Costco, the sixth largest retailer in the world, succeeds because of its adeptness in breaking the rules of retail common sense. Costco has no advertising for non-members, though contained in a vacuous space, they offer no signage, then when you check out they do not bag your purchase. On top of that, the Costco store contains a mere 3,600 SKUs. Supermarkets offer around 25,000 and a typical Walmart can tally 142,000 SKUs under its roof. At Costco, if you want ketchup, you get just one choice, not 12. And all this comes with a membership fee; the shopper has to pay to even enter the store. But it works, and here's why:
After transcending those barriers to entry, once you walk through Costco’s doors, the store is clearly set before you. It’s a carefully choreographed movement. The store—a three-acre, 148,000 square foot warehouse—at first glance appears overwhelming. The store layout however, offers a panoramic view of each of its shopping districts.
In comparison, Ikea stores create a circuitous but forcefully maneuvered "yellow brick road." You survey each Ikea district only at your point of arrival there, whereas at Costco, the consumer can visually survey the entire store at its entrance, taking in the racetrack retail plan that will lead them past each of the Costco shopping districts they have already visually anticipated.
Upon entry, the Costco visitor is met by the "luxe" offerings of televisions, computers, and electronics. Add the unexpected but exotic offerings: a Cartier watch or a Prada handbag, or, on at least one occasion, an original Picasso. They may be for sale at a much reduced price, but likely for only a fleeting moment.
As the customer continues along, the racetrack infield features home, seasonal, and lifestyle selections on low-profile racks that allow for open sight lines across any point of the store. Beyond, floor-to-ceiling racks of hard goods ring the outside of the racetrack while fresh food is found at the racetrack’s far end. The very outside of the track is home to practical staples, including toilet paper, whose location requires consumers to pass many impulse buys.
Another element of Costco’s magic is the constant, storewide rotation of target staples—such as light bulbs, detergent, and paper towels—referred to as "triggers." The shopper must search storewide for triggers, which, again, exposes them to a greater number of products. This is a "treasure hunt" in Costco’s parlance.
Costco rotates upward of 25% of its hard-goods and its products inside the racetrack as triggers. The result is that, of the 3,600 items for sale, a full 1,000 may be offered only for that particular moment and may not be available upon a future shopping visit. In fashion retail, Zara has mastered this version of perishability, which creates a high turnover of unique and current offerings that, when sold out, are replaced by a new set of fashion looks or unique new offerings. The ensuing sense of urgency to impulse buy is stemmed by the fear that the item might be gone if you wait to reconsider.
This choreography has resulted in astounding, perennial success: Last June, the Seattle Times ranked Costco as the 10th best company in the Northwest, placing it ahead of Amazon.com, Microsoft, Nordstrom, and Nike. The Times acknowledged that this kind of ranking is relative, but the recognition is still impressive. To qualify the retailer’s success further, we can look at rankings by specific factors, which offer more concrete comparisons.
In this case, it actually produces an even more staggering result: Costco is the fourth largest retailer in the country, and this year it’s No. 22 in the Fortune 500. The Costco private label, Kirkland Signature, is one of the most successful brands in the industry. Jim Sinegal, Costco cofounder and former CEO, just won the National Retail Federation’s Gold Medal Award for 2014, that organization’s highest honor. Since its inception, the company has never posted a negative same-store sales result, and Costco averages among the highest sales figures per sale in the industry.
Despite this success, greed has not overtaken its operation. Costco engenders loyalty among both its employees and members with a strategy that looks out for both. For its members, Costco religiously limits its mark-ups to a maximum of 15%, straining its profit margin compared to the average mark-up of 25% for supermarkets and in excess of 50% for department stores.
For its employees, a full-time hourly Costco worker with customary raises can make upward of $40,000 annually after three to four years. With an average pay approaching twice the minimum wage, Costco also offers health care for upward of 90% of its employees. That results in one of the lowest turnover rates in the industry.
Costco thrives on a sense of simplicity and sustainability. The store recycles packaging boxes for customers to use instead of bags, and displays are often just stacks of pallets from the loading dock. Costco also recycles tires and grease, and each warehouse uses around 150 individual skylights to provide a majority of the store’s illumination through natural lighting. Customers are unaware of many sustainable strategies, such as advanced heat recovery from the refrigeration system, or the increased introduction of solar panels. These efforts to maximize efficiency, from operations to store design and production, help Costco scale worldwide and still offer the benefits to its customers and employees.
Costco also serves as a commodity editor that we can trust. There is a sentiment in shopping psychology that we as consumers suffer from a burden of choice and resultant overload anxiety. More than ever, we rely on social editors—people in whom we have faith or institutions whose values we identify with—to make simple decisions for us. Shoppers can freeze at the sight of an entire corridor of breakfast cereals, but Costco pre-selects and makes only one or two offerings. While Costco’s motivation may be efficiency, it ends up offering the customer simplicity and less stress, increasingly valued commodities.
After the checkout, the food court offers—in this case very similar to Ikea—a hot dog at $1.50, the same price since 1985. It’s again indicative of the company’s concerted effort, if not culture, to provide ever more value for its members while holding prices steady—or reducing them. It creates a situation where even the most determined single-item hunter shopper will be persuaded into many additional purchases. This carefully orchestrated layout of temptation and choreography results in an unexpected shopping spree that makes Costco a genius at seducing and catering to its customers at the same time. All this contained in a seemingly innocent warehouse.
—Stan Laegreid, AIA, is senior principal of MulvannyG2 Architecture, Bellevue, WA, which has designed nearly every of Costco’s 648 warehouses and counting, worldwide, since the retailer opened for business in 1983.