3 Reasons Costco May Cost You More Money

Justin Sullivan/Getty Images

Justin Sullivan/Getty Images

Plenty of shoppers swear by Costco. It’s No. 3 on a list of just 10 companies that collectively swallow two-thirds of all U.S. retail dollars. Costco’s appeal, as with other warehouse stores, is low prices on bulk items. Costco doesn’t mark up items more than 15%, whereas supermarkets generally mark up merchandise by 25%, so there are bound to be opportunities for savings.

But in the experience of the consumer, does Costco always have the best deals? Of course not. Most consumers don’t have time to do a thorough price check, but the ones who do will likely find lower prices on some products at surrounding stores, especially if generic brands are an option. Carrying only about 4,000 products, Costco doesn’t give shoppers much of an opportunity to choose between brands or similar products for a better deal.

Costco does offer its own generic label, Kirkland, which for some products could be the best deal around. Cheapism.com did price comparisons with stores like Best Buy, Kroger, and Kohl’s, and largely found Costco’s prices to be lower, with huge savings on high-priced items like a TV and Blu-ray player. Of the items on the list, only tomatoes and salmon were cheaper at Kroger.

Interestingly, a 2011 study published by The National Bureau of Economic Research found that while Walmart has been shown to drive down prices at nearby grocery stores, it’s a different story with wholesale retailers. According to the research, a Costco store actually increases competitors’ grocery prices by 1.4% in the short term and 2.7% in the long run. Seemingly, while stores see the need to match Walmart’s prices in order to stay competitive, they don’t think it’s worth it with warehouse stores than sell in bulk.

Prices in a given region are always going to be dependent on a wide range of variables, but many consumers rule in favor of Costco without doing their homework. Some of that is human nature: People want to save time as well as money when shopping, so thorough research on every item seems to defeat the purpose. Comparing unit prices between typical grocers and bulk stores can be especially cumbersome. But there are some more explanations for shoppers losing money on a Costco investment.

Previously, we covered some of the many sneaky tricks retailers use to get you to spend more. But when it comes to overspending behavior in warehouse stores, retail tricks are just one factor. Here are some reasons shopping at Costco could be saving you less money than you think. It could even be costing you more.

Spencer Platt/Getty Images

Spencer Platt/Getty Images

1. You don’t think you need to check prices

One blogger recounted her experience, concluding that Costco shoppers should be checking prices more closely. “I was at Costco one day where there was a display of two one gallon bottles of Clorox for $1.98 after a rebate,” she writes. “I stood there amazed as people frantically grabbed this ‘great deal.’ I knew I could get that same Clorox for $.98 a gallon at my regular discount store.”

Shoppers don’t behave totally rationally, particularly after paying a membership fee at a warehouse store, according to 2007 research out of Harvard Business School. Those who are charged a membership fee frequently believe they are saving money just by shopping at that store. Consequently, these consumers are likely to spend more money than they originally planned, often on products they don’t need. On top of that, products may be similarly priced, or even cheaper, at local discount stores that don’t require a membership.

“Over and above actual savings, consumers have a general belief that they will save on all products, inferences which are likely erroneous at times,” the researchers explained.

Joe Raedle/Getty Images

Joe Raedle/Getty Images

2. You’re not picking and choosing wisely

The lack of variety means that some things just aren’t a good deal at warehouse stores. If Costco is carrying only a high-end brand of toothpaste, for example, then sure, Costco might offer the best deal on that brand. But it could be loads cheaper to just buy a low-end toothpaste brand somewhere else. There is plenty of advice out there about how to make Costco work to your advantage. It often comes down to which products you choose to purchase there.

Toilet paper is the No. 1 product at Costco. The company even hires technicians to test the Kirkland brand for thickness, strength, and softness. Some argue, however, that household paper products like toilet paper should be avoided at warehouse stores because they are usually cheaper elsewhere. In 2014, Consumer Reports called Kirkland brand toilet paper low quality and claimed Walmart’s White Cloud 3-Ply Ultra was a better deal despite being twice the price. Costco’s bacon, on the other hand, ranked as a high-value item.

Consumer Reports stressed the importance of shopping strategically at Costco. Another way to do that is by using price tag codes to determine whether at item is on sale. Prices that end in 97 cents, for example, indicate a mark down.

Joe Raedle/Getty Images

Joe Raedle/Getty Images

3. You get lost in the store

Costco, with its stripped down warehouse aesthetic, appears to put little effort into its design. A 2012 National Post article explained how stores like IKEA and Costco intentionally create a maze for consumers to navigate. This way, they will spend more time in the store, see more products, and spend more money.

“[Costco] doesn’t feel very experiential or interesting, but that’s OK because people who go to Costco love nothing more than a deal,” said Michael Norton, a Harvard Business School professor. “The more the place looks like they don’t spend a lot of money on making it look nice, the more you feel like the prices are low, and the more you feel excited about the deals you’re getting.”

Costco uses other clever tactics in the design of it stores, with the specific purpose of driving sales. One is putting all of the fresh food in the very back of the store, CBS News reported, so consumers have to walk by countless items on the way there, much like the strategic positioning of milk in grocery stores. Costco also has a complete lack of signage in its store aisles. This might appear to be a cost-cutting measure, but it really just helps consumers get lost, forcing them to search through endless aisles to find a single item.

More from Personal Finance Cheat Sheet:

More Articles About:   , , , ,