You can't talk about Costco for too long without inevitably discussing hot dogs.
The clubhouse retailer introduced its hot dog and soda $1.50 combo deal in 1985 and it continues to offer it today. Reportedly, leadership insisted on maintaining the price even after finding out that the company was losing money on the offer. According to lore about the company, the tussle ended with co-founder Jim Sinegal saying: "If you raise the effing hot dog [price], I will kill you. Figure it out." That story came out in 2018 but had a renaissance on social media this year as people discussed the enduring legacy of a company that decided to dig in deep to get the details right.
The story is a fun anecdote, but it also serves as a metaphor for the warehouse club retailer itself: Costco is the retailer that decides on a direction and steadily perseveres. As trends come and go, even when other retailers spend energy chasing each other in attempts to gain market share, Costco has dug deep and stayed the course.
The club retailer played an important role in many Americans' lives this year, as consumers found themselves in the middle of a pandemic without much go-forward instruction from the government. People were suddenly living a majority of their lives from home, which included increased demand for grocery and household items, and general products to help ease into a life primarily conducted indoors.
The retailer responded to an uncertain situation with measured responses. By early May, the company said all members and employees in its warehouses were required to wear masks or face coverings. Early in the pandemic, the retailer also set special shopping hours for older members and vulnerable communities and temporarily placed limits on the number of guests entering the warehouse per membership card. Costco also halted one of its most recognizable perks — food sampling — in order to cut back on potential health risks.
Even with its warehouses full of high-demand household and grocery products, and consumers stockpiling their pantries, Costco still felt the impacts of the pandemic. In early March, the company warned that its supply chain had hit snags, resulting in daily out-of-stocks due to increased demand and sourcing from China. At the time, CFO Richard Galanti said that the company was "working, in some cases, around the clock to procure supplies for both existing suppliers and from other sources where possible," to keep up with demand. The retailer put limits on the number of products individual shoppers could purchase and shifted SKUs to "alternative items and categories."
Then the retailer announced its first monthly growth decline in over a decade. April sales dropped 1.8% from the previous year to $11.39 billion, while same-store sales in the U.S. declined 3.3%. "Stay-at-home orders, social distancing restrictions and some mandatory closures led to decreased traffic and sales in our warehouses," the company said in a press release at the time.
But, that's the thing about Costco. The company may be down, but it's never out. By the end of the summer, foot traffic was back up at the retailer, according to Placer.ai. "Costco shoppers didn't just keep coming, they found new times to come. This demonstrated a willingness by customers to adjust their schedules and patterns just to fit the brand in," the company said of the retailer's late-summer data.
By the fourth quarter, the retailer had not only steadied itself, but strengthened its position. It posted a 13.6% increase in same-store sales (excluding fuel) during Q4, beating out Wall Street's estimates. Net sales for the year reached over $163 billion, a 9.2% increase. The club retailer specifically leveraged its fresh foods category, where it all but eliminated shrink.
"We don't have spoilage, we sell out. Not literally, but almost literally to the piece … so you're not throwing stuff away," Galanti said on a call to analysts.
The thing that may be most telling about the retailer's operations has to do with its loyal customer base — because people who love Costco, really love Costco. In 2019, the company said its membership renewal rate was up globally to 88.4%. This September, the company said that its fourth-quarter membership fee income was over a billion dollars, up $56 million from the fourth quarter a year ago.
And, while the pandemic is pushing the rest of the industry to ramp up buy online, pick up in-store offerings, Costco is hesitant to fling itself into that distribution channel. "We continue to look at what others do, we continue to scratch our head a little bit," said Galanti. "It's not that we'll never do it, but it's not on the agenda," he said on the retailer's fourth-quarter earnings call.
Instead, the retailer will slowly and steadily continue to do the things that it's great at, including building customer loyalty, improving its supply chain and giving consumers a sense of security as they try to provide for themselves and their families in the middle of a pandemic.
Contact Kaarin Vembar at [email protected]