HOWARD TULLMAN JOINS LISA DENT ON WGN RADIO TO DISCUSS COSTCO AND HIS INC. MAGAZINE ARTICLE

 LISTEN TO THE SHOW HERE

LISTEN TO THE SHOW HERE

NEW INC. MAGAZINE COLUMN FROM HOWARD TULLMAN

 

Costco Has a Way With Words at “Costco Next.” 

And that’s a bit concerning. One of America’s absolute best retailers risks its rep by giving members “access” to outside sellers. 

EXPERT OPINION BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS @HOWARDTULLMAN1

MAR 25, 2025

Costco may have a bigger admirer than me, but I doubt it. They’re masters of shopping psychology – creating desire, ease of access, and a sense of urgency in every visit. They’re right up there with architect Victor Gruen, whose pioneering design work with shopping malls led to the idea of open-front stores with no barriers to browsing.

Of course, given the recent upsurge in smash-and-grab professional flash mobs and store ransacking by roving gangs of urban teens “just having a good time” according to Chicago’s Mayor Brandon Johnson, we’re seeing more doors, guards, cages, and locked display cases in retailers. But, interestingly enough, not at Costco. Maybe because 18 of anything is a little tough to stuff in your pocket or your girlfriend’s backpack while you’re fleeing the premises. 

Costco’s ability to transform shopping with your spouse from a chore into an exciting experience and a challenge is one of the great triumphs in retail. Not only are the giant TV screens and new technology the very first things you always see week-in and week-out as you roll in, but throughout the store there’s a visceral sense that, if you see something special on an end cap or other display, you better buy it today because it’s likely to be gone forever if you don’t.

In a store literally stacked with product to the rafters, Costco’s merchants can still create a sense of scarcity and immediacy that is palpable. This has quickly become learned behavior – grab the merch before it’s gone.  

How to sell Christmas trees in August

It’s not quite like the blouse-ripping craziness of Filene’s basement in the pre-internet days, or the shopping cart spree races we see annually on Black Friday when the hottest new holiday item becomes available. But there’s simply no other way to explain why sane shoppers would be stocking up on Santa inflatables and artificial Christmas trees in the middle of August. If you ask them, to a person, they’ll tell you that they lost out last year because they didn’t move quickly enough once whatever they “needed” went on sale. Besides that, who can pass up a hot dog for a buck fifty (since 1985) or a 3-lb. roast chicken that’s been priced at $4.99 since 2009. Such a deal. Bird flu be damned.

So, I was excited to read about their latest digital innovation, Costco Next, which is described as a virtual mall experience for members. They get to see upscale brands and other products that are not usually found in the warehouse stores, and at attractive and allegedly unique prices the company has negotiated for members. I thought, for a moment, that after more than 20 years of waiting, someone (other than Meta) had cracked the code and created a workable version of Second Life, where you could actually navigate and fly through a virtual mall, inspecting and selecting, but without the tech glitches– the ones where you’d end up stuck in the middle of some object with no way out.

Costco Next opens the door to outside vendors

But alas, Costco Next is just another glorified gateway to about 90 other suppliers’ websites. Not all that different than something Amazon has been doing for years with programs like Support Small, which promotes products and services from thousands of small and medium-sized independent sellers. While it’s true that Costco Next provides a channel and access to large items, seasonal items and other products that wouldn’t work year-round in the big stores, it’s actually a curious step or two backwards in a world where everyone wants everything to be one-stop shopping.

Every transaction initiated on any of the pass-through websites is a standalone deal – separate payment, varying return policies, and shipping handled by the third-party vendor as well. Whether you select a casket or a couch, all of the risks and burdens of the purchase are on you. While Costco says it curates the items being offered, that’s not much assurance if all of the risks are on you as the purchaser.

Pulling people in using the Costco branding and good will and then shipping them off to dozens of outside sellers seems a little “bait and switchy” to me. And, while Amazon makes no representations about the relative prices of the products sold by third parties on its site, it’s pretty clear from the Costco pitch that users are said to be getting discounts even for products appearing on the same seller’s own online website.

The risks of getting Costco-ized

But the deal actually gets a little worse if you read the fine print and descriptive language. While there are several oblique references to value and unique pricing, the most important part of the description of the new process is the statement that the goods and services will not only have been curated, but also “Costco-ized” as well.

Offhandedly, this might mean nothing more than that instead of a box containing a dozen pieces of a given product, it might be upsized (and up priced) to contain 18 of them. This seems fairly straightforward and it’s certainly nothing new to anyone who has ever shopped Costco and wondered how long it will take you to consume two gallons of olive oil or a bag of chips slightly larger than a sack of grass seed. Shrinkflation is rarely a concern.

Things get a little dicier when you take a closer look at what Costco-ized sometimes means to buyers and would be vendors. A few years ago, one of our portfolio companies created several food products that tasted great and were actually healthy as well. Eventually they approached Costco and were offered an opportunity to create a version for the stores.

But, as a cost saving strategy, it was suggested that they use margarine instead of butter and also change a couple of other ingredients. Of course, and notwithstanding how attractive the sales prospects might have been, they said “no” because they believed that those items would no longer be “their” products regardless of how they were labelled.

How often this happens, and frankly whether consumers could even tell or taste the difference, it was a warning sign that I recalled when the Costco Next materials highlighted that the items being offered were curated and selected by Costco buyers. I worry that far too much emphasis at these stores is placed on price, which is what you pay for something, while value is what you get. There’s no right price for the wrong product.  

 

HOWARD TULLMAN JOINS LISA DENT ON WGN RADIO TO DISCUSS BRAND ISSUES

LISTEN TO THE SHOW HERE 

LISTEN TO THE SHOW HERE

NEW INC. MAGAZINE COLUMN FROM HOWARD TULLMAN

 

You Need to Reimagine How You Market Your Brand

Some of the big names in consumer products are losing share because they can no longer demonstrate that they deserve a price premium. Make sure you're doing the right things to communicate your product's value.

 

BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS@HOWARDTULLMAN1

 

Brands just aren't bringing it and getting the job done any longer. They used to represent a shorthand promise based on the simple premise that you could have basic confidence that you were getting more value for your spend even if you paid a premium for the privilege. That could be in the form of quality, durability, safety, ingredients or efficacy -- but we all believed for decades that something made a brand worth the additional investment. Brands were also an efficient way to address decision fatigue given the virtually unlimited shopping and product choices on the web today.

But now it seems that only those people (entertainers, influencers, gangbangers) who are utterly indifferent to price are still spending and sporting the top few big-name brands for reasons having much more to do with reputation, endorsement payouts and bragging rights than with any connection to reality. The world's wearing Apple watches these days while the jocks and party people are still sporting their diamond-encrusted Rolexes. We're never going to entirely eliminate the ancillary messaging and emotional considerations that accompany upscale brands that have little or nothing to do with function or features, but the days of blindly buying a premium brand for practical, prudent, and economic reasons are long gone for most products.

When you read investigative articles that suggest the private label brands at Costco or Walmart are being manufactured on the sly by the same makers of the branded goods, it's more than unsettling - it's a wake-up call. People aren't panting any more to pay up for products that are functionally indistinguishable from the private labels and even generics, which are being increasingly pushed by the large retail chains. We're seeing this all over the place, but especially with respect to the multi-billion-dollar marketplace for over-the-counter medications. 

Millions of consumers don't believe in much of anything these days, and the MAGAts only believe Trump, largely due to his eight-year assault on the truth. Brand names are just one important casualty. The Trumpist war on truth and medicine throughout the pandemic--which cost them tens of thousands of dead Red voters -- has really diminished consumer confidence in doctors and drugs in general. Drugs aren't the whole story, but they're a great early indicator of consumer brand behavior. As more and more products become confusingly similar and make identical claims regarding effectiveness, price rather than brand drives the decision bus.

There are several explanations for these new customer attitudes toward OTC medications that will eventually impact the future viability of every major brand. The players who react and adapt to the new environment and change their brand messaging, product offerings and customer interactions will survive and grow; those who choose to rest on their laurels and past performance will ride their brands right into the ground. Kraft Heinz's lousy results, even with higher prices, meant a newly-announced CEO. There's still time now - although Big Pharma doesn't seem to get the picture - and soon there will be plenty of blame for the losers and also-rans to spread around.

You could put part of the blame on the pharma companies themselves for clear and repeated price gouging, which the side-by-side comparative displays at Walgreens or CVS make abundantly clear to even the most obtuse observer. Wanna spend three bucks more for a bottle of Bayer aspirin or a tube of Neosporin for absolutely no good reason? Be my guest.

Of course, now that Walgreens has decided in its newest urban stores to hide virtually everything in closed cages or back-of-house, and to use kiosks and clerks to fill orders, maybe these awkward comparisons, which actually helped to educate the consumer, will disappear. That would be unfortunate but at least it won't kill the instant, internet-enabled, comparison pricing for virtually anything that's going on in every store. This smartphone-based smart shopping certainly hasn't made life any easier for the big brands.

Whatever your budget constraints may be, no one wants to look foolish or feel that they're being gouged. Mark Cuban's amazing new initiative - Cost Plus Drugs continues to gain traction and Amazon is jumping aggressively into the pharmacy business as well, which will clearly help drive drug prices down. It's no accident that Blue Shield California has announced plans to work with Amazon, Cuban and CVS on a new distribution system. President Biden's action in locking down the price of insulin for millions of patients is another amazing step forward.

You could say that the panache of pharma brands has been hard to polish and promote when there's so much noise in traditional broadcast channels, where every other ad is for some disease like TED, RVS or AMD that no one's ever heard of. These voluminous ads are clearly targeted to the few ancient and infirm people still watching the tube.  Ever since the success of the "purple pill" promotion, you no longer see the long-recognizable corporate names in their TV ads. The message is all about some made-up catchy name extracted by an overpaid ad agency from the drug's technical designation. Doctors now constantly complain that their patients no longer want diagnoses, they just want the pill with the cute name or the one that makes the fat go away.

And while cable subscriptions are largely a function of consumer inertia, the streamers are spending millions to try to move subscribers upstream to more expensive, ad-free tiers. They're telling the whole world that ads are worthless interruptions and an utter waste of time. In many ways, the bipolar ad industry is eating its own lunch and making its future prospects even more uncertain.

The clear implication in all this anti-ad messaging is that only morons and the poor have to suffer through dozens of ads every day in order to watch reruns, repetitive ad flights, and pitches for old people. Someone recently said that - given the average age of its audience - CBS now stands for "Could Be Sleeping."  And that it's really no harm, no foul if you should happen to nod off because in the online, all the time, connected world there's really nothing new about the nightly news. 

The message being sent to new generations of prospective viewers (and, obviously, consumers) is that all of the ads on traditional broadcast channels, cable stations, and even on much of the new and inexpensive offerings by the streamers are worthless wastes of their time and attention. As we enter the 2024 election ad cycle and suffer through the noise and clutter and the indiscriminate spray-and-pray ugliness, the situation will only worsen for the next 14 months, along with the ability of even the biggest brands to break through.

The bottom line for every business is that - while building and sustaining your brand will be important and challenging - it's even more critical to give your customers (past, present, and prospective) concrete reasons to continue to purchase, use and support your products and services.

Two key things to keep in mind:

(1)    Your team members will be essential to this process because people increasingly will be more likely to trust your employees, their interactions with them, and their suggestions and recommendations than anything else. Successful sales will always be a people business.  

(2)    Businesses and their brands in the future are going to have to have and successfully communicate to the world a purpose beyond profit in order to connect to tomorrow's consumers.