Costco’s Manhattan Project
By Tom Ryan
Costco’s first store in Manhattan, opened in East Harlem last November, has
underperformed so far. The subpar showing is being blamed on everything from
issues around parking access to whether bulk selling ultimately works in Manhattan.
The underperformance came to light after word leaked that Costco terminated
160 of the store’s 453 workers in January. Although many were seasonal, the
number was higher than planned. A Crain’s article at the time listed
numerous problems with the store, including its 15-minute walk from the nearest
subway as well as its $4.00 parking fee. Nearby busy stores in Sunset Park,
Brooklyn, and Long Island City, Queens, offer free parking.
The third possible
problem was the longstanding worry even before the store opened: whether New
York City living was meant for bulk buying.
“People having large-enough apartments to store in bulk is an obvious concern,” Anita
Kramer, senior director of retail development at the Urban Land Institute,
told Crain’s.
On Costco’s second quarter conference call on March 22, CEO Richard Galanti
admitted Costco gets “a lot of grief for the parking lot because it costs
$4,” while
stating that Costco doesn’t own the lot. But the store is only at about 80
percent to 90 percent of its expected sales and he implied the Crain’s story
was blown out of proportion. “We want to get as many people back to work
and as quickly as possible, but it’s continuing to grow,” said Mr. Galanti.
Nonetheless, weekday traffic has been lighter than expected. Mr. Galanti said, “What
we are finding is that during the week we get a lot of local neighborhood traffic.
What you don’t find is people on their way home from work saying, ‘Hey, let’s
go drive over to Costco’ on their way home from work.”
On The Wall Street Journal’s MarketBeat blog, Matt Phillips
said Costco misread the market. He wrote, “New Yorkers don’t tend to
travel around in cars. Instead we opt for an elaborate system of subterranean
railroads that convey us hither and yon about the city. In these trains, we
are often crammed cheek-by-jowl with our fellow travelers, with little room
for the pallet-loads of cashews and toilet paper that suburbanites are at liberty
to load up on.”
Finally, a lighter story this past Saturday in The New York Times painted
an ideal picture of how the East Harlem scenario should work: “On a recent sunny
Friday, Costco was an oasis of urban harmony: Parents who live in public-housing
complexes shopped for after-school snacks alongside people planning to split
their loot between homes in the city and the Hamptons.”
But it also brought up the fourth potential problem with the store: whether
the store had the right merchandise mix. Rob Coope, the store’s general
manager, said the store is finding that Manhattanites were more likely to prefer
the smaller and higher-end version of offerings.
“Almost all the questions we had were, ‘Can you get the healthier
version?’ Organic sugar, low-calorie bread, soy cheese,” Mr. Coope
recalled of the early weeks. “Kosher, big. Healthy, organic, big. Much
bigger than the other buildings.”
Discussion Questions: How might have Costco misread the New York City market?
Of the issues mentioned in the article, which do you think are its biggest
hurdles to jump?
I’m just challenged to believe that Costco–or anyone else for that matter–can sell anything in NYC that can’t be carried on the subway. Maybe they should offer online order/home delivery.
The merchandise mix problem is more interesting, and one that I wonder about for the future of these warehouse stores in general. Healthier choices aside, with awareness growing about sustainability and local food options, how does bulk buying fit into the mix? Often, the bulk packaging isn’t any less than when you buy individuals in a store–just wrapped up and palletized for your convenience. And what does the food supply chain look like going into these mass-quantity stores? NYC may be the bellwether for future trends to come. And you know, in that regard, even a store that does not perform well may be worth it.
People in Manhattan and the exurbs don’t shop the same way they do in suburban stores. Costco should have known this before they even opened the doors. This doesn’t mean completely eliminating bulk packs. Just have a talk with vendors about smaller ones.
Have you ever seen the kitchen, closets, and pantries (if there is one) in New York City apartments? An 18-pack of paper towels could take up half the closet. And I dare you to schlep it on the subway.
Oddly enough, I was at that store last week. Seemed fairly busy. But they need to adjust the mix.
What was Costco thinking? People who don’t even own cars, live in tiny apartments that may not even have elevators as Costco shoppers???
Oh my. Even if the people liked the mix, how could they manage the logistics?
The paradox of bulk buying sums it up. Where to put 18 packs of jumbo paper towels in a one bedroom apartment gives you pause to buy it in the first place. I’ve become a poster child for Costco since it opened in New York City. However, I have to be very strategic in my purchases. And I try to be in and out before the $4.20 parking fee goes up to the next level.
I have to know where the best values come from and whether I will use the food before the expiration date arrives. In some cases (literally) I have comfort in knowing that the price per item consumed is still cheaper if I don’t use all that I buy.
Undoubtedly the location is not ideal for many reasons, but as Best Buy, Target and Marshall’s open their stores in the same site, Costco may benefit from the customers who come to the other retailers. However, the other retailers may face some of the same issues such as distance from the subway.
There is a learning process needed for prospective customers and Costco. Costco may also have to consider alternative marketing strategies for the Manhattan store. In that regard transportation to and from along with storage and usage (before expiration) will be strange bedfellows with the usual awareness and image building messages.
Having lived in NYC for quite a few years (and then the suburbs before moving to the Vermont woods), I relate to all the red flags waved here. My apartments were all too small to store much beyond immediate needs, the fridge and freezer were tiny, parking/driving was a hassle and the idea of carrying groceries on the subway is laughable. What intrigues me is how the market is clamoring for more healthy foods. Would love to know more about the demographics on that. Trying to buy “healthy” in inner cities is nearly impossible, perhaps because of preconceived notions about the demographic. If the demand is there, I’m wondering if it is coming from the gentrified niches, or from the local market in general.
Really odd that Costco would go there. Paid parking is usually a store killer unless the store validates the parking so it’s free. Bulk buying for small households also sounds odd. I know a lot of pressure is put on chains to open in difficult urban areas. Most chains know its a no-win situation. I’m surprised Costco fell for it.
If Home Depot can make it work in Manhattan and other large item retailers, I’m sure Costco can get it right too; they aren’t stupid. Most of the concerns expressed in the article and comments were known prior.
Costco’s had good intentions but with a customer base of small-area dwellers, oversized assortments, a parking fee and long walk to the subway have turned to into repentions. What were they thinking way out in Washington state?
It is easier for outsiders to second guess than for insiders to find great locations in mature markets. Nothing ventured nothing gained. They will figure it out.
New York City is the only locality in the country where more than half of all households do not own a car (the figure is even higher in Manhattan, over 75%; nationally, the rate is 8%). So why would anyone be surprised at the store’s performance, based upon this fact alone?
The right Manhattan strategy for Costco is to leave Manhattan.
People shop a typical Costco store in a fundamentally different way than they do something like a neighborhood store–which most other stores are. Costco is NOT a drop-in store, but one you make significant effort to get to, and consequently spend significantly more time, spending a lot more money. I see the parking and subway problems as both fitting right in with this general characteristic of the Costco trip. The neighborhood store, of any kind, is more of a pop-in, superficial shop place, whereas Costco is a destination that requires effort, and delivers great value on high dollar purchases.
All the focus on toilet-paper purchases is greatly misguided. Costco is the #1 purveyor of fine jewelry in America, for example. Buying a $30,000 piece of jewelry? How about saving $10,000 and paying only $20,000 at Costco. This is simply an extreme example of all the high dollar electronics, gadgets and gewgaws that flood the store.
Obviously, getting all this right in Manhattan is taking a bit of time. But I see nothing that says this won’t be a smashing success. “Patience…and shuffle the cards!” (Cervantes.)
Certainly buying bulk in Manhattan is most likely the biggest hurdle. The Costco in LI City and out on the Island doesn’t suffer from the same problems. Why? Transportation and larger apartments and houses.
Also, $4 for parking doesn’t help. While it may not be Costco’s lot, it’s their customers. They should rebate the money if the customer spends over $100 on a trip.
Costco doesn’t have merchandise mix problems in other urban areas. It’s the big bulk in Manhattan issue. that being said, over time, Costco will prevail.
I never could really picture a Costco in the middle of a downtown area. It’s too congested and the reason big box works is the easy access and ample and free parking. They tried, and I’m sure some quick fixes here and there will improve performance. The parking thing has to be fixed right away.
I would say their biggest challenge is the merchandise mix. If New Yorkers are looking for higher-end products, that could prove to be more of an opportunity than a challenge if Costco’s buyers are up to task.
Coming soon: Kale in 10 pound bags….
” CEO Richard Galanti … (only at about 80 percent to 90 percent of its expected sales)… implied the Crain’s story was blown out of proportion.”
And I agree…100%; get a grip people: anyone who knows anything about statistics knows every estimate comes with a range of probable values, and I would think “only” 80-90% would fall well within that range (If it were 30% I’d worry…maybe).
As for all of the second guessing, all of these factors–lack of car ownership, small apartment size, parking fees–had to have been known going in, so I don’t see why they should be treated as if they were something omitted from the planning process.
I am a born and bred New Yorker. That said, Costco will never work in Manhattan unless it is near a train station and near major bus routes. New Yorkers will schlep anything by train or bus. We have no shame where that is concerned!
Costco would also be wise to make sure they have taxi stands at their locations in Manhattan. I am sure there are plenty of gypsy cabs that frequent its front door where it is currently situated. They need to better think that out going forward.
The parking fee has to go away forever! Did they really think the Harlem residents didn’t know parking was free elsewhere?
Also, contrary to what you all think, there are plenty of large, pre-war apartments in Harlem and lots of residents do have the space to buy in bulk. Plus, many long-time residents may consciously be avoiding the store and frequenting local establishments out of loyalty. Also, many long-time residents still use dish towels as opposed to paper towels.
Costco didn’t really research the area. If they had bothered to talk to true New Yorkers, who they actually thought would travel out of their way just to shop Costco and the area residents, they wouldn’t be in the predicament that they are in now.
Costco can succeed in Manhattan and they don’t need a crazy change of product mix to do so. They just need to talk to us about where they should actually look to set up shop and what we need Costco to be for us.
Just goes to show you; not every retail business model works everywhere. Some people have figured that out though–i.e. where’s Sam’s Club NYC??…and others, like Home Depot, figured it out the hard way, the same way Costco is doing right now.
All in all, it’s a good learning process for Costco to go through, albeit an expensive one. They’ll be a thousand times smarter in very short order. A great study will be their assortment of 2011 vs. right now. All retailers will learn something about urban stores from that study.
I’m sure Costco factored in all the unique demographics such as auto ownership, household size, trade area draw, buying habits, etc. Then when factoring the population density, it still probably looked too good to be true. If 80% of the customers have no use for a wholesale club, then it still means a heck of a lot of people are potential customers. The problem is that perhaps 95% are not club shoppers. In reality, I would guess sales are off a lot more than 20%.
I’m not going to fault Costco’s research because there was no analog to go by. But they have one now and it should save them from making the same mistake in other markets.
When I worked in New York, we opened a store directly across from this center on 116th when Home Depot was planning to open there. Home Depot backed out and was later replaced by Costco.
The center is designed to serve more than just the Upper East Side or East Harlem. Its proximity to the FDR/Harlem River Drive and the Tri-Borough bridge make it possible and relatively convenient for people to travel by car to get there. Many of the people who would travel there would be non-apartment dwellers.
It’s important to understand that All of Harlem but particularly the East Side is in transition. Gradually, the brownstones are being bought up and renovated and apartment buildings are being rejuvenated but it’s a slow transition, especially in light of the recession. The area is still quite rough around the edges and may not yet be the top-of-mind shopping destination either for the Upper East Sider or the person driving in from Queens.
I strongly believe that in the long-run, however, this will be a winner for any major retailer in this center.
As a long time Chelsea resident, I was very disappointed with my community board when they denied Costco opening a Chelsea store. I go to the East Harlem store about once a month, but the subyway-bus ride takes nearly an hour. It is not convenient to the subway. Costco needs to open a downtown location—please keep trying!!! I’ll get my neighbors to sign up!