How Costco thrives in the Amazon era

CNN/Stylemagazine.com Newswire | 8/21/2018, 11:54 a.m.
Retailers around the world are radically reshaping their strategies to contend with Amazon. Costco has a different tactic: Perfect what's ...
Retailers around the world are radically reshaping their strategies to contend with Amazon. Costco has a different tactic: Perfect what's been working for four decades.

Nathaniel Meyersohn

(CNN Money) -- Retailers around the world are radically reshaping their strategies to contend with Amazon. Costco has a different tactic: Perfect what's been working for four decades.

Costco has created a bulwark against Amazon by keeping a lid on costs and using membership fees to offer better prices than competitors.

"Costco wants to be the last to have to raise prices and the first to lower them," said Mark Cohen, the director of retail studies at Columbia Business School.

Costco has a sizable customer overlap with Amazon, especially among wealthier shoppers. It's a looming danger for Costco if those shoppers decide they don't want to pay for both.

But the company has defended against its Washington State neighbor through low prices, offering fresh food and gas, and creating a treasure hunt buying experience that can't be copied online.

"Shoppers will use Amazon to replace physical shopping experiences that are chores or that they don't enjoy," said Kantar Retail senior analyst Timothy Campbell. "Even as many shoppers consolidate their trips into fewer retailers or go online, Costco isn't one retailer they consider cutting from their list."

Throwback business

Costco gets roughly three-quarters of its profit from $60 to $120 annual subscription fees. It's the world's second largest retailer by sales, though Amazon's overall revenue -- including its cloud business -- is higher than Costco's.

Members pony up for the subscription because they believe they can make it back over the year by buying cheap stuff in bulk, like giant jugs of ketchup and mayonnaise.

Costco's 93 million members are exceedingly loyal: As of June, Costco reported 90% of its members renew their subscriptions.

The company pours the subscription proceeds into driving prices down. Unlike Walmart or Kroger, the company has invested mainly in prices: Warehouses are "no frills," and Costco has mostly eschewed costly digital acquisitions to fuel growth.

"Costco is one of the most productive retailers in the industry," Cohen said. "They waste no money on features that their customer does not require or expect from them."

The company makes $1,200 per square foot —double its competitors' hauls — through its self-serve format. Store employees focus on improving shoppers' trips with free food samples, instead of stocking shelves or working in the back of warehouses.

Costco has strong partnerships with suppliers and can negotiate with them for the best deals, even when inflation rises, because brands trust Costco will use the cost savings to keep price tags in stores down. Vendors are happy to oblige because it boosts their sales.

A sharp focus on creating value for customers helped Costco report another stellar month of US sales in July, growing 6.6%, excluding rising gas prices, from a year ago. Costco's same-store sales growth has outpaced Walmart, Kroger, and Target in recent years.

Kirkland Signature

Although big-box retailers like Walmart often sell more than 100,000 items at one of their superstore, Costco stocks an average of 3,800 national brands and Kirkland Signature private label products.