Costco's Retail Innovation Craze

Counterintuitive Retail Strategies Work Globally to Create Consumer Fanaticism

Warehouse shopping
Steve Proehl / Getty Images

Costco Wholesale has been aggressively infiltrating global markets with the retail innovation practices that have created a cult-like consumer fanaticism rightfully characterized as "The Costco Craze." Costco's global expansion frenzy since 2013 includes more than 200 international Costco Warehouse locations operating in eight countries outside the U.S.

Costco Wholesale International Expansion

By June 2016, Costco Wholesale had expanded to over 200 warehouse stores outside of the United States.

These included 90 locations in Canada (in nine provinces), United Kingdom 27, Taiwan 12, Korea 12, Japan 25, Australia 8, Spain 2 and Mexico 36 in 18 Mexican states.Their US stores numbered 494 locations in 43 U.S. States and Puerto Rico.

With the globalization of the retail economy, it's fairly easy for any of the largest U.S. retail companies with ambition and financial backing to open up shop in international markets. So, barring some kind of economy-busting international incident, there was little doubt that Costco would achieve its aggressive international expansion goals.

Will Costco's Counterintuitive Retailing Strategies Work Internationally? 

There was, however, a big question about whether the counterintuitively innovative Costco retailing strategies would create the same kind of fanatic Costco Craze outside of U.S. borders. Target's exit from Canada in 2015, Tesco's complete shutdown of its U.S. Fresh and Easy chain, and Walmart's store closings in Brazil in 2016 serve as cautionary tales to all global retailers.

 

While any retail chain can bully its way into any global retail market, there's no guarantee that the competition will automatically be crushed under the weight of megachain size and annual income. In the age of empowered - and culturally loyal - international consumers, there's no such thing as "too big to fail."

So, far, however, Costco seems to have succeeded in ways that Target, Walmart, and Tesco have failed. According to a Forbes report, Costco membership signups in the first 8 to 12 weeks of a new store opening overseas are generally 10 times greater, compared to Costco store openings. And the retention rate for those annual memberships in international countries is stunningly high... generally more than 80%.

Innovations Fueling the Costco Craze

What is Costco doing right that other global retailers are doing wrong when they venture into foreign territory? The CNBC documentary "The Costco Craze" revealed information generally unknown to consumers, like how Costco's markup compares to other retailers, how Costco buyers pick toys, and how Costco's influence has changed wine marketing globally,

Some of the counterintuitive retail strategies that work for Costco include:

  • Minimal in-store signage, forcing customers to wander around to find things
  • Limited number of products (10,000 compared to 40,000 in most of the largest supermarkets and 100,000 in Wal-Mart)
  • Limited size selections (supersize is the only size)
  • Pays wages that are two to three times higher than the average retailer
  • Provides health insurance benefits to 90% of its employees
  • Includes luxury items in its discount merchandise mix
  • Instead of following the Apple path, uses low-tech / high-touch customer engagement strategies
  • Instead of asking, "How can we make the customer pay more for this?" asks "Could this be less expensive for the customer?"

These unorthodox Costco strategies create two outcomes that any of the largest discount retailers in the world would like to have. First, the average ticket total for Costco customers is high because customers firmly believe they're saving more money by spending more money. Second, once into the more-is-better vibe, Costco customers have a tendency to make impulse purchases when they spot products they didn't expect to be available at a discount warehouse store. And Costco shoppers don't just buy gum on impulse. They buy 80" 3D televisions.

International Impulse Buying at Costco - the Ukelele

An example of the power of retail impulse buying is Ed from New Zealand, who found a $200 fare to Hawaii. A friend took him to an amazing retail store, Costco. It had all sorts of great stuff that Ed had never seen in New Zealand, and he said before he knew it he had a cart full of stuff, even though he knew he would have to lug it back to New Zealand.

When he was just about finished shopping, Ed spotted a ukelele randomly displayed in the middle of a bunch of unrelated products. His friend jokingly told him that he should take that ukelele home with him to New Zealand too. Ed laughed and then added the ukulele to his cart.

When Ed got back to NZ with his new musical instrument, he taught himself how to play with lessons on the Internet. He liked it so much that he taught ukulele classes at a local school and then formed the Russell Ukelele Orchestra. It expanded to 14 members and is well known around his area because they play gigs at local events and gatherings.

The Costco Craze is not just a result of the American bigger-is-better psyche. The Costco international stores in 8 countries have proven that the Costco formula works just as well with consumers outside the U.S.  And unlike other U.S. retail chains that are opening international locations as a defensive strategy, Costco's international expansion isn't compensating for domestic weakness because currently, it has none.

Apparently to know Costco is to love Costco, no matter where in the world Costco is. And the international consumers who are quickly becoming part of the Costco Craze probably don't care much at all which candidates of which political party do (or don't) shop there. They just want quality merchandise, good prices, and an occasional ukulele surprise.