What do Brands Need to Know?
By: Karen Howland, Aditi Dash
We love Costco here at CircleUp. It is legitimately Aditi’s favorite store. Why? It comes down to one word: value. That’s what most Costco shoppers are looking for — whether they are in the market for electronics, food & beverage, wine or even premium jewelry. And, the desire for value is only increasing, a trend we believe will be accelerated by the uncertain economic climate today.
Costco has been gobbling up market share in the grocery space for the past decade, and data suggests that Costco is an especially important partner during and after an economic downturn. Cumulative same store sales growth at Costco over the past 10 years is 70% higher than at Kroger, the largest conventional grocery retailer in the country; and, it is over 40% better than Whole Foods.
Costco has always and continues to stand for value. But, in the past decade, consumers have grown accustomed to Costco leading on innovation as well. With its unique rotational and demoing programs, emerging brands have been able to showcase at Costco, driving a sense of newness to Costco members. Clearly, something is working — in 2019, Costco had a 91% renewal rate in the US.
But, as the Bob Dylan song goes:
The Times They Are a-Changin’.
COVID-19 has significantly changed the Costco shopping experience. In addition to no longer being able to do traditional sampling, there are subtle changes to the consumers’ shopping habits. Kids aren’t packing school lunches or needing snacks for sports events. Therefore, the need for single serve bags has gone down — bigger bags are performing better.
We believe Costco will increase in importance in a post-COVID world. Consumers want to reduce trips to the store. They want to buy larger pack sizes. They are becoming accustomed to working from home, and therefore eating at home more often. They need larger quantities of food in their houses on a weekly basis. And, they are becoming more price sensitive. All of this bodes well for Costco.
Tactical changes for Costco
We have spoken with several brands and advisors on best practices for thinking about your approach to Costco in a post-Covid world.
- Think about postponing your Costco launch. If your product needs to be tasted or trialled to convince the consumer to buy it, think about postponing your Costco launch. While the value/oz is there, the customer is still buying large pack sizes at Costco. If the first region you launch in is not successful, it is extremely hard to get another region to buy into your product. You never have a second chance to make a first impression.
- A new sort of sampling. Sampling will likely begin again, but it will look different. It is highly unlikely for the remainder of the year there will be any open product handed out. Individually wrapped samples make a lot of sense, but only if you have the margin to do this. The challenge with single-serve samples is that it’s almost impossible to know if/when/where it translates to a sale. The concept of digital sampling (i.e. a video of someone explaining or consuming a product) is also something that brands are thinking about, but Costco doesn’t want consumers lingering/gathering in the aisles. In order to make this type of program work, it must encourage people to continue moving through the store.
- Get creative with promotions. This is a new world for the Costco merchants as well as the brands. No one knows the answers. Historically, there have been 3 ways to market to Costco customers: demos, coupons, end caps. Demos are gone, so think outside of the box on different ways you can execute on a promotional strategy with Costco or work an endcap — perhaps one focused on specific diet trends (keto, low carb, plant-based protein). However, marketing for marketing’s sake is frowned upon at Costco. They would rather that expense go into lowering the price to consumers.
- Incorporate COVID into your sales pitches & product innovation plans (at least for the near-term). COVID has reversed some trends and accelerated others. Anything with an “on-the-go” positioning is struggling, while plant-based is thriving even more than before. So, find a way to incorporate some of these trends into your near-term strategy.
- Think 5 steps ahead. Costco is becoming more structured and less flexible during this post COVID period. They are aligning with partners that have systems in place to manage through supply disruptions. Companies that are able to think outside of the box on promotions and ways to keep prices low. This might be more challenging for new brands in the short term.
Tactics that Continue to Matter in Costco
It is also worth repeating some key tactics to success in the Costco channel.
- Show the buyer value. Costco is focused on delivering best value for the customer. That includes driving efficiencies out of the system. Ability to execute on things like the delivery process (full truckloads, cubed out) can be as important as the product differentiation. Make sure that your product can move +$1000/week/warehouse (depends on category, but if you don’t have a more specific benchmark, start here). Think about your price slope and pricing strategy, so Costco is profitable.
- Tell a good story. Ironically, Costco buyers love a good founder story, despite not highlighting that story on the shelf. Buyers are focused on the founder and mission of businesses. Bring the founder to the meeting to add to authenticity.
- Know the Costco customer. Be able to pitch why your brand appeals to that core customer. Before a brand determines its Costco strategy, it’s important to ask: who is the Costco shopper? According to Numerator, the Costco shopping experience is more about “fill up” rather than “pantry stocking”, which means that Costco is a more frequent part of customers lives — they are going back every 43.5 days. Think about real usage patterns (not how you wished your customers behaved) to ensure that they want/need your product again in about a month. Costco customers typically spend $91.22 across 8.1 items, which implies an average price of $11.26/item.
- Know your Operations. Your Costco product needs to be perfect. Make sure lead times are well-understood. Go to the copacker when your product is made and that the product shows up on time.
- Diversification. Costco doesn’t want to be a massive portion of a Company’s sales. If Costco is 30% of your sales, it raises a yellow flag. If it is over 50%, it raises a red flag. Despite meaningful success in your regions, expansion might be limited if you can’t show sales diversification in other channels.
Costco can be an extremely lucrative channel for consumer brands, but it does not make sense for every company. Costco can make or break a brand overnight. But, if Costco is in your plan, it is a retailer that will continue to focus on value, so every decision in relation Costco must be done with that in mind.