The annual fee for my Costco membership came due recently. With a swipe of my credit card at the checkout counter, $110 was added to my grocery bill.
During the first few years of my Costco membership, when I was only on the basic $55 tier, that add-on stung. But 15 years later, I no longer wince when I sign off on the annual fee.
Between fish and meat, coffee beans and organic bananas, and beer and wine, a substantial portion of what’s in my kitchen today was purchased at Costco. And why do I pay for the privilege of entering Costco’s warehouses? Because the savings on these and other products over the course of a typical year easily exceeds that $110 fee, for my household of two.
“People ask, why do I have to pay $55 to walk in your doors?” said Robin Ross, Costco’s senior director of corporate marketing. “Where do you get off charging me to enter the store?”
As I’ve come to understand over time, Costco’s core business isn’t about selling merchandise—it’s about selling memberships. The only way the store can do that is to offer a value and selection proposition that's so winning, so unbeatable, that consumers will literally pay to get inside.
With 79 million card-carrying members and steady growth by anyone's measure, Costco is surely doing something right.
Bulking Up on Bargains
Now, I know what you’re thinking—I must live in a mansion or a rural compound to be able to store the bulk-size goods Costco is famous for. But actually, I know that Costco is not the place for me to buy something like, say, mayonnaise. At the rate mayo gets used in my house, Costco’s one-gallon jar would survive until the next ice age.
While the perception that Costco is all about bulk buying isn’t entirely off the mark, much of the store is made up of conventionally sized items. Yes, toilet paper is sold 30 rolls at a time, but Calvin Klein jeans and Greg Norman polo shirts are offered in sizes other than XXL. New York Times best sellers are packaged the same way that Amazon sells them.
“Yes, you can get the giant pack of toilet paper,” explains Kimberly Peterson, who runs the popular blog AddictedToCostco.com. “Or you can walk right past and save money on TVs and printers and appliances. There’s so much more in the store than that giant jar of mayonnaise.”
“If you wear glasses or contacts you can easily recoup your membership cost in one visit,” she adds.
With few exceptions, the savings can really add up on items large and small. Here are just a few comparisons I noted on my last visit:
• A 1.75-liter bottle of Ketel One Vodka runs $29.99 at Costco; the lowest price I can find anywhere else in town is $34.99.
• The iRobot Roomba 655 Pet Series Robot Vacuum has a list price of $499.99, and the best deal I could find online was $416.69. Costco’s price is $349.99, and a temporary manufacturer’s rebate took an additional $30 off.
• At Costco, Starbucks’ house blend coffee is priced $19.99 for a 2.5-pound bag, working out to $8 per pound. A 1-pound bag of the same beans at a Starbucks retail outlet sells for $11.95.
• Costco’s overall book selection isn't deep, but when Harper Lee’s Go Set a Watchman hit shelves, the hardcover retailed for $15.49 at Costco. It was $16.07 plus shipping through Amazon, against a $27.99 list price.
Navigating the 80-20 Rule
At any given time, there are usually only a few dozen book titles available at Costco, mostly hewing closely to bestseller lists. But this is one of the keys to Costco’s sales strategy: the 80-20 rule. The principle holds that 80 percent of a typical retailer’s revenue will be generated by 20 percent of the merchandise.
By focusing on the 20 percent of products that are most likely to sell, Costco maximizes volume, allowing the company’s buyers to negotiate better pricing. And with many items—including mayo—represented by only one brand, manufacturers compete fiercely for coveted shelf space, maximizing Costco’s leverage.
So, while you’ll find white and yellow onions in bagged abundance, leeks don’t grace Costco shelves. The top two or three toothpaste brands are here, but not Tom’s of Maine. I prefer chunky peanut butter to smooth, but chunky apparently doesn’t satisfy the 80-20 rule. For these items, I need to stock up elsewhere.
Costco's awareness of the 80-20 rule also means store shelves are better utilized. Instead of tying up real estate for 100 different cereals in a couple different sizes each, Costco sells 18 or so, and one size fits all.
Many items are sold straight off the shipping pallet, reducing stocking time. Indeed, the overall experience is one of browsing through a no-frills warehouse. There are no branded shopping bags, just the original shipping boxes, which you can re-use to carry your haul home. You won’t see much money spent on décor, signage, or marketing—costs that are typically passed on to consumers.
“Some retailers have a philosophy of 'How do I make more money off this product?'” suggests Ross. “Our maxim is, 'How do we keep our operating costs low?'” He points to the company’s policy that no product should be marked up more than 15 percent. Some items—particularly food—are even sold at cost.
While the majority of Costco items are name brands, the company also sells products under the Kirkland house brand, and here apples-to-apples comparisons come into play.
“At Costco, you’re getting a certain quality of apple juice that you won’t get at Walmart,” Peterson says. “Kirkland is better than Sam’s Choice. It’s often organic, whereas Sam’s Choice is sometimes full of chemicals.”
And although many of Costco’s food products are decidedly mainstream, there’s a surprising selection of higher-end items. I'm talking about elegant Humboldt Fog chevre from Cypress Grove; delicious, sustainably sourced Wild Planet canned tuna; and pure maple syrup and raw pine nuts at a fraction of the price you’d normally pay. And would you believe that Costco imports more high-end French wines than any other company in the world?
Why Costco Isn't the Be-All and End-All
“Costco is not for everyone,” Peterson admits.
If you're tight on living space or you’re shopping for one, it may be difficult to justify Costco’s annual membership dues. And if you want to make a single trip to a single market for your groceries each week, you may find it tough to get the job done at Costco.
One of the store's most common customer complaints has to do with checkout lines. In particular, a lot of families do their “big” shopping on weekends; the aisles can be clogged with all manner of humanity, with particularly dense clusters anywhere food samples are being handed out.
Although I rarely wait more than three or four minutes to check out, that's because I frequent the store on weekdays. I’ve learned that Saturdays and Sundays are a good time to avoid the warehouse.
Peterson says that two comments she’s hearing more frequently from her readers revolve around to Costco’s increasing reliance on the Kirkland label, and a gradual switch from conventionally grown produce to organic. “The organic products are more expensive, and not everyone can afford them,” she notes.
But there are other features that keep me loyal to Costco. I like the store's liberal return policy, if not the line for returns. The company's labor-friendly employment practices—high wages and progressive benefits packages that set precedents for the retail industry—are another reason I feel good spending money there.
About That Admission Fee…
The entry-level option is the basic “Gold Star” membership, which runs $55 a year. It's a good place to start, so you can take your time and decide whether Costco’s shopping model works for your household. Remember, the membership fee is fully refundable at any point during the year if you feel you’re not getting value out of it.
Many members soon upgrade to the “Executive” membership, which provides a selection of discounted consumer services plus an annual rebate check equaling 2 percent of the previous year’s purchases. Just before the end of the membership year, a check arrives in the mail, which you can either cash or put towards next year’s membership. (However, it's worth noting that several items aren't eligible for the 2 percent rebate, including gas and travel purchases.)
To be sure, Costco is not the only place I do my grocery shopping. There are plenty of items the store stocks—clothes, furniture, garden supplies, and most produce—that I choose to buy elsewhere. But Costco’s business model works well for many of my needs. It’s a store I’m happy to tell my friends about.
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