When I was a coffee service operator, I hated Costco. They were the true competition with that ridiculous low pricing. I personally boycotted the store.
I felt that any client of mine who would choose Costco over a legitimate coffee service wasn’t much of a client after all. A client with any level of intelligence (too harsh?) would always choose a service instead of taking on the internal cost of “doing it on their own.”
That said, now that I have a little more time on my hands, I have learned to appreciate (love) Costco. In fact, I have identified ten lessons we can learn from that big lug of a retailer and most importantly, how to beat them at their own game.
1 - Membership (Get Commitment)
If you want in at Costco, you sign up. A commitment is required. Do your sales reps have the guts to demand a year to year contract? Would they lose a deal if the client refused to sign an agreement?
2 - Performance Rebates Are Powerful
The Executive Membership at Costco costs $120 but pays a 2 percent rebate. So, if I spend $6,000 a year (I could spend that on Greek Olives and Feta Cheese) my membership is free.
Rebates are something I utilized in the coffee service business and I believe operators should apply the strategy more often, especially those who tend to be unnecessarily aggressive (low ballers) about pricing. There is no reason to give the store away on day one. Make the client earn discounts over time, which is the next best thing to a long-term contract.
3 - Private Label Works
Costco is private labeling everything these days, from mixed nuts to fine wine. I confessed to my friends recently that I bought a bottle of Kirkland XO Cognac ($50) – now residing in an unmarked decanter.
Private label is a powerful equalizer. Price comparisons are impossible, since nobody has your private label and when your private label is around long enough to be a recognizable brand, you will enjoy a huge competitive advantage.
4 – Earn a Good Reputation As An Employer
You hear it and read it frequently: Costco is a generous employer. Decent pay, good benefits and opportunity for advancement. A good reputation attracts good candidates.
I also think they have low expectations, since it is virtually impossible to find help in the store. At best, their employees are not offensive and reasonably pleasant. If you are an employer, on many days, you would settle for that.
5 – Sell Volume
Costco sells just about everything by the case. I still see operators selling k-cups by the box, paper towels by the roll and beverages by the six-pack. If you are selling products in this “each oriented” fashion, you are losing sales and losing money. You can forget about inventory management when you start breaking cases.
6 – Offer Some Super Premium Items
Costco recently offered Louis XIII Cognac for $2995.00 per bottle. They sell prime beef, $100 bottles of wine and luxury electronics. Too often, operators assume that purchasing decisions are primarily price driven. While some clients are certainly price sensitive, operators should not hesitate to offer premium micro-roasted coffee, high end ice dispensers, custom logo cups and eclectic tea selections. Your clients need to take care of their employees. Give them the opportunity to do so – before your competition steps in and fills the void.
7 – Business Delivery Is Key
Costco’s decision to offer business delivery has been costly for coffee service and pantry service Operators.
Knowing how important delivery is to our clients, we need to be committed to doing it better than Costco. That means putting product away and offering truly distinguished service. I’ve written this before: “Don’t drink the online ordering Kool-Aid” unless you want to be stuck with the same low margins that Costco lives with (without the membership fee that drives their profits).
8 – Surprise Clients With Variety
I know, you corporate guys in suits are shaking your fist saying, “We need less SKUs, not more.” You are wrong. What you need to do is utilize the latest technology to manage your inventory.
Costco is selling everything from gift cards to travel services and their customers love it. Last week, just in time for spring, they set up a garden area and sold the finest tomato plant starters I have ever seen.
In our business, variety keeps our clients coming back – to the coffee service station, the vending machine and the micro market.
9 – Costco Stays Connected
It would be very easy for Costco to sit back and wait for their members to roll into the store. Operators, who enjoy the benefits of regularly scheduled route sales, can easily fall into that trap.
Much like Amazon, Costco stays connected with customers – using e-mail, social media, direct mail and in-store promotion to generate interest in their wide variety of offerings.
Successful operators have already learned the importance of engagement, not only with clients, but with end-users, whenever possible. It does not take much time or money to send a professional quality newsletter every month. A new company called Tidings can harvest your web information and create a newsletter for you in minutes. Use this link for new user discounts and no set-up fees. Easy engagement for less than $40 a month.
10 - Everyone Loves Samples
I had no intention of purchasing a huge block of Kirkland blue cheese until I tried it on a cracker. How about those steamed dumplings? A 32 count box jumped into my cart. Samples generate sales.
Get product support from your suppliers and set up a new product sample area in your micro market, new flavored creamer samples and crowd-pleasing tea samples in your office coffee locations.
At one time, my company gave away a free rack of Tazo tea with every new installation. Well over 50 percent of the new customers were buying the Tazo teas one year later. The sample strategy works - Costco proves it every day.
How to Beat Costco
Costco is a model for success that we as operators can follow. At the same time, they are an easy competitor to beat when you are dealing with competent and professional facility managers. Here are five ways to beat Costco in the workplace refreshment business:
- They sell too many variety packs. That is how suppliers dump unpopular selections. Is that what your client really wants?
- Do you have an exclusive rights contract that is not so exclusive anymore because of Costco? Did you pay consideration for that contract, like free installation or a special pricing structure? If that is the case, it’s time to have a new talk about pricing with your client.
- Does your client really have time to manage their own program? To order online – put the product away – chase back orders – not be sure exactly when the delivery is coming? Beat on that drum.
- Business delivery is one thing – great service is another. You know what you need to do.
- In all my years, I’ve never seen Costco take a client to lunch, give them tickets to a ballgame or invite them to a backyard party.
Learn from Costco, then beat them.
Speaking of samples, I am looking forward to grazing the convention floor in Las Vegas, March 20th to March 23rd. See you at the 2018 NAMA Show!