Independents Face A New Goliath In Costco

Recently my wife and I had the frightening experience of visiting a newly opened Costco warehouse club outlet in our neighborhood.

I say "frightening" because what we saw was a serious threat to the existence of every independent consumer electronics and major appliance distributor and dealer in the nation.

In the opinion of this observer, those who fail to adjust their merchandising practices to this latest version of superstore and Price Club competition are surely doomed.

This is not to advise readers to emulate Costco merchandising practices. Instead, it is intended to show dealers the type of competition they are facing, so that they can plan accordingly.

Despite its heavy-traffic location, and interior facilities ranging from clean washrooms to a fast food restaurant counter, to refer to Costco as a "store" would be a misnomer.

The facility, at least one football field in size, is, more accurately speaking, a wholesale warehouse, with floor-to-ceiling stacks of merchandise to which retail consumers have access without any assistance from on-the-floor sales help.

In fact, before shoppers can buy, they must pay a membership fee of $45 annually. (The fee for business owners — those who buy merchandise for resale — is $100, with many entrepreneurs lined up at the "Sign On" counter.)

There are already more than 385 of these warehouse centers in the United States and Canada, and Costco is planning to open 32 to 34 new outlets in seven different locations within the next 12 months. To help assure heavy traffic, 50 percent of the existing and planned units will have discount gasoline pumps outside the front door.

With tactics like this, and distributor pricing, it is not too surprising that the average annual sales volume per Costco outlet is in excess of $100 million. Nor that the company projects a 6 percent increase in same-store sales in this year.

Most striking to any observer is the fact that these "clubs" carry a wide assortment of products including food, apparel, pharmacy items, pet supplies, hardware, and furniture.

In the electronics department, featured on the day of our visit were a 13-inch Toshiba TV/VCR combination, model number MV13K2/MVE13K3, for $129.99, and a Panasonic DVD/CD player, model number DVD-RV22, at $99.

Rounding out the electronics line was a Philips 25-inch stereo TV, model number 25PS405, at $219.99, before a $20 rebate.

Over in the appliance section of the warehouse, a Whirlpool 18.2-cubic-foot, no-frost refrigerator/freezer, model number ST18HPXKQ, carried a $499.99 price tag, while a 14.4-cubic-foot unit under Costco's private label "Kirkland" brand — whose Whirlpool lineage was clearly marked — was priced at $329.99, less a $10 rebate.

Under the same private label, a gas dryer, with a $30 rebate, carried a $379.99 ticket, and a washing machine, with a $20 rebate, sold for $279.99. Rounding out the appliance assortment was a dishwasher priced at $279.99.

Although signage in the appliance department advised shoppers to contact Whirlpool for in-warranty repairs, this was the only reference to service. There is also a $60 delivery charge for items too heavy for the customer to carry home, although installation is neither included nor provided.

Therefore, to survive in the midst of competition from Costco or any other warehouse club, an independent dealer must borrow from the strengths of the big boys and play his own cards, like having a service department, as often as he can. Thus, the public will become aware of the fact that the independent is concerned about the shopper after the sale as well.

Finally, the warehouse club practice of offering fewer brands is not to be taken lightly. Concentrating on one supplier means quantity discounts and added inventory turns. That means the local retailer will have to lower prices if necessary to meet competition, hopefully sell enough units to also qualify for a better quantity discount, and at the same time still retain a respectable gross margin.