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Six Megatrends of Retailing

Survive and Prosper the Consumer Megatrends

The New Shopping-as-life Model Has a Broad Competitive Perspective

As we enter the 21st century, the nature of shopping and the role it plays in life has changed dramatically. Shopping is about much more than feeding and clothing the family, it is about who we are, how we live, and how we spend our time. It is no longer about shopping versus life. It is about shopping as life. In fact, shopping has become so integrated into everyday life that consumers do it almost without thinking as they juggle family, work, and social activity.

How then do we manage this shopping life? We do it by being more efficient, smarter about our choices, and by blending shopping seamlessly into our lives, sometimes as a practical function and sometimes as entertainment, adventure, and emotional reward. We are shopping more at the outlets of choice and for more product categories.

Heighten the Emotional Quotient in Retail Branding

In the last four years, consumers have doubled the number of outlets they shop during their weekly shopping trips. However, they are not making more shopping trips, they are shopping more stores on each trip. The increase in outlets and categories shopped is partly due to the range of new, convenient, and affordable shopping options.

However, this increase in shopping is also driven by the level of shopping confidence and experience exhibited by female shoppers who willingly and eagerly shop everywhere.

Consumers have changed their weekly shopping matrix, overlaying the traditional supermarket with the increasingly accessible, discount-oriented mass merchandiser and the local convenience store. While three out of four American women still shop the local supermarket weekly, one-out-of two now shops a mass merchandiser once a week and one-in-five shops a drug store weekly. We now see the interrelationship between convenience and price. Retailers can no longer trade one for the other. Consumers demand both. If it is not conveniently located, reliable, and easy to shop, if the prices are not right, consumers will not integrate the outlet into their weekly shopping matrix.

One-in-two consumers of all ages shop at a mass merchandiser weekly (more than double five years ago). Mass merchandisers have affected supermarkets and caused declines in all outlets that compete with them.

Six Megatrends of Retailing

Six Consumer and Retail Mega-Trends

  • The Walmart-ing of America. This trend is not about mass merchandisers as a whole, it is about Walmart. Walmart has redefined the American consumers’ shopping experience and expectations. Stunningly, four-out-of-10 American female consumers now shop Walmart weekly. Walmart has become the benchmark against which American consumers evaluate not just the functional aspects of shopping (price, convenience, selection, service) but also the emotional experience of shopping. Not only is it the outlet consumers rate as the best place to get the lowest prices but also the place they look for what’s new.
  • The new value equation. Consumers now demand the functional aspects of convenience, price, selection and service as basic requirements of any and all retail outlets-be they discount-oriented national chains, catalogues, department stores or e-commerce sites. No longer can an outlet define itself by a singular functional dimension, such as low price, convenience or service. Today, all consumers demand convenience, good prices, selection (always in stock) as basic minimums wherever they shop. Now consumers view shopping as part necessity and part adventure, part pragmatism and part emotion. A retailer can no longer survive unless it satisfies consumers on both functional and emotional issues.
  • Retailers on the rise. Mass merchandisers are clearly leading the way as the outlet of choice. Not only do nine-out-of-10 primary shoppers of all ages and income levels shop a mass merchandiser quarterly but also one-out-of two shop there weekly! Mass merchandisers reflected the largest increases in consumers shopping for all the core categories they carry, with the exception of clothing. Mass merchandisers are now the primary outlet for all major beauty care categories, skin care, hair care, and cosmetics, overtaking department stores and drug stores, and second only to department stores in fragrance. As the big get bigger, the opportunity for the more concise, more personal, more specialized retailer grows. More consumers are shopping specialty stores in areas that did not even exist 10 years ago—in beauty care, hair care, skin care, fragrance, and cosmetics.
  • Retailers at risk. Retailers that fail to offer more than price or convenience or service are struggling to survive. Drug stores have become convenience store—places where Americans fill their prescriptions and pick up a container of milk. Seven of every ten consumers still fill their prescriptions at the drug store; however, the margins on the prescriptions have declined significantly in this era of managed care. Since 1996, the percentage of consumers shopping department stores has declined in all core categories with the exception of clothing. Most department stores focus on attracting younger consumers. However, they are not doing it as effectively as the specialty stores. The result? Older consumers with more disposable income are disenfranchised, and younger consumers are not compelled to make the department store their primary fashion outlet. The warehouse club is no longer the adventurous shopping outing. Other retailers have learned how to compete on selection and price. The result: the percentage of consumers who shop a warehouse club declined significantly. Supermarkets beware. Mass merchandisers have moved ahead of supermarkets as the outlet more consumers use.

The Demographic Divide Trends in Retailing

  • The demographic divide. While everyone is shopping more, younger consumers, 18 to 34 years of age, are driving the increases. Consumers 55 to 70 are shopping more selectively. This creates a demographic divide in retailing that has major implications, especially since consumers over 50 now represent 38 percent of the U.S. adult population and have 55 percent of the disposable income. When retailers and manufacturers concentrate on youth to the exclusion of older shoppers, older consumers stop shopping. They only replenish their basics. They spend their discretionary funds on investments, travel, computers, and their gardens, eating out—not on clothes, accessories, beauty products, home decorating products, or entertainment.
  • The truth about E-commerce. The outlook is clear: e-commerce will play an important role in retailing. However, today’s reality is that only 10 percent of primary female shoppers use the Internet as regular shopping alternative. E-tailing will have an impact on where consumers shop. The growth over the last two years has been dramatic. In 2000, 10 percent of respondents said they had shopped on-line in the last three months, up from five. The fact that one-in-four upper income women have embraced this new shopping outlet is an indicator of its potential.

How to Survive and Prosper the Consumer Megatrends

How can a company profitably capture the consumers’ attention and hold it when at every moment, on every corner, at every event there is an enticement to shop and spend. It is not just about opening more stores. It is not only about adding entertainment. It is not solely about offering e-commerce. What it is about is integrating a brand into the consumers’ life and embracing their lifestyle so that the outlet or product is indelibly inscribed in the consumers’ shopping life. Here are six keys for success:

  • Expand the landscape. It is no longer enough to present a singular concept in a singular landscape and assume it will satisfy your target customers and maintain their loyalty. Ensure that the real estate or the assumption that your target customer will shop there regardless because what you offer is so compelling does not limit the concept.
  • Increase share of consumer’s mind and life. Create multiple reasons for consumers to think of you for more. Once the consumer “buys” into the initial concept, they are encouraged to embrace you as part of their life and community—and thus buy more. By creating multiple layers of value, it is harder for a competing outlet to entice customers away.
  • Any way the customer wants it. Enable consumers to shop when, where and how they want since consumers can readily find somewhere else to shop. For consumers to keep coming back they need more than random access; they need to be assured they can count on you whenever they need you.

The Truth About E-commerce

  • Retail branding. Loyalty is built when consumers see and believe that the company reflects and satisfies both the practical and emotional tenor of their life, that it mirrors their attitudes and their sense of community, that it clearly resonates, “this outlet is like me and for me.” By creating a format—be it web site or store—with such affinity to a consumer’s life, it ensures that the consumer will stay true and loyal in spite of the shopping alternatives.
  • Heighten the emotional quotient. Pragmatism and functionality are merely the foundations of customer loyalty. Every company must provide convenient, easy-to-shop outlets, with a mix of merchandise always in stock at fair prices. What keeps customers coming back is the emotional bond they form with the outlet or brand. This is not solely about entertainment or novelty. It is about the trust and affinity customers feel a company offers them.
  • Recognize its global. The model against which you must evaluate your opportunities is global.

To build loyalty you need to establish a clear functional and emotionally satisfying matrix Study the trends and apply the six keys.

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Is Costco threatened by Amazon?

Is Costco Wholesale threatened by Amazon?

The North American retail landscape appears entirely different today than it did even ten years ago. The method that consumers make purchasing decisions has radically changed: they stand in stores, using their smartphones to match prices and product reviews; family and friends instantaneously chip in on shopping choices via social media; and when they’re ready to buy, an ever-growing list of online retailers deliver products directly to them, occasionally on the same day.

Brick-and-mortar retailers such as Costco simply focus on selling items that Amazon can’t beat them on. Some products do not lend themselves to package delivery since they are too big, heavy, cheap, fragile, or reliant on fitting properly. Likewise, lawn chairs, boots, thumbtacks, bags of cement, frozen shrimp, and thousands of other items are difficult to move via ecommerce channels.

Paradoxically, Costco is not one of the many companies that accuse Amazon for uninspiring growth or stagnation. Amazon can easily take bites out of the edges of Costco’s market share, and that’s all it takes to flatten out comparable sales, an important metric in the retailing industry.

Costco is remarkable at staying in stock on the goods it sells, but when it comes to general merchandise, you have to mostly grab what they have. Want Fancy Feast cat food? They’ve got it, but only in one specific flavor combination packet. If your cats don’t like it, so it goes. However, you can get precisely the flavors you want from Amazon, without waiting in lines.

Then there’s items like deodorants. While I’m happy to buy in quantity, I was unsure if Costco sells the brand I like. I ordered a four-pack from Amazon and it was here when I got home. Same with shaving cream. Women won’t find “Edge” shaving cream to have anything like a feminine smell. I bought it once. That was that: another item, gone to Amazon.

Costco established the warehouse club retail model, which depends on customer-friendly average markups on branded products (in the low double digits, compared to the high teens at WalMart and the mid-20s at most grocery stores), high throughput, bargaining power, a no-frills shopping environment, and supply-chain effectiveness.

Costco-Amazon Competitive Analysis

I still like Costco, and I’ll definitely continue re-upping my membership. The treasure hunt can be fun and the moveable feast is great. But quantity purchases of exactly the household items I want aren’t available often enough. It sells one kind of almond butter, two kinds of detergent. These are items that have forever left my Costco basket, and have actually caused a reduction in trips, as well.

Costco has lots of options left available to it. It rarely advertises. It can change that. It has been a real laggard in omnichannel retailing…any relationship between items on the website and items in stores is purely coincidental (or opportunistic). I think the company has to change that. There are some items that have to be touched and seen, even if the sale consummates on-line.

The company’s business model remains sound, but the assortment on certain items and sundries might have to broaden. No one wants to go on a treasure hunt for deodorant. That’s a seriously risky proposition.

In May 2016, UBS analyst Michael Lasser and team argued after Costco’s quarterly results that the quarter was so good that it “refutes the bear case that centers on the potential that Costco is losing customers to Amazon.com”:

We think this provides evidence that refutes the bear case that centers on the potential that Costco is losing customers to Amazon. Further, Costco’s op. margin was in line w. our expectations showing how well it’s managing in this tough environment. A lower than expected tax rate added ~$0.01 to EPS. While Costco’s sales slowed in 3Q, we think the deceleration was largely due to the pending transition of its credit card. We believe its sales will pick back up once the transition occurs on June 20. This provides a visible NT catalyst. Plus, there’s a secondary catalyst next year when Costco is likely to raise its membership fees. We think buying shares ahead of these catalysts is a prudent move.

Grocery One of Coscto's Advantages in comparison to Amazon

In July 2016, UBS analyst Michael Lasser and team explained why shares of Costco Wholesale soared after the company reported same-store sales for June:

While there was no mention of a disruption from the credit card transition, we believe it had some impact. So, the result would have been even better without this effect. Further, it’s probably too early for the shift to Visa (V) to have that much of a benefit. The gains should build in the coming months, driving an acceleration in Costco’s US comp. Even so, the company still generated a 3% increase in its global traffic. This type of performance warrants a premium valuation, in our view.

With the credit card switch in effect, spend/member is likely to pick up as private-label credit-card customers take advantage of the new card’s more attractive reward structure (2% cash back at Costco vs. 1% prior). Also, we think Costco’s reliance on grocery & gas sales (~2/3 of total sales) helps insulate it from Amazon.com (AMZN). These factors support our forecast of 4% core US comp growth in July, which would match its highest growth rate since Nov ’15.

Costco has long been known for giving higher wages and presenting more liberal benefits than its competitors —and producing superior sales per square foot, too. The benefits of the good old days are unreasonable because of rising costs and an aging population. Lifespan job tenure is obsolete and most people embrace workforce mobility. Yet in a consumption-based economy, workers must be able to afford more than the basics, and they deserve a certain measure of security.

Citing a recent report from Cowen’s Internet analyst John Blackledge, Cowen analyst Oliver Chen wrote that Amazon Prime members are expanding their shopping well beyond books, clothing and movies. Data shows that 22% of those Amazon Prime members shopping on the web site 3.5 times each month buy groceries on the web site.

As detailed in the Ahead of the Curve: Amazon Dominates “Prime” Time 50-page report by Cowen’s Internet Analyst John Blackledge), AMZN’s aggressive growth of Prime is both impressive and has wide ranging competitive implications given broad HHI, permeation across media and appeal among young consumers. How can bricks-and-mortar retail compete?

  • The key competitive weapon remains transformation towards a consumer-led supply chain which integrates physical stores to drive convenience—Buy online pick up in store, return in store, ship from store, and car pickup along store need to be utilized across chains;
  • proprietary relationships with vendors and vertical integration such as owning factories and direct sourcing capabilities;
  • frequency of store traffic based on inventory turns and product assortment;
  • emotional, brand-lead lifestyle contact;
  • categories which are not easily replicated online (jewelry, physical fitness); and
  • fashion & curation leadership.

Citi Costco Credit Card Citi’s new Costco Anyway card is significantly more appealing than Amex’s TrueEarnings Costco card. Costco’s management has stated that the terms Citi offered were too compelling for Costco to stay with Amex; to protect/ insure continued customer service levels in transition to Citi, there are significant and specific requirements associated with the portfolio.

Amazon.com Prime Compared to Costco Membership

Morgan Stanley’s Simeon Gutman and team conducted a survey and suggest five reasons that Costco Wholesale should remain Amazon.com-proof:

  • Amazon.com (AMZN) and Costco Are Not Mutually Exclusive. Of the 23% who are Costco members (628 respondents), 45% (285 respondents) are Amazon Prime members as well, which suggests the two retailers fulfill different consumer needs. Of the 33% surveyed who are Prime members (893 respondents), 32% (285 respondents) are also Costco members…
  • Grocery One of Coscto’s Advantages. 12.5%/11% of Costco members call out increased spending on packaged/fresh grocery, well ahead of the 5%/2% of Prime members….
  • Only 8% of People Shopping at Both Costco and Amazon Plan to Shift Dollars Away from Costco. Of the 14% (285 respondents) who shop at both, only a net 8% (32 respondents) plan to shift shopping away from Costco towards Amazon. This represents just 1% of total consumers surveyed.
  • Sticky Members with Higher Spend…with Amazon Scoring Higher on Multiple Qualitative Factors. 94%/95% of surveyed Prime/Costco members intend to renew their memberships, which speaks to high loyalty and low churn. Further, 49%/26% of Prime/Costco members indicated shopping more frequently over the past 12 months and 85% of surveyed members attributed “Retailer I Trust” to Amazon and Costco. It is also notable that Amazon scored materially higher than Costco in perceived prices, selection, convenience, quality of checkout and ease of navigation…which will be important to monitor going forward as these advantages could tilt Costco members’ toward Amazon over time.
  • Costco Members Younger than Perceived. The average Costco member is 49 years old vs. 44.5 for the average Amazon Prime member. This four-year gap seems insignificant, in our view, and is counter to the bear case that Costco does not resonate with millennials…

Implications: The survey results should be a positive step in alleviating the greatest investment debate for Costco, that the club model/Costco is at risk from Amazon.

Given that membership fees represent about 70% of Costco’s operating profit and renewal rates stand at about 90% in the U.S. and Canada, Costco’s long-term revenue and profit growth could stagnate. There is little room for additional household penetration because Costco by this time has around 80 million members; historic sales and earnings growth predictions may not be maintainable. Also, new club openings in current markets could cause cannibalization of sales from older locations. Not to mention of challenges in acquiring appropriate real estate choices for 140,000-square-foot warehouse clubs in urban regions.

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Costco’s Winning Business Model Strategy

Costco Logo: Costco's Winning Business Model Strategy

Costco has built a devoted foundation of customers with low prices and workers with high wages. The discount warehouse services industry is highly competitive. There are several warehouse operators across the United States and Canada that offer similar merchandise quality, selection, and price.

At the end of financial year 2015, Costco managed 480 membership warehouse clubs in the United States, 89 in Canada, 36 in Mexico, 27 in the United Kingdom, 23 in Japan, 11 in Taiwan, 12 in Korea, 7 in Australia, and one in Spain. Base and executive memberships cost $55 and $110 per year, respectively. The company operates 557 warehouse stores, 406 of which are situated in 40 U.S. States and Puerto Rico. The rest are in Canada, Mexico, Japan, Taiwan, Korea, and the United Kingdom.

The internet has made it immeasurably easier for shoppers to chase for the latest deal—and a lot more demanding for brick-and- mortar retailers to command customer loyalty. However, Costco has managed to resist the tendency—with only 3% of its retail sales occurring from e-commerce. In reality, it outclasses other retailers when it comes to dependably increasing sales from its millions of loyal shoppers.

At the warehouse stores, forklifts relocate pallets into racks such that the first time an item is actually touched is when the consumer contacts into the shelf to collect the item and places it into their shopping cart.

Costcos

Costco’s Sustainable Competitive Advantage

Costco’s objective has been to increase sales while cutting long-term costs (by trimming freight expenses, scaling its merchandise, negotiating prices with vendors, and reducing packaging) with the intention that it can pass those savings down to members. Costco has said that its “rule of thumb is to give 80% to 90% back to the customer.” Those efforts have paid off, with memberships reaching an all-time peak of 81 million members in 2015.

Shiny steel caskets exhibited amongst the stacks of snow tires and pallets of heavy applesauce, rose-scented toilet tissue, mentholated shaving cream, and mild-flavored salsa. However, in time, people may grow familiarized to the sight. By including these special deal items to the cart, the total spend at the cash register expands. This behavior diverges severely with the type of consumer who has the self-control to fill up on everyday consumables at everyday low prices. The latter type of consumer does win in the end even if the cost of the membership is factored into the equation. As one (rather demonstrative) instance, when reviewing the 1999 Kroger-Fred Meyer merger, the FTC vindicated this definition by asserting,

Supermarkets compete primarily with other supermarkets that provide one-stop shopping for food and grocery products. Supermarkets primarily base their food and grocery prices on the prices of food and grocery products sold at nearby supermarkets. Supermarkets do not regularly price-check food and grocery products sold at other types of stores and do not significantly change their food and grocery prices in response to prices at other types of stores. Most consumers shopping for food and grocery products at supermarkets are not likely to shop elsewhere in response to a small price increase by supermarkets.

What Makes Costco Successful

What Makes Costco Successful

Renewals of Costco’s $55 annual memberships stand at a remarkable 91%—a record high. On the word of financial analysts, the low price of memberships and a stable return of loyal members is what sets Costco apart from big box and department store retailers which persist to fight for market-share gains in a altering landscape of increased competition from online retailers led by Amazon. Costco’s ability to dependably drive increases in traffic is a key differentiator.

Everything at Costco is continually being evaluated for productivity. Costco manages a mix of distribution facilities to accomplish the overall objective of operating with an efficient supply chain. The company lately substituted the form of their milk cartons to get rid of the empty space at the top. They can fill thinner jugs all the way to the top, so they can get more gallons onto the same amount of space on a freight truck. The loss-leader abilities of Costco’s business model ought to endure to drive market share advances over the long term. However, it is possible that incumbent grocers could react to Costco, Sam’s Club, or Walmart Supercenter entry along one or more of these non-price dimensions, in which case their prices could continue unaffected or rise.

Costco’s philosophy is to provide its members with quality goods at the most competitive prices. It does not concentrate its efforts on maximizing prices in the short term, but instead focuses to maintain a perception among its members of “pricing authority,” or constantly providing the most competitive prices. This question is actually quite complex in that it has multiple answers that boil down to individual consumer behavior. The reality is that Costco has perfected a purchasing strategy known as the “treasure hunt” which means that there are always new items and tempting deals that extemporaneously come and go. The consumer who walks every aisle knows what I mean by this because they are subconsciously on the treasure hunt.

During the next 10 years, warehouse openings should move the number of primary cardholders to 65 million–75 million, up from 45 million in the most current fiscal year. In spite of having warehouses that spanned three acres, and piles of merchandise stacked to the ceiling, Costco carried only 4,000 carefully chosen products at a time. Three-quarters of the items were such “basic” products as batteries, laundry detergent, and instant noodles. Then there were the “high-end” name-brand products, which might be stocked at Costco one day and then gone the next.

Costco Employees Happier with Wages and Benefits

Costco Employees Happier with Wages and Benefits

While Walmart and Target just recently began increasing take-home pay for their employees, Costco has been an industry trendsetter for years. With starting hourly pay at about $11.50 and a company average of $22 per hour, Costco’s compensation costs beat the competition. Costco has asserted that paying employees well can be more advantageous eventually by keeping turnover low and capitalizing on employee efficiency. Actually, turnover stands at about 10% compared with the industry average of 55%. For employees who have been there more than one year turnover drops to just 6%. Employees rarely leave: The company turnover rate is 5% among employees who have been there over a year, and less than 1% among the executive ranks. Costco management has asserted that loyal employees bring about better customer service.

Costco purchases the majority of their merchandise promptly from manufacturers and routes it through a network of cross-docking facilities, which act as merchant consolidation points to move goods in full truckload volumes to the stores. Sam’s Club carries about 4900 items and Costco around 4000; by comparison, the normal grocery store carries approximately 50,000 and the average Walmart about 100,000. Furthermore, the shopping experience at warehouse clubs is unusual—members pay a fee for access to goods stacked high and sold in wholesale quantities in low-amenity environments. Warehouse clubs are very spartan in their accommodations. They do not bag consumers’ purchases, and a club employee checks all shoppers’ carts and receipts on exit.

Secret to Costco's Success Lies in Supply Chain Efficiency

The Secret to Costco’s Success Lies in Supply Chain Efficiency

Big-box retailers Costco, Sam’s Club, BJ’s Wholesale, and Walmart, along with full-service and fast food restaurants, are significant contributors to the nation’s obesity outbreak. Costco continues to productively increase its businesses, on account of its low prices and robust customer loyalty. Its ability to provide quality products, at a reasonable price, should appeal to most consumers in North America and around the world. While competition in the market remains ferocious, Costco’s leadership is taking the right steps to guide the company into the future. Over the years, Costco added departments, growing further than the traditional discount warehouse offerings. A large majority of the stores featured a drugstore, an optical-dispensing center, one-hour photo services, a food court, and the ever admired and low-priced hot-dog stands. More than half-offered hearing-aid centers and a handful were equipped with print shops and copy centers. More generally, not all big-box chains are created equal. The big-box retail literature has fixated almost exclusively on Walmart, examining its effects on a wide range of outcomes, including prices, labor market consequences, small business activity, time use, obesity, and social and cultural pointers.

Using city-level panel grocery price data matched with an exclusive data set on Walmart and warehouse club locations, customers find that Costco entry is associated with higher grocery prices at obligatory retailers and that the effect is sturdiest in cities with small populations and high grocery store densities. The competitive response need not be to reduce prices; conversely, as segmented-market models with a mix of brand-loyal and price-sensitive consumers have shown that in some cases incumbents can increase prices in response to a low-cost entrant.

The lesson to be learned from Costco for every manufacturer, distributor, or retailer, regardless of industry, is to figure out how to eliminate the fingerprints within the respective supply chain and within internal processes.

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Why is Costco so Successful

Why is Costco so Successful

Costco established the warehouse club retail business model, which relies on bargaining power, a no-frills shopping atmosphere, supply-chain efficiencies, and customer-friendly typical markups on branded products. Now, Costco is transforming its no-fuss wholesale business into a global brand.

Membership Fees

Costco has become a significant shopping destination for consumers across all income levels, as well as small businesses. This is foremost because Costco derives approximately 75% of its operating profits from membership fees.

Costco derives nearly all of its profits from membership fees, allowing the firm to sell many of its products at little to no margin, and sometimes at a loss. These loss-leading capacities are reinforced by the firm’s deployment of gasoline to drive store traffic. When blended with membership renewal rates above 85%, these characteristics give Costco a defensible competitive advantage.

Succeeding Overseas

There is little room for more household penetration because Costco already has more than 70 million members; historical sales and earnings growth forecasts may not be justifiable.

In 1985, Costco opened its first warehouse outside the U.S. in Canada. Currently, Costco has 187 locations in Canada, Mexico, the U.K., Japan, Taiwan, Korea, and Australia. Overseas sales more than doubled from 2008 to 2013. While other traditional American retailers grapple to stay competitive in international markets, Costco’s no-fuss warehouse-shopping model is a new experience for international consumers. Remarkably, people in Asian markets are acclimatizing well to shopping in bulk—although it means fastening pallets of toilet paper and enormous teddy bears to the back of their motorbikes as they whizz away from the Costco parking lot.

A Good Living Wage for Employees

Costco has long been known for paying higher wages and offering more liberal benefits than its rivals have—and generating greater sales per square foot, too.

Unlike most retailers, Costco does not see raising employee salaries and growing profits as opposing objectives. While the average hourly wage for a full-time worker at Wal-Mart is $12.81, Costco pays its workers an average of nearly $21. Costco sees the return on this investment in its low employee turnover rates: Just 10% in 2013 and 7% for employees who have worked at least one year. High employee retention permits Costco to reduce considerably on training costs.

Superior Customer Experience

  • A guarantee of quality. Their model promises fundamentally “100% satisfaction” and they mean it. Their return policy stands out among the best in many retail categories and they are exceptionally relaxed about fulfilling it. Costco will take back an empty package of any food, if you are not satisfied, and give you your money back.
  • A extraordinary selection of products that is a bit more refined than most but at a pretty good price. A typical Costco store only carries about 5,000 items, and there is a bunch of those items that rotate regularly.
  • The “treasure hunt” model. The store does have a layout, but within that layout, everything is rotated frequently to keep you looking. This would never work at Walmart or Target —because you’d get frustrated. However, at Costco, it’s part of the fun to “treasure hunt” a new find. They have a very wide selection of very different merchandise types which offers an unique convenience level as a shopper.

CEO Jim Sinegal once said, “If that stuff doesn’t really turn you on, then you’re in the wrong business.” Costco caps margins at a sacrosanct 14% on branded goods, pushes buyers to find creative ways to lower prices and add value, and gets store managers to crank up their efficiency efforts. Under Sinegal’s leadership, Costco has gained a reputation for bargain prices and surprise designer goods.

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