I recently came across an article that claims to address the questions people “always” wondered about Costco. Although I’m not convinced that many people have always wondered about these questions, I still think they are worth sharing with fellow Costco fans.
The article discusses 6 issues. (Although the article did not word all of the issues in the form of questions, I did for consistency)
1. What Does Costco Do With Returns?
The author writes that he talked to a store manager to get this answer. As he did, I will separate the information by the type of return.
Food
According to the article, in order to provide the most sanitary practice, most returned food is thrown out. Because Costco employees are not always able to tell if products have spoiled or been tampered with, they throw them out. Occasionally, canned or completely sealed food items may not be thrown out, but the vast majority of food items are thrown out.
I wrote about how I first learned about the policy of discarding food items that get returned several years ago (Maybe they are too generous…) She was in the parking lot when she realized she bought the wrong item and went right back in to return it. Obviously I knew that returned open packages would be thrown out (e.g., when my dad returned an open package of lox that was clearly spoiled, as it was very different from the high quality we were used to from this product (Product Review:Kirkland Signature Smoked Salmon)). However, in this case the item my mom returned was sealed and the time on the receipt showed it was just purchased. I actually kind of like knowing that food bought is not resold even if closed because I don’t know how it is stored in others’ houses. Nevertheless, throwing out sealed food is wasteful.
Opened boxes
When members return opened boxes, they are asked if there is anything wrong with the item and the boxes are opened. Defective items are marked so they are not resold and either sent back to the manufacturer, thrown out, or sold to other companies who may resell them.
Returns Without a Receipt?
Costco’s computer system enables them to look up past purchases of members. Therefore, even without the receipt, the store can verify past purchases.
2. Who Takes the Loss on Returns?
Vendor Items
On items that Costco procures from vendors, those vendors generally take the loss on returns. Costco knows that a small percentage of items sold will be returned, which they consider when the price the items. According to the article, vendors handle this in two ways. Some gather the amount of each of their items that were returned or thrown out and Costco gets an allowance for these amounts. Other vendors ask Costco to return these items to them (typically larger and higher prices items).
Direct Imports
In contrast to items from vendors, Costco takes the loss on direct imports. They may sell the items at a low price to flea markets or other stores that buy from Costco.
The article points out that Costco pays very close attention to the amount of money that it needs to make on each item and how many returns they expect for each item and factor them into the prices. Therefore, if certain items repeatedly get returned, they will stop selling the items.
I have written about my frustration when Costco discontinues the items I like (It’s Gone? Discontinued Products ). My family has even joked that Costco must be viewing me as a “reverse indicator”. However, joking aside, I know and am impressed by the extent to which their selling decisions are carefully based on numbers. Although all stores need to keep track of sales and profits, I imagine it is especially true for Costco because they have such limited number of items (Freedom of or from choice?). Therefore, every product sold needs to sell well.
3. Does Costco Practice Deceptive Marketing?
The author discusses ways that other retailers trick customers into thinking that they are getting deals when they are not.
The article mentions several ways that stores do this. For example, some stores significantly mark up items (up to 200%) and then offer “sales” on them to.make customers to think they are benefitting from a discount.
Other stores offer coupons or deals in which, if customers spend a certain amount, they get a percentage or dollar amount off. However, the stores don’t allow these specials to be used with sale items. Yet other stores may invent their own listed “retail” or “compare at” prices (30 to 100% higher than the manufacturer’s suggested retail prices). This strategy then enables the stores to offer up to 30% or more off and call them “sales.” Yet another tactic the article mentions is to mark items up and then offer a “deal” in which customers can buy a certain number of items and get one free. Customers therefore end up paying more per item than they would pay at another store but think it is a deal because of the “free” item.
In contrast to some of these practices, Costco only takes a 10-15% markup over their costs. Therefore, it is safe to assume that, on many (but not all as is mentioned below), it’s prices will be lower than most other retailers.
I am interested in marketing strategies (and how to avoid falling for them). Therefore, although I do not fully understand the details some of the strategies mentioned, I am certainly aware of some of them. For example, when I see “buy one, get two free” advertised in grocery stores when (seems like a great deal), I make sure to first ensure that the “buy one” is not significantly marked up.
4. Does Costco Always Have the Lowest Price?
No.
Although this question is aimed at prices, the article also points out that Costco does not carry all items that people may want for a few reasons. First, some manufacturers refuse to sell to big box stores for fear of disrupting their normal retail channels. Second, some smaller manufacturers simply aren’t big enough to fill Costco’s needs.
I have commented to others about items I would like to see at Costco. They, knowing more about business and production than I do, have said that many companies could not even come close to producing what Costco would need.
Manufacturer Deals
Some smaller chains receive special deals from manufacturers on regular, close-out, or discontinued merchandise. These stores pay less and then pass those savings on to their customers. Costco is so large that they may not be able to do this because the manufacturers don’t have enough of that item to satisfy Costco’s needs.
Loss Leaders
The author also mentions Loss Leaders (merchandise sold below its actual cost to lead shoppers into the store where they will hopefully buy other items) as a reason that Costco may not always have the lowest prices. Smart customers can take advantage of loss leaders by only buying those sale items. Although Costco carries a few loss leaders (e.g., rotisserie chickens (An assortment of Costco facts (Part 1 of 2)); (How Costco Gets Members to Spend More)), it does not typically use this strategy.
5. How Does Costco Get Luxury or Designer Goods?
If Costco wants to carry an item that it can’t purchase directly through normal channels from the manufacturer, it may decide to purchase from a third-party seller. According to the article, this practice is called buying grey market goods. Apparently, a company that meets the manufacturer’s criteria to become a dealer purchases the product from the manufacturer. These companies then sell the items to companies that do not meet the criteria to be dealers. When Costco finds companies abroad that sell the items at a lower cost, they import the items. They can then sell the items at a lower cost than do stores that qualified as dealers by the manufacturer .
I had never actually thought about how Costco can sell designer items at lower costs than other stores. I am glad to have learned something new! (I trust Costco but have to admit that this strategy sounds a little suspicious to me…)
6. Does Costco Push Additional Insurance Plans?
All items purchased at Costco include their Costco Satisfaction, Price, and Return Guarantees and Costco doesn’t try to sell additional insurance. The author contrasts this Costco’s practice with going to other stores and being offered extended warranty but having to pay an additional 10-15% or more on the purchase. The author does caution that it is important to check the guarantees on some electronic, computer, or camera items, as they may vary from the regular Costco guarantees.
I know that my family always feels reassured by the quality of items at Costco, as well as by the extent to which Costco “stands by” their products with their guarantees.
Had you wondered about these questions asked in this article? Are you surprised by any of these answers?
Cruising Costco 