When Costco Europe senior vice-president Steve Pappas retired last autumn, after overseeing the US giant’s UK operations for 13 years, his departure didn’t make the same headlines as some other senior retailers.
It was typical of how Costco can sometimes be overlooked in the UK, but while there may not be much media focus on the business, it has made a big impact.
From humble beginnings in Seattle in 1976 – like that other famous retailer Amazon – by 2019 Costco Wholesale had grown into a $150bn-turnover global business with margins of 11% and profits of $3.7bn. It is the third-largest retailer in the world with 783 warehouses in 12 countries.
In the UK, Costco launched in 1993 and it now boasts 29 warehouses here that generated turnover of over £2.6bn in 2018 and online revenue of £75m – up from £12.8m in 2013.
Profits of £14m were generated in 2018. Considering it has opened petrol stations and owns most of its new warehouses, Costco has placed long-term investment ahead of short-term profitability.
Loyalty pioneer
As a warehouse club where members have to be tradespeople or meet certain criteria to join, its sales are not collated by consumer panels such as Kantar. That channel blur means its actual bite of the consumer cherry is often unaccounted for.
All sorts of people are eligible to buy at Costco, ranging from health service and local government employees to professionals such as dentists and architects. Costco’s own statistics show that in the US, 66.5% of members are employed and 31.1% are trade members.
But unlike some other wholesalers, Costco pack sizes are more consumer-friendly and not always sold in bulk, such as two boxes of Kellogg’s Special K rather than the 12 boxes typically found in more mainstream wholesalers.
“Costco could arguably be credited with having created the first loyalty scheme in 1976”
Costco’s food court and more polished atmosphere also make it a more family-oriented environment, rather than a functional cash-and-carry.
The launch of Amazon Prime in 2005 and, more recently, Tesco’s Clubcard Plus subscription programme, are obvious examples of when consumers have been willing to pay to shop at a retailer for the benefits they get in return.
Costco has long been a pioneer of that approach. The fact Costco membership can cost up to £36 for individuals has not deterred its 2 million UK members who receive two to three weekly multi-vendor mailing coupon booklets. An Executive membership option giving 2% cashback up to £500 a year is also offered to drive the loyalty of Costco members even further.
Global scale
Costco’s recipe for success is simple. It is a limited SKU business like Aldi and Lidl. It offers only 4,000 SKUs and guarantees the quality of everything it sells.
Costco could even arguably be credited with having created the first loyalty scheme in 1976 because only members can purchase or benefit from promotions. Membership of course also provides Costco with invaluable customer data.
Every membership card has a picture and every purchase is logged, so no receipt is required for refunds and the membership fee can be refunded at any time if a customer is unhappy.
“No retailer or category is safe from Costco’s global buying power”
That is in clear contrast to most retailers who insist on receipts as proof of purchase, another barrier to the seamless customer service Amazon and Costco have developed. Who remembers those paperless receipts?
Costco buyers work hard to balance the core customer’s basic needs and creating a treasure-hunt effect with special seasonal lines running right up to Chanel watches for £5,000 – all neatly displayed alongside those Special K two-packs.
No retailer or category is safe from Costco’s global buying power, which translates into identical products labelled for all the English-speaking countries in which it operates.
The model is working on a global scale. In a world where omnichannel retailers such as Alibaba and Amazon are seen as invincible, the crowd of 100,000 who fought to join the opening of Costco’s first warehouse in Shanghai in August proved bricks and mortar isn’t dead, as long as it’s relevant to customers.
Sometimes, it’s the old-fashioned approach that retailers need to learn from, exemplified by Costco.
- Michael Lieblich is a retail analyst
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