Costco in Chicago
WITH A FOCUSED PRODUCT SELECTION AND AGGRESSIVE PRICING, COSTCO’S BEVERAGE ALCOHOL DEPARTMENT WIELDS SHARP ELBOWS IN THE CITY OF BIG SHOULDERS.
By her own admission, Susan Schubert is having “a blast.” As the beverage alcohol buyer for the Midwest Region for Costco Wholesale, she is responsible for purchasing the wine, beer and spirits for 32 Costco outlets in six states (Ohio, Mich-igan, Illinois, Indiana, Kansas and Missouri). “I began working for Costco in 1985 in northern California,” she remembered. “In those days we had mostly large bottle formats on the floor, selling for under $10. And we had lots and lots of beer. We still have lots of beer, but things have really changed on the wine side.”
Susan Schubert, Buyer, Midwest Region, Costco Wholesale, has been purchasing wine, beer and spirits for 32 of the chainÕs outlets in six states for several years.
Indeed, in one of her newest Costco Wholesale outlets — located in the semi-fashionable Lincoln Park neighborhood of Chicago, opened in May 2001 — there are no bag-in-box wines or jug wines for sale. And there are plenty of over-$10 wines on display, some way over $10. “The business has evolved,” Schubert stated, noting that her stores regularly stock, for example, Chateau Margaux and Opus One.
The company closely guards the case and sales volume for wine, beer and spirits; however, estimates are that chain-wide wine sales themselves were around $620 million in 2003. Of course, that number is dwarfed by the company’s annual sales of $41.6 billion in fiscal year 2003 (which ended 8/31/03). The entire warehouse chain, headquartered in Issaquah, WA, consists of 319 locations in the U.S. and Puerto Rico, and 432 locations worldwide. There are 42 million warehouse club cardholders, representing 23-plus million households, which provide a built-in strength for Costco.
“Our cardholders are very loyal members of Costco. We have very few pilferage problems. People are generally well educated. Basically, they get it,” Schubert said.
In a sense, like several other mass retailers throughout the U.S., Costco has become a brand unto itself. The company has successfully translated its corporate mission of selling quality, branded merchandise at the best possible price into the consciousness of its members and other consumers throughout the U.S. For the most part, then, Costco shoppers are pre-sold. Essentially, they know what to expect and trust that they’ll generally get a good deal.
“There has always been a clear-cut focus in this organization,” Schubert said. “To offer the right merchandise, at the right price, at the right time. The goal is to provide quality products at a good price, and pass the savings on to our members.”
A Tough City
The Lincoln Park Costco is an “average size warehouse, about 135,000 to 140,000 square feet,” said Schubert, adding that the interiors of all Costco stores are very similar. Lincoln Park itself is a diverse marketplace comprised of all types of people, Schubert said, though some would say that it is rapidly gentrifying with lots of young families recently moving into the area and a lot of “sharp retailers.”
Overall, the beverage alcohol retail environment in Chicago “is tough,” Schubert said. “It’s legal for retailers here to sell products for less than cost, though we never do that.”
At most, the mark-up is 10% to 13% in the Costco wine department, Schubert said, which is incredibly aggressive in an industry that generally measures its non-discounted markups usually in the 33% to 50% range.
The higher-quality wines are usually — but not always — displayed like this, in what Schubert terms “boats,” which are constructed in small and larger sizes.
“We keep it simple,” Schubert stated. “The philosophy works the same way for spirits and beer and other product categories. Book a good deal; put it on the floor at a good price.” One of the dictums of the Costco model is that it offers a very “focused” selection of products. “When a customer walks in our store, he or she is not going to find a dozen different tequilas to choose from,” Schubert said. “We try to offer the best value on a limited selection.”
More Than 20% Turn Rate
Interestingly, though, that selection is not static; it often depends on what Schubert and her colleagues decide are the best-tasting wines available for the best price. “It can be pretty mixed,” she said, “and can change quickly, in a week’s time, from Australian this week to French next week, depending on the buys.” Indeed, the Costco model tries to maintain more than a 20% turn rate on merchandise at all times. And while the inventory at the Lincoln Park store may be a bit more upscale than at some suburban stores, Schubert stressed that “we don’t exclude any building from high-end goods.”
There are no handsome wooden shelves holding row upon row of wines at Costco. Generally speaking, the wines that sell for $10 and under are stacked on the floor, Schubert said, while more expensive wines are laid down in wood-case bins — what Schubert calls “boats” — for a more appealing display. But there are some exceptions, especially what Schubert terms, “treasure hunt items,” which are products that she has gotten a great deal on. “If I find something that tastes really good for a great price, then we buy everything we can get, and put it right out on the floor.” Asked for an example, she cited a “delicious” Rutherford Hill Merlot that she sold for $15.59 a bottle. “We brought in as much as we could and stacked it on the floor.” Another instance she cited was a third label of Cos D’Estournel called St. Estephes D’Cos. “We tasted it and loved it,” Schubert said. “We sold it nationally for $10 a bottle. It had huge sales.”
No Discounts, No Special Sales
What is interesting is that Costco does not specifically highlight these “deals” other than using a sign identifying the wine and the price. “In our Fine Wine section,” she said, “we might include some short wine tasting notes, which are generated here in the office.” More than anything, that fact underlines the success of the program, which is understood by its customers to offer quality products at inexpensive prices. The key is to deliver the goods, and Schubert and her team have obviously been succeeding at that. It’s a formula that allows for no special sales of any kind, no discounts, no hands-on merchandising, little personal selling and no newspaper advertising. “Word-of-mouth is a strong selling tool,” Schubert added.
Costco tries to maintain a 20% turn rate at all times for its beverage alcohol products.
Schubert noted that at the store level the sales force consists of “good merchants. Most are pretty savvy and take an interest in what they’re doing. If a customer asks them a question they can’t answer, they’ll call me or e-mail me and I’ll try to answer it for them.”
Spirits & Beer
As with wines, distilled spirits are also case stacked and on pallets in their own section not far from the wines. Schubert said that in most outlets they carry the basic leading brands among spirits categories, and if they have the room, they might augment that with a bit wider selection. “Again, we try to keep it simple and offer a focused selection,” said Schubert. Because of its location, the Lincoln Park store, however, does carry a selection of high-end spirits, she added. In fact, there is a small wine boat in that store to help display some of their finer spirits offerings.
You cannot buy six-packs in the beer section, however. Only cases (mostly 24-pcks) and larger are for sale, stacked on pallets. “We sell basically the leading domestics and imported beers,” Schubert said, “and we try to support local breweries whenever possible.” For example, she noted that she carried Goose Island. “Now, it’s everywhere, but we carried it when it was only distributed locally.”
Schubert meets with her Costco warehouse managers about once a month. “We go over the budgets at these meetings, and buyers present the managers with products that will soon be coming to their locations. We let them know what to be ready for, whether it’s seasonal gift baskets or a great deal on particular wine.”
According to Schubert, category buyers dictate the inventory, the inventory control specialists focus on product replenishment, which for its part is determined by sales. The inventory, in turn, normally dictates how the warehouse is merchandised — what is stacked and where it’s placed, for example. Still, “we always work closely with warehouse operations in deciding on displays,” Schubert said. “We are in constant contact through internal e-mails and phone calls.”
Aggressive pricing and quality products have made Costco the major force in wine retailing nationally.
There are eight Costco regional buying offices across the U.S. and the beverage alcohol buyers stay in communication with one another. They meet together often and coordinate their buys, while the entire operation remains controlled by the company’s national headquarters in Issaquah, WA.
“It is a partly top-down, partly horizontal management structure,” Schubert noted. “All the basic, important decisions are made at the central office. At the same time, we emphasize teamwork with our peers across the nation.”
These days, Schubert’s office is inundated with product. Salespeople either visit the office or send their products to be sampled. “I diligently try to taste everything,” she said. When she is dealing with producers, “they generally understand that they have to offer good quality at a good price.”
“We had a great year with the 2000 Bordeaux vintage, which everyone knows was extraordinary,” Schubert noted. “It was very easy to sell those wines; I personally tasted hundreds, and they were all delicious and value-priced. The result was that we saw a substantial increase in our overall French wine business.” She is excited about the upcoming 2001 Bordeaux vintage, which is about to hit the market. Her stores will be selling first, second and third growths that were all pre-bought.
For the future, Schubert said she planned on keeping it simple. “What works now works well,” she said. “Sales continue to grow year over year.” *
‘A Great Place to Work’
“Costco likes to promote people from within,” said Susan Schubert, who began working for the company 19 years ago as an hourly employee. “I did just about everything,” she added, “customer service, stocking, receiving, working the cash register.” When the company opened its first regional satellite office in northern California, she was promoted to “inventory control specialist,” where she worked for different buyers. “You track the sales and inventory of particular products, and then re-order them when necessary,” she said, noting that she worked in many categories including candy, sundries, groceries as well as beverages. After years of research, the company decided to move into the Midwest and she was chosen to help open up that region seven years ago. “We opened five buildings in Michigan in one day,” she said. She become Midwest buyer for wine, beer and spirits several years ago, and has been perfecting her trade ever since, tasting everything she can. “All buyers are food safety certified,” she said, “and take wine and spirits courses.” She has been educating herself on numerous buying/educational trips to wine regions all around the world. Indeed, the day before this interview she had returned from a week visiting vineyards and wineries in Chile, and was soon off again for France to spend two weeks tasting wine samples in Bordeaux. She and the other members of the Costco team will be buying futures for the 2003 Bordeaux vintage. “It’s very exciting that we’re in that realm, of buying pretty expensive French wine,” Schubert said. “No doubt about it, this is a great place to work.”