Retail success story: Costco
Miguel Nicolás
15/04/2021
-
This time, we are going to share a new retail success story: the story of Costco. A retailer that challenges the giants with its private shopping club model.
-
-
Although not at the speed of eCommerce, retail has also undergone a lot of changes and the depth of the strategy is really remarkable. Many times more than it seems at first glance.Without a doubt, Costco is a great example. At first glance, it is not very different from any other department store: huge warehouses full of products with people moving between shelves. It is very similar to the concept of large American retail that competes with Walmart or Target in the US (although it is not so widespread in other countries).But do not be fooled by appearances... There are many things that make Costco different and are the basis of its success.
-
What is Costco?
-
This company was founded in 1976 with the not inconsiderable amount of 2.5 million dollars raised by brothers Sol and Robert Price from family and friends.The idea was to create a private shopping club, a chain of stores in which only those members who had previously registered could shop. An annual fee was set that would have to be renewed at those times. This is basic to their business model, which we will analyze in depth later.But back to the grounds, what we have is a single warehouse located in an old hangar in San Diego, California.
-
INSIGHT: We already know that retail always requires a greater investment than eCommerce, and in the case of the segment in which Costco wanted to compete, even more so. With such consolidated and economically powerful players, the Price brothers had to look for a truly competitive differential value.
-
The “shopping club” concept
-
We have already mentioned it briefly, but it is precisely that differential advantage that we were talking about with respect to big rivals such as Walmart.By setting an annual fee and an essential membership card to access their stores and make the payment, they were achieving 3 things at once:
- Boosting recurrence: once they have managed to get you to become a Costco partner, it is always going to be one of the first options you handle. It is an added purchase motivation to "get a return on investment".
- Create a sense of belonging and exclusivity: to be totally honest, anyone can be a member of this club, there are no selective rules. But it is known that being part of a community is always a plus.
- Profitability: one of Costco's advantages always lies in the prices received by the customer. The fact of being a member paying $60 for a standard member or $120 for a Gold Star Executive member allows the club to finance itself and sell at very low prices, so much so that they sell at cost price.
-
INSIGHT: Remember that this company was born in 1976, when it was not so widespread to have loyalty cards of every chain or commerce. Moreover, it is not exclusively a card of this type, since it has really powerful additional advantages and is an exclusive condition for access.But what is really interesting is how they manage to use the very cheap price as bait to attract members who pay a not inconsiderable fee. So much so that most, if not all, of Costco's commercial margin is found in the club's membership fees and not in the sale price of the products.A risky gamble that has been working wonders ever since.
-
If you are wondering why there are two types of members, it is due to Costco's segmentation. When you go to one of their stores you can see that there are two very different profiles.
-
-
On the one hand, there are families with children, especially middle class, upper middle class and predominantly millennials. In addition to this buyer that we could call private, there are the professionals who run small businesses and use Costco to supply them, Costco being for them a wholesale supplier.The difference is that for large buyers the Gold Star Executive card generates a series of additional advantages, such as a 2% rebate on purchases.By the way, this is somewhat different in Spain. In their introduction strategy they have proposed much lower prices (€25 and €30 for Gold Star and Business respectively).
-
INSIGHT: It is important to know your potential customers and implement strategies that appeal to different segments. Costco has nailed it in that regard by making the big shopper have an incentive to pay for the most expensive plan.
-
What does Costco sell?
-
Actually, it has a fairly horizontal assortment. We can find a huge amount of food products (both fresh and frozen or prepared), beverages, cleaning and hygiene products... Basically what in any supermarket.In this type of products it is very common to find bundle packs and big formats for large families and, especially, for professional customers.
-
-
In addition to food products, they handle an offer of clothing and textiles, almost always of relevant brands, which has a high rotation. From men's, women's and children's fashion to bed linen and towels.Costco is characterized by a wide assortment of technological products. Therefore, we can find from televisions to Apple computers or the latest generation of telephony. Of course, there is everything in terms of small and large appliances.In fact, almost anything that can be sold has a place at Costco: furniture, exercise machines, camping products, books, stationery... even jewelry.But Costco also provides services of other kinds: travel agency, fast mechanics, optician, gas station or travel agency. They have been enriching their catalog over the years.
-
INSIGHT: Having a good assortment and a wide range of categories increases the options for recurring sales. Complementary services help to reach beyond what a conventional store would do, and in the end, with this type of offer - everyday, necessary in day-to-day life - Costco manages to position itself as a convenience store with advantages and at an unbeatable price (this type of stores are usually expensive).
-
Business and management model
-
There is something interesting about the way they stock their warehouses. To begin with, the fact that, although they have a very horizontally extended catalog, they do not have an excessive number of references for each category.There are approximately 3,800 of them. Of these 3,300 are fixed and the other 500 are occasional offers of high rotation and very good prices. This is what they call "treasure hunting" and is highly encouraged by the company itself.Another interesting aspect is the company's private label. In the United States they are not as prone to these as in Europe, but in spite of this, Kirkland products have become a benchmark for their extraordinary value for money. It is an absolutely transversal brand, ranging from diapers or barbecue sauce to prescription glasses, hearing aids or jewelry.
-
-
For Costco, seasonality is important. They tend to be ahead of other retailers precisely with their professional customers in mind. That is why we find Christmas trees and decorations in October and swimming pools in April.
-
INSIGHT: Often a well-designed inventory is much more valuable than one that is too deep. It is interesting to know how to play your cards right, as Costco does.
-
Customer service
-
It is at least worth noting: this is an unashamedly customer-centric company. For them, customer satisfaction is essential because, as recurrence is a basic part of their business model, they want the life cycle to be as long as possible.
-
-
That is why their staff is extraordinarily attentive, with an extraordinary dedication to service. This is true both among the people who work in the store and in any of the services or in the offices.It is also reflected in the facilities. In the style of IKEA, Costco stores have a catering service with very low prices. Once past the checkout line, we find the food court, where we can eat a pizza or chicken nuggets for a really minimal amount (by the way, these products are so popular in every way that they can be found in the supermarket area).
-
INSIGHT: When part of your revenue is based on loyalty, customer service has to be excellent. Costco takes this to such an extreme that, if you are not satisfied, they will refund your membership card at any time during the period - from the first to the last day.
-
Costco's keys to success
-
- Recurrence generators: they have a thousand tactics to motivate users to return to their stores, from paid membership to "treasure hunts" with high-turnover products.
- Own business model: the shopping club brought to a large retailer is a brilliant idea, as Costco's success has shown.
- Premium private label: Kirkland has become a benchmark and has even banished the prejudiced idea that assimilates this type of brand to low quality. In fact, as is the case in Spain with Mercadona, Kirkland has become an international brand asset.
- Unusual profitability: few retailers are willing to forego the commercial margin on product sales and dare to generate their profit exclusively through membership.
- Product + service: its stores can cover the entire spectrum of commercial needs. This makes Costco an interesting option for the users since they do not have to make multiple trips to cover them.
- Global concept: a Costco customer is a worldwide customer. In other words, with your valid card you can access stores in Seville, New York, Ontario or Beijing. In addition, you will always find the same structure and a similar range of products, which highlights the perception of globality.
-
What do you think of the Costco story, did you know about it, what do you think of membership-based businesses, and would you dare to bet on this business model? Share your thoughts below!
-
Images | Unsplash, Costco.