Surprise surprise

From hot dogs to hearing aids, Costco customers never know what to expect, writes Elit Rowland

When you step into Costco, you don’t know what you might come across: the business has everything from TVs and golf clubs, to office supplies and designer handbags, with high-tech gadgets that make it difficult to walk out empty‑handed.

But with just 3,800 SKUs to play with per warehouse, Costco gets maximum sales from a very tight range. ­Trading director Steve Barnett explains that the company is unlike other traditional wholesalers: customers pay a membership fee.

“We are a warehouse club – the only one in the UK,” he says, as he guides me around the depot, adding that not many people really ‘get’ the business. Its mission is to be a low-cost, high-value operator. “We will not stock an item if we are unable to show our members a saving.”

This is how the business shifts stock quickly and why Costco often won’t stock the full range for many of its food and drink lines. “Instead, every item is offered on its own merits.”

To illustrate the point, Barnett uses the ‘salmon story’ – an anecdote that summarises the Costco way. “Our first salmon fillets were a fairly standard spec and as our volume increased, we were able to reduce our costs. We passed these cost savings on to members through a combination of improved specification and reduced price.

[pull_quote_right]“This resulted in a dramatic increase in sales and enabled us to repeat the whole ­process.”[/pull_quote_right]

And this rule – to drive economies that lower costs, while improving specification – is what Costco applies to all its products, where possible.

The Watford site isn’t the only depot that stocks a maximum of 3,800 SKUs: all 25 warehouses in the UK operate under the same formula. Of that 3,800, 1,200 are core running lines, while the remainder is allocated to rotating lines, which change seasonally or are one-off ­offers.

It’s these rotating lines that keep many shoppers coming back. “Customers love the treasure hunt,” explains Barnett, showing off one of the main attractions of the day: an electric Mini Cooper for kids. “Things like this do really well in the run up to ­Christmas.”

With no guarantee that the item will be around next time customers visit, it’s easy to see how a routine shop for supplies could turn into a Christmas shopping frenzy.

Hearing aids trialled at Watford

Costco’s warehouse club business model is unique but the benefits of membership, which include subsidised health and dental plans and free eye tests, keep members loyal. One of the newest initiatives being trialled at the Watford warehouse are hearing aids and free hearing tests.

“With longer life expectancies, more people will require hearing aids, and despite being available on the NHS, there is a market for a higher specification product,” explains Barnett. “Hearing aids are big business in the US so we are trialling the programme in the UK, too.”

The diversity of Costco’s offering and club benefits has attracted 65 different types of trade membership, from the average consumer to retailers, caterers, foodservice operators and more. Barnett says that his TVs are popular with hotels looking to refurbish their rooms while restaurants enjoy Kirkland (Costco’s private-label) wines and frozen foods.

“We have an own-label product for almost all our biggest categories now,” he says. “It accounts for about 10% of our SKUs. I’ve even got an own-label shirt on.”

One of the most popular Kirkland lines is its water, which costs five pence a bottle – good news for food­service outlets and independent retailers.

“This is a great re-seller – we’ve seen it being re-sold at £1 a bottle,” Barnett reveals.

Pressure from the big retailers

Over a Kirkland hot dog and coffee (great value at £1.50), Barnett tells me that despite its success, Costco still faces pressure from the big retailers, particularly when it comes to confectionery.

“When you have the likes of the multiples selling four Mars bars for £1, it is difficult to show value,” he says.

And despite selling such a wide range of high-end products, including diamond rings, watches and plasma TVs, Costco’s biggest category in terms of sales is still tobacco. Luckily for the business, the tobacco room has always had restricted access. “There was little impact on us when the legislation changed,” Barnett says.

Costco’s total UK group sales are more than £1.5bn and Barnett’s advice to smaller operators is to know what you want and stand by it.

“If you have a plan, stick with it, don’t get thrown off course, and find a way to make it work. That way you will achieve greater success and satisfaction,” he says.

And having a clear vision can sometimes mean not giving customers exactly what they want. Barnett says: “Members do ask for fitting rooms and more signage, and point of sale, but our strategy is to strip out costs and pass the savings down. They appreciate the value we offer them in the long run.”


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