Costco offers deals members can't resist
By Margaret Webb Pressler
Washington Post
For years I have changed the subject or turned a deaf ear when the conversation turned to Costco. It was just too embarrassing to admit that I, ostensibly an expert on retail and shopping, had never set foot in one of the famed warehouse stores.
After hearing so many friends joke about how much more money they spent at Costco than they intended, I figured I simply didn't need that kind of temptation. To put it simply, I was afraid to go.
Finally, though, for the sake of professional development, I relented and made my maiden Costco voyage the Friday before Memorial Day. It didn't take long to see that the chain does many things well. With sales last year of $42 billion and profit of $721 million, it just wouldn't be the monster competitor it is if it didn't have incredible financial discipline and first-rate distribution systems.
But the abandonment of restraint on the part of its members and their almost cultlike enthusiasm are also carefully orchestrated, and clearly form the foundation of the Costco strategy.
"We kind of count on it," John Rohr, manager of the Costco store in Pentagon City in Arlington, Va., said of the frenzy. "We create it — the buying staff does, in bringing in those kinds of items where you come in to buy some food items and there's the irresistible temptation of everything on the other side of the building. The buyers call them spice items."
Spice items are not necessarily cheap. The day I was there, items rapidly selling out included, Rohr told me, a newly arrived Chateau Cheval-Blanc Bordeaux for $229.99 a bottle, gone in hours.
Also snatched in one day were five LCD flat-screen jumbo televisions the store received that morning, $3,199 apiece.
Were these treasures bought by shoppers who were looking for a flat-screen television, or had they come in for a jumbo bag of Boca Burgers and gotten distracted?
"I think they were the Boca Burger people, because nobody knew (the sets) were coming in, and they sold right away," Rohr said. "Very little decision-making went on with these folks."
Overspending at Costco is something shoppers seem almost proud of — or at least happy to laugh about. And that shows the power that a good bargain has in our culture.
Costco's markups are indeed tiny. Its profit margins are among the lowest of any retailer. Because about 60 percent of the chain's profits come from annual membership fees, it can afford to sell merchandise for just slightly above cost, thereby generating excitement and loyalty.
"The prices are more than 15 percent cheaper in almost everything they sell relative to a retail store," said Daniel Barry, senior retail analyst for Merrill Lynch. "So when you walk in there, the prices look so compelling that you sort of have to buy it."
Costco not only does a great job of offering consistently low prices — what the company calls "pricing authority" — it also sends that message in every way: the bare-bones decor, long lines, lack of shopping bags and massive packages. In fact, the company frequently asks manufacturers to make larger packages to conform to Costco specifications.
"Even the inconvenience is almost like a kind of reverse psychology. ... It makes you feel like you really are getting something special," said Miriam Tatzel, a social psychology professor at Empire State College in New York. "If you're getting the boutique treatment, then you must be paying too much."
In such an environment, she said, shoppers give themselves "permission" to let go of spending inhibitions because they feel like they're being so price-conscious just by being in a Costco.
Which is why a number of securities analysts seamlessly transitioned from analysis of Costco's numbers to rueful histories of their own spending indiscretions.
When analyst Gary Balter of the New York investment firm UBS, for example, brings home Costco's big packs of Caesar salad, he says, his wife makes him eat it for days until it's gone. When he called her from Costco because he'd found a fantastic swing set "with a treehouse and a slide" for only $999, she didn't see why the family needed it. "Because it's better than the one we have," he implored.
He owns up to having bought things at Costco "that I'm sure I've never used." Still, he feels no guilt.
I, for one, think I did pretty well on my first outing, going in with a budget of $100 and coming out having spent $167 — not including the $45 membership fee. What I'm not going to tell you, however, is how much I spent when I went back Sunday.
