Costco dodges economic bullet

The warehouse retailer may not have the perfect model for success, but it is close.

By 247 Wall St. Mar 4, 2013 4:30PM

Arrow Up Nicholas Monu iStock Exclusive Getty ImagesCostco Wholesale's (COST) annual sales run above $100 billion, more than twice J.C. Penney's (JCP) and Macy's (M) combined, and nearly 40% of those of mega-retailer Target (TGT). Yet, Costco's sales have not been dented by the current downturn or slowdown in sales that most of the nation's largest retailers have felt.


Costco reported net sales of $9.35 billion for the month of January, or the five weeks ended February 3, 2013, an increase of 7% from $8.74 billion during the similar period last year.

 

Costco may not have the perfect model for retail success, but it is close.

 

At the heart of Costco's lack of vulnerability is its membership model -- a kind of club exclusivity for the middle class. Its annual membership fees range from $55 to $110 a year. That is not much of a buy-in to shop its massive warehouses, whether the shopper is an individual or a company. Even Tiffany (TIF) and other high-end retailers do not have a price of admission. Whether or not the Costco membership gives access to special value, it appears to create that illusion.

 

There also may be a belief among those who invest in Costco memberships that size matters. The average Costco location covers 143,000 square feet, much larger than the average Wal-Mart Stores (WMT) location, which measures only 102,00 square feet. Does a Costco store contain more products at low prices because of its size? Probably not, but the size may create that impression.

 

The last and most important inducement Costco offers customers is a satisfaction safety net, which covers almost any level of problems buyers have with products or memberships. All a member has to do is claim that a product or a membership does not measure up and Costco promises a refund -- at 100% of the purchase price.

 

Costco has effectively made a promise to its shoppers -- pay to be a member and that membership will be worth more than its weight in gold -- even if gold is so expensive now as to be beyond most people's reach.

 

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