Nearly every Costco customer has entered the store with plans to buy groceries and home essentials, only to leave with something else entirely.
Sure, you didn't need a kayak or a giant teddy bear, but passing on those items at Costco's prices would practically be criminal.
Costco (COST) offers two types of shopping. First, it has a well-curated selection of grocery and household items at very good prices. Many of its customers shop at the warehouse club instead of their local grocery stores.
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That means trading choice for price. Where Publix or Kroger might have three brands of ketchup in five different sizes, Costco will likely have one. Traditionally, that has been a very large size, meaning that shoppers have to be careful when buying perishable items.
In addition to offering grocery and household basics, Costco also gives members an ever-changing collection of items. Some of those will be in the grocery space — perhaps an exotic spice or unexpected frozen meal — while others can be in pretty much any category.
These are the items that create the so-called treasure hunt experience for Costco members. On offer could be anything from clothing to furniture, toys, gift cards and more.
It's with this selection of goods that Costco deftly pushes its members to spend mor.
Image source: Patrick T. FALLON / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images
Costco understands its customers
Costco wants to create buying opportunities for customers. The idea is to put items on the shelves that are too good to pass up. You want people to both spend more and feel good about the choices they're making.
Chief Executive Ron Vachris pulled back the curtain a bit on his chain's thinking during its fiscal-third-quarter-earnings call.
"We were just in a session with our grocery divisions and talking there. And we've seen a great success in international foods that have been brought into the U.S. and then of the like from the U.S. into the other regions of the world where we do business," he said.
The company leverages its global presence to offer members items that might not be common in their parts of the world.
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"But you want to take care of not only the consumables in the grocery side, but when we bring in an item that's a success in Taiwan or Korea or the U.K., then it creates that excitement for the member," he said.
"That's when we really have done a good job of triggering that impulsive purchase where members are trusting the buyers, and they will add that additional item to their cart. So, that's been a big win for us."
Costco embraces the treasure hunt
Costco understands that part of the experience it offers members is having items they may not have been looking for but really want to buy.
"And again, it goes a lot of times with that treasure hunt. ... [You've] heard the phrase, 'people come in to spend $100 and walk out with $300.' That's because our buyers and our operators do a great job in making the warehouses exciting," he said. "When they come in there and do their basic shopping, they pick up a few additional items that just compel them at the time."
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Costco has seen its members visit more often, but spend less. Chief Financial Officer Gary Millerchip sees that as an opportunity to drive more treasure hunt purchases.
"The nice thing about the opportunity there for us is with trips up by 5%, that's really why the average basket size has been more flat recently, and that's because we've been growing member engagement in consumables, as Ron mentioned, with food and fresh," he said.
"And so, it does present a great opportunity, and I think it also speaks to the team doing a good job of driving more frequency of member visits. So, it creates a great opportunity for us to drive more of that basket size as well."
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