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Costco Finds a Way to Offer Even Fewer Frills

Daniel B. Kline, The Motley Fool

Costco (NASDAQ: COST) keeps prices low by making sure it controls costs. That means no merchandise displays and no bags at checkout. The chain also skimps on personnel, and its stores have relatively few customer-facing workers.

Now the warehouse club wants technology to remove human interaction in another part of its business. The chain has been adding self-checkout locations to many of its stores -- something it had previously moved away from -- with plans to have them in about half of its warehouses over the next few months.

"Of the 540-ish locations in the U.S., it's in about a hundred in the quarter and we are going to move to 250 in rapid order over the next several months," said CFO Richard Galanti during the third-quarter earnings call.

The exterior of a Costco locaiton.

Costco makes every effort to control its costs. Image source: Costco.

Why is Costco adding self-checkout?

Galanti admits that using self-checkout saves the company some labor. That's a rare admission, as most companies adding this technology go out of their way to talk about how self-checkout frees up labor to perform other tasks.

"For us it works best in high-volume locations, where it's gotten a lot easier particularly if you have a credit card -- where you can just contact us and it is very fast and customers are using it, our members are using it," he said. "And so it's saving some labor at the front end ... it's getting people through the front end faster."

To be clear, the CFO did not say that Costco planned to cut any workers. His comment on saving labor was vague, but when a store needs fewer cashiers, it's reasonable to think that may result in the chain's being able to have fewer people working.

That's a very good thing for Costco shareholders, as the labor market -- especially in retail -- has become very tight. It's getting harder to hire quality entry-level employees, even though the warehouse club pays some of the highest starting wages in the industry.

Is this a good idea?

Self-checkout has become a standard offering at large retail chains. Costco can integrate it as long as it offers assistance for customers who may not easily understand how it works and traditional staffed checkout lines for consumers who want them.

Ideally, this is just a first step toward more automation. Scan-and-go technology has been used by other chains, and it may ultimately make sense for the warehouse club.

Costco rarely innovates. It's more likely to let its biggest rivals test new technologies in order to figure out what works. Once that happens, the membership-based warehouse club can pick and choose what works for its customers.

The message from Costco to its members has always been that not having certain things -- like shopping bags or pretty displays -- translates to keeping prices low. This fits into that messaging, and as long as it's rolled out carefully it should not be disruptive to the company's business model.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.