Does Costco have a youth problem?

On last week’s fiscal second-quarter conference call with analysts, Costco officials noted that the company is taking several steps to reach a younger demographic. These include bringing in more organic foods, testing same-day delivery with Google Express, and social media outreach.

Asked directly in the Q&A session how Costco was trying to "get younger people into the warehouses," CFO Richard Galanti cautioned investors that Costco wasn’t making any major changes to reach Millennials.

"We’re not going to do anything rash but we’re also not going to have our head in the sand here," stated Mr. Galanti.

Many of the steps also offer some appeal to all ages. For instance, Costco is increasing organic offerings, which Mr. Galanti described as a "big business" and "growing fast" with the chain able to show "a better savings on those bigger ticket price point items." Since stocking organic beef, the chain is able to reach many existing members who never bought beef from Costco. But Mr. Galanti said organic fans "tend to be a little younger."

costco fb page r1A Seattle Times article noted that Costco’s bulk buying better serves suburban homes with garages and ample closets rather than urban locations where the young are congregating. McAdams Wright Ragen analyst Dan Geiman, remarked, "You’re not going to stick big vats of mayonnaise and big stacks of toilet paper in a small apartment."

But Mr. Geiman said the organic push and any increased online presence could help.

"Anything you can do to lower the age of your target market is going to be a positive in the longer term," he said.

Besides the organics push, Costco’s minimal online presence, especially given its spot as the world’s fourth largest retailer, received some media attention. Some analysts are questioning how vulnerable Costco is to losing sales to Amazon Prime.

According to Internet Retailer, Costco’s e-commerce sales represented only a little more than two percent of its total sales in it fiscal 2013 year. To boost the business, Costco recently added apparel and some health and beauty care items to its online offerings, is better coordinating online with in-store merchandising, and started shipping out of three depots instead of one.

Around social media, Costco’s Facebook page has 1.1 million likes versus
22.7 million for Target and 34.5 million for Walmart. Its Twitter page is inactive with no followers versus 1.08 million followers for Target and 465,000 for Walmart.

BrainTrust

Discussion Questions

Is there anything (e.g., bulk buying) in Costco’s business model that handicaps the chain when it comes to a younger demographic? Which of its current steps will be most effective in helping Costco attract younger club members?

Poll

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Frank Riso
Frank Riso
10 years ago

Costco will see the younger demographic pooling their resources so that bulk buying can be shared. Many will not yet have a home for storage, but could handle sharing some bulk paper products etc. As they do buy homes, they will then be a full shopper at Costco and they will also take advantage of home delivery as many households will have two working members of the family. The Costco experience is one that most Millennials are looking forward too as their families grow.

Nikki Baird
Nikki Baird
10 years ago

It’s funny – I just finished reading an article about how rising home prices and tighter lending markets continue to make it difficult for first-time homebuyers. Which gets right to the point about how urban dwellers just don’t have the space to stash mass quantities of anything. But I have to think having kids is the part that pushes people over the edge into bulk buying, more than just having the space. The two end up going hand in hand, I think. At least, they did for me. And I’m still not convinced that this is the driving factor of Costco’s success or lack thereof. Not if how well Costco seems to be doing in Manhattan is any indicator.

I think Costco should be more worried about Amazon Prime and subscription services. Costco has long focused on a treasure hunter kind of store experience, where the products can be here today and gone next month. But that’s becoming dangerous. If I don’t find what I want to buy on a Costco shelf, I don’t wait until next month to see if they get it again. I turn to Amazon Prime. And once there, Amazon does an excellent job promoting its subscription service to keep me there.

Organic, whatever. Not having to haul home large bulk packages? Not having to think about ordering more because it magically shows up when I need it again? Yeah, that’s tough to beat. And that’s not just a Millennial story. That’s a shopper story.

Jason Goldberg
Jason Goldberg
10 years ago

All established retailers are struggling with how to attract/engage younger shoppers. Millennials simply don’t automatically inherit their parent’s brand preferences, and so all retailers are struggling to earn those new shoppers.

On top of this, Costco is optimized for suburban living in an era in which populations are migrating from the suburbs to city centers. Fewer Millennials own a car (US use of public transportation is at a 50 year high) to visit a Costco, fewer Millennials have the pantry square footage that Costco is optimized for.

Space constrained shoppers are opting to subscribe to necessities that arrive just in time, rather than stocking up at Costco. Which is exactly why Sam’s Club rolled out its subscription pilot last month.

Costco is a great retailer with a world-class buying organization, and I can imagine numerous ways in which they can re-invent themselves to appeal to millennial shoppers. Like most legacy retailers, they most painful part will be a real estate re-alignment.

Carlos Arámbula
Carlos Arámbula
10 years ago

The club store business model is not appealing to Millennials.

Millennials are explorers, and it’s impossible to be an explorer when you need a membership. I can think of several promotional programs that can help Costco attract a younger audience — all of them geared to explorer appeal, but ultimately unless the business model changes they will not lead to increased traffic by a younger demographic.

I would consider increasing store appeal to the growing demographic that would favor the store format: Hispanic families.

It is my understanding that Hispanic families already favor club stores. So simply build on that appeal by catering to specific flavor profiles, bulk purchase preferences, and favorite brands and capture a large percentage of the population that makes up the younger/Millennial consumer.

Jeff Hall
Jeff Hall
10 years ago

I don’t believe Costco has a youth problem, for Millennials are consciously not a part of its ideal and target customer base…the CFO even says as much at the top of this article.

Costco’s sweet spot lies with higher income households, usually with kids, and the brand does a great job of catering to the needs of that demographic. Those in the younger demographic become Costco customers when they transition into that phase of their lives.

I do agree with others’ sentiment that the convenience of Amazon Prime is a much bigger threat to the Costco model than the challenge of attracting Millennial members.

Richard J. George, Ph.D.
Richard J. George, Ph.D.
10 years ago

I believe the article described most of the impediments. However, an additional impediment is income levels and household development spending habits. I tell my students that when they graduate, happy hour and dinner can now become two separate events. The millennials are not used to big basket spending. Besides the noted space constraints there are budget constraints associated with bulk buying.

Social media development is a minimum to engage this group. In addition, the “treasure hunt” which Costco is so known, for can be an additional draw and communicated via social media.

This market represents untapped potential for Costco.

Ted Hurlbut
Ted Hurlbut
10 years ago

I think it’s important to maintain focus on the target customer. In the warehouse segment, the target market is small businesses and homeowners. As Millennials become able to afford homes, and move from more urban areas to the ‘burbs, they’ll begin to fall into the warehouse clubs’ demo.

Catherine Hamilton
Catherine Hamilton
10 years ago

Many young people are living in urban environments with horrific traffic conditions that make getting to Costco difficult. Public transportation makes “hauling” your purchases home a challenge.

Also, with limited storage in many apartments and singles, it becomes more economical to shop at the Whole Foods or Safeway conveniently located around corner.

While Costco’s initiatives are well intended, it likely won’t change the shopping habits of the young people I know.

Tina Lahti
Tina Lahti
10 years ago

I think that a lot of retailers need to face the fact that everything about the way we live has already changed. Marketers and the media are just slow to recognize it. Many seem to think that all they have to do is wait for Millennials to grow up, have a few kids and move to the suburbs; completely ignoring the fact that life patterns have already dramatically changed. Almost half of all babies in the US are born to single mothers; over 40% of Gen X women don’t have children by age 40; people are already paying close to twice as much per square foot for urban versus suburban homes and urban homes are appreciating faster. Better utilization of social media won’t change this.

COSTCO is going to have to show Millennials how the warehouse club experience benefits them right now, not in some imaginary idea of the future that is rooted in the past.

Verlin Youd
Verlin Youd
10 years ago

It would seem obvious that Costco should increase its focus on e-commerce, including mobile. Also, with more Costcos in urban markets, there may be an opportunity for scheduled home delivery.

Li McClelland
Li McClelland
10 years ago

This is no mystery. The article does a good job of identifying why young urban marrieds, singles and Costco are not a good match. Space and disposable income. This demographic will never be Costco’s target market without radically changing their warehouse and bulk buying model–and they’d be crazy to do that.

Christina Ellwood
Christina Ellwood
10 years ago

I agree with Frank Riso that an app that allows Millennials to share bulk purchases would help their sales. Young people are price sensitive and like Costco’s prices but they don’t have the up-front money to buy and they can’t consume perishables fast enough (in addition to lacking the storage space as was already mentioned). They like bulk because less packaging results in less solid waste (good for the environment). Like crowdsourcing, freecycling and other ways to “share” material goods, I think Millennials would like an easy way to split bulk goods.

Don’t forget style. Costco’s clothes and furnishings are not geared to youth styles.

Organics are also appealing and were already mentioned.

They would also do well to improve customer service as this is a weakness and millennials are impatient. An app that let’s them know how long they will have to wait to pay would be helpful to decide when to shop and at which Costco store. It could include both historical “best times” and also real-time wait times.

Kelly Tackett
Kelly Tackett
10 years ago

Costco isn’t alone, and many other retailers across different sectors are having the same issues trying to capture the attention of a generation whose very wants, needs and values are all very different from its predecessors. What strikes me about conversations about Millennials is the same thing that strikes me about conversations about omnichannel. To consider generations in silos is the same trap that many retailers are falling into with omnichannel. It’s about shoppers and shopping–not generations and channels. And Costco clearly has room to improve in both areas as the other panelists have pointed out. Shared memberships, subscription models, and urban/smaller formats with click and collect all are worthy of exploration.

Daryle Hier
Daryle Hier
10 years ago

Younger adults expect the process to be free so even though Costco has better pricing, the cost of the membership will be an obstacle.

Although anecdotal, I will say that I shop in a college town and though there’s not as many younger types as you might expect, I often check to see what they’re buying and it may surprise you, or maybe not: I often see regular hamburger (not organic – probably because of the extreme cost), hotdog and hamburger buns along with soda pop. Yes, they do tend to go for some of the organic offerings, but I just don’t see this group as terribly involved with “organic or else.” Again, this is anecdotal and we might be talking about the difference between very young adults and those who are out of school and have a job, along with families.

The idea of expanding their social media is a must – NO Twitter followers? They need to move into the 21st Century! And their weakness with online is something Costco will need to address quickly and attack with a vengeance.

Costco has an appeal and their target demographic fits them right now, but they need to look to the future and do it soon.

Mike B
Mike B
10 years ago

Many young people grew up going to Costco with their parents and the perception that going to that messy parking lot and dark store with long lines was to save money.

Then these young people left home and paid for a Costco membership while in college and or while living in an apartment. The store is typically not convenient, has limited hours, and takes a long time to get in and out of. And they find they can’t use many sizes or the items for sale aren’t what they are looking for. Then membership comes up for renewal and they wonder why pay that?

I think they need to wait for young people to grow up, but the hard question is will they return to Costco once they have a family? The shopping experience is awful, at least at the Reno location…I am turned off.

Ed Rosenbaum
Ed Rosenbaum
10 years ago

When you really sit down and think about it, I don’t think any of the warehouse models attract the younger generation. I am in agreement with most of the earlier comments. The younger generation does not have the house, space or family large enough to have a need for warehouse shopping.

The article did make me think about the customers we see when we shop at Costco or Sam’s. Yes, they are older or businesses shopping for bulk items. By older, I am saying families with more than one child. Certainly not a scientific analysis. Just one person’s observation.

Lee Kent
Lee Kent
10 years ago

Costco needs to do what Costco does best. Vet products like nobody else does, thereby ensuring that the products you buy from them have value. And then market the heck out of that vetting process.

I saw a special about Costco some time ago that took the viewer through their vetting process. It was awesome and much of what goes on behind the scenes, I actually did not know. Can you imagine?

Costco is known for having quality products at reasonable prices and I do believe that this will continue to serve them well. They simply need to get the message out in a way that resonates with this younger generation.

But we do need to remember that many of these young people have grown up shopping at Costco and know the value of bulk purchasing. They will likely join Costco when bulk works in their lives.

And that’s my 2 cents.

Larry Negrich
Larry Negrich
10 years ago

First, I wouldn’t say the “sky is falling” as Costco is a retailer that understands its target member and has created a great shopping experience that appeals to this group. Focusing on the specific customer is something that many unsuccessful retailers fail to do, leaving them always to chase a customer or market that looks like a better fit where they will, this time, make money…arg.

But it is always good to be teeing up the next generational wave of shoppers so getting more fully on mobile, social, and the ecom (mcom) bus are channels Costco should be leveraging. There are some characteristics of Costco that would seem to be more geared at the homeowners and multi-member families, both groups that Millennials seem to be a little late in joining. I found a Pew study that stated in 2012 36% of the nation’s young adults ages 18 to 31 the so-called Millennial generation live at their parents’ homes. Preparing now for when these people either move out of their parents’ homes (or inherit their parents’ homes) will keep shopping carts overflowing at Costco in the future.

Kenneth Leung
Kenneth Leung
10 years ago

Interesting thing though is that part of Costco’s business is supplying small business and home offices, which is giving it the infusion of younger buyers. The younger buyers are more apt to be influences and communicated to by social media, so it is important from a brand relevancy for Costco to leverage those mediums, whether it is to communicate with them as personal or work buyers.

I just spent over $300 at Costco over the weekend to stock up and I live in a condo, and one thing I did notice is that the toilet paper super pack comprises of 6 packs, which you can squeeze into all sort of spaces in a condo. 🙂 The hand soap is now a twin pack of medium size rather than one large bottle. I guess they have figured out people break apart large packages for condo and people who are sharing purchases.

Gordon Arnold
Gordon Arnold
10 years ago

Like many retailers, Costco is suffering with their lack of marketing prowess. This is often mistaken for an identity crisis and or a lack of market opportunity awareness. Wasting time and materials looking at a market segment without information supporting the return on these endeavors is a clear case of mismanagement. Costco needs to first explore the present day retail opportunities for a bulk provider and then explore the needed methods of supplying the new prospects with introductory and value messages. As I indicated in the first sentence this starts with a real marketing department within the company.

Brian Numainville
Brian Numainville
10 years ago

While Costco does a good job of appealing to its core customer, the customer of the future must also be considered as part of long-term strategy. And I agree with the comments earlier that a bigger challenge than simply appealing to Millennial shoppers is Amazon Prime. As I tried out Google Glass the other day, it became ever so apparent that the world is changing moment by moment, and retailers that survive into the future will need to adapt to new models. And quickly.

Diana McHenry
Diana McHenry
10 years ago

Costco is a great retailer and buying organization (as Jason notes). I queried some young adults (my sons and their friends are handy) and this small sample is glad to shop at Costco, get the deals, and pay the membership when the stores are geographically close enough. That’s the challenge. They said they cared about value versus cool with Costco and that social media could be a place to offer an exclusive deal and drive traffic versus change an image.

Shilpa Rao
Shilpa Rao
10 years ago

Bulk buying and membership fees to enter are the inhibitors. When you are younger, you don’t worry much what you would need for a month. Big sizes not only do not have have space in their pantry, but also eat up their disposable income which could be spent on phone bills or partying or anything else.

I think more than organic, the subscription model is what could help them and perhaps a subscription based group buy for large discounts.