Costco

This spring, as retailers were being buffeted by economic storms, Costco Wholesale Corp. (Issaquah, Wash.) announced a 32 percent gain in third quarter net income.

True, it’s an economy that would seem to favor discounters. But Costco – this year’s VMSD/Peter Glen Retailer of the Year – doesn’t think of itself strictly as a discounter.

“The company’s mantra has always been ‘the highest-quality product at the lowest possible price,’ ” says store designer Russ Hazzard, senior principal and leader of the Costco account at MulvannyG2 Architecture (Bellevue, Wash.), which has been building Costco stores since the first one opened in 1983. “It seeks out interesting goods and unusual bargains you might not get at the competitors.”

In fact, a list of those competitors indicates how difficult it is to pin the Costco concept down. It includes the other wholesale club operations, like Sam’s Club and BJ’s; mass-merchandise discounters like Wal-Mart and Target; the supermarket chains; the pharmacy chains; consumer electronics retailers; auto supplies retailers; and even small department stores. Costco may have only one-tenth the SKUs that Wal-Mart has, but its tightly controlled inventory management covers merchandise its members have shown they really want as they roam the cavernous stores on what ceo Jim Sinegal calls “a treasure hunt” for new finds in packaged goods, food, tires, pharmaceuticals, electronics, apparel and alcohol.

Sinegal, who was present at the creation (see sidebar), still drives the company’s initiatives, like paying its employees well and keeping a ceiling on mark-ups so prices never get too high. “Combining high quality with stunningly low prices and appealing to upscale customers epitomizes why… Jim Sinegal might be America’s shrewdest merchant since Sam Walton,” The New York Times wrote in a 2005 profile of the Costco executive.

One constant element of the Costco formula, says Mulvanny’s Hazzard, is the bare-bones, concrete-floor warehouse space with the industrial-height ceiling and gondola racks. But that doesn’t mean there aren’t important elements of design in these spaces. “We’re always re-examining the architecture,” Hazzard says, “and it’s almost always for practical reasons. As big as these stores are, design considerations often boil down to inches.”

For example, aisles have been widened slightly to 11 feet, so forklift equipment can get through the aisle, unload merchandise, make one turn and get back out. Similarly, structural columns have been moved three inches in some buildings to make space for more freshline cases of high-margin items, such as meat and seafood. “Just three inches,” says Hazzard, “allow us to get one more case in there.”

Costco has been ahead of the curve on sustainability. “Their pre-engineered metal buildings have always been created out of plate steel from recycled products,” says Hazzard. “They’ve had skylights in their stores for 15 years. They have an aggressive heat recovery system for the stores’ refrigeration systems. They actively recycle their cardboard, tires and grease.” And, they reuse vendors’ original product boxes as take-home containers, eliminating the need for shopping bags, paper or plastic. “We always use ‘best practices’ in desiging projects for Costco,” Hazzard says, “which is necessary to keep not only initial costs down but also life-cycle costs.”

Earlier this year, Costco announced it will install solar panels at a number of locations and that it’s switching from round to rectangular tubs of cashews, reducing by 400 the number of delivery runs a year because rectangular tubs can be packed more efficiently into trucks than round ones. No detail seems too small to keep costs down for the nearly 53 million card-carrying members.