Food still fueling Costco gains: furniture can't match consumables - Cover Story

DSN Retailing Today, May 5, 2003 by Mike Duff

The hot initiative at Costco today is furniture, but don't let that fool you. The company continues focusing on food as a driver of sales and traffic, revisiting operations continually to generate greater member frequency with value promotions and intriguing new items.

Over the past year, the company shelved plans for a food-focused spin off concept in favor of testing a furniture store format. The food concept originally was slated for Manhattan, but community opposition caused Costco to change plans. A food concept remained an active idea, but the company's success with furniture operations--big ticket, big margin--helped propel it to develop the focused format, located in Kirkland, Wash., near the retailer's headquarters. Jim Sinegal, Costco's ceo, said the new format was a test, but the company expected to learn much more about furniture operations by performing its experiment, boosting its expertise and expanding contacts in the category.

Still, food remains a central factor in the Costco equation. "The furniture is a nice extension, but they would never walk away from their bread and butter," Emme Kozloff, a Bernstein Research analyst, said.

Costco continually hones the food operation to meet evolving consumer demand. The company wants to get bigger and better in food, updating its assortment as it establishes partnerships with suppliers to tailor presentation to members.

Richard Gallanti, evp and do, said in a conference call that Costco decided to rethink its food format initiative in response to basic realities. Costco Food is still under consideration, he said, but its future depends upon how the market develops and where Costco feels it must invest its resources.

"We put it on hold. It could be for six months or 18 months or forever; right now, my guess is for the next year. In simple terms, we turned around and what we found was for this test--which includes a lot of our fresh foods and food and sundries people and senior management and middle management all the way to buyer level--people were spending half their time working on this fresh concept when we've got 400 locations to worry about. So Jim said, 'We've got a lot going on, so lets hold off for the next year.' It's really that simple."

Keeping things on course remains important. Costco has become the class of the warehouse club industry in part because it has successfully navigated the channel between business and consumer members. As a result, its primary competitors, BJ's and Sam's, have shifted their market positions in the last several months, with Sam's taking a more business-oriented position and BJ's enhancing already significant efforts to cater more effectively to consumers.

Consumables, including food, drive footsteps through Costco's door. Frequency remains an important issue with warehouse dubs, and the enthusiasm with which the sector has embraced gasoline sales is supporting evidence that dubs continue to value operations that promote more member visits. Margins may be slim in gas and in many consumable segments, but those categories play into Costco's merchandising strategy.

Food and consumables are pushed toward the rear of Costco units for a reason. The retailer is anxious to lead customers past the bargains it offers in categories such as home electronics, furniture and jewelry, not to mention an increasing array of services, where Costco offers consumers everything from hearing aids to vacations. Getting consumers into and through the dubs is a way to keep all those big-ticket operations top of mind.

Food also plays into the treasure-hunt element of warehouse club merchandising. Some consumers come for necessities and take advantage of bargains. Others come for bargains--for the thrill of the hunt is a mighty motivation to some shoppers--and take advantage of necessities. Road shows contribute to the treasure-hunt atmosphere by offering expanded selection and deeper bargains in various categories. Overall, the in-and-out nature of warehouse club merchandise makes urgency of purchase more acute. Costco may have to maintain a larger core assortment in food than in some other areas, but road shows provide the buy-me-now-while-you-have-the-chance element. Road shows--as well as the vast sampling efforts that accompany club openings--also are an important way for Costco to test potential new products.

Whether as part of road shows or everyday selection, Costco works continually to hone assortment based on its reading of member desires and preferences. In food, said Jeff Lyons, vp/gmm, fresh food department, that means working to add value all the time. Sometimes it is simply a matter of finding ways to trim a little fat, which can be complicated if you're trying to keep your prices down on meat products. Or it can mean adding fat where the consumer wants it.

Costco eagerly works with its food suppliers to find ways to improve product whether they are sold as national brands or under its own Kirkland private label. Still, the company develops its value initiatives with the intent that everyone can make a little money To further tailor its approach to the member, it uses regional staff to ensure that products suit local tastes This is as true in road shows as in basic assortment. Seafood offered in Florida, New York and Seattle will reflect the tastes of customers in those regions, said Lyons, based on whatever characteristics are most critical, be they geographic, economic or ethnic.