For those that do not believe the aforementioned manufactures would not sell to Costco and for those that believe Costco only purchases items that they can purchase in massive quantities at heavy discounts, the following article will open your eyes to some of Costco's buying practices.
Aggressive and Uncaring Methods
This is part of an article written by Elise Eden & Wendy Berner titled "At What Price Costco?" The article was published in the April 10-16 issue of Willamette Weekly.
When Bob Laman's company started out seven years ago, it sold the rooftop carriers through a toll-free phone service. Within months, Laman says, Packasport had developed a small but loyal group of customers, who loved the luxury item and its wide variety of options. As sales grew, the company began to sell the storage systems at automotive outlets and high-end sporting goods stores. These retailers were chosen, Laman says, because they could maintain attractive floor displays of the six Packasport models and afford to train customer service representatives in the finer points about the features and custom work available with each carrier.
In January 1995, a Costco buyer approached Packasport and asked to carry the company's rooftop storage systems in its warehouse stores, Laman says. Packasport refused, giving two reasons. First, the company was concerned that Costco couldn't provide adequate customer service for the specialized equipment. Second, Costco admitted that it would sell the cartop carriers below the manufacturer's suggested retail price. This, in Packasport's mind, could sully the product's reputation and anger its regular retailers. Those retailers would be so upset about Costco offering the same product at a discount, Laman says, that they might decide it wasn't worth the effort to order any more Packasport merchandise. "For a small company, [selling to Costco] destroys the market," he says. "The last place we'd sell to is Costco." Laman thought that was the end of the conversation. He was wrong. "Telling Costco you won't sell directly to them," he says, "is never the end of the story."
Soon after Costco's inquiry, Packasport received a large order request from a small sporting goods shop in Seattle, which Laman won't identify. The size of the order seemed out of place given the size of the store. "It raised an immediate red flag in my mind," Laman says.
Laman was so curious that he asked one of his other retailers to call the shop's owner, who confirmed that Costco had approached him about getting Packasport's basic model and that the products his store had ordered would indeed end up on Costco's shelves. Packasport refused to fill the shop's order.
Several months later, the Bend manufacturer received an order from New Delhi-based Indian Distributors for 104 carriers. Suspicious, Packasport made the small export company sign a contract stipulating that the Indian firm would not sell any Packasport products to any stores in the United States. The cartop carriers were to be picked up at Packasport's small Ohio manufacturing plant, loaded onto semitrailers and trucked to Los Angeles, where the shipment would go through customs and end up in India.
The shipment, however, never arrived at customs. Within three days after the products left Ohio, the Packasport System 90 rooftop carrier was on shelves at Costco warehouses in Oregon and five other Western states.
Laman didn't find out right away. It was only after handfuls of warranty response cards, which accompany each Packasport cartop carrier, started pouring into the Bend office from destinations as far away as Wyoming and Montana. "It was kind of like a little mystery," he says.
Even though he suspected Costco right away, Laman was baffled. His company had done everything within its power to keep Packasport products away from the discount chain. He drove to the Bend Costco and walked straight down the automotive aisle. There, sandwiched between haphazardly stacked truck storage boxes and an occasional radial tire, sat his product--only partially displayed and still in the original shipping boxes. He stood motionless on the cement floor as he stared at the price tag: $499.99, almost 33 percent below the suggested retail price of $745. He took a minute to remind himself that this wasn't a personal attack, just a business technique. But still, he says, "They're not the kind of business partner I'd like to have."
Costco officials won't comment specifically about their dealings with Packasport, but top brass don't deny that their company often obtains products by using what it euphemistically calls "diversion." "Our goal is to bring high-quality products to consumers at the lowest price," says Richard Galanti, Costco executive vice president and chief financial officer, from his Issaquah, Wash., office. "We try to buy directly from manufacturers, but in instances where they refuse, we buy through a third party--legally." Galanti estimates that about 4 percent of the goods in Costco are diverted, but a number of retailers are convinced that the figure is closer to 12 percent. At an average of 4,000 products per warehouse store, that means that anywhere from 160 to 480 brand-name products on Costco's shelves at any given time are there without the express approval of their manufacturers.
This should scare the you-know-what out of all small business owners. Costco is certainly not the first to obtain their products through diversion, but they are certainly the first to do it in such a manner. Small businesses must be able to control their market to compete with large corporations. The way they compete is by keeping their products out of the bottom-end sales bracket. The advantage of large corporations is that they can produce lots of products for a very low price, a price that small businesses can't match. The key is to find a niche in an existing market or create an entirely new one that operates on variables other than the bottom dollar.
Using Packasport as an example, that business is only successful because it has found a market where they are sheltered. By selling to the upper-middle class outdoor types, their product is evaluated on presentation, customer service, and sign value. When Costco acquires this product, they destroy its presentation by leaving it in the shipping box, customer service is non-existent, and the low price makes it just another car top carrier. Costco has taken it out of its market where could do well and dropped it down to the bottom-dollar market where the only thing that counts is the price tag. Small businesses can never compete in this market so Costco's actions destroy small businesses while fueling large corporations. The effect that this could have is frightening. If power-boxes like Costco continue to spread and consumers continue to only be concerned with getting the lowest price, small business will suffer greatly. Say "hello" to monopolies, larger corporations, more powerful corporations, homogenization of products, and an ever growing lower-middle class. View Original Text in Willamette Weekly