How Costco Beats Amazon

Amazon and Costco sell the same things with the same variety of products. Yet while Amazon squeezes other retail chains out the market, Costo is not only relevant, but is expanding globally.

How?

To set the context, Costco operates a membership business model with profits achieved through high volume sales and rapid stock turnover (versus raising prices for higher margins).

Although membership is not a loyalty scheme—it costs $60 or $120 a year—customer churn is phenomenally low at only 9% (Future Work Technologies, 2019). How Costco drives 91% of customers to renew their membership each year is that it consistently impresses them with high quality products at exceptionally low prices.

With a massive inventory range and high-volume turnover, one could imagine Costco’s outlets taking up acres of space. Indeed, while each store is really just a warehouse, space is optimised by stocking only 1 or 2 of the best brands for each product line. By comparison, while Walmart Superstores carry 140,000 SKUs, a Costco warehouse might hold as few as only about 4,000 SKUs.

So instead of a bewildering choice of a dozen different brands of coffee bean, you might find only the 1 brand that Costco deems the best quality that still assures a low price. As another comparison, while US supermarkets have a 30% mark-up on average, Costco’s average mark-up is a mere 11% (PolyMatter, 2019).

The combination of bulk buying, lowest price, and high quality criteria means most suppliers are clamouring to win those 1 or 2 spots on Costco’s shelves. This competition plays directly into Costco’s quality-price promise to customers.

The key difference between Costco and the failing retailer chains is that, unlike retailers who sell indiscriminately, Costco’s approach is to stock only the best quality brands at the lowest price in each product line.

But that sounds a lot like most retailers’ tag lines. It’s not what really sets Costco apart.

Costco’s key success factor is its ruthless buying policy: if the quality-price criteria can’t be satisfied, it simply won’t stock a product line at all.

Could this principle work in your business? For Costco, losing a few brand snobs is evidently well worth the loyal customers who keep coming back.

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(c) Brent Combrink’s management consulting, project management and non-exec board duties have helped successful entrepreneurs stabilise and scale their businesses. You can reach him at brentc [at] growth-surge . com.??(Original article published for Growth Surge, 29 September, 2021.)

References:

1. “HOW COSTCO WORKS BUSINESS & REVENUE MODEL”, Future Work Technologies, 2019.
2. “Why Costco is Cheaper than Amazon”, PolyMatter, 25 Oct. 2019.

Image credit: Eat This, Not That!