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.
