Inside the ‘treasure hunt’
LIMIT PEOPLE’S CHOICES
Costco was recently selling three types of women’s deodorant, four toothpaste varieties and 10 shampoo sets, while its competitors sell hundreds of personal-care items. About 55 to 60 per cent of Costco’s merchandise changes every few weeks and regularly stocked items might shift in location. “We have to rearrange all the time,” said Andrée Brien, senior vice-president of national merchandising at Costco Wholesale Canada Ltd. “We have to show customers what is new, what’s fresh. You come here on a Saturday, it’s a zoo. Families are here, everybody is pushing carts, they are sampling. But that’s the treasure hunt. It’s fun.”
MAKE MONEY OFF MEMBERSHIPS, NOT PRODUCT SALES
The warehouse retailer’s annual membership fees amount to 2.3 per cent of net sales, but account for 72 per cent of the company’s operating profit. That allows Costco to sell goods at an ultra-low gross margin, the average percentage of profit on each item sold. In fiscal 2016, Costco’s gross margin as a percentage of sales was 11.35 per cent. By contrast, Wal-Mart Stores Inc.’s gross profit margin was 24.6 per cent in fiscal 2016; at Loblaw Cos. Ltd. more recently, it was around 27 per cent.
DON’T ADVERTISE
There’s a reason consumers never see Costco billboards, full-page ads, or weekly mailedout flyers: there aren’t any. Instead, Costco hands out in-store flyers and emails its members with offers. “There is a cost to flyer advertising,” Brien said. “When you average eight-percent margin (including foreign exchange), there is no place for me to pay for that.” In an era when retailers are trying to lure customers to bricks-and-mortar stores even as they invest heavily in their websites, customers need to go to Costco in order to find out what’s on offer since 80 per cent of the assortment on its website is different.
OFFER VALUE FOR THE MONEY
Costco merchandise may be a deal, but it’s by no means cheap. Selling high volumes of a handful of items allows the retailer to sell at a lower price. Whether it’s a diamond ring for $ 5,999.99 or a nationalbrand shampoo, consumers who do the math will figure out that they are saving money. For example, Live Clean Coconut Milk Shampoo and Conditioner sells in a two- pack of one- litre bottles at Costco for $ 15.99 before tax. A recent sale at Walmart priced the same products at $5.46 each for the 350 ml size. At the till, it would cost $21.84 before tax to buy 1.4 litres, or 600 ml less than the Costco deal. “We are asking people to buy these huge sizes — it has to be a deal,” Brien said.
MAKE NICE WITH SUPPLIERS
Costco eschews several retail industry practices that antagonize consumer goods manufacturers, such as the slotting fees they pay to get their items onto shelves or deducting a percentage of sales from manufacturers’ invoices for marketing programs. “It all comes down to simplicity,” said Michael Graydon, chief executive of the manufacturers’ industry association Food and Consumer Products of Canada. “They negotiate hard up front to get a great price, but they work hard to deliver. It’s old-fashioned retail: Here is the price of the goods, here is the volume we will work toward.”