Out Of The Box Thinking

Bob Cooper can't pass a Costco without stopping. The California wine connoisseur has filled his cellar with more than 1,000 bottles purchased off the wooden shipping pallets at the no-frills warehouse club. And he's not buying the cheap stuff. Pinot Bob, as his friends call him, favors full-bodied pinot noirs that can run $80 a bottle. And he buys them by the case. Last year alone, Cooper dropped $11,000 on wine at Costco. His says his wife is now trying to put him on "wine restriction." But it doesn't sound like it's taking. "When I find that key buy at Costco, my motto is 'clean 'em out'," he says. "You have to or somebody else will."

Costco is overflowing with big spenders like Cooper. While most merchants struggle with the sluggish economy, Costco's cement aisles have shopping-cart gridlock. The big retailer has become America's No. 1 wine merchant and No. 3 grocer, and accounts for one fifth of sales on some best-selling books. Oh, and it's America's top seller of toilet paper--moving enough rolls in a year to encircle the globe. Costco's sales have almost doubled in the past five years to nearly $40 billion. Even war didn't slow traffic at Costco's 306 U.S. stores: sales jumped 8 percent in March--nearly double expectations--and climbed another 5 percent in April versus last year, execs say. And here's the kicker: Costco is clobbering America's retailing goliath, Wal-Mart, in the $70 billion warehouse business. Its sales surpassed Wal-Mart's Sam's Club warehouse chain for the first time last year, according to researcher J.M. Degen & Company. And a typical Costco store does almost twice the business of a Sam's outlet.

How is Costco beating Wal-Mart in the warehouse-club game? By taking the traditional big-box strategy of "cheap, steep and deep" and transforming it into a tony treasure hunt. Before you reach the tubs of peanut butter and stacks of radial tires at Costco, you'll find an $10,999.99 Lalique crystal vase and a 42-inch plasma-screen TV for $3,000. Venture deeper inside and there are tanks of fresh lobster and walls of $90 Dom Perignon champagne. Behind a long glass wall in the back, white-coated butchers chop slabs of filet mignon and logs of pork tenderloin. The idea is that if you go in to buy a vat of mayo, you'll walk out with a cartful of Waterford crystal and a new Movado watch. "We try to create a sense of urgency, so if people see it, they'd better buy it," explains Costco's earthy CEO, Jim Sinegal, who still works and eats lunch at the same desk he started the company from 20 years ago. He also answers his own phone, since Costco doesn't employ a PR department or even advertise. That gives Costco the lowest overhead in retailing--even lower than famously stingy Wal-Mart. And it's why Sinegal can decree that no item will be marked up more than 14 percent--a ridiculously low margin in the retail business.

But aiming high is the real secret to Costco's success. By mixing class with mass, Costco attracts some of the richest shoppers around, with incomes twice the national average. Costco is a rare hybrid, says Robert Thompson, professor of pop culture at Syracuse University. "Its father is a Rodeo Drive boutique and its mother is Woolworth's." And after Costco's well-heeled shoppers cram their treasures into their Beemers and Benzes, they can't stop bragging about their finds. "A Coach handbag at half the price of a department store's gets people talking at cocktail parties," says Sinegal. "They don't talk about saving 50 cents on peanut butter."

--In the beginning, Costco was much like other warehouse clubs--offering cut-rate merchandise to small business owners. But Sinegal recognized that his business shoppers had plenty of money to spend on themselves, if only he'd offer them some indulgences alongside pallets of copy paper and fax machines. So as Costco expanded beyond its base in the Northwest, Sinegal relentlessly tested his shoppers' spending threshold. (He hasn't found it yet: last year a Costco shopper dropped $106,000 on a diamond ring.) As Costcos cropped up in affluent suburbs across the country, the buzz grew outside the business community. And today, individual members outnumber business members by two to one. "I'm a Costco queen," raves Michelle Heston, who just nabbed some leather pants at the Costco in Marin County, near San Francisco. "Everyone goes to Costco."

Sinegal would like to keep it that way. That's why each week he's walking the floors of Costcos throughout the country, constantly tinkering with the script for his retail theater. He's even developing two new concepts: an upscale home-furnishings warehouse and a giant gourmet grocery. He's also keeping a nervous eye on Wal-Mart, which just shook up Sam's management and is rumored to be looking to acquire BJ's, the No. 3 wholesale-club chain. Wal-Mart declined to comment. But the competition for Costco's moneyed clientele extends well above the traditional discounters. Just ask financial planner John Scales, who dropped into the Costco in tony Bloomfield Hills, Mich., last week. "I find better deals here on high-end stuff than I do at Neiman Marcus or Saks," he says, as he selects a Baccarat heart pendant for his wife. "You don't get the box, but so what?" Those upscale stores might want to rethink their packaging. Cachet these days is being found inside Costco's big box.