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Costco stock sees remarkable growth. What’s behind that?

Shanghai Costco

This photo taken on August 20, 2019 shows a staff member checking items at a Costco store during a media day in Shanghai ahead of its official opening on August 27. STR/AFP via Getty Images

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At a Costco store in New York City, Evelyn Rodriguez is leaving with groceries and art supplies for her kids. The physical instructor said she has to stretch her dollar by buying in bulk — such as the nuclear-winter’s supply of ketchup in her shopping cart. She’s carrying six giant bottles. 

“I’m here all the time. They all know me in here,” Rodriguez said. “The price you pay for the bulk pack, in the store you’re getting one bottle that size. The bulk is the key here.”

Loyal shoppers such as Rodriguez are helping drive big sales at Costco and leaving investors bullish about the stock, which is up more than 40% this year, at a time when other retailers are struggling.

But with its model of membership-based shopping, Costco has built a loyal customer base and become the fourth largest U.S. retailer, after Walmart, Amazon and Kroger. 

Offering bulk items cheaper, including brand names, and passing on the savings is a key component of Costco’s success. But, the company has also expanded into more luxury items, such as Apple computers and Coach handbags.

The combination plays into the “barbell effect,” in which consumers are increasingly spending more on luxury goods and stretching their dollars on staples, said Bryan Eshelman, head of retail at the consulting firm AlixPartners.

“They offer a value in the bulk purchasing of food, gas, consumable items like that. But also, they offer more luxury goods at a discount price,” Eshelman said.

Costco’s memberships also keep customers coming back for perks such as discounts on gas and eye wear. 

“This format has proved to be very popular in the U.S.,” said Moody’s analyst Charlie O’Shea, who has been following Costco for 17 years. He points out that Costco is also showing promise in China, where it opened a pilot location in August.

The Costco model also is being copied by the likes of Amazon, which is “taking a lot of pages out of the Costco playbook with its prime membership: offer members more, makes them more loyal,” O’Shea said. 

Stephanie Kretschmer is among those loyal customers. She shops at Costco once a week and in February started an Instagram account called “CostcoCasuals” featuring fashionable clothing from Costco. She’s discovered that there is an entire online community of Costco fans. 

“I had one woman say her husband says if you can’t get it at Costco you don’t need it. So there are other fans out there — kind of extremists — if you will.” 

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