Merger May Spur Rivalry -- Grocery Stores Could Suffer

The merger announced today by Costco Wholesale Club and Price Co., two warehouse club giants, could provide stiffer competition for grocery stores and others already battling the clubs for market share.

Warehouse stores have been locked in a heated battle with grocery stores, which are fighting back with bulk offerings and lower prices.

A 1992 report on the warehouse club industry said traditional food retailers would be hurt the most by warehouse club expansion and could expect to lose more than 15 percent of their market unless they adopt new strategies.

"Costco and Price Club are experiencing the highest success ratios in capturing market share from supermarkets," noted the Babson College Retailing Research Report on the warehouse industry. The Wellesley, Mass., college is an independent school of business management.

At Costco's Kirkland headquarters today, Jim Sinegal, the company's president and chief executive officer, said the merger would open up opportunities for expansion in the Pacific Rim and Latin America.

"It opens up a lot of opportunities for us . . . lots of things that we probably wouldn't even want to say because we wouldn't want our competition to know."

Sinegal said employment at both companies should remain the same, or expand, in Kirkland and San Diego - where Price Co. is headquartered.

Although the companies say they plan to maintain the two headquarters, retail analyst Saul Yaari of Piper Jaffray Inc. said that plan sounded like "a temporary solution."

Yaari said the merger benefits Price more than Costco because Price's sales productivity per store had been declining faster.

Shareholders in the companies - both traded on NASDAQ's National Market System - will exchange their shares for shares of the new company. Costco holders will get one new share for each existing share. Price shareholders, whose shares cost about twice as much, will get 2.13 new shares per existing share. In the end, Price shareholders will own 48 percent and Costco shareholders 52 percent.

Robert Price will be chairman of the new company. Jeff Brotman, Costco chairman, will be vice chairman. Sinegal will be president and chief executive of the new company.

The companies said major shareholders already have agreed to the deal. A $50 million fee must be paid under certain circumstances if the merger falls through.

Although Costco's recent financial results have been disappointing, it has been viewed within the warehouse industry as having particularly strong and innovative management.

Today, Costco reported that for the 12 weeks ended May 9, sales at stores open more than a year were up only 2 percent. At one time, double-digit sales growth was common. Overall sales rose 14 percent, to $1.7 billion, but profits sank 13 percent, to $17.7 million.

In Costco's most recent fiscal year, ended last August, sales totaled $6.6 billion. Price's sales during the same period were $7.3 billion.