Ask people who have shopped at Costco Wholesale Corporation (NASDAQ: COST) store if they liked it, and you will likely hear exuberant songs of praise, along with a list of great deals they found on their last shopping trip. More than 81 million people pay $55 for annual memberships for the privilege of shopping at Costco, with fewer than 10% each year deciding the experience isn’t worth the price of membership. To some, Costco shopping is a religious experience, which might explain why Sunday is its busiest day. For others, going to Costco is like going on a treasure hunt. They may be going to stock up on cereal or wine, but to get there they need to walk past large aisles packed floor to ceiling with new inventories of cool stuff. When you walk into a Costco, you never know what you are going to find, which is one of the reasons why Costco shoppers spend nearly 150% more per shopping trip than at the average retailer. Another reason is that the retail markup at Costco is never more than 15%, so shoppers know they are getting a good deal.
Costco Is Not For Everyone
Bargains are the big attraction at Costco, but the average transaction is often very steep, which is why the typical Costco shopper earns about $100,000 a year. Costco shoppers enjoy a bargain as much as anyone else, but they also have the means to buy in bulk, which, for many products, is the only way to buy them. Although the cost of shampoo at Costco is the lowest around, shoppers pay three times that amount because it is typically sold as a three-pack. Multiply that by any number of products shoppers add to their carts, and you can see why the average transaction is so high. It is also why most Costco shoppers are homeowners. It takes a lot of space to store bulk purchases. It so happens that, of the more than 700 Costco stores, the vast majority are located in suburban areas heavily populated with affluent homeowners.
Big Spenders Drive Costco’s Revenues
The membership component is a critical part of the Costco experience and the company’s business model and growth strategy. Not only did membership fees generate $584 million in highly profitable revenue in 2015, the company knows they are a main reason why members keep coming back. Most Costco shoppers pay $55 for a gold membership, which gives them access to Costco bargains all year. More than one-third of Costco shoppers pay $110 for an executive membership, which reimburses them 2% cash back on their purchases. To cover the cost of the extra $55, executive members have to spend a minimum of $230 per month, or $2,750 a year. Executive members who spend twice that earn enough to cover the full cost of membership. To reap the full benefit of up to $750 cash back, they have to spend $37,500 per year. According to the company, although executive members make up just 36% of the member base, they account for about two-thirds of the company’s overall sales.
Costco’s Average Customer Fits its Profile
That Costco attracts more affluent, college-educated homeowners is no accident. It has been a part of its strategy almost from the beginning. Initially, Costco targeted business owners, licensed professionals and people who work for governments, utilities, hospitals and banks because they were a stable source of ongoing sales revenue. By extending its membership opportunity to the general public, Costco knew it would attract a certain type of shopper who understands the value of membership. In exchange for its members’ loyalty, the company doesn’t try to chase customers who aren’t a good fit, choosing instead to cater to the needs and preferences of its ideal members.