Former VP at Costco & Founder of Popchips
Pat is a Former VP at Costco and the Founder of Popchips, a leading healthy snack brand that is also sold in Costco stores. Pat spent over 8 years at Costco where he was responsible for launching the Executive Membership and ancillary services such as the gas station business that is now over 9% of Costco’s sales. He left Costco to launch Popchips which is now sold in over 30,000 stores globally generating over $100m in sales annually.Read moreView Profile Page
Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.
Pat, what was the original thinking around executive membership at Costco?
Costco is a membership organization at heart. They were trying to both solidify and create an even stickier relationship with its most valuable members such as the volume shoppers, businesses that buy many products annually, as well as individuals who are heavy shoppers.
Prior to the executive membership there was individual and business, and the executive membership applies to both. Some benefits were for individuals in their personal lives and some were for businesses, but both solidified the relationship with volume shoppers.
How did you think about which services to launch, to add additional value to that target group?
We looked at a collection of both individual and business services. Everything Costco does is not about how much money they can make on services, but more about how much value those services could create.Costco is not afraid to do things differently, looking at where there was an inefficient market and where they could help deliver savings. An example is businesses that take credit cards. Keep in mind, most Costco businesses are small businesses. Back when Costco offered a credit card service, the people who offered them were very inefficient with their black box pricing and complicated grid matrix. There were even resellers who would go off and mark up the service and then resell it through a small business.
It was an inefficient market with very high margins. Costco realized if you strip out all the marketing costs and inefficient middlemen, businesses were being overcharged for credit card processing. We worked with the largest credit card processor in North America to create a very simple pricing strategy of one price. At that time, you were paying 4% to 5% for credit card processing and we charged 1.99% which represented a huge savings to those businesses. If all they did was use the credit card processing service at Costco, the average business paid for their executive membership four or five times over. Those were the kind of services we wanted to deliver. In some cases, we would see there was not much value to add, and would not offer them.
Is Costco's credit card offer still attractive given all the payment solutions?
Costco compressed the mark-ups in that business, which upset the entire industry, to the benefit of small merchants, but there is still benefit. Costco removes all marketing costs for that credit card services provider and do not take any mark-up themselves. They always offer value because they look to strip costs out of the system and pass those savings on.
What was the adoption rate for services in the executive membership?
It was surprisingly high, quite quickly. In 24 months, Costco had a $1 billion merchant portfolio. Today, I would think it was a multiple of that.
Did you add the 2% reward immediately on the launch of the Executive membership?
No, that came about a year into it, and was the cherry on top of the sundae. Once the executive membership was working and we saw the impact it was having, the 2% rebate was an ultimate add on. At that point, it made the math easy for a member who purchased more than a certain amount from Costco every year, to use the 2% rebate. People were asking why we were giving that away. We found that volume shoppers were cherry picking Costco versus alternatives like Sam's Club, and would split their purchases. The rebate incentivized them to drive all their purchases to Costco, which again locked up the most valuable members.
How does Costco's reward system compare to Sam's Club or BJs or any other offering that they have for high-volume shoppers?
The average Costco location did double the sales of their competition, on a per store basis. We had substantially more members and could drive more volume to the providers. Whether it was auto insurance or credit card processing, we could deliver more volume and command better value than our competition could.
Is that the same with services?
It is exactly the same. When you buy a jar of mayonnaise, you know the cost and it is very clear how much savings you offer versus a typical retailer. Whereas when you buy a service, things are a little squishier. That was a unique challenge because if Costco cannot offer the lowest price, they simply will not offer it.
You have to build trust with that member?