Unless you’re there on a Saturday, trying to avoid collisions with oversized shopping carts, you probably like Costco. The bad news is it will cost you more to shop there as of June. The basic membership fee is going up to $60, while premium folks will pay $120.
Paying to spend — an incredible business model, wouldn’t you say? Imagine, with more than 10 million members in Canada and a renewal rate exceeding 90%, Costco makes millions before selling a single product. Thus, with its high inventory turnover which allows it to pay for merchandise after it’s bought by customers, Costco’s high asset productivity makes it look like a bank. It’s all about cash flow.
Same-store sales for Costco in Canada were up 8% this year, which is higher than its rates in any other country. These are the kind of performance numbers most retailers would die for, and the future looks even brighter. Costco operates 94 stores in Canada, and will add seven more by year’s end — the most stores Costco has opened anywhere in the last decade. Canada will remain a growth market for Costco in retail/warehousing space, largely because it doesn’t have to compete with its U.S. rival, Wal-Mart-owned Sam’s Club, which failed miserably here a few years back.
Costco is undeniably a well-run company. It sees itself as a retailer, but also 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 SKUs, or merchandise categories, compared to around 150,000 SKUs in most other retail stores of similar size. Therefore, procurement is much less stressful and costly. More choice can lead to confusion among customers. There are also no signs, no weekly promotional specials, and no decorations — true merchandising bliss.
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It is in selling food that Costco’s strategy has worked best. Not only have they increased their market share in food sales to 10 per cent versus Wal-Mart’s seven per cent, they are selling quality products. Costco’s success is not just about selling in bulk through coupons but by setting up a kind of treasure hunt, it entices 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, uninspiring places, Costco welcomes members with attendants serving food. While tasting stations at Costco generate food sales in its big-box stores, other retailers are spending millions to make their stores feel like glamorous labyrinths of flavours and scents. Quite the paradox. All of this seems counterintuitive but it’s working for Costco, and in Canada especially.
But while Costco has exhibited an impressive ascent to the level of food-retailing elite, the model doesn’t seem to make sense to millennials. Some surveys suggest Costco is not even in their top five of 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. If the market moves further in this direction, Costco may be in trouble. Their service is also questionable. The simple functional checkout system with no bagging supplies or service can be annoying. More demanding customers, who don’t mind paying a little extra for this service, may be end up going elsewhere.
Charging more to give members access to Costco won’t actually change much for the company. In fact, those who see membership fees as a sunk cost may end up wanting to spend more. Nevertheless, 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.”