Spreeing Is Believing

On a First Trip to a Discount Phenomenon, Resistance Wavers

For years, I have changed the subject, or turned a deaf ear, when the conversation turned to Costco. It was just too embarrassing to admit that I, ostensibly an expert on retail and shopping, had never set foot in one of the famed warehouse stores.

It has not been merely an oversight. Staying away from Costco has been a willful act of omission. After hearing so many friends joke about how much more money they spent at Costco than they intended, I figured I simply didn't need that kind of temptation. I can get everything I need at the places I go now, I reasoned, and there are already enough stores where I spend more than I plan. To put it simply, I was afraid to go.

Finally, though, for the sake of professional development, I relented and made my maiden Costco voyage the Friday before Memorial Day at Pentagon City (there are at least 10 other stores in the area, sprinkled around the outer suburbs in Maryland and Virginia). It didn't take long to see that the chain does many things well. With sales last year of $42 billion and profit of $721 million, it just wouldn't be the monster competitor that it is if it didn't have incredible financial discipline and first-rate distribution systems.

But the abandonment of restraint on the part of its members and their almost cultlike enthusiasm are also carefully orchestrated, and clearly form the foundation of the Costco strategy.

"We kind of count on it," John Rohr, manager of the Costco store in Pentagon City, said of the frenzy. "We create it -- the buying staff does, in bringing in those kinds of items where you come in to buy some food items and there's the irresistible temptation of everything on the other side of the building. The buyers call them spice items."

Spice items are not necessarily cheap. The day I was there, items that were rapidly selling out included, Rohr told me, a newly arrived Chateau Cheval-Blanc Bordeaux for $229.99 a bottle, gone in a matter of hours. Also snatched in one day were all five LCD flat-screen jumbo televisions the store received that morning, for $3,199 apiece.

Were these treasures bought by shoppers who were actually out looking for a flat-screen television, or had they just come in for a jumbo bag of Boca Burgers and gotten distracted?

"I think they were the Boca Burger people, because nobody knew [the sets] were coming in and they sold right away," Rohr said. "Very little decision-making went on with these folks."

Overspending at Costco is something shoppers seem almost proud of -- or at least happy to laugh about. And that shows the power that a good bargain has in our culture. It's okay to buy it if it's a good deal.

Costco's markups are indeed tiny. Its profit margins are among the lowest of any retailer. Because about 60 percent of the chain's profits come from annual membership fees, it can afford to sell merchandise for just slightly above cost, thereby generating excitement and loyalty.