ALTERNATIVE FORMAT Costco Wholesale

The club channel has been a favorite of the natural and organic set for some time as an alternative to mainstream supermarkets. Though club stores carry fewer SKUs, the top brands are often there. Issaquah, Wash.-based Costco goes a step further by actively seeking out new untested products. They've followed the discount philosophy of, Heavy on the best, and the heck with the rest, said Eugene Fram,

The club channel has been a favorite of the natural and organic set for some time as an alternative to mainstream supermarkets. Though club stores carry fewer SKUs, the top brands are often there. Issaquah, Wash.-based Costco goes a step further by actively seeking out new untested products.

“They've followed the discount philosophy of, ‘Heavy on the best, and the heck with the rest,’” said Eugene Fram, a research professor of marketing at the Rochester Institute of Technology's Saunders College of Business. “They inventory only select items that sell well.”

Costco was the preferred warehouse club for some 27 million households last year, and they helped the company clear $59 billion in sales. Nimble marketing of higher-quality items, including health and wellness products, allows the chain to boast an 87% membership renewal rate.

“Costco is the exception to the rule in the sense that it appeals to a higher socio-economic group,” Fram said. “I think it works very well in assessing the needs of that group, and this is the same one that's the avant-garde of organic.”

Manufacturers like the format because the large, club-pack sizes emphasize volume; limits on the number of products in the stores also help make their brand stand out more. For example, Costco averages about 4,000 SKUs per warehouse vs. up to 60,000 SKUs in a conventional supermarket.

Unlike competitors BJ's or Sam's Club, Costco has also made the most of the “treasure hunt” mentality that propels many consumer warehouse club trips. This type of guerrilla marketing works well with the anti-establishment attitude expressed by many wellness products, particularly organic packaged foods, Fram said.

It's not all about sales, however. Costco rewards managers who actively manage energy costs in their stores. The chain last year took energy-saving efforts to a new level with the installation of a large-scale solar panel system in one California warehouse. The system generates up to 500 kilowatts at peak output, while its placement on the roof reflects the hottest sunlight and helps cool the building. The company is installing a second unit at another store, also in California.