Costco's Retail Innovation Craze

Costco Wholesale Corporation (trading as Costco) is the largest American membership-only warehouse club. It has been aggressively infiltrating global markets with retail innovation practices that have created a cult-like consumer following characterized as "The Costco Craze." Costco's global expansion frenzy began in 2013 and includes more than 200 international Costco Warehouse locations operating in eight countries outside the United States.

Selling Costco's Retail Strategy Internationally 

With the globalization of the retail economy, many large U.S. retail companies are opening locations in international markets. Costco's aggressive international expansion is in line with the strategic plans of many retail chains.

Before Costco's international expansion, investors wondered whether the counterintuitively innovative Costco retailing strategies would create the same kind of fanatic Costco Craze outside the United States. Target's exit from Canada in 2015, Tesco's shutdown of its U.S. Fresh and Easy chain, and Walmart's store closings in Brazil in 2016 serve as cautionary tales for global retailers. 

While any retail chain can bully its way into a global retail market, there's no guarantee the competition will be crushed under the weight of megachain size and annual income. This level of risk is exacerbated by cultural loyalty, international trade disputes, and the empowerment of customers that comes from easy access to information about corporate practices.

However, Costco's expansion succeeded in ways that Target, Walmart, and Tesco failed to achieve. Costco membership signups in the first 8 to 12 weeks of a new store opening overseas are generally 10 times greater than Costco store openings in the United States. Additionally, the retention rate for annual memberships at international locations is generally over 80 percent.

Unlike other U.S. retail chains that are opening international locations as a defensive strategy, Costco isn't compensating for domestic weakness. Costco's international expansion is coming in the middle of high profits in the U.S. market, allowing the company to focus on a long-term international strategy, rather than trying to shore up declining sales by any means possible.

Costco's International Expansion, by the Numbers

By December 2019, Costco Wholesale had more than 700 warehouses worldwide with over 200 warehouse stores outside the U.S. These included locations in Canada, Mexico, the United Kingdom, Japan, Taiwan, South Korea, Australia, and Iceland.

In 2019, Costco opened its first location in mainland China. Consumer response was so enthusiastic that the store had to close early on opening day due to traffic jams caused by crowds of shoppers and three-hour wait times just to park.

Costco's Successful Retail Strategies

What is Costco doing right when they enter foreign territory that other global retailers aren't? 

The CNBC documentary, "The Costco Craze" revealed behind-the-scenes details about Costco's counterintuitive but successful retail strategies, such as how Costco's markup compares to other retailers, how Costco buyers pick toys, and how Costco's influence has changed wine marketing globally.

Unlike many retailers, Costco focuses on strategies for making products less expensive for customers, rather than trying to increase revenue by finding ways to make customers pay more. Other successful retail strategies include:

• Minimal in-store signage, forcing customers to wander around to find things.
• A 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.
• Wages that are two to three times higher than the average retailer.
• Providing health insurance benefits to 90% of its employees.
• Luxury items in its discount merchandise mix.
• Using low-tech / high-touch customer engagement strategies.

These unorthodox strategies create two outcomes. 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 mindset, customers tend to make impulse purchases when they spot products they didn't expect to be available at a discount warehouse store. Because of the product selection and warehouse setup, Costco shoppers don't just buy a pack of gum on impulse: they buy 80" 3D televisions.

The Costco Craze is not just a result of the American bigger-is-better mindset. Costco's international locations have proven that the Costco formula works just as well with consumers outside the United States.