5 Reasons Why Costco is Amazon Proof
By Tricia McKinnon
One retailer that hasn’t faltered in the wake of Amazon is Costco. Costco’s sales increased by 9% to reach $138 billion in 2018. Costco seems to have found the secret sauce to retail success by focusing on the basics. These basics include low prices that customers receive through the retailer’s membership program, a fun shopping experience and its world class customer service. Costco is the second largest retailer in the world for good reasons. Here are a few ways that Costco stays ahead of the competition.
1. A membership that creates a loyal following and drives profits. Nearly 100 million people have a Costco membership. Each member either pays $60 (household or business) or $120 (executive) annually to become part of the club. Once this fee is paid customers treat it like a sunk cost. The investment has been made and now it is time to get value from it. Just the thought that the payment has been made can entice customers to make additional trips to Costco to make sure they get value from their investment. It is a powerful play on human behaviour that helped to generated $3.1 billion in membership fees for Costco in 2018.
With a membership renewal rate of 90.7% the retailer has an extremely loyal customer base. The membership is also economical for Costco as it allows the retailer to reinvest the membership fees into low prices for customers. According to a study of 100 items sold at both Amazon and Costco, Costco was cheaper on average by approximately 20%. The membership program also helps with Costco’s bottom line with approximately two-thirds of Costco’s profits coming from membership fees.
2. A shopping experience that keeps customers coming back for more. Costco is one of many retailers that has found success by offering customers a “treasure hunt” in-store experience. Costco offers many limited time deals and products enticing customers to go back to Costco often to see what is new and exciting and to make sure that they don’t miss out. Retailers like T.J. Maxx and Dollarama also employ a similar strategy and its working. Human beings crave novelty and not knowing what you are going to encounter when entering a Costco store has helped the retailer to remain successful. The treasure hunt atmosphere is also a safeguard against online competitors as customers have to go into a Costco store to see what is new and exciting.
3. A business built around frequently made purchases. Costco has figured out the type of assortment that is most likely to increase the frequency of customer visits. For example, it sells groceries. Groceries are one of the most frequently purchased products, that is why Amazon is focusing on the sector. 93% of Costco members shop at Costco for groceries. It also sells gas and a recent study found that Costco offered the cheapest gas in the US. It also has a great selection of food for purchase in its food courts. From a customer perspective being able to grab a hot dog at Costco is a nice treat. For Costco it is big business. Costco sold 150 million hot dog and soda combos in 2017 and the food courts generate over $1 billion. Selling items such as hot dogs also get customers into its stores to have a quick, cheap and tasty meal. Then afterwards customers can go shopping. These are deliberate choices and have had a tremendous impact on the success of the business. Not only does changing its assortment frequently make customers want to visit a Costco again and again but its assortment is aligned to the purchases that customers make most frequently. As shopping becomes more and more convenient through eCommerce retailers have to work harder to get customers in the door and Costco has figured out how to do this.
4. A $39 billion dollar private brand. Kirkland, Costco’s private label brand made $39 billion in 2018, up 11% from 2017 and the brand generated nearly a third of Costco’s sales. Kirkland is one of the most trusted private label brands on the market. No other private label brand has a similar level of trust. The brand is known not only for its quality but also for its low prices. It is typically 20% cheaper than the national brands that are sold in Costco stores. Since the brand is exclusive to Costco it is another effective traffic driver for the retailer.
5. Best in class customer service. Costco has a very liberal return policy where customers can return almost anything they have purchased at anytime. On the Costco’s website it says: “we are committed to providing quality and value on the products we sell with a risk-free 100% satisfaction guarantee on both your membership and merchandise.”
In recognition of the company’s outstanding customer service in 2018 Costco was ranked number one in the American Customer Satisfaction Index in the internet retail category, ahead of Amazon.