What Costco Is Doing to the Liquor Business

I am a suburban dad. On weekends my family attends youth baseball, soccer, lounges at a Starbucks in the neighborhood and walk the aisles of Home Depot. My weekend is also marked by constant trips to Costco where I peruse the wine, beer and spirit aisles while my wife buys 1000 rolls of toilet paper. This is my life on the days that are not Monday thru Friday, and this is today’s column.

Walking the adult beverage aisles at a Costco is a who’s-who of big distribution placements and is a testament to the largest booze retailer in America’s head buyer and her skill set. It is also a major reminder of the large uphill battle that the consumer and the independent retailer have as big box gets stronger and small boutique sellers will forever forward struggle to compete.

Aside from chocolate chip cookies for 50 people, Costco is really good at trend spotting and trend ending information. I recommend you just go to watch consumer behavior. The chain is also very, very good at taking the independent out of the market in terms of inventory, pricing and expectation. Costco has multiple revenue streams, notably membership dues, that make light gross margin pick up on liquor, wine and beer not as critical and in fact, a core business principle.  Costco also has a captive audience. The expectation is set; you are a buyer there and they are the sellers. There is no confusion at all about the role each party plays in the activity. Consumers go there to stock up, to purchase a perceived bargain and to treasure hunt.

Those three purchase triggers are the key to any decision-making process.

• Stocking up is a staple in the adult beverage space. The key for any account is to create a store that makes the consumer want to stock up. Case stacks, great lighting and room to browse all increase the time the consumer spends in store and thus increase the average cart. In the Sam’s days, we used oversized shopping carts to give the impression of an empty cart longer. The consumer has been trained to fill a cart. The bigger the cart, the larger the need to fill it became.
• Perceived bargain comes organically from the concrete floors, the brand reputation, the warehouse style layout and large stacks of goods. In the Sam’s days, we were the first to go bare bones décor. Concrete floors, florescent lights and brick walls were cheaper to build, but gave the impression of deal level pricing.
• Treasure hunting is the key. Costco sells a limited number of SKU’s and thus goods and inventory is always shifting. The consumer makes repeated trips there to get something “new” or to see if something’s sold out. We did not do this, but we did reset the store often to get the consumer lost, so they asked questions, and thus engaged a salesperson.
• Private label phenom is alive and well there. Kirkland is the brand and the bottle shape; label design and style all make the consumer less brand loyal to the origin brand and loyal to the “deal”. We did this too but back in the day (2005 or so) you needed to buy pallets of private label goods to get anyone to sell them to you. Now it is easier and likely cheaper and more profitable.

All this Costco-ing of America is killing the neighborhood store, and the independent off premise account. The above bullet points are a nagging that most retailers cannot compete on. Space, private label, price, treasure hunting are the keys to warehouse stores success and will also be the key to the independent failure. The independent often chooses selection and service to compete on but at least 50% of those are not measurable and thus non quantifiable. It is very hard to hang a hat on service because that is by definition, a personal feeling. Great service is arbitrary to the recipient.

When my family goes to Costco, we go to buy cookies, fresh meat and toilet paper, not booze. We support local and the independent. Readers of my column should do the same. Costco will survive regardless, but our collective brands need us more than ever. Warehouse stores will win the battle, but let’s at least make the fight a good one.