Silent Costco concept proves it means business

DSN Retailing Today, Oct 11, 2004 by Doug Desjardins

SAN DIEGO -- Costco's Business Center division has kept a low profile since it was founded in 1996, but a new store opening in San Diego this month will give it a presence along the entire West Coast as it eyes new markets.

The company will open its first San Diego store (and sixth overall) here in late October just a few miles from Miramar Naval Air Station where the movie Top Gun was filmed. The opening of the 50,000 square foot center will mark Costco's official entry into San Diego, though it's been serving businesses here for more than a decade.

"We inherited a delivery business from Price Club when we merged and management decided we had enough customers to run a small operation out of our Chula Vista store," said Phil Lind, vp, Costco Business Centers. "But the Chula Vista store is expanding and we don't have room there anymore so we're opening this center."

Costco opened its first business center seven years ago in the Seattle suburb of Lynnwood and has since expanded to the Bay Area, Los Angeles and Phoenix. The business centers' product mix is different from a regular Costco and features a wide variety of office products, hardware, furniture and an expanded line of food and utensils for the restaurants and delis it serves.

Business centers also carry many of the same products found in regular stores but in larger sizes. During a recent tour of the Lynnwood store, Costco Business Center regional operations manager Rob Parker pointed out the huge sides of beef and slabs of ribs in the meat cooler.

"Those are the same large cuts that we get it the back door of our regular stores and cut into smaller packages, but there's no need to do that here," said Parker.

The 135,000-square-foot store is one of four "hybrid" stores with both delivery and walk-in business. Customers who opt for next-day delivery can order online or by phone or fax, though most (50%) order online. Online ordering gives customers the option of making their buys during off-hours and keeps the center busy around the clock.

"About 40% of our volume is done in the middle of the night out the back door," said Parker. Deliveries are made curb-to-curb by a fleet of 30 trucks that make their pickups from five bays in the back of the store.

While the hybrid stores do a higher volume of business than the delivery-only centers, they come with much higher start-up cost, since they require about the same amount of space as a regular store. "It's not always easy to find a 120,000-square-foot building and 10-acres of land," said Lind.

By comparison, the new delivery-only center in San Diego will occupy a 50,000 square foot building (once part of a distribution center operated by Fed-Mart) and have just enough parking space to accommodate employees and delivery trucks.

"It's a good base for our existing business," said Lind, adding that there's room to expand the center or open a hybrid store to accommodate future growth.

Costco hasn't announced where it will open its next business center, but Lind said it could be an existing market or one of several cities where Costco has a large customer base. He said the Bay Area and Los Angeles could support a few more centers and strong markets such as Portland, Ore., Denver and Sacramento are on a short list of potential new markets.

"But we're still looking, and there's nothing on the drawing board right now," said Lind. "We're not in a rapid expansion mode. We're just a small operation that shows a lot of promise."