The New Daily

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

People are flocking to Costco. What's their secret? Photo: Getty

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.

The six stages of Costco: which level are you?
• How Bunnings’ prices are designed to nail customers
Aldi tries new store layout to lure cashed-up customers
• Why generic brands will soon fill your shopping basket

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.

1. Memberships

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.

Costco

Memberships to Costco cost $60. Photo: Getty

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”.

2. Petrol

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.

Screen Shot 2016-01-10 at 7.22.51 pm

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.

3. Bulk

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.

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  • Athinker

    Won’t shop where they won’t even let me look, not even once, without paying for membership..

    I regard the bogans I know who claim it’s good so stupid it make the impression worse.

  • Carolyn Cordon

    My husband is our shopper and he is certainly addicted. It’s his money more than our money, so that is that. The fuel issue is OK, he drives past there anyway and it’s convenient to stop there to fill up. But addicts and logic have nothing to do with each other, so probably more money is being wasted than he realises. It’s interesting to watch it all in action …

  • Davo the tyke

    But Costco isnt cheap,Things are dearer than Coles or Woolies. I go as a Guest only to buy the things not available anywhere else. eg American chocolate. Granola. very little else.

  • Athinker

    They wouldn’t let me in at Ringwood, not even to just look. Won’t be back.

    And I’ll keep telling everyone of the unfriendly attitude of the lady who stood in my way.

  • Tokabi

    Yeah but: think of all the petrol and time you’ll save by only shopping once a decade.

  • Martín Ffluge

    Stupid article:

    1. Yes, you have to buy a $60 membership, but that’s it for the whole year – the comparison to a gym membership is spurious. And I find it hard to believe that many people would go once and never go back – I go monthly and save > $60 at Costco (compared to Colesworths) most times.

    2. Again, the comparison to other retailers is misguided, because, since Costco has already got your membership $, they aren’t using cheap petrol to push sales… it’s really just another tick in the ‘pros’ column if you’re deciding whether to join or not. You could easily make your membership back on petrol alone!

    3. There are certainly many products that you can only buy in larger sizes – that goes some way to explaining why they are cheap. But five kilos of Nutella? Utter bullsh!t. Most lines are less than double the standard size, eg 18 eggs or 3 liters of milk or 2kg of minced beef.

    Ok, not everything is *always* cheaper at Costco – they rarely have specials for instance – so it pays to keep an eye out for specials at Coles etc. But you can always rely on Costco to be pretty close to the other retailers on almost everything, and often they are less than half the price.

  • midian454

    A kilogram of eggs is about 18 eggs. I have more than enough room in my fridge for a carton and a half of eggs.

  • Harry

    If they’re fools to shop at Costco they must be suckers to shop at Coles and Woolies I guess.

    • Tony Peters

      Yes, why support Australian companies when you can support yet another American giant company.
      And people complain about the Chinese taking over Australia. America already has.

      • Kevin j.m

        you only just worked that out why do you think Australia follows them into wars outside our sphere of influence.

    • Sam Carter

      Did you read the same article I did?? Guess not.

  • Why would you bother with the hassle just to look around then walk out without any purchases?

  • Athinker

    Writing from experience?

    😉

  • The claim that costco makes most of its profit from memberships should be substantiated. Personally, i think this claim is wrong

  • Tony Peters

    MY GOD! When did Xenophon buy out Costco????

  • David P

    Yeah, sorry, have to disagree with this post. And, no, I’m not a Costco employee, although there seem to be a few Wollies/Coles folks here… :op

    The only decision you have to make about bulk shopping is where to put stuff, and to focus on stuff you’ll use eventually and that won’t go off – like toilet paper. Figure out where to store the 71 rolls you don’t need right now, and you’ll save a motza. Same with dog food. Same with shampoo and air freshener and bug spray and detergent. I use a set of shelves the garage to store stuff. Easy as.

    It’s also a good spot to buy perishables if you’re throwing a party – ginormous bags of chips, slabs of Coke for about 60c a can, pre-made pizzas, platters of peeled prawns… the list goes on.

    The real challenge is to escape the place once a month for less that a couple of hundred bucks, and I’m very strict with myself even then. Assuming I’m saving 10% overall, that’s $20 per month, or a net saving of $240 per year (or $180 if you subtract the membership). That’s a minimum, I think I’m doing even better than that.

    And fat people? You think that’s a downside? Seriously? You can pick a good Asian restaurant if you see Asians eating there. Want a place to buy a lot of food cheaply, go where the fat people go. Just sayin.

    And with prices between 10% to 20% off the local shop prices, it doesn’t take long to save back the membership and start to really save. When the Canberra Costco started selling petrol at about 20c a litre under every other outlet in Canberra, my family’s three cars started saving about $35 a FORTNIGHT. That’s over $700 per year on that alone.

    The range is good as well – not just weird brand stuff either, the products I prefer. And while the home brand (Kirkland) products are also on offer, the quality is excellent. I grant you that you won’t see the standard 46 varieties of Colgate toothpaste you get at Wollies, there might be two, but if you’re that fussy for choice, go somewhere else and pay more.

    And it’s not just food. There’s auto, office, kitchenware, computers, toys, camping and sporting equipment, books, furniture, clothes, jewlery, cameras, fridges, TVs… the list goes on.

    But for me the winner is checkout time. You will never force me back into Wollies or Coles with a big shop. My idea of fun does not include standing in a queue for 15 minutes because they won’t or can’t open some more checkouts when things get busy. Costco does.

    So if you want to have a look, find a friend with a membership and go visit, there’s lots of us out here. But if you live like a hermit and prefer to buy your toilet rolls one at a time, yeah, maybe Costco isn’t for you.

    • You should compare them with Coles and Woolworths on prices NOT the local stores who don’t have bulk buying power. If you do that you would find the savings over those two to be illusory and your $240 saving evaporates so you are behind.

  • Gerald

    I have been a happy Costco member for the past 4 years. My average spend per visit (monthly) is about $100.
    I avoid almost all the American lollies and rich sauces/ gravies.
    My normal buys are 30 eggs, pro biotics drinks, pack of dozen croissants for $7.99, 6 pack of wonton noodles at about half the price at Coles/ Woolies. The other items are rice bran oil, honey and soy sauce.
    Of the $100 spend, I would save at least $15 if not more.
    I confirm I am not an employee of Costco but merely a satisfied customer.

    • You then go to Coles or Woolies to buy all the stuff you actually need. That also seems like a lot to spend for a few items.

  • ArghONaut

    Costcos success vigorously challenges the assertion they are a mirage.

  • Martín Ffluge

    Actually I’m just a happy customer… I only commented because the article was lazy and factually flawed… and your reply addressed nothing I said. If they’re not for you , fine, I really couldn’t give a fck. But since they’re expanding faster than any other retailer (except possibly Aldi) , obviously there are lots of people who agree with me.

  • James Quigley

    Costco has no advertising budget…zero. Short of sending flyers to prospective members, Costco sends out coupons to existing members and that is the full extent of their advertising. Like any company, Costco started off small opening their first warehouse in 1983, and yes, they are enormously successful and have expanded and taken on new markets as companies do when they experience success. Myer, Coles, Woolworths, Bunnings and Masters all have multiple locations and, perhaps with the exception of Masters and Myer, all are continuing to build stores. I have not looked into whether or not any of these retailers have already or plan to expand overseas, so I can’t comment, but I suspect there would be few, if any, complaints from within Australia if one or more chose to do so. I’m not quite sure what point you’re trying to make regarding advertising budgets because if Costco had an advertising budget, whether it be smaller, equal to or larger than that of any particular Australian retailer, it would simply be a result of their success, every bit of which they deserve. Costco’s success can be attributed to three things: their business model, their staff and the fact that, as many articles I’ve read have cited, the product sells itself. The bulk of their new memberships are generated by word of mouth. Who’s mouth? The mouths of their current membership base which has a consistent retention rate of 85%. Costco staff members are well paid and as a result are said to be three times more productive than staff at other retailers. The result of combining productive (and I would assume happy) staff with an attractive product sold at an attractive price is a satisfied customer.

  • Taxmemore

    Complete and utter bollocks!

    Xenophon is one of a handful of ethical and trustworthy politicians elected to our Federal Parliament.

    Xenophon leads. He doesn’t follow!

    Quite apart from which, what does Xenophon have to do with this article anyway?

  • Rom

    What a nonsense article, was it written by a Coles / Woolies exec? Costco is a ‘buyers club’ not a retail store like the others, that is why you need to be a member to go in there. Another distinctive factor is the outstanding customer service you get from their staff compared to indifference don’t care attitude of the other retailers, as well as quality products you don’t find in the majors. I had no problem renewing my first year membership.

    • You actually fell for that buyers club line? So sad really that so many have fallen for that line. As a club You would be recieving your share of any profits, do You. As a club you should be able to run for president or any other position, Can you? As a club you should be able to vote for all the different club positions, can you?
      Guess it isn’t a club and is just another retailer after all.

  • How much does Costco pay you to respond to articles? They are the Only ones you respond to. Or is it part of your normal wage? Do you get a bonus per word for defending your employer Costo?

    The thing is you see everyone can see what you have done and what range of articles you have responded to.

    • James Quigley

      Mate, I’m not employed by Costco or any other retailer as I stated originally. There are two sides to every argument and you cannot label someone like myself ‘staff’ simply because you don’t agree with my point of view. I’ve left comments on hundreds of articles over the years, though as you pointed out, this article is the first using Disqus. Besides the three or so comments/responses related to this article, I’ve not commented on anything Costco related. I chose to comment on this article for three reasons, 1. This is an op-ed, labeled National News. 2. The article is poorly written and factually incorrect. 3. I’m very happy with my Costco membership and the money save shopping there.

      It amazes me that someone like yourself would post at all considering that half of your comments are nothing other than baseless accusations, and why? I won’t speculate or make accusations the way you have, but based on your other comments, especially the gem where you attempt to define the word ‘club’, you either have no facts or personal experience to back up your argument or you have no argument at all. Which again, begs the question, why are you posting in this thread?

    • edweirdo

      I think James Quigley has been purchasing so much in bulk that he must received a great deal on words. Don’t think I’ve ever read this much by one commentator. Hope they don’t offer him a great deal on ‘bull-dust’ because he certainly knows how to use it.

  • Damon Schultz

    “Go see for yourself if shopping at Costco is worthwhile for you…” Unless you know a member that’s going to cost you 60 bucks, isn’t it?

    • James Quigley

      Yes, you will have to purchase a membership just as every other member has, however, as stated, if you are not satisfied with your experience (products, savings, etc) they will immediately refund the $60 membership fee back to you.

      • Damon Schultz

        Thanks. A strange retail model. One I won’t support as a matter of principle, but no judgement upon those who do.

  • Damon Schultz

    Made me lol, Jeff. Well done 🙂

  • Damon Schultz

    Thumbs up to the author for application of the Sunk Cost Fallacy.

  • dotrat

    I’m not a ‘bogan’, and I’m not an employee and to all who ‘won’t ever go there’ that suits me fine, shorter lines. $.20 a liter less on petrol last week (with two cars to fill) and a sensible plan when we go there saves us a lot. I’d go just for the pizza.

  • James Quigley

    Mate, you and the editor must not think very highly of New Daily readers…the word ‘analysis’ did not appear anywhere in the original posting of this article, and certainly did not appear in the headline or title…the word analysis has been added in the last couple of days and without an explanation. Lame!!!

  • Matthew Scrivener

    Who doesn’t love a 5 litre bottle of vodka!!!! Hick!

  • Nick Black

    Congratulations on writing a record amount defending a corporation without being an employee of it!

    CostCo earning the majority of their profit from membership fees is very well known, here it is in plain English from their own financial filings:

    > Membership revenue totaled $2.4 billion last year, up 6% from 2013. Meanwhile, Costco booked $3.2 billion in total operating profit. So, subscriber fees accounted for 75% of earnings, which shows why its more useful to think of Costco as a membership club rather than a retailer.

    http://www.fool.com/investing/general/2015/06/10/why-membership-fees-are-so-important-to-costco-who.aspx

    • Prabjot Singh

      membership revenue can only be compared with total revenue not total profit. “so, subscriber fees account accounted for 75% of earnings” is not a true statement.

  • Wonder Womans Girlfriend

    This article is truly some of the absolute worst journalism I have ever wasted my time reading. Costco offers great value and huge savings second to none. And yes you can find some items cheaper at other locations but overall the Costco experience is absolutely amazing. Where else can you go have a huge shop, buy a $1 hotdog on the way out and then fill your car up at the same place whilst saving money along the way! And no I don’t work at Costco but I am a American so I grew up with Costco and confirm that their business model works no matter what country they are located in.

    Btw I am not biased I give credit where credit is due. For example I love Bunnings and think they rock but on the other hand I’m completely dumbfounded with what Lowes was thinking with the whole Masters disaster. Oh and no I don’t work for Bunnings either.😉

  • Narutoo

    Seriously, people are so sucked into this costco shit. My wife jumpes into the bandwagon and ended up getting the membership. I have been to costco few times and compared the prices of several goods with the outside and this is what i found. TV and electronics are not cheaper than JB hifi or dicksmith. Infact Ps4 and xbox360 consoles were lot expensive compared to Eb games. Liquors were about the same price as dan murphy or liquorland, infact during sale dan and liquorland have them lot cheaper. Most of the things i compared were not any cheaper. The meat and perishable food items like fruits etc were bit cheaper but you have to buy in bulk. Now who has a family big enough to consume 8 kilos of chicken in 5 days? You will have to shop very frequently to get worth of that $60 membership. But there are sale going on quite often at woolworths and coles all the time. However aftee you pay at the counter there is a fast food on your right who sells a massive sized pizza for only $14 and you can buy a drink for like $1.5 and they will give you an empty takeaway cup which you can refill as many time as you want.

  • Caryn Spriggs

    Your statement “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.” is actually not true and shows a lack of research. You buy a yearly membership and if on Day 364 of your 365 days of membership you decide it was not worth it guess what happens? Costco refund your membership! So tell me again how that is a bad thing. I have been a member for only six months and have already saved more than five times my annual fee, so I am a happy Costco customer.

  • Vijay

    The entire thesis is wrong. Do it this way.Just plan buying the grocery, toiletry and spirits in advance. Buy for week or so. And choose the items and the day to visit the store wisely. For rest of the week, you will pay fewer visits to nearby shop or the shopping mall – may be only to buy fresh milk and green vegetables / fruits, which cannot be stored for long. Do not forget what you saved by spending less on patrol.

  • Jens Lipponer

    LoLzzzz I save a shit load on fuel because I buy in bulk every 4 to 6 weeks… Every corporation no matter what or who are ripping us off. Period. There is no argument. Just be smart and you ‘will save’. Smart is something which a lot of people aren’t. Period.

  • Gloria

    Well, I know the exact price of the toilet papers I buy, the sheet sizes and numbers of sheets. I am the one who does the family shopping. I’m guessing that the author of this article either doesn’t do the family shopping, or is just plain irresponsible with his money. If I have a packet of frozen beans coming close to it’s time, I plan a few meals around beans.
    Just because the author of this article lives wastefully doesn’t mean everyone does.
    In fact, we have just built our house with maximizing storage of bulk items in mind – my pantry is 2.5m x 4.25m, and my store room is the former laundry space at 1.8m x 5.5m.
    Not everyone has that opportunity of course, and they probably shouldn’t shop there unless they club together in a membership with other households and have organized shopping trips. This isn’t a new idea by any means – people have been co-op shopping for a long time. (And I don’t just mean at bricks-and-mortar co-ops).
    I have several diagnosed illnesses (including under-methylation) which require organic products to be as much of my diet as possible. Costco has a plethora of organic items at affordable prices – consequently my health has improved leaps and bounds. I can now afford to eat decently. I can buy better quality meats for my family, because places like Costco and Aldi have saved me money.
    I spend judiciously in each place, and have saved my membership many times over. When you throw in the things I pick up for other families, (no, I don’t charge more than the cost to me), even more people are saving.
    Grow up!

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