Wholesale Distinction

The genesis of Costco Wholesale Corporation's victory in the 2001 Frozen Food Age Master Merchandiser competition can be traced back to a decision made several years ago, when the Issaquah, Wash., chain decided that innovation, too, had a place in its cavernous stores. That decision has helped Costco boost sales—in the frozen food aisle and elsewhere—and won the company a legion of fans among small and mid-sized suppliers who find the battle for supermarket shelf space increasingly difficult to afford.

"What we used to do wrong was to send the message, don't bring us an item unless it's a winner," says Tim Rose, senior vice president at Costco. The corporate mandate was to pack its clubs with the 20% of SKUs that did 80% of sales; unproven product need not apply. "We would never look at innovation," Rose says.

But several years ago that philosophy changed in favor of one that sought a quality/value relationship beyond just offering mass quantities at a bargain price. "We're not about price, we're about the best value," Rose says. "Quality and value are what set us apart. That's how we define being the best."

In that spirit, Costco began working more closely with manufacturers. "We wanted to be in the developmental stage with our suppliers," Rose says. "We were getting tired of seeing, well, here's what we built for the retailers [in other channels]." Thus, smaller suppliers suddenly found a way to work with a large, national retailer, while the big players found cause to grumble at the extra work. "I think most smart vendors will tell you that Costco is tough to do business with," Rose relates, "but most will say we've made them a better company."

Certainly, both Costco and frozen food suppliers have flourished under the new regime. Frozen food sales now account for about 10% of total food sales at Costco, and so far this year are running about 7% ahead of 2000. "That's better [frozen] growth than in fiscal 2000 and 1999," Rose says. He credits both a sharper focus on the core "80/20" items and the impact of innovative products in creating a more exciting shopping experience for the improvement.

Costco carries between 120 and 140 frozen food SKUs, depending on the time of year, Rose explains. About 60% to 70% of those units are consistently stocked year-round, and include the frozen food category's top volume and velocity performers. The No. 1 item is a frozen boneless, skinless chicken breast, a co-brand carrying Costco's Kirkland Signature store label and the Tyson, Foster Farms, or Gold Kist brand, depending on the region in which it's sold. "That does $100 million alone," Rose notes.

Costco's wholesale strategy plays a strong role in the selection of these items. "We still do a lot of resell business," Rose notes. "Frozen is a very important category to the restaurants and caterers who look to us. It's a very key category if you want to be in the wholesale business."

The other 30% to 40% of frozen items are rotational. "We define our business as a 'treasure hunt,'" Rose says. "We want the consumer to always be surprised by something." It's here where the new and different come most strongly into play—and here where shoppers are simultaneously most delighted and annoyed.

In focus groups conducted for Frozen Food Age (see page 22), consumers said that they indeed loved the treasure hunt aspect of club shopping, but were vexed by the "here today, gone tomorrow" nature of what was stocked. Rose is sympathetic, but unapologetic. "We consider ourselves an item business," he says. "We carry items, not categories, so that makes it difficult for consumers to understand."

Finding those items is the primary job of Costco's eight regional food buying offices. "We have eight regional offices that concentrate on finding regional items," Rose says. In addition to meeting with both national and local suppliers, Costco buyers also travel to domestic and international trade shows, such as ANUGA and the Fancy Food shows, as well as keeping an eye on the competition. "I think our buyers out there are very innovative," Rose says.

Costco constantly looks to tweak its product selection. "We test the waters a lot," Rose says, doing things like increasing a 5-lb. bag of chicken to 6-lbs. and seeing how that affects sales and volume. As might be expected with its relatively small number of frozen SKUs (compared to a supermarket), Costco manages the frozen category internally. To measure the results of its efforts, the company looks to bottom-line sales impact (no surprise) as well as consumer comments generated at the store level.

"Each of our stores has a suggestion box as the front of the store," Rose says, "and those [suggestions] get keyed in every day, so I get a 20-page report of customer suggestions every day."

FFA's research also found that consumers like clubs' extensive sampling efforts, which Rose says are heaviest in the frozen section.

"It's all demo-driven," he says. "[Frozen is] probably the area where we do more than anywhere else. You can't build end-caps, you can't put [frozen items] in the middle of the store, and when you're merchandising in master cases, it isn't pretty. So you have to get people to try them. Especially when you're asking people to buy in quantity, you have to get it into their mouths."

Costco includes its private label frozens in that program. "We demo private label as much as we can, since we don't have the benefit of an ad campaign," Rose says. The chain also tries to create unique items not offered by national brand manufacturers, such as a five-cheese ravioli.

"We've put a lot of emphasis on quality in [frozen] private label" over the past year, Rose says. It's been part of an overall initiative to upgrade quality in order to differentiate Costco from its competition. "We continue to develop relationships with suppliers who are willing to put quality back into their products," he says. "Over the years, many manufacturers have been forced to take quality out in order to maintain a certain price point or profit margin." That message, he adds, has been well-received by manufacturers.

Rose, an 18-year veteran of the club store industry (all at Costco), believes that frozen foods are poised to play a bigger role in the channel. He points to the new Sam's Club in Texas that features a frozen department relocated to the front of the store, and notes that Costco is expanding the size of the frozen food department in its new construction. "Again, innovation in frozen continues," he notes. He also expects that clubs will be delving more into prepared frozen entrees and similar convenience foods, following the prevailing consumer trends.

Of Costco's frozen aisle, "probably the one area we need to do a better job in is ice cream," Rose says. "We're underdeveloped in ice cream. But other than that we're coming along nicely." With, he concludes, a little help from their friends: "Frozen food manufacturers are some of the most innovative suppliers out there.".