who receives a copy of the audit within three days of the evaluation. The vendor must then address any issues listed in the audit and provide Costco with what corrective action will be taken within a specific time frame.

Costco's food-safety and quality-assurance program includes three levels of food-safety education and training programs for all Costco warehouse employees. Examinations and certifications are administered by Costco staff at each warehouse. Food-area employees must read a food safety handbook and review an interactive, multimedia presentation on a CD-ROM that covers SSOPs for all areas--plus be advised on their roles and responsibilities in ensuring safe food. Employees are tested after viewing the CD and awarded a completion certificate.

Costco managers must also take a 22-hour home-study course followed by a four-hour class and a certified exam given by management staff, the article relays. The desire is to have each manager in each warehouse food-safety certified. Every three years, managers take a re-certification course, which supports Costco's cross-training of employees.

The company's quality assurance department provides food-safety and quality assurance support to all warehouse, manufacturing, packaging, and private-label operations, the Food Safety article continues. In product testing, food-product samples taken from vendors and Kirkland Signature product producers are sent to the corporate headquarters lab in Washington State where the microbiological quality is checked against specifications set by the buying staff.

This department also:

* Oversees managing the in-house microbiological labs based in its ground beef processing plant and repackaging facilities

* Works with third-party labs for chemistry and some microbiological testing services

* Coordinates sampling and testing of products scheduled for export and items to be tested in other countries Costco operates in

"Craig Wilson's group has done an excellent job of formalizing what we need to do in regard to food safety," Winters tells Meat Retailer. "Enhancing food safety has become a part of our culture; it's the way we do business. Investing in food safety makes us better operators."

Costco will continue striving to reduce prices as it improves product quality. Winters relays how the company first offered a commodity chicken filet years ago, and this product has since evolved into a boneless, skinless, 99-percent fat-free breast--and it is co-branded with Costco's Kirkland Signature and Tyson brands.

"Each product under our private-label brand, Kirkland Signature, makes a quality statement," Winters says. "If we co-brand that brand with a national brand, we're saying this product is even better than the national brand and represents a better value to the members."

When asked how the company determines what meat and poultry products to offer under the Kirkland Signature brand, Winters says any high-volume product allowing Costco to leverage itself, or where there isn't a national product that represents the best buy, is fair game.

Meat and product sampling is popular at Costco. During the Detroit-area grand opening, a number of sampling tables offered prepared beef, pork, and poultry products--and all were swamped with long lines of hungry members.

"We started our sampling program years ago by promoting new items," Winters says. "We want to get these products in the hands and mouths of our members. Once they see and taste the product, they'll buy it."

Before leaving any Costco warehouse, members have one last chance to buy meat-based products at the Food Court located near the check-out area.

"Food Courts sell our signature hot dog, and you can't buy a better pizza," Winters boasts.

What does the future hold for Costco's meat operations?

"We don't have any big plans on the horizon that will change us drastically," Winters says. "We'll continue to fine-tune our operation in every way we can--from buying all the way through distribution--to drive out costs."