American big-box retailer Costco will open its second Australian location today in the Sydney suburb of Auburn, with thousands already having lined up early this morning to get their first glimpse at the long-anticipated store.
The company is also preparing to replicate its success in Canberra, where a new location is set to open near the city’s airport.
The success of the chain has been one of the glimmers of hope for the retail industry, which is continuing to suffer low consumer confidence. However, Costco’s Melbourne location continues to draw massive crowds nearly two years since it first launched.
Local managing director Patrick Noone has told SmartCompany that he hopes the Sydney store will be even more lucrative than its first location in Melbourne. The company is also planning more locations in every major capital city, along with duplicate stores for Melbourne and Sydney.
With retailers continuing to battle poor consumer sentiment, there is a lot to learn from Costco’s approach. Here are five secrets to Costco’s success.
Most of Costco’s money doesn’t come from the hundreds of products available on shelves. Instead, it charges customers a yearly membership fee that allows them entry and the ability to actually purchase those products.
Consumers are always attracted to businesses associated with some sort of exclusivity. Not only does introducing a membership system naturally create some sort of hype, it also ensures repeat business.
Costco members want to make the most of their $60, and so will inevitably make at least a few trips back to the store.
Relying on memberships ensures a continual stream of revenue – estimates suggest that over three quarters of profit come from these fees alone.
Despite Costco releasing essentially no marketing material at all – no catalogues or advertisements – the news of the arrival of such a well-known retailer has spread like wildfire, ensuring crowds of hundreds on opening day.
Part of this is because Costco wants to keep prices as low as possible, but it also shows that Costco understands the best form of marketing is word-of-mouth, and knows when to utilise it. Why bother doing all the marketing when your customers will do it all for you?
With consumer confidence continuing to fall, retail experts have continually warned businesses they need to make their stores more of a destination. With discounts saturating the market, SMEs need to convince shoppers that not only should they enter their stores, but get them to actually stay there for extended periods of time.
Costco is not just an outlet where customers go to stock up on day-to-day items – it is an entire experience. Employees stand along aisles handing out free samples of food, while the attached cafe offer cheap, take-away meals – attractive for families, one of Costco’s key target demographics.
A Costco attracts shoppers, but its real power is the ability to keep them there for extended periods of time.
The concept of a big-box retailer is new to Australia, and many consumers have balked at the idea. Critics suggest that because Costco offers so many products, it is impossible for anyone to actually shop there unless they want one or two specific items.
But Costco has countered this. While the store itself offers items under hundreds of categories, there are actually only one or two brands under each. The possibility of overwhelming consumers with choice is hedged by the fact there is a limited range of products for each category.
There are specific demographics that Costco is targeting. Middle-class families who require large amounts of day-to-day items regularly are some of the company’s biggest customers. But the business also succeeds because it doesn’t specifically target any one group.
The stores themselves are stripped bare, with limited branding surrounding shelves. Locations are meant to look like a warehouse, adding to that “discount” feel.
The result is that although Costco implicitly attracts certain demographics, it doesn’t necessarily target any one of them. Local managing director Patrick Noone has previously said businesses make up quite a large number of the customer base, not just families and individuals.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
