Why Costco Delays Price Hikes on Muffins

Costco has a well deserved reputation for looking out for its members, especially in terms of price. They are notorious for keeping margins slim, and kicking out vendors where there is a pricing or value issue - i.e. Coke (back in), Apple (not). I think members realize that Costco works hard to keep prices low and value high, and they reward that accordingly. There are other things that they don't do so well, but consumers are by and large willing to overlook those.

Al McClain, CEO, Founder, RetailWire.com

Let's applaud Costco for their ongoing support of the small business market. Yes, they are a large part of Costco's business and they realize the need to assist them in any way they can. Great job Costco.

Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

I think it's great. Many are raising their prices in advance of actual cost increases, I mean seriously, look at the price of gas and oil. No supply disruptions have occurred yet. It's just piggishness,

Good job Costco. Makes me want to go buy some massive quantities of something!

Paula Rosenblum, Managing Partner, RSR Research

Well - this move will certainly drive shoppers to pick through the aisles for good deals. That's smart - taking advantage of a marketplace negative & turning it into a business opportunity. Good for them.

Liz Crawford, President, Crawford Consulting

The customer segment valuation in this example is interesting (i.e., "particularly on business items"). It makes a lot of sense economically. Costco's business customers must spend a lot more on average than consumers do. Yet the product margins are the same, so individual business customers must be far more profitable. This gives a way of investing in the more valuable segment, but without price discriminating on a customer basis.

Of course, this same approach (price investments targeted to segments through products) is relevant much more broadly in retail. But I'm not sure holding off on taking price is the right way for many retailers outside the club sector to handle it.

Jonathan Marek, Senior Vice President, Applied Predictive Technologies

Let's see, Costco pays and treats its employees better than most, and really does seem to have the best interests of its customers in mind. Hmmm ... anyone surprised then that they continually perform so well?
Retail isn't rocket science (although the IT folks would like us to believe that it is). More retailers should follow Costco's lead on both employee and customer relations.

Kevin Graff, President, Graff Retail

Costco's delay in raising prices on select products during inflationary times is because they know it's smart business, good merchandising, top notch PR --- and Costco can afford to do it because they generate strong sales per square foot. Costco has its act together.

Gene Hoffman, President/CEO, Corporate Strategies International

Eight to ten percent consistent same store sales growth. I wonder? Do they know their customer? Do they know how to create real loyalty? As Captain Jack Ross said, "These are the facts, and they are undisputed". Consistent same store sales growth. Its a fact. Their strategies are directed towards that and they win - consistently. No magic act. No misdirection.

'Scanner'

This is an important story as the effects of cotton and other commodity price increases begin to manifest. Taking a literalist, item-for-item price perspective (my price increases so yours will as well) is old school, particularly for multi-category retailers. The key phrase is "overall margins." Costco gets it that they are managing a portfolio, not a single position.

Carol Spieckerman, President, newmarketbuilders

I wonder what Costco's Galanti charges for tin foil. Is it cheaper than aluminum foil? If so, our family could save some money.

In "Pretty Woman," Richard Gere asks Julia Roberts what happens after the hero "climbs up and rescues" the girl, and she responds, "She rescues him right back." It's the same with Costco. Costco is loyal to its members, and the members are loyal right back.

We continually refer to consumers who purchase in Costco stores as customers. They aren't. As Al McClain pointed out, they're members. And that's precisely why Scanner referenced loyalty in the Costco/member relationship. Costco is loyal to members and members are loyal right back. And clearly Costco has identified several items that are brightest on its members' loyalty radar. Essentially, Galanti is saying that a static price for muffins leads to a static price for muffins. That is, because a price increase has been delayed for "forever," it will continue to be delayed. It must make sense to Costco, because it seems to be effective.

To today's question, we must take into account that there are different pricing dynamic rules for member/consumers as opposed to customer/consumers. Costco has taken upon itself a merchant responsibility in their relationship with members that goes far deeper and is far more accountable than typical retailer-shopper transactions. Thus, price policies for Costco in inflationary periods will not apply to other types of stores. The timing and extent of Costco's price increases depend most upon member feedback and satisfaction, unlike any other style of retailing.

M. Jericho Banks PhD, President, CEO, Forensic Marketing LLC

All this positive feedback is very gratifying. I work for Costco and am responsible for getting today's topic on the racks in a large enough supply to increase sales. All I know is that our muffins are the most time consuming part of our day, it commodities prices are increasing our company would rather take a hit on our margins than upset our members. They are the driving force of our company, happy members keep signing up.I don't think it's any more complicated than that. Great feedback everyone.

'muffinman'

All pricing should be selective. A good merchant understands the marketplace and prices their products accordingly. A good PR agency never misses the opportunity to leverage a positive story. In this case, Costco is running on all cylinders.

Christopher P. Ramey, President, Affluent Insights