Retail Marketer Of The Year: Costco

Costco CEO Jim Sinegal is distinctly unimpressed by awards, let alone those with the word "marketer" in them.

"We're not big on awards," he harrumphs when informed that he's won Retail Marketer of the Year. "We don't even have a PR department."

In fact, what makes Costco such an exceptional company is that, save for some select direct marketing efforts, it's a brand that built its reputation by word-of-mouth.

Certainly, a big part of its success is being in the right category at the right time. While other big-box retailers have been experiencing all kinds of expansion bumps and economic reverberations, the warehouse club segment--with an expected $100 billion in sales in 2007--continues to be on a hot streak. A recent report by TNS Retail Forward says the category has annual sales growth of 9.2% over the last five years, and it's predicting growth of 6.1% for the next five years.

But the Issaquah, Wash.-based company continues to outpace its two main competitors and now controls half of the industry's sales, TNS says, with a 50.1% market share. Sam's Club, owned by Bentonville, Ark.-based Wal-Mart, has a 41.7% share, and Natick, Mass.-based BJ's Wholesale Club has just 8.2%.

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Costco does this without any marketing at all.

"There's just a Costco mystique," says analyst Robert Toomey, who follows the company for E.K. Riley Investments in Seattle. Costco executives have long chalked up that mystique to a kind of "treasure hunt" atmosphere for shoppers, where consumers can stumble upon anything from chic diamond earrings to a great deal on a laptop to a five-year supply of Cheerios. (What other store sells caskets and grand pianos?) Add a healthy smattering of hot brands, like Nike, Apple and Versace, and you've got a bargain hunter's Nirvana.

While Costco's shoppers tend to be more affluent than those at other clubs (how many other big-box discounters are mentioned in The New York Times as the secret source for dinner parties for Washington's power elite?), low prices keep them coming back.

The "industrial warehouse" look isn't just for show. "Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable," its Web site boasts. "We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members."

Not only are its stores bigger than its competitors' at about 140,000 square feet, they're also more lucrative. Costco's sales are $998 per square foot, compared with $556 for Sam's Club and $470 for BJ's. "Costco has superb merchandising, excellent execution, and has learned how to differentiate itself by creating a true Costco experience," says Toomey. "It really is in a class by itself."

Its private label, Kirkland Signatures, has enhanced Costco's reputation for quality and value, accounting for about 15% of sales. TNS reports that it is expected to grow to 25%. Increasingly, it's bolstering online retail, too. The company expects to generate $1 billion in online sales this year, reports TNS, and to reach $5 billion in the next five years.

"Costco posted a solid 6% same-store sales gain in 2007," TNS Retail Forward reports, "coming off a strong 8% annual gain in 2006. Costco generally leads the industry in monthly same-store sales performance."

And finally, Costco is especially well-positioned for troubled times. While luxury retailers are already feeling a little pinched and those catering to lower-income demographics are downright strapped, Costco's most loyal consumers represent a sweet spot. Yes, they're well-heeled. But they are also incredibly motivated by bargains, a drive that will likely intensify if the economy continues to sputter.

Costco "has done well through a recession," Toomey says. "Over the years, it's demonstrated its resilience in the face of a softer economy."

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