Editorial: Why Costco succeeds where others flail

This week, a Costco store on Chicago’s North Side ran out of regular gas. Not entirely surprising, given the lines that routinely form at the warehouse store’s pumps. Any other gas station would simply have put up a “go away” sign and taped over the regular pump option. But Costco made a different decision. Premium gasoline was promptly reduced to the $3.99 price of regular, saving the warehouse store’s members a bundle, given that premium was well over $5 a gallon anywhere else in town.

That is just one customer-friendly decision that explains the massive crowds that rush into Costco, especially on weekends. There’s also a liberal return policy — one that we put to the test recently with a sketchy external phone battery — that requires neither the packaging nor the receipt. As long as Costco can see the purchase on your card, it returns your money, even from months ago. The only other store we remember focusing so intensely on the customer experience was Nordstrom, which would do anything for those shopping there, back in the day, before department stores and mall shopping took a dive.

We hardly need to note how rare this kind of customer-first attitude is these days. And it surely partly explains Costco’s phenomenal success. On Wednesday, Costco reported net sales of an eye-popping $19.8 billion for the retail “month” of April, the four weeks that ended May 5, showing an increase of 7.1% from last year. Net sales for the first 35 weeks of the year, the store also announced, were $166.44 billion, an increase of 7% from last year. Costco stock has been a stunner of a success story — it’s up more than 700% over the last decade and close to 20% this trading year alone — leading to stories of some ordinary retirees from the warehouse floor exiting into their golden years with hundreds of thousands of dollars worth of stock, bought through employee stock purchase programs over the years.

Costco knows how to generate excitement, not least when it started selling gold bars, which quickly sold out. But the secret sauce here is the $60 to $120 membership fee, the annual fees from which reportedly generate around 70% of the retailer’s profit and also create a sunk cost that motivates shoppers to return. This allows Costco to hold down prices, as does its huge volume of sales, giving it huge leverage with suppliers.

None of this would work, though, if people did not feel like the store treated them well. As it invariably does — unless you cannot deal with crowds.

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