August 24, 2018
If you’re a retailer in 2018, you’re busy retooling your strategy to withstand the impact of the Amazon juggernaut. Unless your name is Costco, in which case the plan is to essentially continue what you’ve been doing for years.
The Issaquah, WA-based warehouse club differentiates itself with a formula of low prices, fresh food and gas, and a self-service shopping experience that can’t be replicated online. It derives about 75% of its profits from annual subscription fees, with many of its members in the same pool as Amazon’s customer base.
Yet, while shopping at Amazon is a matter of convenience as well as habit, for Costco members that trip to the nearest location is a matter of loyalty. In June, the company reported that 90% of its 93 million members renew their subscriptions.
“Shoppers will use Amazon to replace physical shopping experiences that are chores or that they don’t enjoy,” Kantar Retail’s Timothy Campbell told CNN. “Even as many shoppers consolidate their trips into fewer retailers or go online, Costco isn’t one retailer they consider cutting from their list.”
A significant factor in that loyalty, of course, is the appeal of low prices. Costco members can achieve economies of scale by buying commodity items in bulk. Beyond selling giant-sized jars of mayonnaise, though, the company cuts deals with its suppliers, who trust that the company will pass along the savings to its members.
Costco’s operational efficiencies also pass along the savings to itself: thanks to a no-frills approach to merchandising, its sales of $1,200 per square foot are double those of its competitors. The company has also largely avoided making costly acquisitions to drive growth.
“Costco is one of the most productive retailers in the industry,” Columbia Business School’s Mark Cohen told CBB. “They waste no money on features that their customer does not require or expect from them.”
The results speak for themselves. After Walmart, Costco is the world’s second largest retailer by sales, although Amazon still has the edge in overall revenue.
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