Oh no, recession - pitch Costco?
2 min- read
It’s tempting to want to sell into Costco when the economy is slowing. I know brands want a cash infusion right now.
During the last recession, 2007 – 2009, Costco food sales increased (included in the warehouse category below) while retail grocery decreased as a percent of total food expenditures.
Does this mean you should pitch Costco now that recession is looming?
If you are a premium brand, the recession is not a reason to run to Costco. When you dig into recession era shopper data, as Chicago Booth researchers did, you learn that “Cheap brands are stealing share from the mid-tier brands, while the expensive brands seem insulated from the effects of the recession”. (For more insight into natural/premium segment performance across retail channels, see this post.)
Still, you might be tempted, especially if you are low on funds and having a hard time closing your next round. Costco is big volume business, and an infusion of cash might feel like just what you need right now. Perhaps you’re rationalizing getting your products into Costco as brand building, because items get so much visibility there.
In that case, let’s explore if you are Costco ready.
Costco is a different kind of retailer: Costco is about value, limited SKU assortment, the treasure hunt, and free in-store sampling. From their suppliers, they demand flawless logistics and high sales hurdles: dollars-per-club-per-week ($/C/Wk). It is rotational business, meaning they test you in one region, you get 13 weeks to prove yourself, and you have to continue proving yourself in future rotations.
The Costco buyer is not your friend, or the broker’s friend. Costco buyers pride themselves on being jerks. They like to be late to your meeting just to rattle you. They are demanding. All in the name of being unabashedly on the side of their members by offering value to their members. Period. To impress the buyer, show the value.
Show the value: The member price needs to be at minimum 20% value compared to the category which can translate to up to 40%+ value to your regular grocery retail price (on an equivalized basis). So, do the math and show your work.
Pack size, Packaging, and Pricing: All three will be unique to Costco to fit their no-touch merchandizing and bulk-pack business model. You must anticipate how much you will invest in new printing, packaging, run volume etc. against what is anticipated to sell through. Costco is 13-week rotational business. If at the end of 13 weeks you haven’t sold enough, Costco will cut you loose and you’ll be kicking yourself for spending all that upfront money to get into Costco in the first place. You have to get the economics right. Pricing is a strict 11% - 14% mark-up off of the cost you give Costco.
Don’t let rotational business disrupt regular business: Be prepared to spend time getting Costco ready. It takes months. In the meantime, you do not want to neglect your other business or put it at risk. Once your first region launch at Costco is over, you might have met their hurdles and get to launch in more regions. Or you might not. Don’t allow the new Costco business to make up more than 30% of your total sales because the capital tied up in ramping up can cause devastating losses if you lose regions or don’t get another rotation.
Logistics, logistics, logistics: Can’t say it enough: you have to be ON TIME. Costco business is cross-dock business. They don’t have storage - there is no warehouse behind the warehouse. You are given a window and if you have a late truck you need to call them and let them know of the delay. If you co-pack, you need to ask about your manufacturer’s Costco supplier track record.
What are the sales hurdles? Every category is different. Don’t hold me to this, but I knew you’d ask:
· Dry grocery items: $800 - $1000/C/Wk
· Frozen: $1000/C/Wk
· Refrigerated: $1500/C/Wk
Contact Jeremy Smith of Launchpad, an agency focused on helping food and beverage businesses succeed at Costco. Launchpad represents mostly brands, but some private label as well. Jeremy has over 20 years of experience working solely with Costco. What I love about talking with Jeremy is he doesn’t pull any punches. Costco is great business but brutal business and there’s no sugar coating it. Understanding the economics of Costco and its rotational nature is crucial to building out your profitability model.
All my best,
Beyond Meat products tested positive for Listeria 11 times between the second half of 2021 and the first half of 2022
I don’t know what’s going on at Beyond Meat but ICYMI go back and read my last few posts!