Costco Aims for a Younger Customer, Sells More Kale
Costco, home of cheap hot dogs and unreasonably large buckets of mayonnaise, has found a new niche: fresh food and, along with it, fresh customers. In an earnings report today, the company said sales of fruits, vegetables, and other perishables increased, in percentage terms, in “the high single digits.” Overall, it reported profit growth of 13 percent, making this its best quarter since May 2013.
The company has been stocking all that produce to lure younger consumers, a strategy it revealed in the spring. Chief Financial Officer Richard Galanti crowed about the hefty margins on new organic fare, including “giant bags” of kale. “That competitively gives us a leg up,” Galanti said on a conference call this morning.
At the same time, Costco (COST) started blasting out membership discounts on the Web. Last quarter, it dangled a deal on LivingSocial, offering $20 in Costco cash and coupons for a free apple pie and a rotisserie chicken, along with a $65 membership. “These types of promotions we believe will allow us to get in front of younger demographics,” Galanti said in a conference call this morning. Costco is also luring urban shoppers with free delivery service in Los Angeles, New York, and San Francisco via a partnership with Google (GOOG).
The millennials appear to be gobbling it up. Buoyed by 2 million new shoppers, Costco’s membership revenue was up 7.3 percent in the quarter. This is critical, because memberships are pretty much the only place Costco makes money. For the year ended Aug. 31, Costco collected $2.4 billion in membership fees.
It also realized a $2.1 billion profit. That those two numbers are close is not coincidental. The kale sells at cost; the customers are the margin. The younger those customers are, the more years of annual membership payments they have ahead of them.
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