CNN has a story about how Costco continues to be both viable and relevant in a fast-changing retail environment - even though its strategy seems to hinge on perfecting “what's been working for four decades.”
And what’s been working? “Costco gets roughly three-quarters of its profit from $60 to $120 annual subscription fees … Members pony up for the subscription because they believe they can make it back over the year by buying cheap stuff in bulk, like giant jugs of ketchup and mayonnaise … The company pours the subscription proceeds into driving prices down.” At the same time, “Costco has strong partnerships with suppliers and can negotiate with them for the best deals, even when inflation rises, because brands trust Costco will use the cost savings to keep price tags in stores down. Vendors are happy to oblige because it boosts their sales.”
This model creates what the story calls “exceedingly loyal” customers: About 90 percent of Costco’s 93 million members renew their subscriptions.
While this model has been working for Costco for a long time, it also “is getting a boost from its digital business … Sales grew 21% in July compared to a year ago. Costco sells 10,000 products (compared to fewer than 4,000 in its typical store) on its website and app, including expensive items like furniture that weren't always available in stores.”
CNN goes on to note that “Costco has a sizable customer overlap with Amazon, especially among wealthier shoppers. It's a looming danger for Costco if those shoppers decide they don't want to pay for both.
“But the company has defended against its Washington State neighbor through low prices, offering fresh food and gas, and creating a treasure hunt buying experience that can't be copied online.”
And what’s been working? “Costco gets roughly three-quarters of its profit from $60 to $120 annual subscription fees … Members pony up for the subscription because they believe they can make it back over the year by buying cheap stuff in bulk, like giant jugs of ketchup and mayonnaise … The company pours the subscription proceeds into driving prices down.” At the same time, “Costco has strong partnerships with suppliers and can negotiate with them for the best deals, even when inflation rises, because brands trust Costco will use the cost savings to keep price tags in stores down. Vendors are happy to oblige because it boosts their sales.”
This model creates what the story calls “exceedingly loyal” customers: About 90 percent of Costco’s 93 million members renew their subscriptions.
While this model has been working for Costco for a long time, it also “is getting a boost from its digital business … Sales grew 21% in July compared to a year ago. Costco sells 10,000 products (compared to fewer than 4,000 in its typical store) on its website and app, including expensive items like furniture that weren't always available in stores.”
CNN goes on to note that “Costco has a sizable customer overlap with Amazon, especially among wealthier shoppers. It's a looming danger for Costco if those shoppers decide they don't want to pay for both.
“But the company has defended against its Washington State neighbor through low prices, offering fresh food and gas, and creating a treasure hunt buying experience that can't be copied online.”
- KC's View:
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I continue to believe that Costco may even have a bigger problem than Amazon - it needs to figure out a strategy to compete in environments where people are getting married later, having fewer children, living in urban environments and may not even own a car. Seems to me that this shift in consumer behavior poses significant problems for Costco … and a lot of other companies.
