Costco Takes a Different Route Online

Discussion
Oct 27, 2006

By George Anderson


If you’re looking for the Scallywag Sloop Pirate Themed Club House, forget about going to your local Costco Warehouse Club to buy it. It just isn’t there. Of course, the company would be happy to sell you this unique item with its oversized 5′ x 6′ custom pirate-themed clubhouse for only $18,499.99 (price includes shipping and handling). The only hitch is you’ll need to go to Costco.com to buy it.


Costco has gone in a different direction than most multi-channel merchants. While many are looking to further integrate their in-store and online offerings, Costco makes fewer than 5 percent of the items sold on its web site also available in its clubs.


In another difference from its warehouse store operation, consumers do not have to possess a Costco card to buy items from the site. Non-members pay a 5 percent premium compared to shoppers with a Costco card.


Last year, Nielsen/NetRatings reported Costco.com was the seventh most visited e-tail site.


Discussion Questions: What is your analysis of the approach Costco takes to online selling? Are they frustrating their loyal store customers by not matching
inventory on- and off-line?

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10 Comments on "Costco Takes a Different Route Online"


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Kenneth A. Grady
Guest
Kenneth A. Grady
15 years 6 months ago

Costco and other multi-channel retailers don’t have to match online selections with the brick and mortar (or catalogue) selections. Consumers today understand that the channels offer different advantages and disadvantages and readily accept differences in selections. I do think that it is important to remain consistent to the brand across channels. By doing so, the company builds brand equity and reduces the chances that consumers will be confused about the values attached to the brand.

While differences among the product selections are fine, not knowing what you are doing with a channel is not fine. Many companies have a web site because…well, they just have to. They don’t know why or what they are doing with it. Today, web sites need to have a well-defined purpose to be successful and to support the company’s overall strategic efforts.

xx xx
Guest
xx xx
15 years 6 months ago

Offering unique items available online enhances the offering, but why not also offer a good selection of items available in-store as well? Just last night I purchased from an online retailer because they had both the items I was looking for. It was more convenient to have one “shopping basket.” Same with Costco; if I want one of the unique items, I will probably build my basket with a few everyday items to make the on-line transaction more valuable to me as a consumer. Additionally, many times I will search online for an item that I intend to buy in a store. I want to see if they carry an item before I head out. Clearly Costco probably will not be able to show all in-store items but I’ll at least know they carry something similar. What’s the down-side in expanding the online offering?

Dan Nelson
Guest
Dan Nelson
15 years 6 months ago

Costco’s on-line offerings are an important element of their overall operating strategy. Costco’s business model works when they stock in the Club’s high turn, limited assortment selection so they have to maintain live inventory controls at around 8000 SKUs.

Costco is also very focused on serving their Club shoppers with unique, differentiated products to reinforce the value of membership (buying the card each year) so the online offerings compliment that message and add value to annual dues to be a Costco Member. They have to open up online offers to non members (at a higher price) to provide enough velocity for suppliers to support their online program, but their primary motive is stated above; saving their Costco members and membership cost.

Bill Robinson
Guest
Bill Robinson
15 years 6 months ago

Costco is breaking new ground with their approach to online. But they are also breaking some rules. If you are going to maintain the same brand, which they are, they need to maintain a consistent message about value and experience, which they aren’t. That said, rules are made to be broken, especially in marketing.

We have to keep in mind that online retailing is barely ten years old. And multi-channel retailing is less. The rules are being written by pioneers such as Costco in this case.

The true test is whether Costco’s managers are able to see a 360 view of their online shopper by integrating their transactional behavior between channels. They need to test, gain incite, and learn. It’s the cycle gained from great business intelligence. Only after penetrating learning should they pursue such counter-intuitive tactics.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
15 years 6 months ago

This is terrific! One of the major advantages of e-commerce is that retailers do not have to stock all the items. Benefit to the retailer is little or no inventory costs for these items. Benefits to shoppers are wider choice and not having to subsidize the retailer’s inventory costs. Everybody wins.

Ed Dennis
Guest
Ed Dennis
15 years 6 months ago

Bet you can’t name 2 things Costco has done wrong! These guys are brilliant. They perfected “treasure hunt” shopping. They put a cap on their per item profit in their by laws. They made quality wines available at reasonable prices. They treat their suppliers like partners– no I mean they really treat their suppliers like partners; they walk the walk! These guys are GREAT retailers and I only pray that some quick profit LBO firm doesn’t get in their way by trying to force them to rake in quick profits. We should all buy Costco stock; there aren’t that many great companies left.

Kai Clarke
Guest
15 years 6 months ago

Costco has done a good job at complimenting its retail success through a unique online marketing perspective. By offering different products to both members and non-members, Costco broadens its retail base while attracting potential new members to its traditional stores. Membership is the key to Costco’s model, and cultivating these membership fees is the overall goal for Costco. This approach to online retailing does both of these while ensuring the integrity of their stores.

Phil Masiello
Guest
Phil Masiello
15 years 6 months ago

Costco’s approach to retailing will probably frustrate some customers, but the true Costco customer understands what Costco is about. There is an October, 30th issue of Fortune, where Jim Sinegal outlines the merchandising strategy.

“‘We only carry about 4,000 items,’ says Sinegal, ‘compared with 40,000 in a typical supermarket and 150,000 in a Wal-Mart supercenter. Of that 4,000, about 3,000 can be found on the floor all the time. The other 1,000 are the treasure-hunt stuff that’s always changing. It’s the type of item a customer knows they’d better buy because it will not be there next time, like Waterford crystal. We try to get that sense of urgency in our customers.'”

This philosophy transcends to the web site. The Costco customer is looking for the treasure-hunt items both in the store and on the web site.

If there is one thing Costco has a great handle on it’s the customer.

Mark Lilien
Guest
15 years 6 months ago

Costco hasn’t been the best retail investment, but it’s among the better ones. Five years ago it was $40 and today it’s $53. Its customers love it, but its comp Christmas traffic leveled off last November and December. Many in-store Costco items would be losers online, so it isn’t worth it for Costco to use the online channel for everything. Retailing’s only unforgivable sin: losing money. Costco, like J.C. Penney, Whole Foods, Trader Joe’s, and other well-run, profitable retailers will not carry merchandise categories guaranteed to lose money. Great retailers are great editors.

Odonna Mathews
Guest
Odonna Mathews
15 years 6 months ago

Costco’s reputation speaks for itself. Offering more items on their website than in-store adds to their appeal. Allowing all consumers to make on-line purchases shows marketing savvy. That can and does increase its market share and appeal to a greater number of shoppers.

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