Business
10 Reasons Why Costco Is So Successful!
No matter where you’re from, you’ve probably met a Costco fanatic at some point. That, or you’ve already been converted. It’s not news to anyone: Costco has low prices, good quality items, and a cult following. But how? Here are 10 Reasons Why Costco Is So Successful!
10. Costco’s History
Back in 1954, an attorney named Sol Price inherited an empty airport hanger in the city of San Diego. Immediately, he knew what he was going to do with it. He saved up 50k and then stocked up on wholesale jewelry, furniture, and liquor. With those items in stock, he launched FedMart, a warehouse-style store where people could pay a $2 membership fee to access the assortment of deals he’d procured. By the time he sold FedMart in 1975, he’d grown it to an astounding $350 million dollar per year, 40-location chain. While FedMart is no longer around today, it proved that a membership business model for a store was definitely possible. So, after he sold FedMart, Sol launched Price Club, a one-stop-shop that offered basically anything you could think of. If you wanted car tires or a fridge or dish soap, Price Club had it all. The thing that made it stand out from its competitors is that it didn’t advertise. The stores were ugly and bare-bones and refused to mark up items as much as other stores did. You can probably see where this is going because many of these tactics are ones that Costco still employs to this day. Sol had a protege named Jim Sinegal, who worked at FedMart and then at Price Club. He knew all of Sol’s successful strategies, and he knew exactly how to create the perfect store. And in September of 1983, Sinegal and his friend Jeff Brotman launched the first Costco in Seattle, and the rest is history.
9. It Doesn’t Boost Markups
Sinegal continually highlighted the importance of saving the customer money, and we can see that in Costco’s policies. Costco’s huge buying power allows it to get great discount deals with vendors, and instead of boosting their markup to try and get more money from its customers, it passes down those savings to its shoppers. Costco has stated that it caps its markups at 14% for brand-name items and 15% for its in-house Kirkland brands. This even includes wine, which is notoriously given 200% to 300% markups at other stores. But, even though it caps its markups at 14%, most items in the store are only marked up at 11%. If you compare this to the 25 to 50% of other stores, you can start to see why people love Costco so much. Take, for example, a pound of Wagyu beef, one of the most luxurious meats in the world. Because of its large buying power, Costco can buy it for, say, $100. They’ll only mark it up by 11%, meaning they sell it for $111. A regular grocer without the buying power of Costco might buy it for $112 but mark it up by 25%, selling it for $140. Already a huge difference. Because Costco buys in such large volumes, its purchase price is often lower than other retailers, to begin with. But when you add in the company’s reduced markups, you’ve got yourself a much cheaper piece of meat. Costco doesn’t want its customers paying more money, and it doesn’t rely on making huge profits off its sales – remember. your still paying to get access to these deals. Offering these great deals to its customers is why Costco has such a loyal customer base.
8. Two Words: Membership Fees
Less than half a century ago, people would’ve considered it nuts to charge customers money simply to walk through the door to buy something. But Costco’s been doing it since the 80s, and people have been happily obliging since the old FedMart days. Costco’s members pay either $60 or up to $120 a year to get a membership, with the price depending on your membership status. Why? Because they believe having access to the store’s good prices and bulk items justifies the upfront cost of a membership. Did you know that Costco makes just over $3 billion dollars in annual revenue, from its memberships alone? There are approximately 51.4 million people with Costco memberships, and they can’t seem to get enough of it; the renewal rate is an impressive 90%. And out of those people, it looks like there are more than a few with a Costco obsession. How do we know? Well, there are countless Costco blogs, Costco forums, and even Costco Facebook groups. People talk about how much they love the store, share deals with each other, and sometimes even create memes related to the store. Costco just might be the rock star of the retail world!
7. Costco Fans
There are plenty of Instagram accounts and websites dedicated to Costco. Costco has even become a travel destination for some people, with one fan sharing that she’d been to nearly 70 Costco stores across the world. And, it might even be a place for romance: at least one couple has tied the knot in a Costco. But why do people love Costco so much? Well, inspiring Costco addiction is part of Costco’s grand plan. Retail experts have examined this phenomenon, and they have come to a few different conclusions. The first one is that some of this Costco devotion comes from physically holding a Costco card: the exclusivity of the Costco card makes you part of a community, which will only deepen your brand loyalty. On top of that, there’s the sunken cost fallacy: since people have already spent $60 on a card, they feel that they have to indulge in as many deals as possible to make up for it. Another part of the Costco craze is that everyone loves a good deal. Anyone who’s gotten something on sale knows the rush of victory at the counter, and often, we can’t get enough of that. Bob Nelson, the senior vice president of financial planning and investor relations at Costco, has stated that the driving force behind Costco’s sale strategy isn’t just having low prices but also offering high-value products. Well, whether you’re there for the deals or because you’re a loyal soldier, Costco can be sure that its customers will keep walking back through the doors.
6. Less Choice, More Bulk
While many people believe that variety is good for business, Costco does the opposite. Other stores like to offer a wide variety of products – you might walk into the chip aisle and have over a hundred different brands to choose from. But at Costco, there’ll only be a couple of brands. Most supermarkets stock up to 50 000 items at a time, whereas Costco stocks just under four thousand. Oftentimes, Costco will only provide one or two brands in a given category. Why? Because Costco knows its customers freakishly well and can curate its selection towards what they are most likely to want. Because of this, Costco solves the paradox of choice, in which customers have too many options. This causes stress in customers, which can lead to delayed decision-making or can even deter them from buying something in the first place. But it’s not just that: it’s also cheaper to stock fewer items. Less selection means less labor, which saves Costco big bucks. To save even more, Costco’s supply chain is rigged to minimize steps. Items are removed from trucks and driven straight to the aisles on forklifts, where they sit on giant pallets, waiting to be plucked by shoppers. But, while Costco stocks less, it sells things in bigger quantities. Everyone knows that at Costco, things come in bulk. You can’t just buy one pack of gum; they come in a packs of 12. This is because, for most customers, it makes more sense to spend $400 once per month than $100 on four different trips. It saves time for the customers, and it saves Costco money!
5. It Makes Products Cheaper
So, now we know that Costco limits the brands that it stocks and is very picky about the vendors it chooses to work with. When Costco finds a product it likes, it spends months and months working with the vendor and its factory to both amp up the item’s quality and reduce the cost. For example, in 2012, there was a toy that retailed for $100. Costco had the option to buy it at $50 and sell it for $60 but decided to try harder to cut costs. Over the course of several months, Costco ended up working both with the vendor and the factory where the toy was manufactured. The end result? They were able to reduce the price by 50% and ended up selling the toy for only $30. It’s in stories like this where you can see that Costco actually cares about its customers. Ultimately, the company would’ve made the same amount of money if they had sold the toy at $60. But, because Costco is dedicated to lowering prices with shoppers, it went out of its way to try and reduce the cost! There have been other instances of Costco reengineering things to make them cheaper, such as changing a certain cashew container from a circle to a square so that more would fit into the shipping boxes. At the end of the day, it means that customers get to save more and more!
4. It Treats Its Employees Well
Unfortunately, retail workers are among America’s lowest-paid employees. In the past years, we’ve seen just how important they are at keeping daily life running smoothly, and yet, big companies still refuse to pay them a living wage or to give them any benefits. Costco, on the other hand, understands that treating employees well is good for business. The average wage for a Costco worker works out to be about $21 an hour, which is near twice as much as Walmart. What’s even better is that 88% of their workers receive company-sponsored health insurance! Because of this, Costco employees continue to work for the company for years, meaning that they have an extremely low turnover rate, which means they don’t need to train new employees all the time. Sinegal once told the Los Angeles Times, “I don’t see what’s wrong with an employee earning enough to be able to buy a house or have a health plan for the family.” And for that, he gets some respect. Other big companies should definitely take this page from Costco’s book!
3. It Cares About Its Customers More Than Its Shareholders
CEOs of big public companies are often trying their hardest to maximize shareholder value. To do this, they hike up prices, lay people off, and cut corners by giving customers worse quality products. In the last 30 years, the percentage of corporate profits going to stockholders has increased from 50% to a shocking 86%. This has resulted in fewer deals for customers and less money for employees. But, once again, Costco goes against the grain. Since it opened in 1985, investors have complained the company has been too generous with its customers and employees. Shareholders have been calling for higher markups on goods, stricter prices, and reduced benefits for workers, but Costco has repeatedly refused to meet these demands, both because it cares about its employees and customers and because it’s actually proved good for business. By sticking to their principles, their stock has gone up 387% since the year 2000. Sinegal told the New York Times that Wall Street is distracted with making money immediately and will do anything to get it. But Costco doesn’t see it that way. The people behind Costco want to build a company that will still be around in 50 years, and that’s certainly something most people can get behind.
2. Costco is a Maze
Another reason that Costco is so successful is the way the stores are organized. Costco has arranged its stores to be more than a simple grocery stop: every item has been strategically placed to draw people in, keep them in the store longer, and ultimately make more sales. It starts with the basic store layout; necessities are placed at the back of the store, which means shoppers have to pass everything else in order to get to them. That means that every time you go to get milk, you have to resist the impulsive urge to buy something more fun for yourself, like a computer game or a giant bucket of cheese balls. Then, of course, there are Costco’s famous samples. On your treacherous path to the grocery section, you get to try unlimited samples, from food to massages. According to experts, free food has the effect of making people much less disciplined shoppers, which leads to even more sales for the company. Lastly, there’s the treasure hunt aspect of going to Costco. Shoppers can always expect to find the unexpected at Costco’s stores, and that’s part of why they come back. Costco has an ever-rotating lineup of surprise deals, such as designer items, which keeps customers hunting for good deals.
1. It Doesn’t Advertise
Walmart spends about $2.4 billion on getting the word out about its store. All things considered, that’s only around 0.5% of its total revenue, which is why Walmart is considered to be stingy on advertising while still being one of the largest advertisers in the world. Now, let’s take a look at another store, Target. It spends a little over 2% of its revenue on marketing. Costco, on the other hand, spends essentially zero on marketing. It has no advertising budget, though it does send mailers to both prospective and existing members. How can such a large company get away with barely any advertising? Well, there are two reasons. Firstly, Costco as a product, sells itself. The membership obviously has great value to those who shop there, and other retailers simply cannot match them on price. Secondly, driving existing members to the store more often through marketing wouldn’t really help the company make more money, since membership fees are the real driver of profits, and spending heavily to gain more members doesn’t make much sense either. Ultimately, if Costco was like Walmart and spent 0.5% of its revenue on marketing, it would take out 17% of its operating profit. If it were to spend even more, let’s say 2%, like Target, then that spending would erase nearly 70% of Costco’s profit. The numbers just aren’t in favor of advertising, and it goes to show that you can still be successful without it.
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