Costco Is Moving into the Mall, but Only on Its Own Terms

Last Updated Sep 13, 2010 6:31 PM EDT

Yes, Costco (COST) is moving into malls. But don't take that news too literally, as the retailer would rather operate in the adjacent parking lot than change its style to conform to somebody else's rules, CFO Richard Galanti told me.

Malls might once have shunned a mass-market operator as insufficiently fashionable to share their space. But these days they're changing their tune. A Costco generates 34,000 transactions a day via the main check stands and that translates into thousands of consumers drawn to a mall location, Galanti said. From Costco's perspective, the advantage of malls isn't the customers they draw but the space they have available. Many older malls are in cities or densely populated suburbs that have Costco's kind of customer but a limited availability of reasonably priced retail space.

Galanti said:

Strategically, if we're trying to open 20 or 30 units a year with some large fraction in the United States, then we're going to want to be in mall parking lots. Ideally, we would love to have 10 or 12 acres to develop on our own, but the reality is, we can't find 10 or 12 acres everywhere. With malls, we have plenty of room to put a building of our footprint in the lot plus ample parking.
If a particular mall wants to make it easier for Costco's customers to wander over, it might consider making adjustments, such as tearing out an unoccupied department store anchor structure to provide better access. That already has happened in the case of an Atlanta-area mall, Galanti noted.

Whenever possible, Costco will operate its sprawling single-story layout, although it has multi-level variants it can use where the location is particularly desirable and alternatives are scarce. In the United States, it already operates locations in retail develops that are a verticalized variation on the so-called power centers that are its typical suburban setting.

Multi-floor retail centers can be an attractive alternative in urban setting where malls are crowded out. They generally lack the enclosed bazaar of shops that define true malls, but offer a common exterior space and attached parking structures with separate entrances to each of several stores that would elsewhere operate stand-alone locations. A Costco in Rego Park, N.Y., just opened on the lower level of such a development, one it shares with Kohl's, T.J. Maxx and Century 21.

Yet Costco has had its own issues in urban retail developments, particularly the one that houses its Harlem location in Manhattan. Often, such developments charge for parking, and Costco has heard it from members who don't like paying to visit after paying Costco's membership fee. They also have problems of access, as customers have to deal with ramps, elevators and other inconveniences often while pushing large, laden shopping carts. Costco's experience with urban retail centers demonstrates that it could operate in malls if it chose but also why the parking lot option is attractive.

Costco continues to regard its traditional big-box units as ideal for its business. Even when it opens at the mall, it will be happy to sacrifice the canned music and standardized glamor within to enjoy the familiar, wide-open opportunities â€" ones that have been paying off in terms of growing sales and consistent profits -- without.