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The Costco Craze & International Expansion - Unorthodox Costco Retail Strategies

How Costco Creates Shopping Value, Employee Values & Shareholder Stock Value

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The Costco Craze & International Expansion - Unorthodox Costco Retail Strategies
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Updated April 23, 2014

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I just happened to see an enviable example of free publicity for Costco yesterday while... flying on an airplane. After the in-flight movie finished, instead of playing the usual TV sitcom re-runs, what popped onto all screens throughout the aircraft, for the entertainment of the captive flying audience, was a CNBC documentary called "The Costco Craze."

Those who watched The Costco Craze on that flight - and it looked like more than 200 people did - were essentially viewing a 42-minute infomercial for Costco. There was hardly a disparaging word in the entire piece, which is pretty uncharacteristic for a CNBC report about anything.

Because the documentary reveals little known information like how Costco's markup compares to other retailers, how Costco buyers pick toys, and how Costco's influence has changed wine marketing globally, The Costco Craze has good entertainment value to the average consumer. But because it reveals all the ways that Costco uses counterintuitive retail strategies to boost average ticket prices and retain loyal customers, The Costco Craze has priceless retail strategic value to the average retailer.

Some of the counterintuitive retail strategies that work for Costco include:

  • Minimal in-store signage, forcing customers to wander around to find things
  • Limited number of products (10,000 compared to 40,000 in most of the largest supermarkets and 100,000 in Wal-Mart)
  • Limited size selections (supersize is the only size)
  • Pays wages that are two to three times higher than the average retailer
  • Provides health insurance benefits to 90% of its employees
  • Includes luxury items in its discount merchandise mix
  • Instead of following the Apple path, uses low-tech / high-touch customer engagement strategies
  • Instead of asking, "How can we make the customer pay more for this?" asks "Could this be less expensive for the customer?"

The sum total of these unorthodox Costco strategies are two outcomes that any of the largest discount retailers in the world would like to have. First, the average ticket total for Costco customers is high because customers firmly believe they're saving more money by spending more money. Second, once into the more-is-better vibe, Costco customers have a tendency to make impulse purchases when they spot products they didn't expect to be available at a discount warehouse store. And Costco shoppers don't just buy gum on impulse, they buy flat screen TVs.

I ran across a great example of the power of retail impulse buying recently when I was talking to a man who lives in New Zealand. He is the organizer of a ukelele orchestra (who knew there was such a thing) and was kind enough to demonstrate to me how easily vintage rock 'n roll classics can be adapted to to the ukelelele. (Surprising well, by the way.) I asked him how he first decided he wanted to play a ukelele.

Ed told me that he had found a $200 fare to Hawaii a few years ago, and while visiting the Big Island, a friend of his had taken him to the most amazing retail store. It had all sorts of great stuff that Ed had never seen in New Zealand, and he said before he knew it he had a cart full of stuff, even though he knew he would have to lug it back to New Zealand. (Perhaps he purchased an extra suitcase there as well.)

When he was just about finished shopping, Ed spotted a ukelele randomly displayed in the middle of a bunch of unrelated products. His friend jokingly told him that he should take that ukelele home with him to New Zealand too. Ed laughed at the jab, and then added the ukelele to his cart.

When Ed got back to NZ with his new musical instrument, he taught himself how to play with lessons on the Internet. He told me that he liked it so much that he taught ukelele classes at a local school, and then formed the Russell Ukelele Orchestra, which now has 14 members and is well know around his area because they play gigs at local events and gatherings.

As I was listening to his story, I was thinking about what an interesting impact a random retail impulse purchase had made on a whole lot of people. I said as much to Ed and he said, "Yeah, it was a fantastic store. Have you ever been to it? It's called..."

Costco. What else?

The Costco Craze is not just a result of the American bigger-is-better psyche. The Costco international stores in 7 countries have proven that the Costco formula works just as well with consumers outside the U.S. Consequently, instead of opening 5 international stores per year like it has for the past five years, Costco will be opening three times as many international retail locations in its FY 2013. And unlike other U.S. retail chains that are opening international locations as a defensive strategy, Costco's international expansion isn't compensating for domestic weakness because currently it has none.

Apparently to know Costco is to love Costco, no matter where in the world Costco is. And the international consumers who are quickly becoming part of the Costco Craze probably don't care much at all where Ann Romney does (or doesn't do) her Romney family shopping. They just want quality merchandise, good prices, and an occasional ukelele surprise.

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