Perfect! I’m half an hour early for my interview Louise Wendling. That gives me plenty of time to wander the store and formulate a few more questions for Costco Canada’s longtime head. But when I check in with a clerk, I’m surprised to learn that Wendling’s already here.
Within seconds, she rounds the corner wearing a big smile. After exchanging pleasantries, I learn she’s been here for a while, walking the store with her staff. She’s one-third of the way through the store already, doing what she likes to do best: teach. Today’s pupils are store staff. Wendling easily chats with them about aisles that need some attention. “Watch the heights, not too high,” she tells the store manager as we walk down a power aisle of skyscraper end caps on either side. Later, when we pass a row of Halloween costumes, Wendling stops and suggests hanging them sideways to help customers find the right size.
I quickly realize just how far (and how fast) this CEO will go to get her stores’ merchandising and selection right. I casually ask her why there is no lactose-free bagged milk sold at Costco’s Markham, Ont., store, pointing out that the town’s population is largely Asian, and many Asians are lactose intolerant. Wendling spends about two seconds mulling this over before she gets on the phone and tells the store’s manager to try out the bags.
The smartest retailer in the room? Heck yeah.
Wendling was a Costco Canada veteran before she took the top job in 2001 (her official title is country manager). She has taught French as a second language and held various jobs in the federal government, then spent 11 years at Hudson’s Bay Co., before joining Price Club, moving over to Costco in 1993 when Price Club and Costco merged.
Today, Wendling runs an organization that breaks just about every golden rule of retail. Costco doesn’t advertise, charges a fee to over nine million members for the privilege of shopping its Area 51-like warehouses and carries a limited selection of just under 4,000 products, compared to 50,000 at a typical supermarket. The result? It’s one of the biggest retailers in the world, and in Canada ranks fourth (behind Loblaw, Sobeys and Metro) in terms of annual food sales. Last year, according to CIBC World Markets, Costco food sales totalled an impressive $7 billion, nearly $2 billion more than Walmart. Overall, the company sells $15 billion worth of products in this country each year.
If that isn’t enough, Costco has managed to figure out the albatross around the necks of most retailers: staff loyalty. With a staff turnover of five per cent after one year, Costco keeps workers smiling by paying them an average of $22 an hour.
Like we said, the smartest retailer in the room.
How has Costco’s business changed since you opened in Canada in 1985?
The challenge in the old days was that we were small and we were trying to get the right price with everybody else around us being so much bigger. Back in 1986, Loblaw was the dominant traditional grocery retailer. But now Sobeys and Metro have taken a part of that business, so [the industry is] much more fragmented. Today, the pie is broken up into a lot more pieces.
We’ve seen retailers come and go–there’s no more Steinberg’s, and Zellers is about to disappear–but through it all, our culture at Costco hasn’t changed. The challenge, then and today, remains giving value to our members, which we define as a combination of price and quality. It was probably harder for us to do that in the earlier days because we were so small and didn’t have the volume.
We’ve seen a lot of temporary price reductions in grocery stores lately. What’s the effect been on your business?
Promotional activity in Canada has always been strong and there are always people selling goods at cost or below cost. We have an advantage because our membership vehicle enables us to keep our prices low and maintain quality. If we can’toffer you the best price, we have to have a conversation with our vendors. Why should people pay to shop at Costco only to pay the same price as everyone else? Our expenses and margins are the lowest in the retail business, and it all comes down to being very good at the execution. Otherwise we wouldn’t make a profit.
A lot of retailers have developed loyalty cards lately. Are you looking to develop one in addition to your membership card?
Costco’s card is a membership card, not a loyalty card. Our membership has been growing, with an average basket spend of over $140, which is high in the industry. Frankly, I don’t believe in loyalty cards. Whatever business you have, if you deliver what you promised, you don’t need a loyalty card. Do you think people would pay $55 for a Costco membership card if we didn’t deliver what we promised? They wouldn’t. We’ve set clear expectations with our customers on store cleanliness, price, quality and transparency. Whatever we receive on volume rebates or discounts we pass on to our members. You have to know what your customers want now more than ever. That’s why I make it part of my daily routine when I’m in the office to read the member suggestion cards that customers fill out right across Canada. All the buyers and operators read them, too.
What is the profile of a typical Costco shopper today, and how has this changed over the years?
The majority of our customers are between 35 and 60 with average household incomes well over the Canadian average of $68,000. It’s very difficult on a budget to come and shop here because of the big sizes. On the wholesale side of things, people often ask me, “If you have so many wholesale members, where are they? I don’t see them in the store.” The fact is, wholesale members fax in their orders; we put it together and they just pick it up. There’s a misconception that we’re not selling wholesale at all anymore. We do, but overall it’s hard for me to tell how much. Not everybody who buys for their home office has a tax number; and those who do may not buy goods with a tax number. I know how many business members we have, but I don’t know which portion of that is for personal and business use.
How has the shopping behaviour of Canadians changed since Costco started doing business here?
At the beginning of Price Club and Costco, the members wouldn’t buy ahead of time. We now have a saying “in early, out early,” so our members, without us telling them, got used to buying seasonal items like snowsuits in July or Halloween costumes in August. It’s basically impulse buying. When I walk with our group, I always tell them that you have to walk in our members’ shoes and make it exciting so they don’t get bored. We do it by displaying merchandise on the end caps. We’re also a firm believer in an “intelligent loss of sales” when it comes to our limited variety of products and getting out of seasonal products before traditional retailers would. For example, we won’t mark down our Christmas paper after Dec. 24. I want to be out of seasonal product before the sales go down.
Do you incorporate things you’ve learned from other Costco divisions around the world into the stores here?
Everybody tells me how different retailing is everywhere else, but it isn’t. If you look at our Top 10 items in the U.S. and in Canada, it’s the same Top 10 products, but in a different order. Every single month, Costco executives from around the world come to Seattleand we show items from each country that are doing extremely well. There’s a lot of Canadian product bought out from around the world–seasoned oils, cheese that we show at these meetings. When you have a great product, people write it down. For example, we brought in moon cakes after seeing the San Francisco division selling them.
Costco’s staff turnover rate is low for a retail operation. How do you keep it that way?
Our turnover after one year is five per cent. We have an open-door policy, which means people can call me directly. The higher you go up in our organization, the more you teach. At the warehouse level, 90 per cent of a manager’s job is teaching and mentoring. It makes up 98 per cent of my job. That’s our culture. Member service is not a program, it’s the way you behave, and it’s a way of life at Costco. When a member asks where a product is located, our staff will take them to the location, not just point it out. It’s about respect for each other and our members.
Most of us fell into retail, and we’re so lucky to be a part of this company that is so transparent and where there are no politics. We always stand behind the customer. The biggest challenge for us is to make sure all of our employees understand our culture and keep it alive. And the only way to do that is by teaching. When you tell staff to move a product from one location to another, we have to explain to them the “why.” People have the tendency to direct, instead of explaining and teaching. It’s hard work keeping that teaching environment alive.
How are hourly employees moving up in your business, and what do you do to make that happen?
We have two student programs. One employs students, offering them hours that work with their school schedule. We employ them throughout their school career, giving them normal [pay] increases that any other employee would receive. The other is a university graduate program. Graduates have to be recommended by their manager, and show potential to be successful in retailing. The program gives them experience in every single deparmtment as a first level manager during an 18-month program. I really believe in on-the-job training.
Let’s talk about Costco’s fresh business. Where are you seeing the most growth?
In produce we’ve added about four pallet spaces in the last couple of years and typically we have only 50 SKUs maximum in produce. We’re also building stores that are a little bigger than the average 148,000-square-foot warehouse to accommodate more fresh goods. Along with produce, our meat and deli departments are expanding– especially the latter as more people want things that are already cooked for convenience.
Right now the challenge is we’ve got a lot of products that we buy at a higher price than the U.S. does, so we continue to put pressure on our vendors to make sure they sell us their products at the same cost. When you’re a merchant, you can’t say “In three years these are the categories that are going to be selling well.” It’s difficult to predict the future. Four years ago frozen was huge, then it was fresh, and back to frozen. We’re very flexible and our turnaround time is faster than traditional grocers. We’re not like a big grocery store where they sell the listing allowances.
How do you manage to keep prices down in fresh? In the U.S., the total company has over $97 billion in sales, so obviously we have huge buying power. We have a group of people who buy produce here, in the U.S. and worldwide. Even where we don’t have warehouses, we have people that do all the buying globally. We maintain our margins under 14 per cent worldwide. Our approach to the business doesn’t change by country. The only difference is whatever it costs in transport fees.
What kind of impact will Target’s arrival in Canada next year have on your stores?
Part of our shoppers are the Target shopper: young, 30s and early 40s. We don’t try to be the answer to everybody’s needs. We only have under 4,000 SKUs. I suspect Target has 50,000.
We try to do what we do better, not something different. As long as people are copying us, we’re OK, but when we start copying others, that’s when I start asking myself questions. I want to be the leader. We’re in merchandising, after all, and our goal is to drive sales. People have to come, see it’s still a treasure hunt, and say, “Wow, look what I found at Costco!” Wow because of the price and because they can’t find it anywhere else. We have to keep that alive, and that’s not easy to do.
Our buyers go to shows and visit the competition, both in and outside of the country. They take items and tweak them for us. For example, yoga wear was nowhere five or 10 years ago; we brought it in at the very beginning because the buyers happened to see yoga wear out in B.C. that hadn’t come east yet. We were the first to carry it for two or three years, apart from the specialty brands. We’re always looking for what’s next. You can’t be successful if you don’t make mistakes. And we encourage taking chances here.