How Costco Leverages Loyalty to Drive Growth
Loyalty can’t be bought, even with a membership. That’s something that Costco Wholesale Corp. has learned — and honed to its advantage — over the years.
As a result of its business approach and the strategies that support it, the club store chain — which operates 839 warehouses globally and 578 in the United States and Puerto Rico — continually lands in the top tier of third-party polls of both shoppers and employees. Costco ranked first on Newsweek’s recent list of superstores and warehouse clubs, based on a survey of 30,000 customers. In another Newsweek poll of America’s Most Trustworthy Companies, the Issaquah, Wash.-based retailer came in 10th.
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Some consumers really get into their personal Costco store. A survey released in October by FinanceBuzz shared the states with the highest Costco ratings based on factors like stock, friendliness and cleanliness, and pegged the winner as South Carolina, followed by Ohio, Tennessee, Missouri and Connecticut. A look at social media reveals an array of Costco-centric fan pages.
Renewal rates are a solid indication of member loyalty, and to that end, Costco’s membership renewal rate reached 92.6% in the United States and Canada by the end of its recently concluded fourth quarter. The retailer’s latest financial report shows a base of 65.8 million paid household members and 118.9 million cardholders.
“We’ve been fortunate in the last couple of years to see new member signups increase at a higher rate and renewal rates to go to their highest levels in history,” Costco CFO Richard Galanti tells Progressive Grocer. “Even for first-year members, when they sign up for year two, those rates are higher than they have been historically.”
Likewise, employees give Costco high marks. The company topped Forbes’ prestigious list of America’s Best Employers by State in Colorado, Idaho, Nevada and Washington, and placed in the top five in nine additional states. On a global basis, Costco was seventh on Forbes’ latest ranking of the World’s Best Employers.
In Progressive Grocer’s own list of the top 100 food and consumables retailers in North America, Costco comes in at No. 3 for 2022. The PG 100 is based on public and private sources, independent research, and proven forecasting techniques.
Trust the Numbers
Beyond consistently positive perceptions, Costco puts up big financial numbers that reflect its club-sized offerings and its loyalty-engendering approach to retailing. For its most recent fiscal year ending Aug. 28, Costco came in with $222.73 billion in net sales, up 16% from fiscal 2021 and largely in line with Wall Street expectations. Comparable sales in U.S. warehouses rose 10.4% on an adjusted basis (excluding gas and foreign exchange) for the year. The retailer’s net income hit $5.84 billion for the 52-week period ending in late August, a respectable increase over 2021’s $5.01 billion.
Costco still shares monthly results, which also bode well for the new fiscal year. According to its September report, U.S. comps rose 11.2% over the five-week retail month and net sales were 10.1% higher than the same month in 2021.
From an e-commerce point of view, Costco is humming along on its own path. E-commerce sales rose 10.4% (adjusted) during the 2022 fiscal year and edged 0.7% higher from August to September.
As with all retailers, the thorn in the side of inflation that has marked late 2021 and 2022 has affected Costco for both better and worse. On the better side, value-seeking shoppers have been stocking up, especially on items priced competitively against traditional grocery stores and other channels.
Surging fuel prices, especially over the summer, have driven many consumers to Costco gas stations, which typically don’t require membership to gas up. According to the company’s latest earnings report, high overall gas prices positively affected sales during the retailer’s fourth quarter by as much as 5.5%.
“We’ve gotten a lot of positive press on our gasoline prices, and we’ve seen that business grow dramatically — double digits on gallons compared to the U.S. population being near flat,” says Galanti.
The climate of high inflation has spotlighted another aspect of Costco’s business that has created an intense, almost cult-like loyalty over the years: Despite surging prices elsewhere, Costco stuck with its $1.50 hot-dog-and-soda deal and its signature $4.99 rotisserie chicken, both of which spurred a lot of positive buzz on social media.
Still, the choppiness of this inflation-defined year hasn’t left the warehouse store operator unscathed. Operating expenses went up for the most recent fiscal year, with merchandising costs increasing from about $170.7 billion in August 2021 to $199.4 billion by August 2022. Costco also reported that its assets of cash and cash equivalents were down compared with last year, while total liabilities edged upward.
So far, though, there’s been no news about passing along higher costs of merchandise, labor or operations via a member fee hike. “We don’t disclose change rates, but we’ve done it historically every five and a half years, and if you look at the last three, they’ve averaged five years and seven months,” notes Galanti, adding, “All of our metrics are fine in terms of member loyalty.” The last increase occurred in June 2017.
A Warehouse View
Periodic COVID resurgences and inflation spikes haven’t spooked shoppers away from Costco stores. In its recent financial report, the company notes that traffic/shopping frequency climbed 7.2% at its locations worldwide and 5.2% in the United States during fiscal 2022.
What has changed in the warehouses is what members are putting into their carts. Purchase habits continue to evolve as lifestyles have ebbed and flowed, Galanti points out.
“We’ve come off two years of incredibly strong sales for the home, whether it’s patio furniture, indoor furniture, exercise equipment or other big-ticket items, because people weren’t traveling,” he observes. “If you look at the headlines now about consumer confidence flattening out, our numbers have come down from high increases we enjoyed for the last couple of years, but they are still strong compared to pre-COVID.”
Galanti cites some other fast movers in warehouses, going into the home stretch of the calendar year. “Housewares have picked up recently, while fresh [food] has continued strong,” he notes. “Fresh was inordinately strong the first year of COVID, and we see some of that sticking as our market share in fresh continues to grow.”
Early indicators point to a busy festive period, Galanti adds: “We are seeing the holiday season start off pretty well — people have been shopping early.”
Burgeoning consumer interest in health and wellness is also spurring some changes at Costco warehouses. Earlier this fall, the retailer revealed that it’s offering a new blood glucose-monitoring system to its members, following the addition of a migraine treatment device over the summer. Costco has also become known for its hearing aid products and services, at a time when consumers are flocking to retailers for those items following the Biden administration’s approval of over-the-counter sales.
Meanwhile, Costco’s beloved sampling program continues to incentivize sales in its warehouses, and its private label Kirkland brand is faring well. According to the latest financial report, Kirkland Signature merchandise penetration was about 28% for the last fiscal year, a 1% uptick.
Future Footprints
Largely staying with what has made it successful among consumers, Costco has been able to post strong sales, move much of its inventory at a time when other retailers are stuck with a glut of product, and continue to grow its footprint. “We are opening 20 to 25 locations a year worldwide, with two-thirds of them in the U.S. We’re now in 13 countries and will be opening in our 14th: Sweden,” asserts Galanti, who started with Costco more than 38 years ago, when there were just four Costco warehouses.
Costco wraps up its first fiscal quarter of 2023 on Nov. 20, and plans to release first-quarter results on or around Dec. 8.
