There’s no doubting that retail is one of the biggest industries around, with supermarkets,
department stores and online shops taking over $20 trillion of our money every year.
But one company has chosen to do things slightly differently, and that’s Costco
With considerably fewer stores than rivals and outrageously low prices
What’s so special about Costco?
And how does their members-only policy make their business even more successful, not less.
Here’s How It Happened.
The very first Costco opened back in 1976 in San Diego and was known as Price Club,
after its founder Sol Price who had already seen success with discount department store
Fedmart.
Like today, Price Club operated on a membership basis, charging local businesses $25 annually
for access to their low prices.
The stores were located in no-frills warehouses, making them cheap to maintain and great for
storing items in bulk that customers could just pull off the shelves.
Meanwhile in 1983, a different discount store was launched over in Seattle, Costco.
Whose apparent strategy was to ‘clone Price Club’
The newer brand was an immediate success, opening more locations across Washington state
and then nationwide, becoming the first company ever to hit $3 billion in sales with 6 years
of inception.
After a decade of direct competition, Price Club and Costco elected to merge in 1993,
becoming PriceCostco, combining their membership bases, 200 locations and $16 billion in sales.
Sol Price left the firm soon after, moving on to form PriceSmart, now Central America’s
biggest membership warehouse chain, while all PriceCostco stores soon changed their
names to just Costco.
The next 20 years saw the company’s membership base continue to grow to astronomically high
levels, reaching a total of 100 million in 2020, while opening new warehouses in Canada,
Europe, Asia and Australia, employing over a quarter of a million people in the process.
How are they able to be so successful with such low prices?
First off, let’s talk about Costco’s profit margins, which are around 11% and much lower
than most department stores who normally sit anywhere between 20 and 50%.
That’s because they don’t just sell one roll of toilet paper at a time, they sell
a hundred.
And such a high turnover of products means they can afford to make less profit on each
one.
What’s more is that the bare bones nature of their stores don’t require constant rearranging
and decoration, just moving a whole crate of chewing gum onto a shelf, so they can also
afford to employ fewer staff per store And when a cashier scans 50 cans of Pepsi
in a single swipe, Costco are able to spend significantly less on staffing per can than
any of their rivals.
But don’t forget that Costco has still managed to build a reputation for paying their employees
well, with many receiving over $20 an hour.
Happy employees make for happy customers, and help create a positive atmosphere throughout
the store.
And Costco also keeps a very low range of stock.
Normally housing just one brand of every item, and one size of multipack, like a 12 box bundle
of crackers, leaving customers no choice but to buy in bulk.
The brands that make the products have noticed this too, often selling their stock to Costco
at hugely reduced prices, as they know theirs will be the only option in store and so is
guaranteed to fly off the shelves.
Costco prides itself on offering great quality items at the very best price, and for products
they’re not happy with, they just sell their own, under their Kirkland Original brand
Named after Kirkland, Washington, the former location of the company’s headquarters
But the final and possibly most important component to Costco’s success, is of course
their membership program
Starting at $60 a year, these membership fees make up around 75% of the company’s total
revenue.
Those who sign up don’t mind paying the annual fee because they feel like they’re
getting a great deal on all the discounted products.
Membership also add to what’s called the sunk cost facility, the idea that members
are losing money whenever they don’t shop at Costco, encouraging unprecedented levels
of brand loyalty to their stores.
Customers come for the loss-leading 5 dollar rotisserie chicken or $1.49 hot dog, and stay
to bulk buy their weekly groceries, or for new kitchen utensils and furniture.
Plus the fact that the membership program itself carves out a particular demographic
of customer, affluent families and couples who are happy to spend slightly more per shopping
trip to ensure they’re well stocked at home.
Costco stores often have over 100,000 square feet or 10,000 square metres in floor space,
much bigger than your normal supermarket, and enough room to store your new tyres, medical
prescriptions or even just a toilet brush.
Basically, you can buy anything at Costco, so members know they can make just one trip
to buy everything they need for their home.
With such a unique model, its pretty impressive that Costco has climbed to the third biggest
retailer in the world, with just a fraction of the number of stores compared to Walmart.
Let us know other reasons that you think Costco is so successful and whether the membership
model could soon be the norm.
That’s how it happened.
And thanks for watching.