Costco new pricing approach will please members

Costco stores have a simple pricing proposition: People buy memberships to shop there. They pay $60 for a gold membership or $120 for an executive membership, which comes with 2% cashback up to $1,000 a year.

Once consumers are inside a Costco (COST) - Get Free Report location, they get access to shelves packed with good value. When it comes to household, grocery, toys, apparel, and other everyday categories, the warehouse club has clear pricing.

Just as you would say at Walmart, Target and any other retailer, the price is right there with no catches. Aside from your membership fee, Costco, like its big rivals, does not have any add-ons or surprise fees.

One exception: when customers buy bigger-ticket items from those other chains that must be delivered, like appliances or larger televisions. People buying those items from Target, Walmart and Best Buy don’t see the full prices when they look at those items — specifically appliances — on the floor.

If you buy an appliance from Best Buy, Walmart or Target, you face a variety of fees on top of the advertised price. Those can include charges for delivery, setup, and removal of old appliances.

Costco has decided to be more up front with its pricing, making a direct effort to show its value proposition versus its rivals.

Best Buy charges delivery fees for appliances.

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Costco handles its own last-mile delivery

Costco began handling the delivery of big and bulky items in-house in 2020, after its $1 billion purchase of Innovel Solutions, a last-mile-shipping service. The retailer made that move to better control its pricing and ability to deliver to customers during the covid pandemic, when demand for appliances and other larger items spiked.

Previously, the warehouse club had been using third-party services, including Innovel, to handle its deliveries for these items. Walmart, Best Buy, and Target generally use third-party-delivery companies for larger items.

Costco’s definition of big and bulky items includes furniture, mattresses, televisions, major appliances, grills, patio furniture, and fitness equipment. That’s not a complete list, but it’s representative of the items for which the retailer uses its in-house delivery service.

The chain does not generally break out numbers for its logistics arm, but Chief Financial Officer Richard Galanti talked about it during the chain’s fiscal-second-quarter 2022 earnings call.

“In terms of an update on Costco Logistics, that continues to drive big and bulky sales for the quarter. Deliveries were up year-over-year, 22%, and now about 85% of our U.S. e-commerce less-than-truckload shipments from Costco Logistics, we’re doing ourselves,” he said.

“[We] averaged more than 65,000 stops per week with Costco Logistics, which translates into a little over 3 million planned drops in Costco Logistics for the fiscal year.”

Costco offers pricing transparency

Costco Logistics enables the company to fully understand its costs and opt to take a thinner profit margin, or even lose money, on delivery. Galanti discussed the matter during the warehouse club’s first-quarter earnings call as part of a broader discussion about the company’s relationship with members.

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“I always said I think the biggest attribute of value is the lowest price on a given quantity and quality of a good or service and then certainly add to that the trust that our members have. I think as it relates to specific things, like I pointed out, like appliances and even tires, it’s value,” he said.

Galanti said the company has done a “lot of business” with Costco Logistics. He also made clear that controlling shipping on these items enables the company to offer lower overall prices.

“And I think we’ve done a better job of communicating what the value is, not just showing what the price of the exact item is at some of the other big retail competitors on some of these big items,” he added.

“But then, you add in delivery, take away the old, use the installation, delivery, take away the old product for disposition. it’s significant savings. Go do a price check of some of those things compared to our competition. That’s where you see the strength.”