Founded in Kirkland, Wash., in 1983 Costco has become one of the largest retailers and membership warehouse club chains because it sticks to its low-price/high-volume business model. The company’s model has clearly proven to be successful, as it currently has nearly 600 locations in the United States and abroad in countries such as the United Kingdom, Canada, Australia, Mexico, Taiwan, South Korea and Japan.
“We know that we cannot be everything to everyone,” Assistant General Merchandiser Annette Alvarez-Peters says. “What we try to do is stay true to our company philosophy. We stay disciplined and we offer quality products at a value. We carry a wide range of product, and we limit our selection and have the best possible price.”
The low-price/high-volume business model that Costco has mastered all comes down to keeping everything simple and not overcomplicating the business. The key ingredient to the recipe is to bring in quality products that possess the value that Costco’s members are looking for.
“Value in terms of price and quality are things we have to consider when we pick our products,” Alvarez-Peters says. “When we try to think too far outside of the box, we complicate the business and spend too much time and effort on sourcing products.”
The bread and butter of Costco’s product mix are the bulk-packaged products that are typically geared to families and businesses. The company tends to have a small number of brands within any given category, although it does have a line of its own Kirkland Signature private label products. Alvarez-Peters says that Kirkland Signature private label products account for less than 20 percent of Costco’s total SKU count.
Costco doesn’t advertise or consistently display items in the same place. It rotates items constantly. The idea behind those protocols is that it requires the members to walk around and see all the new items.
“What happens is it becomes fun for the members because although they know items will move, they don’t know what we are going to have,” Alvarez-Peters says. “That is why we rotate items in and out of our system. It allows us to offer different items all the time. Plus, the limited number of SKUs forces change and exploration.”
Costco’s products are displayed on the same shipping pallets that brought them to the warehouse in the first place. Costco’s merchandising presentation is not glamorous, but that lack of fanciful flair is done by design.
“People expect that look from us,” Alvarez-Peters says. “The boxes that products are shipped in may have gotten fancier, but the merchandising within our stores has pretty much stayed the same for us since the beginning.”
Right now, Costco is looking for ways to drive sales in a positive direction and develop the Kirkland Signature portfolio. The company is also searching for what Alvarez-Peters called treasure hunt items. With a wide range of people holding Costco memberships, the company is tasked with satisfying all of its members even though it has a limited SKU selection.
“We need to find items that can bring new members in while we also work with our suppliers to see what they have that is new and innovating,” Alvarez-Peters explains. “From there, we then figure out how we can be a part of those initiatives.”
Doing What Makes Sense
Costco stays on top of its competition, and its competition isn’t just limited to other membership clubs. Costco’s competitors include the retail sector at large. The company has employees who visit competitor locations to see what they are doing and how they are priced. This is all critical to Costco’s efforts to make sure its members are well served.
“We have more than 3,000 members walking through each and every warehouse every single day,” Alvarez-Peters says. “We charge our members a membership fee for them to be able to shop with us, so we feel we need to be sure we are offering them the right value.”
Alcohol is one category that Costco sees as important to success because it is a segment that supplements other purchases. “Our members buy food every week, and they can pick up wine, spirits and beer to complement their purchases,” Alvarez-Peters says. “We want to be sure the beer, wine and spirits category provides just what people are looking for.”
The responsibility of inventory management and replenishment lies with regional buyers and their teams. Costco always has had the mindset that regional buyers are closer to warehouses on the food side and are better equipped to ensure that each location has the right inventory at the right place and the right time.
“Purchasing and buying decisions are made by the buyer, and we have a review process that goes through the department general manager,” Alvarez-Peters says. “The alcohol beverage category is purchased on a regional level, and all buyers have the autonomy to purchase items which they feel work for their market.
“We do not have a national list that must be purchased,” she adds. “We work together, as a group, for items carried in all regions.”
Costco is happy with its membership renewal rate of 89 percent, which is the highest in its history. Costco tries to delight members with low-priced items they want, which gives members a reason to come back. It is the Costco focus on value and quality that helps members become loyal.
The company is looking for growth opportunities, especially internationally. Over the last five years, the company has grown by about 15 locations a year. That includes domestic and international growth. As Costco continues looking for ways to expand its footprint, grow the Kirkland Signature portfolio and keep members coming back, Alvarez-Peters says success is all about keeping the business simple.
“We can achieve our goals as long as we do what makes sense for our business,” she says. “We must know the business inside and out, and we must continually educate ourselves about the industry so we have the right product knowledge. We need to listen, ask a lot of questions, keep things simple and not complicate the business.”