Some Bargain Retailers Stall Post-Recession, but Costco Just Accelerates
Costco (COST) has gone from strength to strength lately and may be among the greater long-term beneficiaries of the economic downturn. In large measure, that's because it has gradually reshaped how consumers shop its clubs.
As recession turned to recovery, Costco club members visited more often, to the retailer's benefit. In the latest quarter, frequency of customer visits increased by three-and-a-half percent. A significant gain by itself, it becomes more important when considered as an addition to the four percent frequency gain in last year's third quarter.
The increase in shopping frequency is driven by members seeking more food and everyday needs such as dish soap. Of course, every additional purchase helps a retailer, but each helps a club such as Costco more than it would, say, a supermarket. When shoppers drop into Costco for dish soap, they aren't leaving with an item that will last a week but one that might last months, and even if it costs less per ounce, the purchase represents more bucks than it would in a supermarket, or a drug outlet or discount store.
Greater shopping frequency provides Costco with another key opportunity. As shoppers come in more often, attracted by the values it offers on everyday necessities, the retailer has a chance to tempt them with bargains on discretionary buys.
Warehouse club purchasing requires certain adjustments. Bulk products need adequate storage and many of the discretionary goods Costco provides are pricey purchases that only remain in the store for a few weeks. Once they're sold out, they're gone until next year, so consumer have to make buying decisions quickly. Yet, Costco is getting more shoppers to adjust both to everyday and, increasingly, extraordinary purchasing. Once they make the adjustment to warehouse club purchasing, they're likely to stick with it and, if Costco's results suggests anything, do even more.
The evidence? Costco just completed its third quarter with a two percent merchandise sales gain in comparable clubs, those in open for at least a year. Two percent isn't bad in the tough economy, but consider that the comps for the third quarter itself came in at three percent, and for May, with a little help from the Memorial Day holiday they hit five percent. Then consider that Costco is managing the comp gains while making solid earnings advances. So the retailer isn't bleeding profits through discounting to win sales.
That the gains have come in both necessity and discretionary purchases demonstrates that Costco is converting food and commodities shoppers into big-ticket buyers. In a recent conference call, CFO Richard Galanti noted that this spring, Costco sold out of annual patio sets long before it expected to and had to scramble to restock.
Galanti said the retailer has detected a shopping trend in its clubs that executives have labeled "frugality fatigue." Consumers remain conscious of the economy's weakness, but they will spend on things they want -- as opposed to sticking strictly to what they need -â€" if they see the right balance of price and quality. In particularly, Costco members are responding to the bargains it offers on those discretionary items for use around the house, whether something as costly as a patio set or as inexpensive as a Welcome mat. Whichever the case, they are extending their use of Costco to enhance lifestyles that have become more home-centered since the recession and providing the retailer with incremental sales.
As the recession started, some questioned whether shoppers would pay for Costco memberships with money getting tighter. Turns out that a lot of consumers did indeed see the annual fee as a hefty investment. However it didn't turn them off the retailer. Instead, it made many anxious to reinvest.
Costco has been reupping signing up and trading up members. In the third quarter, Costco renewal rates trended up by 10 basis points for business members and 30 basis points for consumer members. Since the second quarter of the current fiscal year ended, Costco added 200,000 households to its membership roster to finish with 31.3 million.
Critically, members are demonstrating a willingness to pony up extra money to obtain Costco executive memberships and gain the perks that come along with them. Executive memberships increased by three percent in the third quarter alone. Now, they represent about a third of all memberships, which certainly suits Costco. Galanti noted that executive members generated two thirds of the retailer's sales. Now that's a member investment that's paying off for Costco as well.
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