THE ORANGE COUNTY REGISTER - JUNE 23, 2002

Costco's big box political clout

- Steven Greenhut

Costco, the big-box discount warehouse company that sells everything from big-screen TVs to restaurant-quality food products, at first glance seems like a marvel of the free-enterprise system. The publicly traded company, with revenues of more than $30 billion annually, attracts legions of devoted shoppers who fork over an annual membership fee for the privilege of shopping there.

But think carefully before you use the words "free enterprise" and "Costco" in the same breath.

The company certainly knows how to market goods and services to budget-conscious customers and to maximize profits. Unfortunately, Costco also is adept at manipulating the political process on its own behalf, in a way that smacks of mercantilism (government-controlled markets) rather than capitalism.

I'm not referring to the standard way companies lobby for lower taxes, fewer regulations or favorable land-use decisions. Those are necessary defensive measures in a world where government agencies hold so much power. I am referring, rather, to the way Costco encourages, or at least allows, cities to use eminent domain on the company's behalf, transferring property from other private owners to the big retailer. Costco isn't shy, either, about taking direct subsidies from cities. Those subsidies are paid for by taxpayers, including smaller shop owners driven out of business by Costco's low prices.

It's the nature of the free market for bigger, more efficient companies to drive smaller, less competitive ones out of business. But it is an outrage when that competitive advantage is gained through government power rather than market savvy. That makes Costco more like those "looting" corporate villains depicted by author Ayn Rand, than like her capitalistic heroes.

In fairness, many other big retailers benefit from eminent domain and tax subsidies. What sets Costco apart is the degree to which the company benefits from the process, and the aggressive role it has taken in defending its approach.

In recent months, Costco has endured bad nationwide publicity for its role in an unholy scheme to deprive Cottonwood Christian Center of its 18-acre property in Cypress. The City Council voted to take the land by eminent domain last month so that it can make way for a tax-generating Costco retail center. The rationale is simple: Churches don't pay much in taxes, but it's estimated that Costco will provide $400,000 a year to the city's budget.

It's unclear whether Costco shopped its idea to Cypress, or whether Cypress officials shopped someone else's land to Costco. It is clear that Costco x understood that its proposed store would come at the expense of a privately owned church that doesn't want to sell its land.

The story jumped from the pages of The Orange County Register to national publications, including The Wall Street Journal. In its "First Church of Costco" editorial May 30, the Journal argued: "[T]he whole point of property rights is that bureaucrats don't get to pick and choose who owns what. Ditto for businesses such as Costco, which should buy their land in the open market instead of relying on local governments to seize a juicy location at below-market prices."

Exactly.

Rather than feel ashamed at its role in this land heist, Costco President and CEO Jim Sinegal fired off a letter to the Journal, published June 12, that echoed the city's shameless demonization of Cottonwood. Repeating nearly word-for-word the carefully scripted Cypress attack on Cottonwood, Sinegal blamed the church for its own predicament, calling Cottonwood's purchase of the site a "highly speculative maneuver" because the property is located in a redevelopment zone.

There was nothing speculative about it, unless one wants to argue that property rights are suspended any time a redevelopment area is created. That would be an interesting argument, especially now that some cities are entirely within redevelopment zones. But that's a discussion for another day.

What really annoyed me about Sinegal's letter was Costco's playing of its victim status: "We were wrongly painted in a negative light. ... It might fill several pages detailing how you [the Journal] were misled and how Costco is being falsely portrayed as the villain in this dispute between the church and the city," Sinegal wrote. "Had we been asked, we could have pointed out that we are not a party to any litigation, and do not have a contract to buy any land in Cypress, nor will we have until a judge or the parties themselves resolve their dispute."

But if Costco is just an innocent bystander in a dispute between a city and a church, then why has Costco been involved in similar situations across the country?

Such as in Lancaster, Calif., where in 2000 a federal district court struck down the city's attempted use of eminent domain on Costco's behalf. According to the court documents, immediately after a competitor, 99 Cents Only Stores, moved into a vacant store next to Costco in Lancaster in 1998, Costco demanded that the city use eminent domain to literally give the 99 Cents Only space to Costco. Otherwise, Costco said it would move to neighboring Palmdale.

There was plenty of room for Costco to expand without bothering 99 Cents Only, but the company insisted on expanding into its competitor's space, according to the court. Afraid of the loss of sales tax revenue, Lancaster officials began an eminent domain proceeding that would remove 99 Cents Only Stores from its leased space, then provide the property to Costco for one dollar.

Unfortunately for Costco, 99 Cents Only Stores owner Dave Gold fought back. Even after the city dropped its plan, Gold kept fighting, reasoning that only a court order could protect his store from being targeted in the future.

"In this case," Judge Steven V. Wilson argued, "the evidence is clear beyond dispute that Lancaster's condemnation efforts rest on nothing more than the desire to achieve the naked transfer of property from one private party to another. ... In short, the very reason that Lancaster decided to condemn 99 Cents' leasehold interest was to appease Costco [italics added by me]. Such conduct amounts to an unconstitutional taking for purely private purposes."

Lancaster eventually appeased Costco by selling the company a portion of a city park.

After the court struck down the city's action, a Costco official was quoted in published reports saying something similar to what Sinegal wrote in his Journal letter: We're not party to the dispute.

Is this in any way a sufficient explanation?

The private development consultant who handles property acquisition for Costco throughout Southern California once told me the company must rely on eminent domain and redevelopment because it is too hard to otherwise assemble large sites in an increasingly urbanized area. Sounds like a company policy to me.

Costco as innocent bystander or victim? "Extremely ridiculous," said Dana Berliner, an Institute for Justice attorney who defends property owners against eminent domain abuses. She's not sure whether Costco goes to cities or cities come to Costco, but the company "is quite happy to take advantage of getting property inexpensively because it was taken from other private owners by eminent domain. The first time, they can say, 'oh well, it's not our fault.' By the time you get to number five or number six, they can't claim ignorance any more."

In Lenexa, Kans., a Costco attorney reportedly said at a Planning Commission meeting that a neighborhood targeted for demolition to make way for Costco was "not much of a neighborhood, anyway." Costco has been involved in eminent-domain related controversies in Maplewood, Mo., and Port Chester and East Harlem, N.Y.

Here's a June 2000 Kansas City Star description of a project in downtown Kansas City: "Costco, a membership-only wholesale store, nearly dropped out of the project. But city officials promised to hasten change by using condemnation powers if necessary to relocate a temporary-labor agency and a liquor store in the neighborhood."

"This is their MO," said Orange County Supervisor-elect Chris Norby, a well-known foe of redevelopment abuses. "They expect this. This is a pattern." If that's the case, then Sinegal and his firm shouldn't act like wounded puppies when they start getting bad publicity and angry letters from members of churches and residents of neighborhoods forced to give up their dreams to boost Costco's profit margin.