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No-Frills Retail Revolution Leads to Costco Wholesale Shopping Craze

Michael Beyman|CNBC Associate Producer
Wednesday, 25 Apr 2012 | 3:28 PM ET

On a warm, late November morning in Augusta, Ga., workers are putting the finishing touches on a brand new Costco Wholesale warehouse, set to open in less than 24 hours. This is the 597th Costco location — the 20th opened last year — and employees are racing to install light fixtures, paint doors and stock the last of the shelves in time for the grand opening.

Shoppers at Costco in Nanuet, N.Y.
David Grogen, CNBC
Shoppers at Costco in Nanuet, N.Y.

Warehouse manager Waymon Bell is keeping track of every last detail as he begins his 10th lap around the building, inspecting the aisles of merchandise and checking in with his workers along the way.

“We’re in a facility that is 3 acres under one roof, so we do a lot of laps around here,” Bell said. “There is still a very long list of things to do, but we will, without question, make it. I’m looking forward to tomorrow morning.”

Though the last-minute burst of activity may seem like the typical preparations for any store opening, Costco is anything but a typical store. Its floors are bare cement, its ceiling nothing but stark steel beams and skylights, and most of the newly delivered merchandise sits on the same industrial pallets on which it was shipped. There are no signs or directories, and customers have to pay a membership fee before they can even walk in the door.

Such a lack of frills might seem like a deterrent to would-be shoppers, but there is no evidence of that in Augusta, where individuals line up patiently to join 64 million other Costcomembers in a retail revolution.

Costco’s low prices and bare-bones operation have not only changed how people shop, but how much they buy. Those unmarked aisles force customers to wander, creating opportunities for them to stumble across — and pick up — items they weren’t expecting. It’s a common Costco experience for customers to spend more than they anticipated.

“I thought I would spend about $25, and I ended up spending over 700,” Gail Creighton said as she left the Hackensack, N.J., warehouse. “It’s why my husband never lets me come here.”

Brian Wansink, a Cornell University professor of consumer behavior, says it’s no coincidence people overspend. “Shopping at a warehouse club gives us license to spend like we otherwise wouldn’t if we were in a normal store. We are motivated to save money, we are motivated to recoup our membership fee, and as a result, we might even end up spending a bit more.”

Spending more can be tough to avoid when almost everything is sold in bulk. Waffles are sold in packs of 60. Costco’s eggs are available in packs of 90. Mayonnaise is sold in gallon jugs. “It’s part of the American psychology,” explains marketing consultant Pam Danziger. “More and bigger is better.”

Despite the idea that customers like more, Costco stocks surprisingly few items, only around 4,000. The lack of selection is deliberate. “There’s only one variety of ketchup,” Danziger explains. “You don’t have to choose from a variety. They’ve edited it down for you. You’ve paid them to do it.”

Costco’s selection in any one category of goods may be limited, but it actually features a wide range of products. Three-quarters of what it sells are what it calls “triggers,” staples such as cereal, detergent and paper towels. The remaining 25 percent are what Costco calls “treasures,” items that make shopping an adventure. Turn the corner and you might find Sony flat-screen TVs, Cartier watches and Prada handbags that appear on Costco’s shelves one day but are gone the next. That uncertainty creates a sense of urgency, and is all part of the Costco shopping experience.

David Grogen, CNBC

“What Costco does is it really understands their consumer,” Danziger says, “understanding what’s going to excite them, and then making sure you have the product that’s going to be there to excite them.”

Costco does draw complaints from its members. The biggest? Long lines at the checkout.

“It’s too damn long” says Costco member Peter Million. “It takes a long time to make your purchases.”

Another common criticism: having to buy everything in such large quantities.

“The real peril of the warehouse club is not that you spend too much money,” says Wansink. “I think it’s that you actually waste the food because it goes uneaten or you end up eating way too many calories.”

Costco’s sparse layout and no-frills shopping experience certainly create an image of a discount operation. But do shoppers really save money by shopping there? The company says that nothing in the warehouse is marked up more than 15 percent — considerably lower than the 25 percent mark-up at an average supermarket, or the 50 percent mark-up at a typical department store. And a recent independent study by Consumers’ Checkbook, a nonprofit consumer advocacy group, confirms that Costco’s prices on food alone are about 30 percent lower than the largest supermarket chains.

Costco also claims a low price doesn’t necessarily mean something is cheaply made. The company’s single best-selling product — its Kirkland Signature bath tissue — undergoes regular, intense scrutiny at Costco’s headquarters in Issaquah, Wash. Blue-coated lab technicians subject toilet paper to a constant battery of tests, checking its thickness, strength, softness and color. Corporate buyers also make repeated visits to the eight paper mills that make it, checking every detail and searching for flaws. All that effort may sound a bit obsessive, but Costco sells $400 million worth of toilet paper — more than a billion rolls — each year.

The Costco Craze - See Show Details
The Costco Craze - See Show Details

Whether it’s redefining the store layout, keeping prices lower than its competitors, stocking an eclectic mix of products, or building a better toilet paper, Costco’s success at redefining retail is undeniable — the company weathered the recession far better than most, and its stock price has continued to perform strongly.

Costco has also created one of the most devoted followings of any store in the country. On the morning of the Augusta warehouse’s grand opening, Rachel and Danny Devine arrived early with their children to be among the first inside.

“We’ve been waiting for a Costco ever since we moved to Georgia. We were members in Maryland and Utah,” Rachel Devine says. “We’re really happy Costco is here.”

For Costco, it’s doing the little things right, over and over again, that has made the company a success, and made its co-founder and recently-retired CEO, Jim Sinegal, a very wealthy man.

“I think to most stories, there’s always a bit more behind the curtain than you expect,” Sinegal told CNBC. “Generally speaking, when people ask, I tell ‘em ‘all we’re trying to do is sell stuff cheaper than anybody else.’”

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