3 Things Costco Does Right

Costco(NASDAQ: COST) has continued to slowly and steadily move forward while many brick-and-mortar retail chains struggle.

The warehouse club understands its customers and serves them without veering too far from its core model. A Costco member knows what to expect, and while the chain will surprise consumers with merchandise selection, or by adding a new service to a store, it does not vary from its core purpose.

Costco offers value. Consumers pay a membership fee -- $55 for Gold Star or $110 for Executive, which offers 2% cash back up to to $750 earned -- and for that, they get a low-cost, low-frills shopping experience. That has been a price people are willing to pay in order for the promise of getting a good deal, but that's only part of what the chain is doing right.

Costco charges a membership fee to enter its stores. Image source: Costco.

Create an engaging in-store experience

While Costco has warehouse-like shelves and little in the way of in-store decoration, that does not mean the chain offers a bland shopping experience. Instead, while not spending a lot of money on presentation, the membership-based retailer keeps consumers interested in a number of ways.

First, Costco makes it so consumers will never know what they may find on the shelves. Staples will always be there. You can count on the chain having paper towels, coffee, aspirin, and other things consumers actually need, but beyond that, the selection will vary regularly. The shelves may hold a deal on a laptop, well-priced wet suits, men's dress shirts, seasonal toys, or anything else you might imagine.

Second, Costco fills its aisles with people handing out product samples. Again, this could be anything from a station offering pizza bagels to one where someone is cooking steaks. In addition, if all the free food is not enough, Costco makes its store more enticing by offering a snack counter with inexpensive food like hot dogs, churros, and pizza.

Gives its members secondary reasons to visit (and stay members)

In addition to its traditional food, household items, and other merchandise, Costco warehouses have a number of other things going on. For example, many locations have hearing aid centers and an area where you can get an eye exam or buy glasses. Both of these services are value-priced, in many cases making the savings on just that item worth the price of membership.

In addition, some Costco stores offer gas stations which are generally the lowest-priced or among the lowest-priced in any given area. In some cases, if you drive a lot and fuel up regularly, gas savings alone can earn you back your membership fee.

Offer incentives to upgrade

In addition to making customers feel like their basic $55 membership is a good deal, Costco has done a very good job making upgrading to a $110 Gold Star membership enticing for its members. That's especially important for the chain because, as CFO Richard Galanti has pointed out in many earnings calls, Executive Members make up about about one-third of Costco's member base, but they account for two-thirds of its sales.

The sales pitch for becoming an Executive Member is fairly simple. Consumers pay twice as much to join, but they get 2% back on eligible purchases, a reward capped at $750 a year. (The cost will increase to $120 on June 1 as the company raises membership prices, while the reward limit will rise to $1,000. At the same time, a regular membership's cost will rise to $60).

For every $1,000 a consumer spends, they get $20 back. That means, under the current pricing, if you spend at least $2,750 a year at the chain, then the pricier membership is a good value. Clearly, based on what Galanti says, many consumers who opt for Executive status end up profiting on the deal. That's good for them, but also very good for Costco, which now has a more loyal member, strongly tied to the store, and very likely to renew when his or her term expires.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.