Costco: $196 Billion of Retail Sales Tactics
Plus the most important KPI's for every retailer to track...
As a consumer, I love Costco (other than the crazy parking lots). As a retailer, I admire Costco, as much if not more than any other retail business. Costco generated $196bn in sales last year, and I wanted to dive in a bit and review some of the elements that makes them so special in the eyes of their customers. I mean, c’mon, we pay them to shop there!
As you may know, I am a huge fan of measuring business results to help improve performance and better understand if your business is “successful”. But what are the most important things to measure? Read down and see the “must have” key performance indicators for every retailer.
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Simply stated, Costco is one of the most successful retailers of all time. A few stats to support this:
Costco’s revenue for fiscal 2021 was $196 billion. Not bad.
Costco operates 828 “warehouses” (stores), the smallest of which is 80,000 square feet and scale up to 230,000 square feet. Average size is 146,000.
Costco has 114.8 million paid members. Each cardholder pays between $60 and $120 annually for the privilege of shopping in Costco. That, per Statista, is $3.88 billion of revenue derived from membership fees alone. By the way, a robust 91% of members renew annually. There is a miniscule churn.
Costco sales exceed most of their competitors not only in total, but also per square foot. Costco averages about $1,400 per foot, while Target, for example, generates (about) a mere $300/ft.
So how do they do it, especially given their bare bones store environments, essentially no salesfloor customer service, no shopping bags, and limited selection (relatively speaking) of often giant-sized products? Well, it’s a highly refined formula, and even the apparent “negatives” above fit their model, driving home that Costco is a low-cost, low-price operator.
Let’s explore some of the key elements of their “success formula”. They are certainly worth knowing, but I’d suggest you also consider each and determine if versions of any of them may work within your business. There is nothing wrong with learning from the best!
Here we go:
The Value of the Entryway
After fighting for a parking space and grabbing a cart, entering a Costco becomes something of a magical experience. You just may not realize it!
Costco intentionally exposes you to two distinct offerings immediately after you show your membership card.
The first is high-ticket products, primarily TV’s, computers and jewelry. Retail prices range from 100’s of dollars to several thousand dollars. While Costco certain sells a lot of these products, your exposure to them also creates an “anchoring effect”, effectively making you think subconsciously that every else you see as you move deeper into the store is much less expensive. What’s anchoring? See last week’s issue of All Things Retail to find out!
Costco also leverages impulse buying in the entrance by offering many of their “limited time discount” items in huge mass displays. This not only reinforces their low price positioning in the mind of each guest, but it also likely results in one or two items being added to the shopping basket within the first 30’ of so of the store!
As retailers, we typically avoid “annoying” customers by moving the placement of categories in our stores around. We want guests to know where to go to find a particular product or category.
They will relocate products and categories as needed to improve traffic flow efficiency (i.e. placing destination products/categories in lower traffic areas to improve sales per foot of that space) as well as to keep customers wandering through more of the store. Why the wandering? To expose shoppers to new products and ideally get them to buy more. The average basket size in a Costco is 9 items at a value of $114, so adding even one more item is meaningful.
Wandering Part 2
Costco is so intent on forcing it’s customers to wander that they avoid other typical in-store elements that typically are seen as positive service offerings.
Wayfinding signage? It doesn’t exist. If you want to see what products are in a particular aisle, you need to walk down that aisle and look (while exposing yourself to and possibly purchasing new and different items).
If you are a typical Costco customer, you visit a warehouse about 23 times each year. After this many visits, you may think you have figured out where all of your “go to” items are located. Wrong. Items are often relocated to different sections (and sometimes entirely to feature areas) which results in the need for additional wandering. And Costco is so good at this tactic they do it frequently enough to keep shoppers on their toes but not so much as to totally turn off their customers.
Shopping for ketchup? It’s Heinz or nothing. Air freshener? Febreze, that’s it. Batteries? Choose from Duracell or Costco’s private label (more on PL below).
Why the limited (curated) selection? Per Costco, they carry about 4,000 SKUs compared to 30,000 in a typical supermarket.
It certainly allows for more effective inventory management and space efficiency, but it also impacts customers shopping behavior.
Studies show that people with fewer choices are not only more likely to buy but are also more satisfied with what they get. Duracell vs. Eveready vs. Rayovac? “Did I choose the right one??” Too many options can lead to consumer regret. Really! Costco’s curation eliminates this potential regret and leaves customers more satisfied.
But will shoppers really buy more when they have a smaller selection? Yep. Research has shown this to be true. For example, customers were given the option to choose between 6 varieties of jams or 24. The people who shopped the 6 options bought jam 30% of the time. Those exposed to 24 options only bought 3% of the time. Too many choices lead to indecision.
There has been plenty of talk about the value of private label products in retail. Well, Costco has taken this to a new level. It’s private brand, Kirkland Signature (named after Costco’s original HQ location in Washington State), generated $58 billion in sales in 2021. That’s over 1/4 of Costco’s total sales. What’s even more impressive is that Kirkland is America's largest CPG brand. It’s revenues are higher than, for example, Hershey, Campbell Soup, and Kellogg. Wow!
Kirkland products are high quality (they are often manufactured by well-known brands like Starbucks, Jelly Belly, Bumble Bee, and yes, even Duracell); high margin (for Costco standards); and highly trusted by customers. A powerful trifecta and competitive moat.
Returns Are Super Easy
In a world where retail returns are on the rise, Costco continues to embrace them (or at least providing its guests the option of making them without a bunch of grief). Purchases are basically risk-free. They will take back (almost) anything at anytime for any reason. This unlimited satisfaction guarantee encourages customers to buy products spontaneously with the assurance that they can return these items at any time, knowing they likely won’t.
“Join the Club”
As consumers, we typically don’t pay retailers for the right to shop with them. Amazon is the most notable exception. But Costco, with 114+ million members and a 90%+ renewal rate is right up there with Bezos and crew.
But why do we pay to shop?
The benefit to the consumer is clearly low everyday prices. The savings on purchases (and select services) will in theory more than offset the membership fee.
The value of memberships to Costco is more profound. It ties consumers to the brand and the stores, it encourages shoppers to visits often and to purchase enough to offset that annual fee (keep them away from the competition), and it is a significant, high margin revenue stream.
There is a science behind this, called the Sunk Cost Fallacy. This principle says that people are more likely to stick with an activity if they’ve made a significant financial or time investment. So in other words, when someone pays a Costco membership fee, they want to get their money’s worth. People are more likely to buy things they otherwise wouldn’t and rationalize it by saying to themselves, “Well, I’ve already spent the money on the membership so… why not?”
Reciprocity (“Give to Get”)
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