In the 1970s, the venerable The Great Atlantic & Pacific Tea Company (A&P) was losing market share. While Safeway expanded in the West and enjoyed the benefits of population growth there, A&P had a bit of a problem: It was focused on the East Coast, where population wasn’t growing all that fast.
To try to increase its market share, A&P came up with a novel way to sell groceries: It decided to sell its most popular items in their original wholesale bulk packaging — for a much cheaper price.
A&P named its concept Warehouse Economy Outlet — or “Where Economy Originates” — and opened its first location in Pennsauken, New Jersey, in 1971. The company advertised the concept on TV, producing a spot with Mickey Rooney.
In another commercial, a spokesperson proclaimed, “It’s a brand-new concept: You shop at a modern supermarket with wild warehouse prices,” as the slogan “wild warehouse prices” flashed across the screen. “Shop A&P WEO: Let wild warehouse prices slash your food costs drastically,” he then added.
While the grocer did end up bringing the concept to an estimated 3,000 of its then 4,000-plus stores, the concept didn’t catch on well at all stores. And, according to Ad Age, the program failed to halt the company’s decline.
As a result, the once-pioneering grocer entered the second tier of retailers. Years later, of course, the defunct retailer filed for bankruptcy for the second time in five years in 2015 — before disappearing from the American retail landscape.
While the wholesale experiment didn’t quite work for A&P, it did turn out to be a blockbuster business strategy for Costco. The retailer got its start in 1976 under the Price Club name, only selling to small businesses at first.
But the owners of Price Club soon found that it could grow the business by serving everyday consumers. It was a winning recipe: After opening the first Costco in Seattle in 1983, the retailer grew its sales from zero to $3 billion in under six years.
Because of its large membership base, Costco is very efficient and has strong buying power. Costco makes up for its low margins on its goods by charging membership fees. They aren’t cheap: Costco charges its members $55 for a regular membership and $110 for an executive membership.
To keep its costs low, Costco also carries a narrower selection of products than traditional grocery stores. With fewer stock keeping units (SKUs), it has fewer products to organize, ship and store. And, with this limited amount of space, suppliers want to give Costco a better price to be the only brand of a given consumer product in the warehouse.
Incidentally, this limited selection boosts sales. “There was a research study in marketing that if you offer people 24 different types of jellies, you’re not going to sell as many as if you offer them six,” Marketing Consultant Pam Danziger told CNBC. “Making people decide, that causes confusion, and they ultimately decide to walk away. At Costco, you don’t have to make those decisions.”
But while wholesale has been a winning recipe for Costco, not all wholesale clubs have fared so well. In January, Walmart’s Sam’s Club abruptly shuttered stores. Some employees learned their stores closed only when they arrived for work.
In the eCommerce space, startup Boxed mirrors Costco’s business strategy. With warehouses in New Jersey, Dallas, Las Vegas and Atlanta, Boxed delivers bulk items such as toilet paper and pet food to consumers’ front doors. And, like Costco, it has a limited selection, which makes for a more efficient operation.
“By having a smaller number of products, Boxed can get stuff out the door more cost-effectively by reducing the warehouse footprint and the complexity of the operation,” Clint Reiser, director of Supply Chain Research at ARC Advisory Group, told Bloomberg. “It becomes a competitive advantage.”
Boxed’s sales have been growing. The company, which is known as the “Costco for millennials,” told Bloomberg that it made roughly $100 million last year, which is up from $50 million in 2015. According to the report, the average order size is $100 and includes 10 items. But orders must total at least $50 to get free shipping.
Beyond Boxed and Costco
The future of warehouse clubs might involve eCommerce pioneer Amazon. Jeff Bezos reportedly invited Boxed’s Founder and CEO, Chieh Huang, to Amazon’s headquarters in January.
According to a report in The New York Post, citing a source with knowledge of the trip, Bezos invited the Boxed.com CEO to discuss a deal for Amazon to buy the startup, which has been around for four years. If Amazon does end up acquiring Boxed, perhaps the new Costco card will be an Amazon Prime membership.