Thursday, May 29, 2008

Costco the enigma

Costco Wholesale (COST) announced their latest quarterly earnings today and the surpassed expectations posting a 32% increase in profit. In my "Costco" post back in October of last year I posted about why I choose Costco over any other retailer for most purchases.

Even in these times of economic hardship in the U.S., Costco just keeps blowing past expectations while retailers like Sears and Target are struggling. Even so, the leading warehouse club operator remains somewhat of an enigma to most. I have heard the business media describe Costco as a higher end retailer, while I've also heard the chain described as a place where people might shop when times are tough and they are 'trading down' to obtain some bargains. So which one is it?

So why is Costco shooting the lights out? They are because they know how to retail, they know what people want out of a shopping destination. Their focus on low pricing has not clouded their view of what is really important. If low prices was the only attribute Costco had going for it, then I'd certainly not visit the store as often as I do. Retailers know that if the story starts and ends with price they become a commodity trader fast. Wal-Mart has realized this as well.

Costco is successful because they've discovered what people want, convincing one customer at a time:
  • Quality - Second to none goods in every category, simply the best brands, and the best private label anywhere (Kirkland Signature)
  • Price - Determined that they are not the lowest price? You simply aren't doing the math. Or you're comparing apples to oranges with respect to product quality.
  • Service - Every employee is pleasant; perhaps they like their jobs. Returning an item is easy, their online store is great to use and delivery is often free.
  • Experience & Surprise - Food samples for all, new and interesting items seem to pop up every week, coupons that actually save people money, photofinishing, optical centre, the list goes on and on.

I believe that Bloomberg, CNBC, and alike have it all wrong on Costco. There is no trading down, or stocking up for the oncoming economic collapse going on. Rice hoarding aside, Costco is taking market share because they are simply BETTER, and they are getting BETTER at being BETTER all the time. Sub-par department and grocery stores are giving Costco market share as each new Costco customer realizes the benefits above of shopping at the warehouses.


Nurse B, 911 said...

My only concern are those DAMN LINEUPS!! Not sure if its the same elsewhere, but at both locations in London (Ont) the lineups are huge compared to the number of cashiers they have open no matter the time of day throughout the week.
As an investor I would be very upset if they didn't have more tills open to push through more product. I can understand the cost factor of overhead, but I don't shop there as often as I otherwise would if the lines were shorter. I could save a few dollars by going there and waiting, but my time is worth something when I'm not on my days off. I'd just as rather go to Shoppers or a nearby grocery store for something quick and pay a dollar more than wait in line for 20+ minutes when there's 15-20 customers and only two cashiers.

Obviously I'm not the majority of shoppers because Costco continue to do well, but from a basic operations viewpoint if I were an owner of the store or investor I wouldn't ever want potential customers NOT coming in because they were discouraged by long lines and tardy tills.

Just a thought...

MG (moneygardener) said...

Good point Brad. There are 2 in London? I've only ever been to the Wellington Road one. I've never really waited in line at the Ancaster one for more than about 15 minutes. The key is to not go on Saturday between about noon and 4pm. I was going to mention in the post that one of the only hurdles I see with Costco is becoming a victim of their own success. By that I mean line-ups and stores that are so busy that they are hard to move around in.

Anonymous said...

I agree exactly with your point. Costco differentiates itself by bringing to the average person a continuous revolving selection of premium products normally found only at exclusive specialty retailers. Sams club is not in the same league as it is often simply a bulk version of Walmart.

If you read Consumers Report you'll often find that some of ther best buys are often products exclusively sold only through costco.

My family tends to make at least one monthly visit and it is never boring.

Sarlock said...

Costco does not always have the cheapest product, but the quality is always excellent. We buy all of our meat there, fish, beef, etc, and the little bit extra we pay is more than worth the high quality we get.

Something to remember with the price too is the yearly membership fee. $50 annual fee spread over $2,000 worth of purchases is 2.5%.

MG (moneygardener) said...

Sarlock, I would argue that their products are always the least expensive anywhere. Also, my membership is actually $100/year but I save 2% on all purchases with it. We probably spend over $6,000 there per year so my membership is free and I get money back.

Sarlock said...

As I only spend about $2,000/year there, so the additional membership fee would not pay for itself with the 2% cash back, so I stuck with the $50 membership. They sure push the $100 card hard at the stores though.

I have found that the Real Canadian Superstore often has prices comparable with Costco on similar product (a lot of RCS stuff is inferior quality, so you have to be careful to compare apples to apples). Since the RCS doesn't require a membership fee, this can make their products, in effect, a bit cheaper. Add to that the fact that RCS accepts Visa (effectively giving me a free 30 day interest-free cash advance) and for me, RCS usually wins out.

I still visit Costco monthly for meat and other products that there is no quality comparison for, however.

TKO from Ontario said...

Why TKO likes Costco:

* Awsome return policy
* Better that average service
* Yummy samples
* Quality brands
* $2 for All Beef Hot Dog + Pop
* Tire Centre -Prices can't be beat

Why TKO hates Costco:

* Long line ups at check outs - ALWAYS :-(
* Fatter than average clientelle that hoards multiple samples
* Arrogant shoppers that leave their carts in the middle of the isles while they go GRAIZING for yummy samples
* Memberships upgrade reps that should open another check out instead of walking around with those scanners.
* Samples not as frequent as they used to be

Mary Popins said...

I think your blog is great. I have learned about the company on the Costco is the nationwide retail chain. It includes online applications and benefit information. The company specializes in selling products at low prices and high volume. Target customers of the company are large families and businesses. Costco is world's leading membership warehouse club chain. Personally I did not yet happen to deal with a company.