While most people associate Costco (NASDAQ: COST) with buying food, household goods, and health and beauty products in bulk, the membership-based warehouse club sells much more than that.
In fact, one of the fastest-growing categories for the chain is one that many people may overlook at its warehouses: wine and liquor. That's because in most, if not all, cases, Costco's alcohol offerings are housed in standalone stores-within-stores that have entrances separate from the main shopping floor, putting them a bit off the beaten path for customers.
That has not stopped Costco from achieving 46% growth in liquor and wine sales over the last five years, according to Bloomberg. Alcohol accounted for $3.8 billion in sales for the chain in fiscal 2016, which had total sales of $116.07 billion that year.
How does Costco's liquor and wine business work?
While the company does sell some name-brand alcoholic beverages, the driver behind its success in the category is its private-label Kirkland brand. The company works with high-end providers to offer its own liquors and wines, generally at much lower prices than name brands of comparable quality. It's a winning recipe, and many consumers believe that the company -- which does not disclose its partners -- is working with some of the best-known names in the business.
"They use very high-end producers -- premium all the way up to super-premium and beyond," Consumer Edge Research David Schick told Bloomberg.
Can this continue to grow?
Sales of private-label liquor and wine benefit from positive word of mouth. As more customers taste what Costco is selling, and presumably like it, they should pass the word on both the quality and the potential savings to their friends.
That could drive additional memberships for the warehouse club, or just give existing members an incentive to spend more -- both obvious positives for the chain.
When a Costco member can clearly see that they're spending less on something than they used to, that increases their loyalty to the warehouse club. In addition, since wine and liquor are consumables, it's likely that increased sales in that category will result in more visits to its stores.
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Daniel Kline has no position in any stocks mentioned.