3 Ways Costco Can Be Even Bigger
I'm there every other weekend, buying half-gallons of milk by the case and occasionally making lunch out of the samples at the end of every aisle. I ogle the oversized flat-screen TVs and tricked-out digital cameras that greet me at the entrance, and the smell of the bakery is enough to lure me past aisle after aisle of humidifiers, power drills, electric tea kettles, and Sinegal knows what else.
As a consumer, I love Costco (NAS: COST) . But as an investor, I think the company is going down the wrong aisle when it comes to growing the business. Sure, its January same-store sales, up 8% versus analysts' expectations of just 5.4%, dovetail nicely with the company's stated goal to increase same-store sales by boosting the number of visits per member and the amount each spends per visit. But for an admittedly ginormous company whose bread and butter is keeping prices low and quality high, the notion that it can somehow get people to come more often and spend more each time strikes me as a stale idea.
Rather than aiming for the impossible -- namely, controlling how often and how much members spend -- Costco should be striving to reach and attract more members. Unlike Target, which welcomes any Tom, Dick, or Harriet through its doors, Costco rakes in close to $2 billion a year on membership fees alone. (Rival Wal-Mart (NYS: WMT) collects roughly $1 billion a year in fees from its Sam's Club members, whose numbers have declined each year since 2009 while Costco's have continued to go up, up, up.) It stands to reason that more members will boost same-store sales growth and other metrics along the way. So as Craig Jelinek takes the reins from longtime CEO Jim Sinegal, here are three outside-the-box-store ideas he might want to consider:
- Bookmark costco.com: You want more visitors, more frequently? Leverage costco.com, one of the only virtual warehouses that comes anywhere near the variety you'll find at Amazon.com (NAS: AMZN) . As a 13-year member of Costco, I've never made a single purchase at costco.com -- but I'm in the store more frequently than the average member's 11 visits per year (and spend more than the average $94 per visit, too). By more tightly integrating store membership with online offerings, Jelinek could woo members like me to the site in between visits, possibly upping my monthly spending -- and certainly boosting my "visits" to the realm of Costco.
- Stay home: Lest the online strategy chip away at the warehouse-and-membership model that has brought Costco this far, Jelinek and Co. need to home in on scouting out domestic store locations, putting international expansion plans on the back burner. Between the physical footprint of each warehouse and the physical bulk of the items people purchase at Costco stores, this company's concept may just be too big for European and Asian countries, whose residents often rely on public or mini-sized transportation and live in modest spaces that can't store a year's supply of paper towels. Stay close to home, where the concept of buying big at big value is ingrained in the culture. One of the potentially most promising markets for bulk retailers, Latin America, is already being dutifully served by a company that's cut from Costco's fabric, PriceSmart (NAS: PSMT) . Trying to expand in this market would not only mean competing with PriceSmart, but repatriating money to a strengthening greenback. Costco should stay close to home for now.
- Promote the brand: It may seem like everyone has heard of Costco, but the company has no official advertising strategy beyond targeted home mailings. A business this size could quickly become a top Google hit by spending the equivalent of pocket change on online advertising, a tactic that aligns with enhancing costco.com's clout.
Even a behemoth like Costco has to realize it can't control members' footsteps through the door or the number of bills they take out of their wallet each time. Yet that's exactly what the company intends to do, as outlined in the 10-K. Jelinek has a chance to chart a new course here -- and while turning a ship this size even a single degree takes a lot of muscle, the new CEO could be just the person to flex it.
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At the time this article was published Kate Herman has a freezer full of high-quality, low-cost meats and more mini sweet peppers in her fridge than she'll ever need, but she owns no stocks mentioned in this article.The Motley Fool owns shares of Costco Wholesale, Amazon.com, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, Wal-Mart Stores, Amazon.com, and PriceSmart. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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