Costco’s Ability to Attract Loyal Shoppers Is Beating the Competition
It’s a retail axiom: The Internet has made it vastly easier for shoppers to hunt for the latest deal—and a lot more challenging for brick-and-mortar retailers to command loyalty. But Costco, which operates hundreds of members-only warehouses, has managed to defy the trend—with only 3% of its retail sales stemming from e-commerce. In fact, it outclasses other retailers when it comes to consistently increasing sales from its millions of faithful shoppers.
According to chief financial officer Richard Galanti, Costco’s (COST) goal has been to boost sales while cutting long-term costs (by trimming freight expenses, scaling its merchandise, negotiating prices with vendors, and reducing packaging) so that it can pass those savings along to members. “Our rule of thumb is to give 80% to 90% back to the customer,” Galanti says. Those efforts have paid off, with memberships reaching an all-time high of 81 million members in 2015.
Those dedicated shoppers have helped put Costco at No. 16 on Fortune’s list of the World’s Most Admired Top 50 All-Stars, and it is currently ranked No. 1 among specialty retailers.
For the past six consecutive years, same-store sales have steadily increased, helping revenues leap from $76 billion to $114 billion.
Below, three ways Costco has kept its edge.
Building a Fan Base
Renewals of Costco’s $55 annual memberships stand at an impressive 91%—a record high. According to analysts, the low price of memberships and a steady return of loyal members is what sets it apart from big-box and department store retailers, which continue to fight for market-share gains in a changing landscape of increased competition from online retailers, led by Amazon (AMZN).
“Costco’s ability to consistently drive increases in traffic is a key differentiator,” explains Baird Equity Research analyst Peter Benedict.
While Walmart (WMT) and Target (TGT) only recently began increasing wages, Costco has been an industry leader for years. With starting hourly pay at about $11.50 and a company average of $22 per hour, Costco’s compensation trounces the competition. CEO Craig Jelinek says it can be more profitable in the long run by keeping turnover low and capitalizing on employee productivity.
Ditching American Express for Visa
In early 2016, Costco will hand over its credit card program to Visa (V), ending a long-running relationship with American Express. Though the company is pretty tight-lipped about the decision, analysts say the change will result in lower costs for Costco and its cardholders— another way the company is helping customers save money. The change isn’t expected to make a huge impact on memberships, but Telsey Advisory Group predicts a membership fee hike could occur in late 2016 or in 2017.
A version of this article appears in the December 15, 2015 issue of Fortune with the headline “Dancing in the Aisles.”