Costco’s “Diversion” Buying Strategy
By Tom Ryan
Crocs Inc. earlier this month became the latest company to freak out upon finding its hot selling shoes on the floors of Costco. Their arrival is apparently part of a long-standing strategy at Costco to look to secondary markets to acquire brands that won’t sell directly to Costco.
Crocs found some cases where it believes its products were sold indirectly to Costco.
“We have not sold Crocs-branded products to Costco nor have we authorized any of our customers to sell our products to Costco,” said Croc’s CEO Ron Snyder in a statement. “We are continuing to take aggressive measures to prevent this from happening. I want to reiterate that Costco is not an authorized dealer of Crocs products.”
Mr. Snyder’s statement came a day after Richard Galanti, chief financial officer of Costco, told analysts that his company’s buyers were seeing more brands in the challenging economy that they historically could not access.
“Somebody just the other day mentioned huge availability in apparel, things like name-brand jeans and name-brand women’s apparel and Crocs and the like,” Mr. Galanti said.
Mr. Galanti afterwards told the Seattle Post Intelligencer that Costco
may not directly obtain Crocs, but Costco has acquired the shoes and other
items with name brands such as Janzen, Hurley, Lucky and OshKosh because there
is more availability in the market. Further prompted by the newspaper, Mr.
Galanti wrote in an e-mail, “We did not and do not disclose how we procure
them.”
This isn’t the first time Costco has found companies complaining about
finding their goods diverted to Costco. Rollerblade, NordicTrack, Cannondale,
Columbia Sportswear, Oakley, Rossignol, Teva and Trek have complained about
the practice in the past, with several unsuccessfully filing lawsuits. Last
year, both True Religion, the designer jeans marketer, and Camelbak, known
for its high-end outdoor hydration products, became irate after finding their
products selling at Costco without their authorization.
At the time, Layne Rigney, CamelBak’s director of sales for domestic recreation, said, “We keep a close eye on unauthorized distribution, but it can be tough to stop. The good news is that it looks like Costco has limited quantities of our product and what they have is only available online. We are determining how the product was diverted to Costco and we will stop it.”
Many retailers worry that Costco’s reputation for diverting name brands and then slashing prices undercuts their business and is irresponsible to the consumer. At the same time, Costco’s “diversion” buying appears to play a huge role in creating their vaunted “treasure hunt” shopping experience, where customers find unexpected deals with each visit. Many of Costco’s items are in the stores for only a short period of time.
Discussion question: Do you think Costco’s “diversion” buying strategy is savvy or a little sketchy? Should they keep doing it? If so, should or can other retailers mimic it?
If Crocs management feels it is important to control the retail presentation of their brand–and that is a very legitimate point of view–then the answer is equally at hand. It is called “Crocs – the Store.” It can also include the Crocs Catalog. Crocs.com. And other direct to consumer outlets I’m sure I’ve missed. But if you are going to take advantage of third party distribution outlets to reach your consumer, then deal with the realities of that decision and move on.
We are all aware that the very nature of a channel can have an impact on consumer perceptions of a brand. Luxury pen maker Mont Blanc found this out the hard way after losing some of its luster by being featured at Sam’s Club. (Indeed, I stopped buying Lalique crystal for my wife when I found Lalique displayed at Sam’s Club.)
However, unlike Sam’s Club, Costco has a reputation for quality, especially under its Kirkland house brand.
I believe there’s an opportunity for Costco to enhance its “if it doesn’t meet our standards, we won’t carry it” position that would actually put Crocs (and others) in a position to want Costco’s “endorsement.” Sneaking a brand in that doesn’t want to be there doesn’t seem like a sound strategy to me.
For example, I found a certain electronics item with this notice: “Costco’s guarantee applies, even though this item may not be covered by the manufacturer’s warranty, because Costco is not an “authorized” dealer of the merchandise.” (Exact quote) That did not instill confidence for me in either Costco or the item.
What better accolade could a brand wish for? A high quality, very reputable, retailer going to the trouble of plotting a means to acquire your product and offer it in their stores to their customers. They only did this because Crocs wouldn’t sell to them direct.
I guess Crocs doesn’t want its products sold to the consumer at a paltry 18% mark up! As for exclusivity, I can buy Crocs and fish bait at the same store down here in coastal Georgia. Been that way for a couple of years now.
Costco is doing nothing wrong. This is what is wonderful about free enterprise, supply and demand, and Capitalism. This is solely an issue with the retailer that the manufacturer originally sold the goods to.
Everything is for sale if the price is right, and that is the way it should be. If this principle is taken away the only real looser is the consumer by paying higher than market demand retails. The US government says that I cannot discriminate against a qualified purchaser for my house, a qualified job/school applicant, or who I let into my private business as a customer. With that in mind, why should a manufacturer be able to discriminate who will sell their goods after possession is given to the original purchaser? …And yes, I work for a manufacturer.
It is clear that many have an opinion on this particular question, and most of those are in one camp.
The fact is Crocs can refuse to sell its products to Costco, but Crocs cannot keep Costco from selling its products, as long as Costco has obtained the product legally.
Crocs’ problem is with the entity that diverted Crocs product to an unauthorized channel like Costco. Secondarily, as a by-product of this polemic, Crocs may realize that Costco is a great channel for its product….
Very savvy. Costco has done an impressive job and has focused on quality of products. They should hold true to their strategy.
Costco’s “diversion” buying strategy is great for Costco and it’s probably not all that bad either for the name brand as long as Costco cannot buy quantities large enough to stay in stock ongoing. However, as a one-time or occasional event, it’s exciting for the Costco consumer and in my estimation it really doesn’t hurt the image of the brand because Costco is not thought to be a house of lower tier brands, in fact quite to the contrary, Costco is known to sell name brands at special event prices. It’s more about opportunity and value, not so much about erosion.
Very savvy. Costco is not being irresponsible to the consumer. In fact they are being just the opposite. They do not advertise the items either outside or within their stores.
At the same time, they do reinforce their own brand. There is a treasure hunt aspect to Costco, however, there seem to be fewer of these treasure hunt items than in the past.
This sounds to me a lot like the story about whether or not manufacturers have the right to enforce price strategies at retail for their products. Manufacturers won that round–do they also have the right to say who can and can’t sell the product to begin with? Even in secondary markets? If Costco can get their hands on the goods, then I say more power to them! If manufacturers don’t want their goods in secondary markets, then they better offer generous return policies to their dealers to remove the incentive to sell to someone else (which realistically is going to happen in an overstock or going out of business situation, primarily).
This is not Costco’s problem, it is Croc’s problem. If Costco purchases product legally, and pays for that product on a timely basis, what have they done wrong? Nothing. They are very good at what they do, and there are a lot of companies who are willing to sell to them. If Crocs wants to stop this practice, they will need to find the authorized distributor who is selling to Costco.
The day will come when Crocs will beg Costco to take their product direct. They should be careful about angering Costco today, when they will need them tomorrow. Crocs are a fad, and fads slow and eventually die.
I saw a display of Crocs the last time I was at my neighborhood Costco and was surprised to see them there. I checked to see if they were actually the Crocs brand and they were. I didn’t think too much about it until reading this story.
Costco never fails to impress me with their programs and policies designed to offer great values to their customers. Crocs should be honored and flattered that Costco would even want to sell their merchandise.
All the news and hoopla about Crocs at Costco is the best advertising that Costco could ever expect to get.
As proven in the past, Costco is not selling knockoffs, but the real thing, gotten legally in the secondary market, which has been the proven case in every other claim against them by other manufactures.
This kind of availability on a limited bases will keep people coming back to find out what the next surprise item will be.
You better buy it today because it will not be their tomorrow.
I saw the Crocs in Costco last weekend and was very surprised to see them there. Now I know how they got there.
As a Costco shopper, it’s hard to condemn them for bringing me great products at a great value.
As a retail manufacturer, it really irks me.
So where do you draw the line?
Dicey situation at best but that’s what makes Costco, Costco. It’s all about the treasure hunt and the good deals.
Brands like Crocs have a vested interest in controlling the supply and allocation to maintain brand integrity but on the other hand, if Costco finds 4 or 5 skids from some vendor that is going belly up, why not? They are in the business of selling high quality merchandise at value prices and passing on products because of branding rights does not make business sense.
The question I have is why wouldn’t Crocs jump at the chance of having their own pallet at Costco? They could even put in those big shoe donation bins they created on The Apprentice!
When Costco offers opportunistic buys to its shoppers, it is simply fulfilling the expectation it has consistently developed with its shoppers throughout its history. Manufacturers may cry foul when their goods are diverted or resold to other retailers–but they likely weren’t complaining when they loaded their goods into the retailer’s warehouse in the first place.
The good news for brands is that if they are reasonably careful about their distribution practices, a retailer like Costco will never acquire a sustainable supply of a diverted product. While a few shoppers may pay a little less for the item, it only proves the brand mystique, in my opinion.
Now if a brand manufacturer loads the market with a product that retailers can’t sell through, all bets are off. So this comes down to a battle of press releases. Manufacturers know full well they can’t control the resale of diverted merchandise. They know retailers sometimes fail, and their liquidates inventories are dumped into the market. They also know their own sales intemperance probably contributed to the problem, by contributing to an oversupply. The threats and posturing are face-saving acts, intended to sustain the product’s price in “authorized” channels.
Many high-end brand name manufacturers wink at warehouse clubs selling their merchandise. Any manufacturer can easily trace Costco’s source by printing serial numbers on the cartons and keeping a record of which retailer was shipped which serial numbers. This technology is at least 5,800 years old.
The main reason Crocs claims they object to Costco is that Crocs dealers want full markup and look foolish to their customers who see the same stuff in Costco for less. Crocs can’t easily tell its full-price dealers to drop dead. So Crocs may claim outrage.
All product flows downhill. So it goes for Crocs. When your hot, your hot, when your not, your not.
Why lose a sale to a copy?
Only a small number of consumers can afford to shop a club on a weekly/monthly basis. The average Costco customer spends over $200+ per visit. Many $400 per trip. Who cares if this unique customer has a pair of Crocs or a flat screen TV in their basket?
Frankly, we all know it is very hard to expand distribution and not aggravate your buyers. Crocs is very lucky today to have all the distribution it has. Someday, they won’t.
This is not a problem. Costco is only demonstrating that demand, even using alternate channels, is outstripping the confinements of a manufacturer’s supply chains as they seek to distribute their goods. This is not illegal and offers all of Costco’s consumers access to a larger choice of products (even for a limited time) at Costco level pricing. Furthermore, any manufacturer who doesn’t recognize that this demonstrates gaps in the distribution channel is ignoring substantial demand in the market that will eventually hurt their business. You can’t ignore the 4th largest retailer in the nation (Costco) simply because of their channel of distribution. Costco represents consumer needs, and all manufacturers are in business to fill these.
It’s very savvy. As several posters mentioned above, it’s the responsibility of the manufacturer to police its distribution.
If Costco sold counterfeit products, it would then be sketchy and they would bear liability and all penalties associated with it.
Costco has a very well defined point of difference from other club retailers and has gained a loyal following because of it. It shouldn’t abandon its strategy.
I’m sure there are plenty of manufacturers who think their brand image will be hurt when their products appear in “discount” warehouses. And they may be right, especially when limited distribution has created an exclusivity which can command higher prices and attract more upscale minded shoppers. I applaud Costco for destroying the brand myth of overcharging manufacturers, especially those who have built their brand identity with advertising rather than superior quality.
But Costco is running a big risk. For any products that are the least bit service-needy, like electronics, Costco’s practices will come back to haunt them. It was great when Costco’s return policy allowed no-time-limit returns, but that practice is becoming history for more and more product categories at Costco. What happens when a customer perceives a problem with a product after the return deadline and the manufacturer will not honor the warranty because it was purchased from an unauthorized dealer? This may only happen 3% of the time, but as J.D. Power has documented in their book “Satisfaction,” that’s enough to turn the tide of customer attitude.
Question–if Costco obtains the products through the violation of a contract (i.e., if the party supplying them agreed not to resell to anyone except the ultimate consumer), is it lawful?
When you buy salon hair care products anywhere but the salon, it’s been re-sold by the salons to consolidators, who then sell it to mainstream outlets. This often violates the salon’s supply agreements, but I’m not sure it’s illegal for the store that sells it to the ultimate consumer.
So, if it’s not illegal, then it’s on the manufacturer to control the inventory. If they are oversupplying, either through bad inventory practices or by pushing out cases to make a number, then you can’t fault the oversupplied retailer for unloading the excess inventory.
If I were an investor in Crocs company (CROX) and read these articles, I would definitely be wondering why management is not doing direct business with Costco. Costco isn’t exactly Family Dollar or the Rose Bowl flea market for criminy sakes. In an apparel industry where product hegemony is fickle and in a dicey economy to boot, why would Crocs’ management not want to pull in every legitimate consumer dollar it can while the gettin’s good?
Costco should NOT market gray market goods! The manufacturer is entitled to select channels of trade. Ill will is hard to reverse; Costco customers like stock predictability.
While Costco is not acting unlawfully, their actions in buying goods indirectly when they cannot buy them directly is unwise. Costco is not 42nd Street Photo.
Often, suppliers are only worried about selling as much as possible, not who is buying, until it is too late. They force/encourage retailers to buy more than they need to make their sales numbers. This is frequently done with deal money.
Retailers may forward buy, sell the goods or divert. Anytime a retailer is overloaded, they will look for options. In apparel, this is frequently done at the end of the season. Costco is smart. It uses small quantities to keep the treasure hunt going. At the same time it buys slower selling items and end of the season/year merchandise to offer consumers good value. So far, diverting is legal except is a few small cases. Don’t expect Costco to back down on a winning approach.
I find this ethically questionable if, indeed, Crocs truly didn’t intend for Costco to have their product. And it’s been my observation that retailers and distributors who push ethical boundaries eventually get into trouble.
It is good for the manufacturer of an exclusive brand to be kept on their toes. Crocs has been wildly successful, and as to the fad aspect, this may be the telling year. They must protect their dealers, however, they have probably already over-extended distribution.
I was at three small independent retailers Friday who had a limited selection of colors, styles and sizes of Crocs in stock.
Crocs needs to reevaluate their minimums. In my experience low minimums where dealers are left with odd sizes, designs, and colors create more dealer problems than high minimums that ensure dealer success.
This sets the little guys up to help the manufacturer get visibility but in the end drives the consumer to the “big guys” such as Dick’s Sporting Goods with their huge display, specialty designs (OSU Buckeyes) and full range of colors and sizes. They have undermined their own dealer network anyway.
Although Costco seems to have only procured an amount for treasure hunt purposes, it’s still going to be a sizable amount. Crocs should be able to figure out which accounts they supply are the potential culprits.
I doubt the Costco buyers scoured tons of small quantities from numerous suppliers.
Or it’s simply a lack or retail relationships. I’ve worked at companies where a sales rep sells to some low key accounts nobody really tracks and the product ends up diverted to another retailer. Every large company has experienced this at some time. Quantities are never too big to red flag, until someone notices it in the marketplace and then people start doing some digging to see why it happened months later.
If Crocs uses wholesalers and distributors, they can try to police them to not ship to certain retailers, but if they do, too bad. Blame yourself or your account for having untrusting relationships.
Crocs are a fad and low priced. Most Crocs I see are only around $30-60. These aren’t luxury products we’re talking about,unless there are hugely expensive models I’ve never seen. At these prices, they are actually low end shoes. I can’t remember the last time I bought any shoe at such a low price.
If anything, Crocs should be pleased. Costco may not give large manufacturer margins, but with the potential sales volume, they definitely provide a blanket of consistent sales and margins to help the balance sheet.
It’s called “diverting.” The Grocery and Mass Classes of Trade have used this avenue to increase their bottom line for quite some time. Nothing new here.
If Costco chooses to sell at a lesser margin than another retailer, that is their business. Wal-Mart does it all the time and I don’t see many manufacturers shying away from them.
Some of you missed the point of the article. It only uses “Crocs” as the latest manufacturer to complain that their product is being sold through “unauthorized” channels. The article is supposed to be about the practice of diverting product from a legitimate source and being sold legally to consumers through an alternative retailer.
The real question is, after the sale of a product by the manufacturer to a authorized distribution, how much control does the manufacturer have if the product is legally sold to a third party? Legally, this is a gray area. Hence, the term gray market. Until there are defined laws restricting sales of this nature, this practice will continue. So far, Costco has obeyed the laws. Because they have a reputation to maintain they will continue to do so.
As far as “Crocs” goes, the publicity generated by this is probably worth more then they could ever have financed. Good luck to them. I hope they can stay around as long as Costco.
Costco is a responsible retailer. Suppliers who choose to not do business directly with Costco should rethink their strategy. There is a way to have a winning channel strategy with Costco. Because Costco ONLY chooses top quality brands to put on its shelves, personally, I think a savvy supplier couldn’t have a better marketing strategy than to “accidentally” find its products in Costco stores. To consumers, this means the product must be one of the best in its category! To the supplier, this means they must be selling!