How the Costco mirage is fooling Australians
ANALYSIS: The ‘membership warehouse club’ is booming Down Under. Here’s the secret behind the store’s success.
Costco – the bulk discount retailer – is expanding yet again.
The multi-billion-dollar global business has already opened stores in Melbourne Brisbane, Adelaide, Canberra and Sydney. It sold $1.3 billion worth of merchandise to Aussie shoppers last year.
Now it intends to open three more stores in Sydney, Melbourne and Brisbane, while gearing up to enter Newcastle, Darwin and Wollongong.
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Is Costco any good? It offers some items more cheaply than other retailers and has many devoted fans. But its business model is set up to exploit our decision-making blind spots.
Costco can work amazingly well for many people. But it can be a mirage for many others, offering the appearance of great value while simply lifting $60 from your wallet.
Before you become a Costco fan, you should be wary of these three tricks Costco is using to help it make millions in profit every year.
If you casually show up at Costco, they won’t let you in. Not even to browse. You must be a member or a guest of a member. Memberships cost $60.
It is weird for a shop to charge entry. But there’s a reason.
Prices in store have small margins. Costco make almost all of their profit on memberships.
Plenty of people join, then never buy enough to get their money’s worth. Costco members will tell you it’s your fault if you buy a membership and don’t use it. But this is how Costco thrives. Selling heaps and heaps of memberships, including to people who never use it, is their business model. Just like a gym.
Some people will keep shopping at Costco even though it is inconvenient, just to make sure they don’t “waste” their membership. They’re probably even worse off than the people who just lost $60.
Spending time to try to feel good about $60 you spent six months ago is a classic case of the sunk cost fallacy, where you use resources inefficiently so previous resources you used up aren’t “wasted”.
Costco petrol is really cheap. As low as $1.04 a litre recently, when nearby service stations are charging 15c more.
The CEO says they are seeing “spectacular” growth in fuel sales. But they’re making basically zero profit. Why?
It’s the same reason those four cents off shopper dockets were such a big deal a decade ago.
People are obsessed – even irrational – over the price of petrol. Price is the only way to compare petrol, so it is easy to compare prices between different service stations. They put the price on big signs and compete to be one or two cents lower than the servo up the road.
If Costco drops the price of its petrol by 10 cents, it looks amazing. We notice that far, far more than if they drop the price of a pack of toilet paper. Who can remember the exact price of toilet paper?
If you fill up there a lot, of course, it’s good value. But not all Costco shops have petrol stations, so you could be driving a long way to make a small saving.
And if Costco aren’t making money on the petrol, they are making it up elsewhere, in places you don’t notice.
Costco sells whoppingly large things.
Five kilograms of Nutella? Done. Six litres of vokda? Sure.
You should get a better deal when you buy in bulk anyway. But Costco implies the cheaper per unit price makes it special.
These whopping amounts put strain on your home. Who has space in the fridge for a kilogram of eggs?
When you’re in the store, it’s easy to forget how annoying it is to have your cupboards full to bursting and easy to convince yourself you’ll use something fast. The reality can be different. At my house we just threw out half a packet of frozen beans we got at Costco over a year ago.
If Costco is coming to your town, make sure you’re not getting fooled before you shell out for membership.