April 1, 2005, 12:00 AM

Against The Grain

(Page 2 of 2)

Because the online and the store customers are mostly the same, there are some cross promotions between the two sales channels. The Costco web site has a store locator feature and, while customers can`t order general merchandise items online to be picked up at a store, they can return items purchased online to the warehouse stores--even items that are not sold in the stores.

Little advertising

There are some notable exceptions to the prohibition against ordering online and picking up at the warehouse. Customers can pick up at the store prescription refills ordered online. They can also check online the status of a prescription being filled at a warehouse pharmacy. Also, customers can download images from their digital cameras online and pick up prints at warehouse stores in Washington, Oregon, Texas, Northern California and Utah.

Costco also puts its monthly fliers on its web site which show what is new at Costco and highlight special sales and events at the warehouse stores.

Because Costco is selling primarily to existing customers--as well as having a commitment to keeping low overhead--it doesn`t engage in many of the online marketing methods that other retailers use; promotions are direct to existing members. "Our low margins do not allow us to do a lot of advertising, so we don`t pay for sponsored advertisements on search engines or pay for our products to show up on searches," Roeglin says.

Costco, does however have an opt-in e-mail marketing program for members. The e-mails include hyperlinks direct to the pages where a customer can buy the item. But Costco keeps limits even on the e-mail program. "We try not to overdo the e-mails and overload our customers with messages," Roeglin says. "We only notify them about valuable offerings and hot buy specials. During the heavy shopping season, such as the major holidays, we might send out one e-mail campaign a week, but most of the year it is more like one every other week."

A feature recently added is a section on the web site that highlights new products so that regular shoppers can see what is new before searching around the web site for deals.

Work in progress

Beyond these limited online features, Costco has not invested heavily in navigational tools or fancy online features. "We`re still a work in progress," says Roeglin. "We realize there is a lot more we can do to improve our web site and we have a long list of things we want to work on. But for now, we`re relying on our great deals on high-end items to attract customers to our site."

Indeed, analyst Weller notes that most online retailers utilize advanced features to show multiple views of merchandise or allow consumers to zoom in on features. Costco shows one shot of each item and lets the price prevail. "Most other retailers try to romance the consumer by showing them how attractive the merchandise is. Costco doesn`t go in for a lot of romance. It lets the price sell the merchandise," Weller says. Additionally, Costco has such strong credibility with its customer base regarding the quality of its merchandise, it doesn`t have to sell the customers as much on the merchandise itself, Weller adds.

One feature recently added is the ability for customers to submit rebates directly so that they don`t have to mail in the rebate offers later on. That feature is particularly popular with Costco`s price-sensitive shoppers.

But even though Costco hasn`t invested in a lot of razzle-dazzle, it has seen significant sales growth. In the fiscal year ending Sept. 1, 2004, Costco`s online sales of $376 million were up 60% from the prior year. The company is expecting sales to grow another 45% this year to exceed $500 million.

But that still only equals the sales of two to three warehouses at a company that has 335 warehouse stores in the U.S. and 450 worldwide. "Ultimately we`d like our online sales to mirror what we would see in an entire region so while we`re growing rapidly, we have a lot more potential," Roeglin says.

Indeed, while analyst Weller estimates Costco`s online sales amount to only about 1% of total sales, he notes that $500 million is still significant. And he projects that online sales will grow much faster than warehouse sales in the next few years. "I don`t think you can call $500 million in added sales anything other than significant," Weller says.

Deploying kiosks

One strategy that Costco is exploring to increase online sales is to locate kiosks in warehouse stores so customers can shop online while they are in the store. That way, customers who can`t find exactly what they want in the store can check the web site to see a broader product range and place the order right then and there. Costco has been testing this concept in six stores for just over a year and plans to expand the test to another 20 stores soon, Roeglin says. She adds that it is too early to tell if the store kiosks are successful in spurring online sales.

Whether it is through in-store kiosks connected to the Internet, even more expanded products or more sophisticated navigation features, Costco continues to develop its online strategy. But one thing remains the same: It won`t veer from the path that made it a successful retailer to begin with. "We plan to follow the same strategy online that we follow in our warehouses--offering exceptional values to our cost-conscious customers," says Roeglin.

Lauri Giesen is a Libertyville, Ill.-based freelance business writer.

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