Millennials were supposed to rid the country of suburban warehouses. But as the supposedly finicky generation ages, it might mature into Costco’s ideal customer base.
Whole Foods is filled with members of the generation that has retailers on their heels. Trim millennials scurry about the South Lake Union store, picking up pricey beer, organic fruit, and almonds. Other shoppers on this festive December afternoon pick up potted pines small enough to serve as Christmas trees in tight quarters. After their baskets and reusable shopping bags are filled with enough goods for the night, maybe a few days, the patrons take a 10-minute walk or bus ride home.
Sixteen miles away, Issaquah’s Costco is crammed with members of the generations who propped up retail’s golden age. The store’s wide aisles are choked with baby boomers and Gen-Xers pushing carts, sometimes two at a time, filled with months’ worth of suburban family life’s essentials: toilet paper, macaroni and cheese, diapers. The sedan- and SUV-filled parking lot is an arena of shopping athletes competing to push the heaviest cart. Many vehicles have 8-foot Noble firs strapped to their roofs, ready to be lit and shown off in a picture window throughout the holiday season.
Some research by marketers and Ph.D.s says the Costco scene isn’t in retail’s future. The logic has face value: Millennials are sticking to cities and minimalist shopping tendencies, while older generations continue to fill large vehicles and pantries with staple supplies. Thus, as millennials replace older shoppers, Costco could be in trouble. But walk the aisles of Costco, and you’ll find an increasing number of the generation that was supposed to doom it.
Gina Locke, 29, and husband David, 31, are the prototypical millennial couple. They are comfortable with technology, environmentally conscious, and they work in the growing fields of data analysis and renewable energy. Their shopping cart is filled with, among other things, copious amounts of organic berries and leafy greens.
Their cart also holds Pia, a wriggling 2-year-old with a taste for strawberries. The toddler is a major reason, along with cost, that the Lockes are pushing a cart at the Issaquah Costco rather than filling a basket at a Whole Foods. “We buy things like diapers and berries in bulk,” David says. “Pia’s a vegetarian, and we only feed her organic. … The produce here is high-quality. We’ll buy organic berries and avocados, things like that.”
Three months ago, the couple moved from their North Seattle neighborhood to North Bend. A quieter lifestyle, home ownership, and more space to raise Pia enticed them away from the city, even though the Lockes left behind the social amenities of city life and lengthened their commute.
As the retail industry scrambles to accommodate a turbulent, tech-savvy, and unusual generation, Costco’s strategy is more reactionary: wait. While other stores revamp product lines, overhaul websites, and dive headfirst into social media campaigns, Costco — where the corporate Twitter account had, at press time, zero tweets — will wait for millennials to age and evolve into families like the Lockes, confident it won’t fall victim to its current customers’ kids and grandkids.
TO BE FAIR, THE generation in question is quite goofy. The 80 million people born between 1980 and 2000, the rough parameters used to categorize millennials, started out as an entitled and materialistic bunch that was spending a heap of Mom and Dad’s money on brands that functioned as status symbols. They wore sweaters emblazoned with Abercrombie and Aeropostale logos. They bought iPods, then iPod Minis, then iPod Touches. They purchased makeup at Sephora. Millennials’ parents spent much of their working lives during fat economic times, and they passed that money down to their kids.
Then the dot-com bust and the recession hit, and a generation shifted. Those economic downturns chipped away at parents’ savings and made it difficult for graduating millennials to find jobs. Thus, the youngsters’ habits changed. The flaunting of brands ended. Frugality became a thing. And the generation with unprecedented access to information started using it to make smart purchases.
The result is an often-misunderstood generation of pragmatic shoppers that has an estimated $500 to $600 billion of annual spending power. The Internet and smartphones have revolutionized shopping, but millennials still make 75 percent of their purchases in physical stores, according to a 2013 Accenture survey. Research is also disproving the generation’s disloyal reputation. Millennials use their multiple avenues of information to discover brands that meet the price point, convenience, and values they desire. But once a brand wavers, millennials take their dollars elsewhere. For example, millennials might switch stores based on price, but they’ll pay extra if their dollars support a charity.
“They grew up in economic prosperity, and they still have the same sensibilities. They’re just constrained by economic realities,” says Kit Yarrow, a Golden Gate University consumer psychologist who studies millennials. “I don’t think the recession changed what they want to buy. They still want the finest food. They still want the finest wine. They’re really creative in how they go about getting it.”
Millennials’ living situations also dictate their shopping habits. The generation is increasingly embracing a lifestyle determined by residing in dense urban areas. City dwellers drive less, or don’t own a car at all, and they often live in small apartments with minimal storage space.
Such living leads to minimalist shopping. A 2014 Food Marketing Institute study found that 25 percent of meals consumed by millennials contain ingredients purchased the same day, a far cry from the stock-up-and cook tendencies of previous generations. This approach produces the scene at Whole Foods — young shoppers filling baskets with enough food to last a short while, either because they are shopping based on a recipe or because they don’t have space for more.
Minimalist shopping and small homes aren’t traits of Costco’s typical customer base, but that doesn’t mean the company is stuck in yesteryear. Rather, it employs a deft product-selection system that allows adjustments without extreme changes to its business model, and its warehouse experience is one that might actually draw more millennials in.
IT’S CLEAR COSTCO ISN’T designed for the urban millennial. A car is all but necessary to haul the store’s oversized items, and most Costco warehouses are in the suburbs. But this has been Costco’s approach for years, and millennial-borne trends such as online shopping haven’t yet derailed the Issaquah-based giant. Costco reported a 7 percent revenue increase and a 6 percent jump in profit in fiscal 2014, and that was preceded by 6 percent and 19 percent increases, respectively, in fiscal 2013. That steady performance has occurred even though online sales account for just 3 percent of its $110.2 billion revenue.
Costco’s success hinges on memberships — net income in 2014 was $2.06 billion, and its membership revenue was $2.43 billion — and memberships are driven by value and a unique shopping experience. Costco’s products are inexpensive but aren’t low-quality, and its warehouse layout fosters consumers stumbling upon items they want but didn’t intend to purchase. “The pharmacy is in the store. Optical is in the store. Fresh foods are in the store,” says Piper Jaffray analyst Sean Naughton. “It is still a treasure hunt … going to Costco.”
If the end goal is memberships, then the vehicle is products, and Costco has a unique standpoint in that area. It carries roughly 3,700 products in each store; the average grocery store stocks 45,000. Costco also has an extremely short turnover time with vendors, which allows it to ditch items that aren’t winning over customers. With so few products, Costco is able to rely on its breadwinners while rotating in new items as customer demographics change.
“(Costco) doesn’t have to predict to be successful,” says Mary Ann Odegaard, director of the retail management program at the University of Washington Bothell. “They do well by seeing what’s doing well in the major market, then developing their own private-label product for something that’s already been discovered. … The formula’s adaptable. They just have to watch what people are buying.”
The formula has worked at Costco’s meat counter. As consumers increasingly sought out organic food — a trend sparked by millennial eaters — Costco decided to offer organic ground beef in 2012. Ground beef, both organic and nonorganic, is now a big seller for Costco, and 80 percent of Costco members who purchased organic ground beef hadn’t purchased ground beef from the retailer in the past.
Organics and fresh food represents an area of Costco adaptation that favors millennials. Traditionally, organic food is higher priced than its nonorganic counterparts, but at Costco, it doesn’t command much of a premium. Two liters of organic olive oil costs just $1.10 more than nonorganic, and organic whole-grain bread fetches 75 extra cents per loaf. The wholesaler is now a major player in organic foods, commanding $3 billion of a $35 billion market. Costco also offers trendy foods such as quinoa and ground bison for a per-pound pittance compared with smaller portions sold at specialty grocers.
Costco CFO Richard Galanti says this has been his company’s methodology for decades. “Forget about millennials for a minute,” he says. “Over the past 20 years, there’s more home-meal replacement, more refrigerated or frozen food — that’s been a big change. Now we have more refrigerated and home-meal replacement. … We’re constantly evolving to meet our customers’ tastes.”
Costco has kept up with millennials thus far. Naughton, the Piper Jaffray analyst, points out that Costco’s scant online and social media presence hasn’t doomed it yet, so any other millennial-sparked trends likely won’t, either.
“From a really young age, they strongly influenced retail,” Yarrow says. “But they’ve grown up, and retail has grown up. (Millennials have) kind of done their job.”
COSTCO CAN ADJUST, BUT there’s a chance it will have to do very little tweaking. Millennial shoppers’ habits already have changed dramatically as they’ve aged, and future changes could play into Costco’s hands.
“Rather than being tied to these generational cohorts, (Costco) is much more tied to family life stages,” Odegaard says. “If you have two kids in diapers … you’re going to go to Costco.”
Millennials are now in a lifecycle transition. The youths who were living in cramped apartments or their parents’ basements are now getting jobs, marrying, and having kids.A study by ad agency Barkley says 9,000 millennial women are giving birth every day in the U.S., and these new parents are using their native technologies to become sensible family shoppers. Furthermore, 51 percent of millennial parents live in Costco’s suburban wheelhouse.
This is what Costco has been watching for the past 30 years. Yarrow says millennials might buy smaller quantities and live in smaller houses than their parents, and they probably won’t adopt the minivan in any widespread fashion, but “everyone in my field agrees that when you have kids, it changes everything.”
Not only can they change in Costco’s favor, but millennials are currently exhibiting traits that play into Costco’s hands. Surveys show the generation places a premium on balancing quality and price, and Costco arguably hits the happy medium better than any other retailer. If you have enough pantry space and enough mouths to feed, there’s less reason to shop at specialty retailers when you can buy two loaves of organic, whole-wheat bread at Costco for 50 cents more than one Whole Foods loaf.
THAT COSTCO AND MILLENNIALS are both changing doesn’t necessarily mean the two will align in a way that benefits the company. History is in Costco’s favor: Affluent Americans have grown up and bought cars and moved to the suburbs as long as cars and suburbs have existed.
But that doesn’t guarantee millennials won’t halt their flight to the cities, and if they don’t, there won’t be enough pantry space for the two loaves of Costco bread. Suburban existence is Costco’s lifeblood, and that paradigm is at risk. Money, jobs, social gatherings, and people are migrating to city centers at the fastest clip in history. Many of those migrants eventually end up in the suburbs, but studies show a majority of millennials prefer to live in or near city centers.
Costco is responding.
CFO Galanti is fond of saying Costco won’t be the one to deliver a box of cereal to your door before 10 a.m. on a Saturday, but the company is hedging by partnering with same-day delivery services such as Instacart and Google Express, which operate in some of America’s largest metropolitan areas.
“Are (millennials) ordering more online? In some cases, yes, and that will change what others and we do,” Galanti says. “We don’t think people just won’t go out and (instead) will order everything online, but we also recognize that value includes not only price, quantity, and quality, but convenience as well.”
Galanti says these experiments, along with online membership deals through LivingSocial and Zulily, are methods of enticing younger consumers to buy a membership and eventually come to a warehouse. A Costco membership is required to purchase items on Google Express, and Galanti says only about half of Costco items can be purchased via Google Express or Instacart.
Odds are good that Costco’s current system will seamlessly accommodate millennials as they age, have kids, and buy cars. Nevertheless, Costco’s home-delivery and daily-deal trials are acknowledgments by a company with more than 460 U.S. warehouses that millennials’ shopping habits may never mimic their parents’. And if millennials decide to take any major portion of the projected $1.4 trillion they’ll spend in 2020 to retailers with smaller quantities and convenient delivery, Costco needs to be ready.
EMILY MENARD IS THE millennial as marketers see them. The 27-year-old lives in a 700-square-foot apartment in Seattle. Her home is a couple blocks from the Whole Foods she just departed with two tabletop-bound Christmas trees and a small bag of groceries. Menard and her husband don’t own a car, so she waits for the South Lake Union streetcar to shuttle her home.
Proximity and quality send her to Whole Foods for groceries. “I don’t want to say I’m fussy, but I don’t like buying food I know is
subpar,” she says.
Menard says she shopped at Costco in the past and enjoyed it, but going to the wholesaler became impractical when she adopted a car-free lifestyle. Costco won’t be an option for Menard anytime soon, either: She is applying for graduate school, and her husband is in the Coast Guard, so laying down suburban roots isn’t an option at this point.
“But we would like to live in a house down the line,” she says. “Ten years from now, it would be great to settle into a house, maybe live outside the city.”
Menard can take her time. Costco will wait.