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Effective Marketing – Lessons from a Grocery Store?

Effective Marketing – Lessons from a Grocery Store?

By Louis Rumao

The thing that is uniquely different about us is we want to find the best items out there and sell it to you at the lowest price, and make a fair return.” – Costco Senior VP

Marketing tyres, like any other consumer staple, already tough, is getting even tougher with behemoths like Amazon entering the online tyre business. And like everything Amazon does – competitive pricing, product availability and quick delivery – that makes them hard to compete with. We all are aware that Jeff Bezos, the founder of Amazon, can teach us a lesson or two in effective marketing.

But are there marketing lessons to be learned from a grocery store? Let us look at Costco Wholesale Corporation, which first opened in 1983 in Seattle and now, as of March 2019, has a total of 770 warehouses: 531 in the United States, 4 in Puerto Rico, 100 in Canada, 39 in Mexico, 28 in the United Kingdom, 26 in Japan, 15 in South Korea, 13 in Taiwan, 10 in Australia, 2 in Spain, and 1 each in Iceland and France. In fiscal year 2018 Costco had net sales of $138.4 billion, revenue from membership fees of $3.1 billion and profits of $3.1 billion, according to the company’s annual report.

With more than 90 million people globally who have a Costco membership card, Costco must be doing something right to generate this level of enthusiasm for basically a grocery warehouse. And that is by design — inspiring obsession for shopping at Costco is all part of their effective marketing!

Membership comes with privileges!

To shop at Costco’s stores — which sell everything from food and toiletries in bulk to clothes, electronics, diamond rings, vacations and tyres — you have to buy an annual membership for $60 to $120. That makes the store feel little exclusive – one has to belong to the “club” to even enter the store! And profitably rely on human nature where members say “I’m going to make sure I get my money’s worth by shopping here. Not to mention that membership dues add more than $3 billion annually to Costco’s bottom line. That revenue “allows us to be a bit sharper on prices we charge than we would have to if we didn’t receive that Revenue,” according to Mr. Bob Nelson, the senior vice president of financial planning and investor relations at Costco.

Smart Store Layout and freebies

It all begins with the store layout: Necessities are placed toward the back of the store. That requires shoppers to pass by everything else — all the fun items like computers and televisions to get to the milk and produce. In addition to the enjoyable shopping experience and value for the merchandise, Costco is famous for its bulk sales – they make money getting you to buy 10 pounds of coffee rather than two! No wonder, average Costco shopper spends more than $130 per visit, compared to $55 spent by a shopper at Walmart, Costco’s nearest competitor. Costco stocks fewer items and rotates the merchandise regularly.

Along the way, shoppers can drink and eat Costco’s famous unlimited samples and even get the occasional free massage. This not only makes the experience enjoyable, and freebies have proven to actually boost sales. Another not-so-secret weapon, Costco’s $1.50 Kirkland hot dog and Pepsi soda combo has been available at that price since 1985. “It’s legacy. Look at all the people talking about it. … It’s one of the things we are known for,” says Nelson. In fact, that’s why it has the same price it did in 1985. Costco makes “very little money” on this combo deal, says Nelson, “But we get so much more mileage out of it than if we raised the price to $1.60 and made a few more million dollars.” Another legendary favorite is the jumbo rotisserie chicken for $4.99, another example of Costco’s “quality products for an affordable price” ethos

Superb customer service

Costco has a very generous return policy: Item purchased five years ago? No receipt? No problem. There are some restrictions of course, like electronics have to be returned within 90 days from the purchase date, but otherwise it’s mostly a no-questions-asked return policy.

Most locations have a Tyre Center with all related sales and service with benefits that include lifetime services such as inflation pressure checks, tyre balancing, tyre rotations, flat repairs and all of their tyres are backed with the Costco Road Hazard Warranty. Additionally, they inflate tyres with nitrogen, not compressed air. Nitrogen retains tyre pressure better over time than compressed air, which may improve tyre life and fuel economy for the vehicle.

Successful business strategy

James Sinegal, the founder of Costco and its CEO until he retired in 2011, spoke at a Massachusetts Institute of Technology course in May 2018 about selling men’s jeans for $29.99 a pair. The pants were selling faster than Costco could stock them, and when he bought another shipment for $22.99 per pair, it was ultra-tempting to charge more. “We pass the savings on to the customer, every time,” Sinegal told MIT students. “Do you know how tempting it is to make another $7 on a pair of jeans? But once you do it, it’s like taking heroin. You can’t stop.”

Fundamentally, Costco’s business strategy — low prices and thin margins on high-quality products — is what makes customers ravenous for the experience. And that makes the company billions.

And Costco boosts its bottom line by saving on costs. It has exceptional relationships with suppliers, so it gets competitive prices on goods. And once the product is in the warehouse, operational costs are bare-bones; goods are sold from the pallets they arrive on, instead of employees taking the time to stack each item individually.

Costco pays its employees well – recently Costco announced it raised starting wages to $15 an hour. “It’s just good business,” Nelson says. For example, turnover, which is expensive for a business, is relatively low, Costco says.

“The thing that is uniquely different about us is we want to find the best items out there and sell it to you at the fair price, and a fair price to us is just make a fair return,” Nelson says. And the single driving force of Costco is value, according to Nelson: “The definition of value for us is highest quality, lowest price and best member service.” Part of that equation is that Costco makes sure every item on its warehouse shelves is the best in its category. Typically, there are between 3,700 and 3,800 items for sale per store, whereas, a Walmart supercenter, Costco’s closest competitor, sells 142,000 different items, according to Walmart’s website.

“Are there things that we could raise the price on potentially and sell just as many items? Maybe,” says Nelson. “If we took a widget or something and changed the price from $10.99 to $13.99 could we sell just as many of them…? Possibly. But that’s not what our DNA is. Our DNA is figuring out what is the lowest price that we think we can sell it to you at and make a fair return.”

No doubt, this strategy — low prices and thin margins on high-quality products — would ensure growth and profitability for any company.

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