March 1, 2012
Costco Does Well, Really Well
When former CEO Jim Sinegal announced he would retire on January 1, he and his successor, Craig Jelinek, made a point that very little would change. And if by that they meant continued strong financial results, they were right.
Costco beat Wall Street’s expectations for the last quarter ending Feb. 12 as the appeal of cheap gas and high quality goods in bulk led to an increase in sales and profits for the warehouse club chain.
According to reports, Costco made the decision to hold the line on prices even as its costs went up. The gamble appears to have paid off as club member visits increased 5.2 percent during the period and dollars were up 2.4 percent per visit.
"Say a vendor raises costs by $1 a pound on those large packages of fresh salmon," Chuck Cerankosky, managing director at Northcoast Research, told The Seattle Times. "They might pass only 60 cents through [to consumers], but most of the market passed 90 cents or all of it through. They’re judicious about how they time the increase. It’s very, very much a daily part of running the business."
While the vast majority of Costco’s sales happen inside its clubs, the company is also making significant investments in building up its e-commerce business. The chain reported a nine percent increase in online traffic for the most recent quarter.
According to a TechFlash report, Costco is working on a smartphone app to be released this summer. It is also upgrading its website.
"The new technology will give us greater visibility on the internet, and we hope will bring users to Costco.com via search engines, which our much older current system does not allow," Richard Galanti, chief financial officer of Costco, said on a conference call this week.
- Costco Wholesale Corporation Reports Second Quarter and Year-to-Date Operating Results for Fiscal Year 2012, and February Sales Results – Costco Wholesale Corporation
- Q2 2012 Costco Wholesale Corporation Earnings and February Sales Results Conference Call – Costco Wholesale Corporation
- Costco tops expectations on higher sales – The Associated Press/Google
- Gas pumps fueling Costco sales – The Atlanta Journal-Constitution
- Costco plans first smartphone app, new Google-friendly Costco.com – TechFlash
- Costco sales and profit up as chain keeps some prices low – The Seattle Times
Discussion Questions
Discussion Questions: How big an upside do you see for Costco’s warehouse club business and Costco.com in North America? Do you see the company becoming a major e-commerce force in the years to come?
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Costco runs a very good business, and will be a force to deal with in the future. Their service level and employee friendliness far exceeds Sam’s Club, and the stores look way better. I am glad Costco is not in my backyard, because they really know what they’re doing.
As long as Costco can offer quality products at good prices, and can continue to deliver customer service above and beyond most retailers, it will thrive. Costco offers better quality meat, fish and produce than most grocers. Their gas prices are always competitive. And their treasure hunt philosophy rarely fails to cause the purchase of something that is not on our shopping list.
Contrary to what Aldous Huxley believed in the 20th century, consistency of excellent performance is not always contrary to human nature. And so Costco has moved ahead steadily with the programs of Jim Sinegal and continued by Craig Jelinek. And there is still much upside available for Costco … particularly as Sam’s Club lumbers to catch up.
Costco can become a major e-commerce force in the future but seemingly the opportunity to showcase that it is better than its competitors is through its brick environments.
The Costco paid membership model proves that subscription based or paid membership solutions at retail not only work, but drive loyalty and sales. Big Y last year added a $25 membership program that guarantees members a price you could only receive with their silver coins. FYE offers consumers a tiered paid membership program that has proven very successful. If you read my tweets from E-tail West yesterday you would have seen some stats about GameStop’s success with their tiered paid membership/loyalty program. Their presentation on paid membership made it very clear that the model works. Other retailers including shoedazzle.com base their entire model on monthly subscriptions. Costco will continue to be a major player both Brick & Mortar as well as online. Their model works and others will continue to imitate it.
Costco will continue to grow as long as they are true to their model of high value across all price points, simple easy-to-navigate stores, efficient checkout, and terrific in-store feature management. This last piece is the one thing no one seems to discuss, but I always hear the refrain when anyone checks out — “I came in to get some paper towels and I ended up with $150 worth of stuff.” Combined, these elements have successfully attracted loyal customers from all economic stratum.
It’s a bit early to see whether these components will transfer successfully into the e-commerce world, but my sense is yes.
Costco is the warehouse club the competitors look at when choosing how to grow profitably. Costco will be a factor in e-commerce or they would pass on the opportunity. They are focused and commited to service which is something the others, Sam’s Club included, fail to understand.
Curious to see the ways that Costco will translate its physical store treasure hunt-like shopping experience to the web. They do understand their customer and reward each visit so I expect that to be more evident as they hone their web site experience.
As long as they keep treating their customers and employees so well, they will continue to stand out as a place to shop and work. All that means a strong bottom line.
Quick story; bought hearing aids at Costco over 18 months ago and have just had a number of problems with them. Last week they exchanged them and did what it took to make me happy. Who else would have done that?
Buying leverage will yield attractive pricing online, so it will be a no-brainer winner — should have been launched long ago, but they were concentrating on other key initiatives I am sure. Those who shop Costco (including my household for 10+ years) are price sensitive first and bulk buyers secondarily. I would love to know the penetration index of a Costco buyer and households with more than one freezer or even a freezer and an extra refrigerator. Anyway, they do know how to do it right — though the hot dogs at Sam’s Club are better. 😉
The upside is rather large when one considers their relatively shallow market penetration and the general economic conditions. Costco should be able to expand at a steady pace just by building new units. There are many metropolitan areas that currently don’t have Costco locations. These are SMSA with well over 1 million people. Additionally, Costco has the ability to attract new members by offering substantial savings in a time of economic need. I see nothing but positives for Costco. They do things right and have earned their success. There is still much low hanging fruit to be picked!
Costco has the potential to become a major internet retailer as well as a full bricks and mortar powerhouse. Strong growth and warehouse pricing along with yearly membership dues makes Costco the model in the retail warehouse market … just ask Sam’s (Walmart).
Much of Costco’s success is due to their bias toward quality products. Affluent consumers are still shopping and Costco remains one of their favorite stores.
Costco will continue their strong growth in North America. They have very loyal members with more predictable preferences. Costco has the right mix of national and private brand products at the right quality level. Support that with solid customer service and their return policy, it is easy to see why the retention rate is so high. Their focus on new products through road shows and treasure hunts make it fun – and an easy way to experiment with new items and concepts. They listen to customers, and deliver a good experience across the store. Their ecommerce will grow nicely for them.
Costco continues to outperform almost every retailer in same store sales. There are few better measures in performance than year over year sales. They seemingly haven’t hit a bump throughout the recession either.
One of the factors rarely considered is their ability to take food dollars out of a market place. In my market there are two locations. Each take over $2 million per week out of the food dollar share. That’s the equivalent of nearly 12 average conventional supermarket locations or four superstore locations just in one market. As long as they continue on the same path and innovate as they have along the way, there remains a huge upside for Costco.
In the same way, they will likely take a large share out of the e-commerce market as they grow in that sector. As long as competitors consider them as somehow not a factor, they will continue to have great success.
They have also been a lesson for all of retail on how you can succeed with happy, well paid, and loyal employees. It can be done and they’ve proved it.
Mr. Jelinek continues to verbalize the same philosophies that have gotten them this far. I don’t see their trajectory changing in the transition.
There are two most important things for a retailer to do, in order to a align perfectly with shoppers. The first is to have a dominant path through the store, a wide unobstructed aisle that most people will traverse and use as their base for shopping. Costco does this right from the entrance, past home electronics with a broad aisle to the rear of the store, with a series of end cap promotions right along one side and a wide open vista to nearly the whole store on the other. That U-turn continues across the back of the store and returns similarly on the opposite side of that large central bazaar or plaza shop in the middle of the store.
The significance of this is two-fold: shoppers intuitively shed all their navigational angst, with little thought to where they need to go. Just, mostly, go with the flow, detouring at will. This in turn allows Costco to actually PLAN that trip, and actually act like intelligent salesmen, offering first this merchandise, then that, in an orderly fashion, rather than the insane treasure hunt much in favor by most merchant warehousemen who style themselves as retailers.
The second issue well managed by Costco is that they NEVER let their large attractive RANGE of merchandise to get in the way of actually selling shoppers mostly what the shoppers themselves, mostly, want to buy. In other words, Costco is an intelligent big-head store, with an adequate, if not optimal long tail.
The Costco near my home regularly hits a million dollars a DAY in sales by leveraging these principles. Of course, Stew Leonard leverages the exact same two principles (dominant path; selling to the path) in what is essentially a large supermarket that hits $100 million annually, regularly; 5X the typical supermarket.
But then, as a senior executive of one of the top global retailers said to me, “Why would we do this if no one is paying us to?” Get a clue. Self service retailers exist to service the needs of their supplier clients, not the shoppers, who basically must fend for themselves in hundreds of thousands of seriously sub-performing stores around the world. What’s needed is brain transplants all around! 😉