Costco appeals to affluent

Costco Wholesale has emerged as a warehouse force over the last two decades by selling high-end products at the lowest prices.

The Issaquah, Wash.-based club got its start 25 years ago, going public in 1985. Its 1993 merger with Price Club turned it into a national player that has since grown to 392 stores across the U.S. and hundreds more locations internationally.

While it has fewer locations than rival Sam’s Club, Costco’s 52 million members slightly outnumber those of Sam’s. The two hold a nearly equal share of the DVD market.

Costco members tend to be more upscale, with a base of affluent adults, typically ages 35-54, Warner Home Video senior VP of domestic sales Mike Takac says.

For Warner and other studios, that has meant a strong market for higher-end boxed collections and TV series.

“We can go after the highest price points there with a degree of confidence,” Takac says. Costco shoppers are “predisposed to highbrow content,” he adds, noting that musicals, classic sets and other collections that are difficult to sell at other retailers do well at the chain. “They represent a big opportunity as we continue to drive this collection strategy.”

While Warner’s sales are about equally divided between new releases, catalog and TV product at most other retailers, at Costco, non-theatrical product represents a bigger cut of sales.

The club also has been creative in working with studios to bundle DVD sets together geared at its members.

“What they all do consistently is they have a great database on their members’ shopping habits and demographics,” says 20th Century Fox Home Entertainment executive VP and general manager Simon Swart. “They do a really good job of varying their merchandise offerings based on what they know.”

And the retailer is closely involved in selecting product to be bundled. “One doesn’t just say, here’s a bundle for you,” Swart says. “Club merchants are involved in the makeup.”

Though Costco has lost disc market share to mass merchants over the last few years by refusing to slash pricing on new releases to compete, the chain is now moving more aggressively into Blu-ray, which some believe could help it regain its position along with the rest of the warehouse channel.

Even on Blu-ray players and other high-end electronics products, Costco sells its members on its ability to offer the lowest prices.

As Costco president and CEO Jim Sinegal explains in a company profile on the media-shy wholesaler’s Web site, “Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable.”