 |
Retail Profiles |
|
|
Page 1 of 5 |
|
|
| October 10th 2007 |
|
| Costco: The high quality, mass market retailer |
by Kevin McCallum
Because of the complex structure of the US market, no one American retailer dominates off-trade wine sales the way Tesco does in the UK. But that hasn't stopped Costco from becoming the world's largest fine wine merchant, even though it's a bargain retailer.
|
|
|
It is the largest retailer of wine in the fastest growing wine market in the world, yet most people outside the United States have never heard of Costco Wholesale Corp. After all, a chain of no-frills warehouse stores is never going to generate the kind of international buzz that luxury retailers like Harrods or Saks 5th Avenue can. Its $50 annual membership fee and locations in suburban areas where tourists rarely tread don't exactly help raise the company's international profile, either.
Yet Costco has quickly and quietly become a name that many winemakers and retailers from Alsace to Australia, Santa Barbara to Santiago, can ill afford to ignore. With 510 warehouses in seven countries, 30 new stores opening this year alone, and nearly 50m loyal shoppers who bought $80m (€580m) of wine last year, Costco has become a key partner for those wineries looking to selling significant volumes of wine in North America.
"If you're a winery producing 100,000 or 200,000 cases or more and you're not looking at Costco as one of your major outlets, you're going to struggle," says George Rose, spokesman for Kendall-Jackson winery in Santa Rosa, which produces about five million cases of wine annually.
It wasn't that long ago that wineries debated whether they should allow their wines to be sold at Costco at all. The company's famously low markups of no more than 14%, and commodity atmosphere were often shunned by wine brands trying to cultivate an image of exclusivity.
Many ultra-premium wineries still won't sell to Costco because they either don't need to, don't produce large enough volumes, or want to avoid angering the small fine wine merchants and high-end restaurants that sell their wines at far higher prices. "You don't want to upset the accounts that got you into the dance in the first place," says David Fischer, director of sales and marketing at Ramey Wine Cellars in Healdsburg, which does not sell to Costco. But increasingly, the debate in the wine business has shifted from whether to sell wines through Costco, to whether wineries can survive without selling there.
"Costco is doing a better job of selling high-quality products and well-known brands to the consumers that (wine companies) are trying to reach, and there are a lot of Costcos," says Vic Motto, a veteran wine industry consultant who heads the Napa Valley-based investment banking firm Global Wine Partners. "So, it represents a very important account for a producer."
Famously frugal
Costco Wholesale Corporation began in 1976, under the name PriceClub, in a converted airplane hangar in San Diego. Its original goal was to help small businesses come together to save money on things like office supplies. But all that changed when the company opened its doors to select non-business members as a way to increase buying power. Jim Sinegal, Costco's famously |
|
|
|
|
|
|
|
|
Retail Profiles |
|
|
Page 2 of 5 |
|
|
frugal CEO, helped found Costco in Seattle in 1983. The two companies merged in 1993, and today there are a total of 510 warehouses in seven countries: 377 in the US, 71 in Canada, 31 in Mexico, 19 in the United Kingdom, and five each in Korea and Japan, and four in Taiwan. From the company's headquarters in Issaquah, Washington, a small city nestled between Seattle and western slope of the Cascade Mountains, Sinegal has grown Costco into the world's largest membership warehouse chain, with 49.6m card-carrying members spending $60 billion in fiscal year 2006. For the most part, the warehouses have kept their original airplane hangar aesthetic. Shoppers push super-sized carts across concrete floors and down wide aisles where industrial-sized metal racks hold shipping pallets filled with everything from 100-packs of diapers to 2-gallon jugs of pickles.
Few shoppers pop into Costco for a loaf of bread or bottle of wine on their way home from work. Most head there to stock up on brand-name products at deeply discounted prices. Costco's average check-out was
$109 (€78.50) in 2005, the highest of any of its big-box competitors, and twice that of Wal-Mart, according to industry analysts. There are several reasons for this. The most obvious is that Costco encourages bulk purchases. You can't buy a jar of pasta sauce at Costco. Instead, you buy a three-pack. You might not have gone into the store looking for a 5-litre jug of extra virgin olive oil, but who can pass it up for a mere $22 (€16)?
The trade off for the consumers is that Costco carries far few items that other big box retailers — about 4,000 items, compared to more than 100,000 at a Wal-Mart supercentre. Average checkouts also soar because Costco sells some expensive things. Just around the corner from the $6 T-shirts in the Santa Rosa, California store recently were a $5,000 hot tub, $2,800 flat screen television, $1,000 leather couch, and $340 video iPod. But perhaps the most significant reason shoppers spend more at Costco is because they have more to spend. The average household income of its members is around $74,000 (€54,000) annually, with 31% earning over $100,000, according to the company. Nationwide, the average household makes closer to $47,000 with just 15.7% earning over $100,000. A higher percentage of Costco members own their own homes (91%) and have college degrees (44%) than the national average, as well. These demographics reflect one of the keys to Costco's success — its recognition that even affluent people love a bargain.
The world's biggest fine wine merchant
This guiding principle has proven particularly successful for Costco's wine department. In the early years, the company had some trouble getting top-name wines into their stores, according to Motto. Some wineries were concerned that being in a deep-discount store could hurt their image. There are even stories about wineries going to great lengths to keep their wines out of |
|
|
|
|
|
|
|
|
Retail Profiles |
|
|
Page 3 of 5 |
|
|
Costco. But that changed when Costco started selling the one wine brand that more Americans associate with luxury than any other.
"One of the breakthroughs for Costco was when they started selling Dom Pérignon," says Motto. "That caused other wineries to say, 'If they can sell Dom Pérignon, then who am I to complain?'"
By the mid 1980s, Costco was the top seller of wine in California, and by 2002 it had became the top wine retailer in the country, passing $600m in sales. Today it is the biggest seller of classified-growth French wines in country, including names like Chateaux Margaux and Chateau Mouton Rothschild. It sells more Don Pérignon than any retailer in the country, moving 125,000 bottles of the bubbly in 2006, according to Annette Alvarez-Peters, the head of alcohol buying for the company.
A French wine is also one of priciest products currently offered on the company's web site — a 12-bottle collection of Chateau d'Yquem selling for $5,000. (Which is a bargain compared to the highest priced item currently on the site, a $90,000, 78-carat diamond necklace.) Selling some of the world's most prestigious wines has helped Costco achieve several goals. It has helped pull in sophisticated wine buyers who might not otherwise shop at Costco. It has elevated the company's image in the minds of consumers generally and wine drinkers in particular. And it has helped other wineries stomach the low markups because they feel they are in good company.
"People in the wine industry kind of look down their noses at selling wine at Costco, but we like being tucked between Dom Pérignon and Opus One," says Rose of Kendall-Jackson.
Customers seem to like it, too. Costco won't divulge exact volumes, but Kendall-Jackson wines are consistently top sellers. Of the four best selling wines over $10.99 per 750ml bottle, two are from the Kendall-Jackson family; La Crema Chardonnay is number one and Kendall-Jackson Grand Reserve Chardonnay is number three. Number two is an Italian Pinot Grigio by Santa Margherita and number four a Napa Cabernet by Beaulieu Vineyards. The winery did well in the under $10.99 category, as well, where its Vintners Reserve Chardonnay is the top seller, followed by Robert Mondavi's Woodbridge Chardonnay 1.5L, Yellow Tail Shiraz 1.5L, and Clos Du Bois Chardonnay for 750ml.
Overall, about 60% of the wine Costco sells is from the US, while 40% is imported, in terms of revenue. Of the imports, the top three nations are France, Italy, and Australia. About 45% of its business falls under $10.99, according to Alvarez-Peters. Costco employs eight regional wine buyers who decide on the mix of wines in their stores, and work hard to tailor those selections to their local communities, Alvarez-Peters said. That means that a Costco in Oregon will have a radically different selection of wine from one in Texas, she added.
Local wines were on the mind of |
|
|
|
|
|
|
|
|
Retail Profiles |
|
|
Page 4 of 5 |
|
|
San Francisco advertising executive Ian Young, 27, when he headed to the Santa Rosa store in Sonoma County recently. Young bought six red wines: four Sonoma County Cabernets, a blend from Napa, and an Australian Shiraz. Most were priced between $12 (€8.80) and $20 (€14.68) each. Though he wasn't sure exactly sure what the prices for those wines would be at other retailers, Young said he was confident he was getting the best possible deal.
"Costco's pretty much got the reputation for having the lowest prices," he said.
Young's trust in Costco also extended to the quality of the wines. While he didn't expect a guaranteed winner every time, Young said he felt Costco was very choosy with the wines that it offered. That trust caused him on impulse to try a wine he had never heard of before, a 2005 Kangarilla Road Shiraz from Australian's MacLaren Vale for $15 (€11). That trust didn't come overnight. Costco has worked extremely hard to convince consumers the company is committed to keeping prices on high-quality goods as low as possible.
Sinegal, the company's flinty 70-year-old CEO, accepts a relatively low salary for the head of a Fortune 500 company. Last year it was $350,000 (€257,000), plus bonuses and stock options. The company also doesn't advertise, or employ sales people or spend much on in-store displays, except for the folks in hairnets handing out samples. But the company hasn't skimped on its employees, paying an average salary of $17 (€12.48) per hour plus benefits, when its rivals pay half that.
Sinegal is also not afraid to tangle with people, or systems, he thinks are inflating the prices of products. He has taken his home state to court over the web of alcohol control laws Costco says unfairly restricts free trade. "Costco seeks to create lower prices and greater choice for Washington consumers and reform an inefficient and unlawful system that permits distributors to benefit at the expense of consumers and certain wineries and breweries," the company argued in court papers.
What the company wants to do is cut out the middle man and bypass the three-tiered system that forces it to work with distributors instead of directly with out-of-state producers, like California wineries. Such laws, enacted by individual states after Prohibition to control alcohol sales, are a good part of the reason Costco isn't an even more dominant player in the retail alcohol industry. Many of the other states have laws that either restrict the kinds of other products an alcohol retailer can sell, or ban private companies from selling alcohol outright in favor of a state-run system. What this means, as Motto notes, is that as important a wine retailer as Costco is, the company doesn't come anywhere the kind of dominance that a Tesco, has on the UK market. "Costco is a giant among pygmies," he quips.
Nevertheless, whatever the outcome of Costco's efforts |
|
|
|
|
|
|
|
|
Retail Profiles |
|
|
Page 5 of 5 |
|
|
against such laws, Sinegal will again have made his point – Costco cares about getting the best values for its customers. Another key way they try to save customers money is with private labels, offering its Kirkland Signature brands at a significant discount to similar products. Interestingly, however, that trust in Costco could not convince Young to try Costco's own private label wine. He hovered over the $20 bottle of 2005 Kirkland Signature red wine sourced from Chateauneuf-du-Pape.
Despite a new label that used the same archaic typeface used by established wineries in the region, Young couldn't quite add Costco's offering to his basket. He couldn't really say why. Motto thinks he knows why.
Buyers own brands
While private label brands are an important component of some wine retailers' strategies, Kirkland Signature may have a tough time competing with traditional producers. Wine is still an experience for most people, an affordable luxury that allows them to explore winemaking styles and regions from around the world. Motto argues that people still want to feel like they are taking that trip with the producer, not with the retailer. Image and authenticity may not be important to the buyer of paper towels, but it is to fine wine drinkers.
"I take the label off the roll of Kirkland paper towels," says Motto. "But I'm not going to bring you a bottle of Kirkland wine when I come to your house for dinner. It's not going to happen."
Alvarez-Peters says she wishes Young had given the Kirkland wines a try. She and her team travel the world visiting the premiere wine regions of the world learning about the wines and looking for value for customers, she said. Kirkland Signature wines and spirits (which include a vodka introduced in 2006) are expected to sell 130,000 nine litre cases in 2006, she said. The new labels that mimic other wines from those regions are an effort on the part of Costco to call attention to the sourcing of the wines. "We're trying to take the Kirkland Signature to a new level," she says. "I think our members expect quality whenever we put our names on it, whatever it is."
|
|
|
|
|
|
|
|
|
