Costco Nurtures Growth of Organics
By Dan Bolton
Costco is quietly emerging as an organic retail powerhouse.

The country's No. 1 warehouse retailer will
sell $59 billion in goods this year, earning more than $1 billion in profits. Organic products represent only a tiny raction of sales, but despite what you read about Wal-Mart, it is the buyers at Costco's 509 warehouses who are
introducing low-cost organic products to their 49 million members in 26.7 million households.

Big box retailers, including Sam's Club and BJ's Wholesale Club, accounted for $638 million in organic sales in 2005 about 5 percent of all certified products sold, according to the Organic Trade Association's 2006 Manufacturer Survey. The tally is part of a mass-market surge.Massmarket retailers saw greater organic product sales than in the traditional natural food channel for the first time in 2006.

"Organic is a great growth category and it's right in the shopper sweet spot for Costco," said Burt P. Flickinger III, managing director of Strategic Resource Group, a business strategy consulting firm based in New York City. "Costco customers tend to have a higher level of education and income and they want to buy the best foods," he notes. Organic goods appeal to all economic levels and since organic shoppers favor perishables, they may be coaxed to visit more often.

Forty percent of the general population/primary grocery shoppers reported shopping at warehouse/club stores for healthy and natural products, including natural/organic foods and supplements, during the past three months according to The Natural Marketing Institute's 2006 Health & Wellness Trends Database.

"They need to change consumer behavior from one monthly stock-up to becoming weekly or even twice-weekly Costco shoppers," explains Flickinger. The typical family makes 79 food trips a month and visits supermarkets about 1.5 times a week. Costco is trying to pick off a dozen of those trips, he said.

"The best way to do it is to put in these food factories," said Flickinger. Bakery, fresh produce and meats contribute less than 7 percent of overall sales but locally sourced organic produce, quality meats and bakery differentiate each warehouse and delight customers.

Afterall, 60 percent of what Costco sells can be found in supermarkets. The rest can be found at office supply, department or consumer electronics stores, said Flickinger. Costco succeeds by buying in quantity and stressing quality at prices that surprise its affluent but bargain-hunting customers.

"When members are spending $15 to $20 per per pack for organics, they realize they are saving three to four dollars a pound from what they would pay in a conventional or health food store," said Jeff Lyons,Costco Senior VP/General Merchandise Manager. "We are able to leverage that cost lower for our members by buying in quantity."

A typical Wal-Mart might stock 100,000 items with fewer than 150 organic food and clothing SKUs. The company features top soymilk product Silk, organic foods from Kraft, General Millsowned Cascadian Farms and other commodity organics. Individual items might get a 10 percent markup over conventional goods but most food items are priced closer to the typical 25 percent markup at supermarkets.

A typical Costco warehouse stocks 4,000 items-all top quality and at big savings. Margins cannot exceed 14 percent on nationally branded products and 15 percent on private label goods - thin, but company buyers have an eye for which products sell well in volume. Last year, for example, they sold 26 million rotisserie chickens.

Look what they are doing with hamburger: Dakota Beef's certified organic three-pound saddlebacks are flying off the shelves at $4.33 a pound.

Supplier shipments jumped from 200 to 400 pallets a month since January 2006. A pallet holds 1,200 to 2,000 pounds of meat - an increase of 250,000 pounds is sizeable even for the nation's largest supplier of organic meat - although a tiny fraction of the 550 million pounds of meat Costco purchases each year.

Lyons has placed organic ground beef in 120 of Costco’s stores and is experimenting with organic steak in another 40 warehouses in the U.S.

Costco is the highest-volume perishables retailer in North America with quality comparable to selections served at the best hotels and restaurants, said Flickinger. In April, Costco was the first warehouse store in Japan to offer U.S. beef after the country lifted a three-year ban over food safety concerns.

Wal-mart's Achilles heel is its meat department, said Flickinger.Wal-mart sells lower government grades of beef. Their case-ready meats can have 10-12 percent saline, said Flickinger, "People know they are paying for liquid, not pure beef."

By contrast, Costco is the largest buyer of USDA Choice beef in the country. Costco CEO and cofounder
Jim Sinegal knows that organic reinforces the Costco brand as the superior retailer, said Flickinger.

The challenge is finding enough USDA Choice.

Choice is a quantifiable grade with marbeling inherent that will give you a good bite, explains Lyons. “Just because it is organic does not make it choice,” he explained.He is working with suppliers to increase what Costco can offer.

Costco's ability to concentrate the buying power of millions of customers on a single brand is a powerful incentive for suppliers to comply with the company's aggressive procurement policies.

Hillary Maler,VP Marketing & Sales at Food To Market, has distributed 15,000 pounds of organic beef a month since January when she began selling Dakota Beef to stores in New York and Boston. "There has been an incredible increase in shelf space for USDA certified beef," she said. "Stores really want to stock it.Many are trying to catch up to Whole Foods (Markets)," she said. "People may look twice at the price but tasting is believing. Get them to taste it and they will appreciate the value."

The OTA survey cites beef as the organic industry's fastest growing segment. Retail sales of organic beef were valued at $49 million in 2005, up 17.2 percent, compared to a 3.3 percent increase for all beef. The National  Cattlemen's Beef Association predicts organic meat sales will continue their quick rise from the current 2 percent
of total beef sales.

Costco opened its first fresh meat, seafood and deli and bakery departments in 1987.No other warehouse club had successfully sold fresh foods. Value packaging reduces the price per pound: meat is sold in two- to seven-pound packages. Products nearing their expiration date are discarded instead of marked down.High volume warehouses employ up to 10 full-time master butchers who work behind glass where customers can see their cleanliness and skill.Uniformity, quality and volume translated into value. Today the firm sells 150 million pounds of ground beef a year.

Consumers also like having real butchers in stores. Writes one customer on the Chowhound blog: "In Eugene Oregon they have one of the best meat counters in town. Actual butchers instead of cellophane jockeys."

The decision to stock organic products began with produce.

"We were doing baby lettuce and we'd cut and wash the whole leaves just at the tips and they'd stay fresh in plastic bags," recalls Myra Goodman, founder of Earthbound Farms. The washed, bagged lettuce proved a hit with local chefs and other outlets. "In the beginning - this was 1986 - organic wasn't why people were buying it."

Production soared when Costco first stocked their product in 1993, said Goodman who began farming with her husband Drew in 1984. The couple single-handedly launched the multi-million dollar packaged greens segment, merging with Mission Ranches in 1995 and with Tanimura & Antle in 1999.

Costco has been selling Starbucks rare and exotic coffee since 1998. Coffee was one of the first organic products stocked in Bay Area stores, which today feature a number of dry goods, including private label items like Kirkland Signature Organic Maple Syrup. Aisles showcase organic iced tea, yogurts, numerous cheeses, olive oil and organic tomato products. Products are displayed alongside conventional goods. In addition, the Costco website sells a gift basket of organic products, along with many additional items not found in their stores.

Costco's Myrtle Beach store has seen a surge in sales of organic and natural foods – but only as long as the price remains reasonable, said General Manager Johnny Matthews.

A Costco buyer in the company's Auburn Hills, California warehouse said the newest organic products include dog food and baby food. He said organic pizza and pasta are very popular and that organic virgin olive oil "sells well." Organic yogurt has always sold well and organic milk products have seen a small but "steady" increase over the last few years.

He said the most popular organic products are fruits and vegetables because consumers are willing to "try organic fruits and veggies first", often moving on to other items later.

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