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.
"The prices are more than 15 percent cheaper in almost everything they sell, relative to a retail store," said Daniel Barry, senior retail analyst for Merrill Lynch. "So when you walk in there the prices look so compelling that you sort of have to buy it."
And Costco not only does a great job of offering consistently low prices -- which the company calls "pricing authority" -- it also sends that value message in every way: the bare-bones decor, the long lines, the lack of shopping bags and the massive packages. Those big packs are so essential to the feel of the place that the company frequently asks manufacturers to make larger packages to conform to Costco specifications.
"Even the inconvenience is almost like a kind of reverse psychology. . . . It makes you feel like you really are getting something special," said Miriam Tatzel, a social psychology professor at Empire State College in New York. "If you're getting the boutique treatment, then you must be paying too much."
In such an environment, she said, shoppers give themselves "permission" to let go of their spending inhibitions because they feel like they're being so price conscious just by being in a Costco.
Which is why several colleagues and friends, when I mentioned my impending introduction to Costco, had regaled me with their stories of excess. So, too, did a number of securities analysts, who seamlessly transitioned from analysis of Costco's numbers to rueful histories of their own spending indiscretions.
When analyst Gary Balter of the New York investment firm UBS, for example, brings home Costco's big packs of Caesar salad, he says, his wife makes him eat it for days until it's all gone. When he called her from Costco because he'd found a fantastic swing set "with a treehouse and a slide" for only $999, she didn't see why the family needed it. "Because it's better than the one we have," he implored.
"My wife takes back anything like that I buy," he said, though he does own up to having bought things at Costco "that I'm sure I've never used." Still, he feels no guilt.
"No, because I'm sure I saved money when I bought it," he said.
But don't be fooled by the cheap prices and warehouse feel. Costco has skillful merchants buying for its stores, hitting just the right mix of necessity and extravagance. When Costco began expanding its selection of fresh produce, it quickly became known in the industry for having some of the highest-quality, freshest fruits and vegetables available. Its depot in New Jersey is strictly a cross-docking operation, explained store manager Rohr, so nothing sits in a warehouse getting stale or soft.
There are plenty of other low-cost retail chains, but even Sam's Club, for all its Wal-Mart-style discipline and value prices, doesn't generate the giddiness that Costco does.
And that reaction is critical to the chain. If people weren't so excited, they'd realize that Pampers are, in fact, sometimes cheaper when they're on sale at Safeway. And they'd recognize that all those things they buy that they didn't mean to are, on one level, cutting into their savings.
But it doesn't matter. It feels like a bargain.
I, for one, think I did pretty well on my first outing, going in with a budget of $100 and coming out having spent only $167 -- not including the $45 membership fee. What I'm not going to tell you, however, is how much I spent when I went back on Sunday.
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