Costco: Retail’s overlooked holiday winner

Retailers are trying to draw holiday shoppers with splashy perks like free shipping, convenient new ways to shop, and mobile checkout in stores.

Costco has eschewed that strategy. It focuses instead on the reliable model that has attracted loyal club members to its no-frills warehouses over the years.

Costco sells just a few thousand hot-selling items — from tires to flat-screen TVs to big jugs of mayonnaise — at cheaper prices than competitors.

Despite Costco’s muted approach, it has emerged as a standout in the end-of-year retail crunch by perfecting its simple formula.

During its most recent quarter, Costco’s (COST) US sales increased 8.3% compared to the same quarter a year ago. That’s higher than competitors like Sam’s Club, which posted 5.7% growth, Target (TGT), which posted a 5.1% rise, and Walmart (WMT), which reported growth of 3.4% last quarter.

“Costco didn’t engage in any large scale, new strategic initiatives this holiday season,” said Timothy Campbell, senior analyst at Kantar Retail. “For Costco, it’s all about tactics with constantly new items and finding ways of providing more shopper value.”

A trusted retailer

Club members who pony up $60 or $120 for annual subscriptions are flooding in to shop during the holiday rush. Costco reported a 6.8% rise in foot traffic in November.

Members believe that they can land deals at Costco on high-quality holiday staples and gifts they can’t find elsewhere.

Costco has staked its reputation on cheaper prices than rivals like Walmart or Target. It pours revenue from annual membership dues back into keeping prices down.

Costco also manages a limited inventory, which gives its merchandising teams a competitive advantage over Walmart and Target. Big-box retailers typically sell more than 100,000 items at superstores, but Costco stocks an average of 3,800 national and Kirkland Signature house-branded products.

“We’re able to mark up our goods so little because of the efficiencies that we bring to the table,” said Richard Galanti, Costco’s veteran chief financial officer. “There’s something in terms of putting all your buying power and focus on fewer items and pre-selecting the right items.”

A narrower selection at stores also helps shoppers avoid the paradox of choice — so many options that it’s tough to decide.

Costco does the vetting work for customers, said Joseph Feldman, an analyst at Telsey Advisory Group. “There’s a high level of trust for customers.”

Looming challenges

Costco benefits from the strong economy. High-income shoppers are increasingly willing to spending a larger chunk of their wallets at warehouses, Campbell noted.

Yet Costco could face trouble holding those shoppers against Amazon if the economy turns sour. It has a sizable customer overlap with Amazon, and those customers could decide they don’t want to pay for both Prime and a Costco membership.

There are other looming challenges, too.

Costco’s low-price model depends on the annual membership funnel. That means the company has to find ways continue attracting new members — especially Millennials as its core baby boomer shoppers age.

It will also have keep improving its online capabilities to keep up with Amazon and brick-and-mortar rivals that are speeding up their investments.

For now, however, Costco’s customers seem to love the club.

In November, Costco reported double-digit increases from last year in categories like sporting goods, electronics, hardware, and appliances, signaling that it was a top destination for big-ticket holiday purchases. Home furnishings, clothes, and small appliances like toasters and blenders grew as well.