C-Store looks at how UK warehouse club Costco is committed to giving its members top quality goods at the lowest possible prices.

In the six to eight weeks before Christmas, Costco’s depot and UK head office in Watford are at
their busiest. That may not sound that astonishing but when you learn that Costco operates 460 warehouses in 37 US states, five in Japan, 16 in the UK plus a few more dotted around in locations such as Taiwan, Mexico, Korea and Canada, you realise how well the company has developed in this country.

Formed in the United States in 1983, the company grew out of the membership warehouse concept, which was born in 1976.

Costco UK managing director Francis Ball says: “The idea for the warehouse club concept was developed in the USA. The premise is getting customers into distribution centres, because they always have a full assortment of goods, and companies save a huge amount of money by not buying or building big stores in the high street. By doing this you can lower prices and give customers a wider product range to choose from. Various formats were tried until a good balance between wholesale and individual membership was achieved, which is pretty much what we have now.”

The first UK Costco warehouse opened in Thurrock, Essex, in November 1993, and was followed by the one in Watford in June 1994.

Ball says: “We now have 16 buildings trading and we are opening our 17th warehouse in Milton Keynes on November 7.

“We don’t have a target for how many warehouses we want to open, but conventional wisdom from analysts is that the UK would be able to sustain around 50 Costcos - we’ll have to wait and see whether that’s accurate.”

According to Ball, the main difference between the Costco way of doing things and a normal cash & carry is straightforward.

He says: “We carry a very a limited assortment. We try and make the first level of selection for the member. For example, toilet paper: we give them just one brand, which is the top brand, the best quality we can find, and one colour. By doing just the one line we can achieve economies of scale that enable us to show a huge saving against anybody else in the industry.

“As we all know, independents very rarely survive unless they’re really sharp in business, and our approach can really help them achieve that.”

The company also makes sure that between the hours of 9.30am and 12.30pm each day only business members can use the warehouse. To measure how much it is saving its members, Costco track the top 200 fastest-selling items in food and sundries each calendar month against all other cash & carries
and retailers.

“We typically show a 16-18% saving against cash & carries, and a 25-30% saving against retailers,” explains Ball. “These include items where no one really makes any money, such as sugar and coffee, and still we can show a saving. This is because of our volume per item per location, which gives us real efficiencies.”

Unlike at cash & carries, members of Costco pay a membership fee, which means that the company has to take note when its members raise any sort of issue.

Ball explains: “As they’re leaving each depot, members are invited to put their suggestions for improvement into suggestion boxes, and these are correlated every day.
We then phone each member who submits a suggestion, and investigate what we can do to improve things. If we get a several suggestions for a certain item we don’t stock, we know we have to find a way of getting said item into the business, or of creating a point of difference to our competitors.”

Even without these suggestions, the Costco warehouse in Watford has a number of services that would make many cash & carries envious: an on-site delicatessen, a butchers, a Michelin tyre centre and even a digital photo-developing centre.

When it comes to its relationship with suppliers, Costco has a very simple mission statement. A major factor in this is making sure each side, supplier and distributor, respects the other.

Ball comments: “We really work hard on that, and want to treat them as we hope we would be treated in their business. We try to make sure we’re always on time and that we communicate clearly. Most importantly we try to avoid ‘mind changing’. This can save so much money between buyers and sellers by eradicating indecision. We try and make sure suppliers can deal with us easily.”

A sign in the supplier waiting room at the depot says that the company expects every one of its suppliers to give it their best price on the first time of asking.

Ball says: “We don’t expect to go through all sorts of hoops just so that they can squeeze an extra few pence out of us they don’t need or deserve.” Again this point goes back to the unique commitment Costco has to its members. Ball explains: “Our members have paid to come into the building. They don’t have to pay to go anywhere else, but they do this because we commit to give them top quality goods and the lowest possible price. In order to do that we have to make sure we’re getting the fairest possible price from the supplier.

“There are some suppliers, who from time to time have a difficulty with that, and its very disappointing for us and our members, who are expecting to see a full representation of the best brands in our depots. Sometimes you won’t see a brand in Costco because the supplier hasn’t allowed us to sell it at the lowest price. We won’t sell an item below cost or if we can’t be the cheapest deal.”

Although Costco doesn’t run day-to-day promotions in its depots, it does issue incentives for members.

Ball says: “We don’t typically run promotions, but once a year we issue a ‘passport’ to our members, which is a book of coupons. Each coupon allows a member to buy a quantity of an item, at a discounted price, for one week.”

As for new members, the company employs a small membership marketing team in each warehouse, who spend their time on the streets, visiting small businesses and telling them about what Costco does.
Although Ball acknowledges there is competition for customers all over the country from the likes of
Bestway, Booker and the Today’s Group, he has faith in what Costco can offer its members and in the loyalty its members show.

He says: “Our membership is yearly. We want members to have to review their membership every year because we want their vote, we want them to make a conscious decision: is it worth the membership fee?
“You can’t renew by direct debit, it has to be a conscious act, not something you take for granted. Thankfully, we have a very high renewal rate, so we must be doing something right.”

Key Points

Location: Costco depot and head office, Watford, Hertfordshire

Staff: 170 when opened, growing to present number of 500

Size: 135,000sq ft

Interesting facts: The company busses staff in at Christmas to ensure there is sufficient cover for the festive period; busiest tyre centre in the UK; digital photo processing on-site.

Sanjay Gandecha, SVG Food and Wine, Watford, says: “I usually come here twice a week. The prices are very competitive so really I had no choice but to join. We have two family-run stores and about eight of us are individual members. It’s definitely worthwhile as there are products here that you don’t often find anywhere else. What really struck me when I first came here were the prices, quality of stock and the open space.”

Harhchand Shar, Kingly News, West End, says: “We don’t have a particular day when we come down - it depends when we can fit it in - but someone from the store has come down here at least once a week for the last 10 years. It’s pretty easy to stock up with quite a lot each time I come in. It has all the products I need and I’m glad I’m a member. I think the store is well laid out and it’s always very easy to get what I want quickly.”

Ajit Patel, Stapleton Stores, Finsbury Park, North London, says: “My wife and I try to visit Costco at least three or four times a week. The prices here are extremely competitive, especially when it comes to non-food items and confectionery. It’s also good to get here early and not have to rush around the warehouse. I like the fact that being a member here means they take more care in listening to your needs.”