• by Sarah Mahoney , Staff Writer @mahoney_sarah, January 31, 2008

Zen and the Big Box

The best marketing plan might be no plan at all

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 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.

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 percent over the last five years, and it’s predicting growth of 6.1 percent 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 percent market share. Sam’s Club, owned by Bentonville, Ark.-based Wal-Mart, has a 41.7 percent share, and Natick, Mass.-based BJ’s Wholesale Club has just 8.2 percent. 

“There’s just a Costco mystique,” says analyst Robert Toomey, who follows Costco for E.K. Riley Investments in Seattle. Costco execs 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?)

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.

Not only are its stores bigger than its competitors’, 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.

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

“Costco posted a solid 6 percent same-store sales gain in 2007,” TNS Retail Forward reports, “coming off a strong 8 percent 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 motivated by bargains, a drive that will 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.”