468 Retail and Channel Management Blog

Saturday, February 20, 2016

Costco's Big Box Style Cashes In

When I was younger, I used to love going with my parents when they went grocery shopping at Costco. From the numerous food samples, to the socks and underwear worn by seemingly everyone on the planet, there was always a motive for me to tag along. At the time there were only 2  locations in Edmonton, both of which were over 15 minutes from our house. This did not stop us however, from making Costco the primary grocery store we shopped at. Costco’s big box selling is becoming a highly desirable feature in Canada, and the resulting trade areas of their stores are massive. With only 3 current locations in the Edmonton region, located either in the outskirts of the city or within industrial sectors, it is evident that people are willing to drive past numerous other grocers to shop at Costco.

Although the location of the Edmonton stores are considered subprime, Costco has by far the highest percent same store sales growth in multiple quarters, closing its last quarter at 9% (Sturgeon, 2016). It’s closest competitor was Walmart at 4.3% (2016). This shows that Costco has managed to differentiate itself from other supermarket stores in a superior way. With 60% of Costco’s products being Supermarket-type merchandise, they have still found a way to get customers to drive past the local Safeway by their house and out to their stores instead.

The biggest draw to a Costco store over a Safeway would be the price. This is what gets the customer into the store and shopping. The other major feature is the buy in bulk mentality that is slowly being adopted by Canadians. The sizes and quantities of Costco’s products take longer to go through at home, and this gives customers the convenience of having less frequented trips to and from the grocery store. These reduced trips appeal to the time-starved consumer segments, particularly families. Costco’s mandatory membership card may seem unreasonable, but I think it helps promote customer relationships and retention. It arguably increases the conversion rates in their stores as well. It would be challenging to spot many people entering a Costco store and leaving with nothing in their hands. The additional selection of electronics, clothes, furniture gives customers a one stop shop experience, and increases the likelihood of unplanned purchases by customers. The food sample stands and appliance demonstration not only increases the sales of the products, but increases customer engagement as well. For a big box store, customer service can be challenging, and this is a unique way that Costco has attempted to reach out to the customers.

Costco’s substantial growth in the supermarket industry is suggesting a transition of consumer preference towards price conscious bulk purchases. This is challenging for many existing companies such as Loblaws to adapt to, leaving Costco largely unchallenged in Canada, and allowing it to capitalize on this trend. With only 90 stores in Canada, It would not be surprising to see its market share grow even more in the next few years as more locations open up.



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