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Costco Cops Best National Retailer Kudos

Whether you love it for the great deals, admire it for its good corporate citizenship or loathe it for deflating flat-panel margins, there’s no denying that the king of the warehouse clubs has become a force to be reckoned with in consumer electronics.

CE sales grew 11 percent to more than $3.8 billion last year, according to TWICE’s Top 100 Retailer report, making Costco Wholesale the ninth-largest electronics dealer and demonstrating a clear consumer preference for its no-frills model.

Founded in 1983 by Jim Sinegal and Jeffrey Brotman , the $60 billion multinational presently maintains 383 stores in 38 states that are frequented often by nearly 50 million card-carrying members.

Those cards, which carry annual membership fees of $40 to $100, are Costco’s real bread and butter. Along with its stark in-store presentation and lean overhead, the fees allow the company to impose only marginal mark-ups on a vast range of well-assorted quality goods.

Customers, typically well-educated, upper-middle-income consumers, have responded in kind, lured also by the rapidly changing “treasure hunt” assortment and largely open-ended return policy.

Another factor driving the dizzying traffic levels is counter-intuitive: the tightly edited selections within each product category. “If you go to a big-box CE store you’ll see 100 to 150 different TVs,” explained Tim Farmer, Costco’s merchandising VP and general merchandise manager for CE. “You might find 10 to 20 32-inch LCDs alone.”

Costco has two 32-inch panels, he said, which, like all of its models, were spec’ed by the department’s buyers in order to deliver the best quality and value.

“We narrow down the selection for our customers,” Farmer said, “and we don’t accept what the manufacturers bring to us. We have 35 buyers who go to Asia three or four times a year. They pick the panels, the scalers, the number of HDMI ports and other feature sets. That allows us to have the right product at the right price.”

Sometimes those products are derivative models, although it’s not unusual for Costco’s specs to also find their way into the open line, he said.

Together those factors contributed to Costco’s third-place ranking out of 23 CE retailers in a recent satisfaction survey of 20,000 Consumer Reports readers.

Despite its successes, Costco’s CE business was not without its challenges. Returns — either by customers trading up their TVs as prices came down or by shoppers who couldn’t recreate the HD experience at home — began eating away at profits. The company also lacked a custom installation solution.

Costco addressed both by reducing the return period on TVs, computers and other devices from essentially forever to 90 days — still the most liberal in CE retailing — while extending manufacturers’ warranties to two years. It also set up a free technical support hotline, and peppered the TV aisles with reminders that HD programming is required to view an HD picture.

To plug the custom hole and further reduce returns, Costco has begun offering basic in-home setup, and will “take it to the next level” within the next two months in a 20-store test of more complex third-party installation services, Farmer said.