A look at what's behind Costco’s strong growth and this club’s cache

Costco’s growth in Canada has been the envy of other grocers.  Its sales grew from $8.7 billion in 2007 to more than $15 billion in 2012, representing a 12% compound annual growth rate (CAGR).

Comparatively, Loblaw, Sobeys, and Metro each recorded a CAGR of less than 3% during that period.

This solid growth is expected to continue over the next five years. Kantar Retail forecasts Costco Canada’s sales will reach $21 billion by the end of 2017. This is supported by club expansion, as the retailer is expanding its base by 3.7% to reach 85 locations this year.  Looking ahead, they have indicated plans to reach up to 110 clubs nationwide.

Despite this pipeline, its shopper reach is already impressive at more than nine million Canadian members.  Moreover, a national survey by TNS Canada found that 27% of Canadians reported that they “regularly shop” at Costco for groceries and consumables.

This club is clearly popular.

To better understand what’s driving Costco’s appeal, both in Canada and abroad, I interviewed Kantar Retail’s clubs channel expert, Sara AlTukhaim.  She explained that the club’s position is driven by much more than simply the value proposition of its big packs, though that certainly helps. To abridge what could easily turn into a deep conversation, below outlines some key points of Costco’s unique position:

Edited brands, strong private label – Offering a limited assortment of roughly 3,500 SKUs, the retailer’s assortment simplifies the experience while promising quality national and control brands.

Localized offering – Costco’s regional buying structure helps its merchants select the right items for the area, adding its ability to curate the assortment for its members.

Rotational, treasure-hunt mindset – Frequently changing the offering, while encouraging a sense of discovery via unique general merchandise and a lack of navigational signage, creates a distinct sense of excitement while shopping the box. This also creates the impression that the club has more items.

Quality fresh proposition – Costco is recognized as having a strong fresh grocery proposition, particularly in meats. For instance, an April 2013 TNS Canada survey found that 81% of Costco’s shoppers were satisfied with the quality of fresh items at Costco, whereas only 70% of Superstore’s shoppers felt satisfied with the Superstore’s fresh offering.

Favourable word of mouth – Instead of depending on traditional marketing techniques, Costco’s avid members are renowned for sharing their experiences and finds with their networks, furthering a sense of “in-the-know” exclusiveness around those connected to the club. This reach has only grown stronger with the proliferation of social media platforms.

For suppliers looking to grow with Costco, AlTukhaim also stressed the importance of understanding its distinct operational model to really align with its leadership’s motives.

Despite the simplicity of its model, its uniqueness poses one of the biggest hurdles to selling Costco: The internal sell.