Costco fine-tunes food offerings to benefit customers - Costco Cos. market to upscale customers - Brief Article

DSN Retailing Today, Sept 3, 2001 by Mike Duff

Costco is applying the same standard to food that it has to other departments by constantly asking. How can we do more for our members?

The philosophy has been so successful that its consumables operations have grown to 60% of sales. But there's more room to grow, and now the club operator is seeking ways to drive new business at the food end of the equation.

"I would use salmon filets as an example," Jim Sinegal, president, told DSN Retailing Today. "We brought the price down from $5.75 to $3.95, and improved them in terms of quality at the same time. Our strategy is to bring greater value to our members. We're experimenting with product in bakery and in produce to see how far we can go relative to the introduction of products and pricing."

Costco approaches food as a dynamic operation that requires constant revisiting and attention both as a set of categories and as a function of its stores.

In bakery, Costco is continuing to go upscale--particularly in desserts--at the same time it works to trim price. "On the West Coast, our cakes are selling at about half the price of discounters and at a better level of quality, and in places on the East Cost, like New York, we're selling at a third of the price."

In produce, Costco is fine-tuning operations to better suit members, sometimes at the price of its own numbers. It had been selling bananas in 5-lb. bunches until internal research suggested the size created too much waste for the shopper. In response, Costco started carrying bananas in 3-lb. bunches. "One of the things that happened, and this was difficult for us, is we wound up selling less bananas. But we felt we were doing our customers a favor, so we kept it at 3 lbs.," he said.

However, you can't necessarily depend on what happens when you go bananas. Contrary to some expectations, Costco isn't under pressure to reduce pack sizes. Indeed, both consumer and business customers are demonstrating they prefer larger sizes. The size issue provoked anxiety when Costco went into the United Kingdom. Europeans generally don't have the same amount of storage space at home that Americans enjoy. Yet, consumers in the United Kingdom didn't give any indication of disliking larger packs once Costco began operations there. What the company discovered, said Sinegal, was that two or three members were shopping together and splitting the packs on the way home. The big packs suggested a better price, so U.K. members didn't mind the chore of divvying up the package.

Often what is true on the other side of the pond is true in the United States. Americans, too, find ways to adjust in the name of a bargain. "Over the years, packages have had the tendency to grow," said Sinegal. "Lots of people today have what they refer to as a Costco pantry."

The novelty hasn't worn off for Costco members, and the club wants to keep it that way. A critical feature of Costco's food marketing is in-club sampling. Sinegal himself confessed to making a lunch out of a Saturday's sampling at the odd club. "I have to restrain myself," he said.

Sampling began when Costco first offered frozen food, and was a way to give consumers and foodservice business customers a way of trying out products that came in very big packages. As fond as Costco members are of bulk, it's one thing to buy big if you know the product and another if you've never heard of it before. "It kind of grew from there," said Sinegal. "We were among the first retailers to offer the big half gallon jars of artichokes. We had to sample them.

Costco likes to create a bit of theater, not only with sampling but also with its road shows. They can include products from salmon to pianos, but the food road shows have their own particular appeal, said Sinegal, and the company plans to continue them and look for ways to make them more appealing. As the pianos demonstrate, little is out of bounds.

As Costco has spread around the United States, another factor it has had to consider is the complexity of local demand, particularly when many communities have a complex ethnic makeup. Costco has been localizing many functions to make sure it is offering a product mix that suits the environment of a particular club. "There aren't too many national grocers in the country, most are local or regional. We are one of the few nationals. We have a huge grocery business, so we have set up business and buying arms in all the major communities we serve," Sinegal said.

Costco's various regional offices ensure each community finds its preferences for brand and cuisine reflected in the store. Sinegal said Costco is committed to tailoring its business to meet the real needs of all its members, not the needs of an imaginary typical member.

Todd Slater, an analyst with Lazard Freres, noted Costco's commitment to food has paid off not only in sales and, critically, traffic, but in current retail circumstances as well. "Food is an important core business, and critical in a downturn, as we have today," he said. Other businesses may grow faster, like gasoline, and others have higher margins, although fresh food does pretty well on that account, he noted, "Food holds up the overall business even when discretionary businesses are falling."