June 4, 2013
Can Costco Continue Posting Strong Comps?
Costco recently reported its fiscal third quarter numbers and they were, no surprise, strong. For the latest period ending May 12, comparable club sales in the U.S. were up six percent. For the three quarters to date, comp sales are also up six percent.
Costco, which plans to open 55 new locations in the U.S. over the next five years, has seen members increase their shopping visits, according to CFO Richard Galanti, largely due to the lure of discounted gas and fresh foods.
"Ten to 11 percent of our sales are gas, and that clearly drives people into the parking lot," Mr. Galanti said in response to an analyst’s question on the company’s earning call. "And 30 or so of every 100 that pump gas go to shop. Clearly, even if one of those 30 is incremental, that’s good, aside from having a profitable gas operation."
Costco continues to hold onto gains it made during the Great Recession.
"When the economy got hammered, people ate out less, not just the steak houses for business travel, but families with neighborhood restaurants," said Mr. Galanti. "While it’s come back, it’s not back to where it originally was, and clearly our strength in fresh foods, I think, has helped a lot."
- Costco Wholesale CEO Discusses F3Q 2013 Results (Earnings Call Transcript) – Seeking Alpha
- Costco Wholesale Corporation Reports Third Quarter and Year-to-Date Operating Results for Fiscal Year 2013 – Costco Wholesale Corporation/Marketwired
- Low Prices Help Costco’s Quarterly Profit Rise – Reuters/CNBC
- Costco Earnings Beat Zacks’ Expectation – Analyst Blog – NASDAQ
- Costco Plans 150 New Stores in 5 Years – Supermarket News
- Costco Earnings Surge on Higher Sales, Fees – DailyFinance
Discussion Questions
What do you think are the biggest reasons for Costco’s continuing success? Do you think it will maintain its pace as the economy further improves? What lessons can other retailers learn from Costco?
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A few points on Costco:
#1 – Costco has a strong “I am saving money here” brand. No stats needed, but the brand of a retailer is critical to continued consistent customer loyalty. “I shop Nordies and I am stylish…” these are the noises in people’s “top of mind” when they walk into a store.
#2 – Costco carries key products that continue top pull members back. The Kirkland brand is a strong player in the Private Label space. As Nielsen stated in their 2012 report, “Millennials…embrace store brands unreservedly, recording the highest store brand dollar share [18.8 percent] and most positive attitude toward store brands of any generation.”
#3 – The Pharmacy. Not many people are aware of the massive amount of money people are saving by shopping around for prescriptions. Costco is a price leader in this area. This is an example of how they expand their offerings for the sake of their dedicated shoppers—from gas to car washes, to drugs, to food, to Kirkland t-shirts and jewelry.
If you aren’t a Costco member then go visit a Costco. You will join, grab some t-shirts to wear with your bling while you eat some good cheese and get the car washed.
Tom…Costco Member….
Cheap gas, better meat and produce than most supermarkets, house brands that are equal to national brands, and an unwavering commitment to great customer service make Costco a preferred destination. Few other retailers can charge consumers a fee just for the privilege of walking in the door, and get it.
Pretty simple as far as my family is concerned. The place has great energy—we just like going there. And of course they have quality stuff—not bulk junk—at a very decent price. When we have a dinner party and someone praises what we serve, the common reply is “Costco.”
What is interesting is that walking into a Sam’s Club (all two times we’ve done it) gives us a totally different vibe. Honestly, we just want to get out of there. It feels junky and cheap.
Nikola Tesla said the secret of the universe has to do with energy and frequency. In the case of Costco the world “frequency” has a double play. 1) It refers to the quantum appeal and magnetism of the place and 2) it means people go back there a lot.
Costco’s growth will continue as they add new stores and delight their customers. They have Retailing 101 down pat—great products, happy employees, great prices and clean stores. They focus on what matters most.
As long as America has the pantry space, Costco will continue to fill it.
Costco is a class operation. The comments that precede me sum it up well. The company caters to people with high disposable incomes. They tend to hire better quality employees and pay them well. I think Costco will continue to improve. As far as same store sales, higher gas prices will help, both at the pump and in the store.
Costco has built a strong reeputation and following based on price and availability of products. Gas is a strong leader that aids getting feet in the door. Once inside you find reasons to return.
When companies can offer savings and value, consumers reward them with repeat and growing business. This is the case with Costco. They have a model where the offering is compelling, and savings are enough to keep people coming through their doors. Inexpensive gas is just another way they are tapping into a practicable option to present shoppers with a great value. Gas is something every driver pays attention to, so to have a grocery store with the station on site is genius. The same people that don’t want to overpay for gas are probably the same people that will find a way to utilize savings from the bulk items Costco offers. In the very least, people have signed up for membership to have access to the possible savings.
As the economy improves, eating out will rebound, but people are still watching their dollars. Although everyone doesn’t need bulk items, the savings and value offerings presented by Costco will keep them growing at a steady pace. Other retailers can benefit by matching significant customer needs with a product they can deliver to shoppers in order to get them in the door and keep them there.
Two words: Consistency and Class.
They live their values and their culture. It shows in their employees, the service they provide, and the products they carry.
I believe two of the biggest reasons for Costco’s continuing success are great value perception and great buyers.
Shoppers clearly believe they are getting great value at Costco. Not only that, but they are getting great value on great product offerings. And both of those perceptions are a result of great buyers. The vast percentage of products are items customers want—really really want—and at a price that can’t be beat.
When your shoppers believe that every product has been carefully chosen and priced well, you have a license to print money.
Costco does a great job in many areas. First, they have a good product selection. This includes a good mix of branded and private label. With the expansion of fresh products, they are greater competition to supermarkets and Walmart. Second, they do a superb job of mixing up the product selection for a true treasure hunt shopping experience.
Their only limitation is good sites to build new stores without cannibalizing existing ones, and finding sites in major cities.
Where does one begin to talk about Costco? The absolute first thought that comes to my mind is the people. I cannot stand to shop in crowded places and wait in long lines for just a few things. But, I never think twice about going to Costco. I know that I will get through the line pretty quickly, the associates will treat me with respect. Always friendly and attendant to the customer.
With that said, I also know that I am getting a good price at Costco and the product selection is tops. And if I can get my gas, wine and liquor at the same place, you certainly can’t beat that.
How do they do all this? They treat their employees well, they pay attention to what their customer wants, they keep their SKU count to a reasonable number so the store is always neat and shopable. Voila!
Costco pays close attention to their customers first and foremost. That has helped them establish a customer base that is any retailers dream team. Based on the Prosper Insights & Analytics Monthly Consumer Survey, Costco customers have an average household income of $95,276, indexing at 170 compared to the general population.
Those customers are well-educated (15.2 years an index of 109), married (73.7%, an index of 146), more likely to have children (index at 111), and are more likely business owners (156 index) or professional/managerial (index 162).
Costco merchandises the stores to fit customer needs, continuously reinforce the value equation (charge of 15% over their costs), and demonstrate how retailer and customer are in the game together (bag/box your own purchases).
Stores are clean, associates friendly and attentive, and merchandise is well-stocked.
Look for Costco to continue their upward trends in Grocery, HBA, Prescription Drugs, Appliances, Furniture, and Apparel. In every category, their shoppers are made to feel comfortable in making their purchase at a Membership Club.
COSTCO built a model that they stood by as other retailers chased competitors tactics only to get crushed. COSTCO differentiates itself from other retailers by:
1) Limited assortment
2) Quality merchandise
3) Exceptional Private Label strategy
4) Treasure hunt in the center of the store
5) Hassle free return policy – no risk purchasing
6) Gas
7) Exceptional bakery department
Focus and pursuit of being exceptional in a few key areas is the secret. As a retailer you need to ask yourself this question: “Would customers say you were exceptional at one or more areas that influences their loyalty?” If not, you better start working on that ASAP.
Good is no longer sustainable. You need to be exceptional.