Corn Flakes, Aisle 1. Cadillacs, Aisle 12Dori Jones Yang
As a retail-marketing professor at Babson College outside Boston, Douglas Tigert already knew about Costco Wholesale Corp. and membership warehouses that sell goods cheap in a no-frills environment. But even he was surprised at the bargain he got when he visited Costco's Danvers (Mass.) location. His local dealer was charging $320 for two new Michelin tires, but Costco was selling the same tires for only $163 the pair. So on Apr. 10, he plunked down $30 for a year's membership at Costco, bought the tires, and had them installed -- all in under 40 minutes. "I'm a confirmed Costco shopper," Tigert says enthusiastically.
These days, thousands of people are becoming confirmed Costco shoppers. They join the giant membership warehouse chain to stock up on basics, such as toilet paper and detergent, and to splurge on fancier offerings, such as steak, asparagus, and personal computers.
The eclectic selection and a willingness to experiment help explain why Costco has the fastest-growing sales in the fastest-growing sector in retailing. Analysts are predict-ing Costco's sales for its fiscal1991, which ends in August, will rise 30%, to $5.3 billion. Although its overall revenues place it third, behind projected sales of $9.3 billion for Wal-Mart's Sam's chain and $6.6 billion for San Diego's Price Co., Costco's same-store sales growth is the best (chart). Costco's 69 warehouses now slightly outnumber the locations for Price Co., whose founder, Sol Price, started the membership-warehouse industry in 1976. Costco shares have rocketed 60% since Jan. 1, to $77 recently.
The hot streak at Costco isn't going unchallenged. Although same-store sales growth at Price has drooped, Sam's Wholesale Clubs are coming on strong. Sam's bought a big piece of market share with last year's purchase of Wholesale Club Inc. Sam's executives have improved same-store growth by widening their product mix and aggressively pursuing small businesses as customers. And Sam's is opening warehouses fast in the Northeast, the same territory Costco has targeted for growth.
James D. Sinegal, Costco's president, plans to counter the threat from Sam's by keeping up the pace of innovation. Sinegal, who founded Costco with Chairman Jeffrey H. Brotman, has a wealth of experience to draw on. Before opening the first Costco store in Seattle in 1983, Sinegal worked as executive vice-president of Price Clubs and, for 23 years before that, rose through the ranks at Fed-Mart Corp., a California discount chain also founded by Sol Price.
AN EXPERIMENT. The first Costco stores were simple knockoffs of the Price Clubs--vast, stripped-down emporiums that sold nonperishable household items at deeply discounted prices, both to regular shoppers and to mom-and-pop businesses. But in 1986, Sinegal started experimenting. He decided to sell fresh vegetables, meat, and baked goods. Because he insisted on having butchers and bakers preparing items on the spot, the move raised labor costs--a big hazard in a business where pretax margins can be only 2%.
But Sinegal persisted--he was confident his frugality would keep Costco's overall costs under control. Costco headquarters in Kirkland, Wash., for example, occupy a small two-story building in a warehouse district. Sinegal's "office" is a desk on an open floor shared with all the other employees. Costco does not advertise and refuses to accept credit cards because they cost too much to administer. And Costco warehouses are simple affairs, where shoppers dodge forklift trucks delivering new wares. "We're not all that pretty," says Sinegal.
Sinegal's gamble with fresh foods paid off by bringing customers back more frequently. Now, 65 of Costco's warehouses have butcher shops and bakeries of their own. Sinegal pioneered in-store discount pharmacies as well.
Sinegal also found that he could attract more affluent customers by offering more than mundane groceries and office supplies. "They tempt you with these delicious impulse items," says Carol Farmer, a marketing consultant who shops at Costco for her business in Boca Raton, Fla.
The impulse items are a varied lot--Dom Perignon champagne, Ralph Lauren suits, Kitty Kelley's biography of Nancy Reagan. And they go at temptingly low prices. Bo Cheadle, a Montgomery Securities analyst, paid $5,500 for a baby grand piano at Costco that would normally go for $8,000. "Costco does a fantastic job of merchandising," he says. Price Club, too, offers upscale items, but most consultants give higher marks for creativity to Costco.
As more customers have heard about Costco and signed up for membership, average annual sales per warehouse have soared from $40 million in 1987 to an estimated $75 million for 1991. With costs per store relatively fixed, the revenue increases have boosted margins. As a result, profit is expected to rise 63% this year, faster than overall revenues, to $80 million.
NEW PLOYS. For all their profitable innovations, Sinegal and his store managers still have to hustle to keep ahead ofthe competition. Price, for example, first rejected the idea of selling fresh meat and vegetables as too costly. But now,it and other membership warehouse clubs have started their own fresh-produce departments.
Sinegal is doing some more copying himself. Price, for example, has come up with an interesting marketing ploy--selling cars at low fixed prices that Price has already negotiated with local dealers. Not to be outdone, Sinegal has started aggressively peddling everything from Cadillacs to motor homes at several Costco stores. He is also playing with more new formats. The latest is a home-improvement section, complete with paint, lumber, lighting, and plumbing supplies. Sinegal says he will tinker with this concept for a year before deciding on a companywide launch.
While he experiments with new formats, Sinegal is pushing hard into the Northeast, where he is scrambling to build business fast in a territory that has relatively few membership warehouses. Most Costco stores operate in Florida and on the West Coast, but two recently opened up in Massachusetts. Four more openings are slated next year for Massachusetts, Connecticut, New Jersey, and Long Island.
As Sinegal sees it, the tough times in the Northeast will push hard-pressed white-collar types into warehouses for the first time. Once they've seen his wares, he figures, they will keep coming back. If he's right, when the recession's over even more people will be likely to buy a baby grand along with the tuna fish and detergent.