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HALIFAX, N.S. March 9, 2017 /Troy Media/ – Unless you’re there on a Saturday, constantly trying to avoid collisions with oversized shopping carts, you probably like Costco, even though it will cost you more to shop there as of June.
The basic membership fee is going up by $5 to $60, while premium folks will have to pay $120, up from $110.
Paying to spend is an incredible business model. With more than 10 million members in Canada and a renewal rate exceeding 90 per cent, Costco makes millions before selling a single product.
And with high inventory turnover that allows it to pay for merchandise after it’s bought by customers, Costco looks a lot like a bank. It’s all about cash flow.
Recent results weren’t bad for Costco worldwide, but Canada has become a beacon of financial success for this global player.
Same-store sales for Costco in Canada were up eight per cent this year – higher than in any other country in which the company operates. These are the kind of numbers most retailers would die for and the future looks even brighter.
The company operates 94 stores in Canada and will add seven more by year’s end. This is the most stores Costco has opened anywhere in the last decade.
And Canada will remain a growth market for Costco for the next several years, largely because it doesn’t have to compete with its U.S. rival, Walmart-owned Sam’s Club, which failed miserably in Canada a few years ago.
Costco is well-run. It sees itself as a retailer, as well as a portal to a vast but often obscure supply chain. The membership angle makes customers feel like elite guests, as members get access to special discounts from manufacturers.
Costco is also a logistical masterpiece. A typical Costco store carries about 5,500 merchandise categories, compared to around 150,000 in most other stores of similar size. So procurement is much less stressful and less costly. More choice can lead to confusion for customers and potentially fewer sales. Wide aisles for easy movement of pallets allows Costco to turn over inventory more efficiently than any other retailer, with much less labour. And there are no signs, no weekly promotional specials and no decorations.
But it’s in selling food that Costco’s strategy has worked best in recent years. Not only has it increased its food market share to 10 per cent versus Walmart’s seven per cent, it’s selling quality products – much to the dismay of Loblaws, Sobeys and Metro.
Like other food retailers, Costco partially processes many food products in-house and makes this clear to customers.
Costco also sets up a kind of treasure hunt, enticing customers to think about food at the just right time, after having gone through pant racks and tool aisles.
Despite the fact that its stores are giant and rather uninspiring places, Costco welcomes members by serving food and lots of it. Anybody who comes hungry can walk out of the store feeling full, especially kids. The food-sampling-to-purchase conversion rate is extremely high at Costco compared to traditional food retailers. While tasting stations at Costco generate food sales, other retailers spend millions to make their stores feel like glamorous labyrinths of flavours and scents.
All of this seems counterintuitive but it’s actually working for Costco, and in Canada especially.
But the picture is not all rosy.
While Costco has made an impressive ascent to the food-retailing elite, it faces a problem attracting millennials. The model doesn’t seem to make sense to this generation: some surveys suggest Costco isn’t even in their top five favourite food retailers.
It will be interesting to see how millennials approach Costco as they mature in the marketplace.
As well, barely three per cent of Costco’s sales are generated online and the company seems content with that number. However, if the market moves further in this direction, as are millennials, Costco may be in trouble.
Service is also an issue. The simple functional checkout system at Costco, with no bagging supplies or service, can be annoying. More demanding customers, who don’t mind paying a little extra for this service, may end up going elsewhere for groceries.
Charging more to give members access won’t actually change much for the company. In fact, those who see membership fees as a sunk cost may want to spend more.
And Costco’s success in Canada will continue to support its global expansion.
So the next time the Costco associate goes through your receipt on your way out, just say, You’re welcome.
Troy Media columnist Sylvain Charlebois is dean of the Faculty of Management and a professor in the Faculty of Agriculture at Dalhousie University, and author of Food Safety, Risk Intelligence and Benchmarking, published by Wiley-Blackwell (2017). Sylvain is included in Troy Media’s Unlimited Access subscription plan.