8 Things Retailers Can Learn from Costco (and One Thing NOT to Follow)
Costco has a pristine reputation. In addition to being the fourth largest retailer in the world, they regularly top employee and customer satisfaction charts. Much of Costco’s success can be attributed to their no-frills wholesale membership model. Costco customers pay an annual membership fee of $60 for a Gold Star plan and access to low wholesale pricing on bulk goods. This unbeatable value spreads across product and service categories including grocery, home goods, clothing, health and beauty, alcohol, auto tires and servicing, vacation packages, gasoline, and more.
Though Costco offers unbeatable value on all of the above products and services, there is one area where they can improve: credit card processing. Costco currently offers tiered credit card processing that is done through Elavon. Since Costco does not actually process the payments themselves, the rates have a built-in markup and don’t currently provide the same value for customers that the rest of their store offers.
No one retailer is perfect. But, Costco gets a lot of things right. This rapidly growing warehouse and grocery retailer’s motto is to “do the right thing.” For Costco, doing the right thing extends beyond offering low prices. Here are a few lessons every retailer can learn from Costco:
How to Retain Employees
Costco has an astonishingly high employee retention rate of 94%. Retailers typically struggle to retain employees long term, especially hourly workers. But, Costco has kept employees happy and loyal over the years by consistently offering above-average retail wages and full medical and dental benefits, even to part-time employees. Many retailers avoid offering full benefits because they come at a considerable expense. But, the price of employee turnover is even higher.
It costs retailers between 33 – 50% of an entry-level employee’s annual salary to replace them when they leave. For mid-level and executive positions, the cost is even higher. With today’s record-low unemployment rates, hanging on to your current employees is more critical now than ever as fewer people are actively seeking employment. Costco teaches us that investing in your employees can cut overall costs by retaining workers year after year.
Stellar Customer Service
High employee retention rates lead to higher productivity and better customer service. Companies that have lower employee turnover rates tend to have the highest levels of customer satisfaction. Costco routinely has one of the highest Net Promoter Scores for retailers and recently topped Newsweek’s Best Customer Service 2019 survey for superstores and warehouse clubs. Retailers can achieve stellar customer service ratings like Costco by doing these three things:
Promote from within. 76% of Costco managers start out as hourly employees, meaning they know how to empower front-line workers and how to approach common customer service complaints.
Have strong values. Costco’s “do the right thing” motto is more than words on paper. Costco scans every customer’s receipt before they leave to make sure they were not overcharged. When Costco found out a shirt they advertised as 100% silk, in fact, wasn’t, they contacted every customer who purchased that product and offered a refund.
Be transparent. Despite being one of the largest retailers in the world, if you call Costco’s corporate customer service, it’s easy to speak to a human associate. When you speak with Costco’s customer service, whether in-person or in-store, they are trained to provide straightforward answers, not scripted apologies.
That Brick and Mortar Retail is Far from Dead
In 2018, Costco sales grew by nine percent in the U.S., in-store traffic increased by five percent, and they maintained a 90.5% membership renewal rate even with a price increase. Similar superstores, Walmart and Target, only grew by about two percent and five percent, respectively. Costco’s sales growth proves that shoppers are still flocking to stores, as long as those stores provide great products at even better pricing.
The Power of Private Label
Costco’s private label brand, Kirkland Signature, is the secret weapon behind much of Costco’s recent sales growth. In 2018, the Kirkland brand alone raked in nearly $40 billion and makes up almost one-third of all Costco sales. If done right, creating a private label can boost your margins, build your brand reputation, and drive shoppers to your store. But, it takes a lot of careful planning and strategy to create a successful private label.
Customers are wary of brands they are not familiar with. When presented with the option of a slightly more expensive product they know or a more affordable choice from an unknown brand, many consumers will opt for the more expensive option. Developing a store brand that consumers know and trust takes time and skill. To build your own successful private label brand, consider these two pages out of Costco’s Kirkland playbook:
Partner with other known brands. Costco helps build consumers’ trust in their Kirkland brand by partnering with known brands to create their store-branded products. For example, Costco works with Starbucks to create Kirkland Signature roasted coffee beans.
Offer samples. It’s nearly impossible to make it through a Costco store on the weekend without stopping to try a few food samples. Samples are part of the Costco shopping experience. They also help introduce customers to the Kirkland brand and products.
Invite Your Customers to Sit Down and Stay a While
For many shoppers, going to Costco isn’t a typical grocery run. It’s a full-on family event and weekend activity. Why? Costco’s food court. The food court offers a legendary $1.50 quarter pound hot dog/fountain soda combo, a giant slice of pizza for under $4, yogurt parfaits, chicken bakes, and more. Costco’s food court prices haven’t changed in years. Costco sells 1 million hot dogs annually, four times more than what’s sold during one season of Major League baseball games. Their hot dog is so popular, it even has its own fansite.
The takeaway? Shoppers visit Costco not just for the groceries, but for the experience. For retailers, making your store a destination is not only trendy: it’s profitable. The longer people are in your store, the more they spend. Encourage shoppers to spend more time (and money!) in your store by doing these three things:
Offer samples. Again, with the samples! But, they work. Makeup and beauty retailers, grocery stores, and liquor stores all use sample tastings and services to encourage shoppers to test products.
Have a seated area. A food court certainly isn’t glamorous, but it fits in perfectly with Costco’s no-frills model. Any retailer can create a comfortable seating area around dressing rooms, in-house cafes, or beauty counters.
Sell products for on-premise consumption. Sounds obvious, but having products for customers to use or consume at your store builds engagement, encourages shoppers to spend more time inside, and can help turn your store into a destination. Plenty of customers visit Costco just for the food court.
Careful Product Selection
A curated warehouse store sounds like an oxymoron, doesn’t it? The truth is, despite Costco’s 145,00 square foot stores, they only carry 3,800 products. The average grocery store has over 30,000 products, and the average supercenter sells over 100,000. That means each and every item is carefully planned and tested. If an item doesn’t perform, Costco wastes no time cutting that item from the shelves. Having a curated product selection offers many benefits for retailers, including:
Employees know the products. Having fewer products means that employees are more familiar with each option and can better answer customer questions, concerns, and make informed recommendations.
Eliminates decision paralysis. People tend to resist making decisions when there are too many options. When presented with a limited selection, shoppers are more likely to make a purchase and to be satisfied with their choice.
Everyone Loves a Bargain
As a retailer (and a consumer), there’s a lot to learn from Costco. This includes not overpaying for any product or service. At the end of the day, Costco’s biggest draw is the rock-bottom pricing on everything from toilet paper to car tires without sacrificing on quality. For consumers, Costco offers some of the best pricing on bulk goods.
Many small businesses even purchase office supplies and restaurant ingredients from this warehouse wholesaler.
As you may have noticed, we love Costco’s direct-to-consumer business model and think that merchants can learn a lot from the company.
But, one area where Costco’s pricing falls short for small businesses is their credit card processing and merchant services. As we discussed previously, Costco’s merchant services do not offer wholesale pricing.
And unlike their retail business, their credit card processing offerings do not use a membership model.
The bottom line? While there are plenty of great lessons to learn from Costco’s retail side, be wary about emulating or signing up for their merchant services. When it comes to credit card processing, the membership pricing model is usually the most cost-effective option for merchants because it allows you to access wholesale processing rates for a fixed membership cost.
Learn more about membership-based credit card processing or get in touch with us — we’re happy to chat.
Quick FAQs about Costco
Q: What are some key factors behind Costco’s success?
Costco’s success can be attributed to their no-frills wholesale membership model, unbeatable pricing on bulk goods across various categories, high employee retention rate, and exceptional customer service. They offer a range of products and services, including groceries, home goods, clothing, and more.
Q: How does Costco maintain a high employee retention rate?
Costco’s high employee retention rate of 94% is mainly due to offering above-average retail wages, full medical and dental benefits even to part-time employees, and promoting from within the company. By investing in their employees, Costco retains workers and cuts overall costs.
Q: What makes Costco’s customer service stand out from other retailers?
Costco’s standout customer service is a result of three key factors: promoting from within (76% of managers start as hourly employees), strong organizational values like “doing the right thing,” and being transparent and accessible to customers in their interactions.
Q: What is the significance of Kirkland Signature in Costco’s sales growth?
Kirkland Signature, Costco’s private label brand, contributed to the retailer’s sales growth in 2018, raking in nearly $40 billion and making up almost one-third of all Costco sales. This success is due to building consumer trust, partnering with known brands to create store-branded products, and offering samples to get customers familiar with the Kirkland brand.
Q: How does Costco’s product selection process benefit retailers?
Costco carries only 3,800 products, making their product selection carefully curated. This approach offers benefits such as having employees that know the products well, eliminating decision paralysis for customers, and encouraging satisfaction with purchases, all of which contribute to the retailer’s success.