Ask people who shop at Costco Wholesale Corp. (COST) store if they like it and you will probably hear exuberant praise, along with a list of the great deals they scored on their last visit. More than 86 million people pay an annual membership fee just to get in the door, with fewer than 10% each year deciding the experience isn’t worth the price of renewing.
To some, Costco shopping is close to 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 get cereal or pet food, but to get there they need to walk past aisles packed floor to ceiling with new inventories of cool stuff.
Tires, Pianos, and Cookies
When you walk into a Costco, you never know what you are going to find. True, it's mostly grocery items, and the sheer number of items stocked is a fraction of what's on sale at Walmart. But if Costco can get a good deal on tires or pianos, you'll find them there as well.
That sheer serendipity is one of the reasons why Costco shoppers spend nearly 150% more per shopping trip than shoppers at the average retailer.
Another reason is that the retail markup at Costco is never more than 14%, so shoppers know they are getting a good deal.
Costco Is Not For Everyone
Costco shoppers like a bargain as much as anyone else, but they also have the means to buy in bulk which, for most of the products it stocks, is the only way to buy them. The typical Costco shopper has a family income of about $73,000 a year.
The cost of shampoo at Costco is the lowest around, but shoppers typically have to buy a three-pack. Multiply that by any number of products that shoppers add to their carts, and you can see why the average transaction total is so high.
It also explains why the vast majority of the nearly 800 Costco stores are located in affluent suburban areas both in the U.S. and around the world. Most Costco shoppers are suburban homeowners. It takes a lot of space to store bulk purchases.
Big Spenders Drive Revenues
The membership component is a critical part of the Costco experience as well as being intrinsic to the company’s business model and its growth strategy.
For starters, membership fees generated $3.1 billion in pure revenue in 2018. But the membership fee is also a reason why members keep coming back.
Most Costco shoppers paid $60 for a Gold Star membership as of late 2019. That gives them access to Costco bargains for a year. More than one-third pay $120 for the Gold Star Executive membership, which gets them 2% cash back on their purchases. (There are business versions of both memberships for the same prices.)
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 overall sales.
Costco’s Customer Profile
Costco got its start in 1983 in Seattle, although the discount warehouse model was invented a few years earlier in San Diego, under the name Price Club. The two companies eventually merged.
From the beginning, the company targeted a relatively affluent and college-educated customer. Initially, it was marketed to business owners, licensed professionals, and people employed by governments, utilities, hospitals, and banks. These were a stable source of sales revenue.
When it opened its membership to the wider public, Costco knew it would attract a certain type of shopper who understood the value of membership.
To this day the company doesn’t try to chase customers who aren’t a good fit. It doesn't do advertising. It chooses instead to cater to the needs and preferences of those ideal members.