
With Costco’s Napa warehouse now open for business and boasting the largest selection of wine of all its US stores, I decided to take a trip to one of Sonoma County’s locations to get a feel for how wine sales at America’s bulk-buy paradise stack up against the larger market. So, as I donned my investigator hat and prepped for some fun data collection last Saturday, I wanted to make sure I went into this endeavor with an open mind. Costco has obviously invested heavily in wine being a core feature of the Napa store; does that mean they’re seeing something different than the rank-and-file producers in Northern California and beyond? Where the rest of us are struggling to move inventory at a level comparable to years past, what’s driving Costco’s positive outlook on wine moving forward? What I wasn’t prepared for was just how low the prices would actually be, as well as how that pricing was affecting consumer behavior.
*A Disclaimer Before I Dive Too Deep
I’m definitely aware of what it takes to get a product on the shelves at Costco, and how that process isn’t particularly feasible for producers with higher-than-average COGS on their wine. That being said, the end goal of this piece isn’t to incentivize folks towards Costco as a sales channel. My analysis is focused on answering two specific questions: what is Costco doing strategically that’s given them enough confidence to bet big on wine, and how is the behavior of their customers driving that strategy?
Venturing into the Vino Wonderland
As I navigated the labyrinth of oversized carts and towering shelves, it became clear that Costco isn’t just dabbling in wine; it’s orchestrating a full-blown symphony. The sheer volume and variety of wines available were nothing short of impressive compared to years past.
But what truly caught my eye — and perhaps made it pop out a little — were the prices. Of the 50 unique bottles featured, only 8 were listed for a price above $25 per bottle. Considering that SVB’s previous State of the Wine Industry report lists median DTC per bottle prices of $84.20 for Napa County and $57.70 for Sonoma County, that’s a staggering difference. It felt like I’d stumbled upon a secret society where the password is “bulk savings.”
The Early Bird Gets the Cheap Wine
I arrived at Costco about two hours after they opened. During that short period, the bins containing wine with the lowest prices were already almost completely depleted compared to name-brand labels with even slightly higher prices close by. It was like watching a swarm of deal-seeking locusts — but with slightly better manners and larger carts.
This immediate depletion of lower-priced wines highlighted a clear consumer preference: price was king. Even in Sonoma County, where collective wine knowledge is perceived as much higher than elsewhere in the country, customers were gravitating toward the most budget-friendly bottles with little hesitation.
Scores, Schmores: The Consumer’s Choice
Costco actively displays wine scores from major publications on their product tags. These scores, often heralded as the guiding stars for oenophiles, seemed to make little or no difference in consumer behavior when selecting wine. I witnessed customers consistently reaching for bottles featuring scores in the high 80s — even if that bottle was sitting right next to another of the same varietal with a score in the 90s and only a dollar or two more in price.
It appears that, for the average Costco shopper, a couple of points on a wine score aren’t swaying factors. The emphasis was squarely on value perceived through the lens of price.
Cracking the Costco Code: Strategic Savvy
So, what’s behind Costco’s stalwart confidence in wine as a warehouse staple? The answer lies in a blend of strategic purchasing, relentless efficiency, and a business model that challenges conventional retail wisdom.
Extreme Low-Price Strategy Through Bulk Buying: Costco leverages its massive buying power to purchase large quantities of wine, allowing them to negotiate prices that smaller retailers can’t match. By passing these savings directly to customers and operating on a gross margin of just 10.57% (as reported in their 2023 Form 10-K), they offer wines at prices significantly lower than regional averages.
Membership Model Subsidizing Thin Margins: With annual membership fees accounting for the lion’s share of their net income, Costco isn’t reliant on high product markups to turn a profit. This financial cushion allows them to maintain razor-thin margins on wine sales, offering exceptional value that drives customer loyalty and high renewal rates.
Operational Efficiency and Limited Selection: By offering a curated selection of around 4,000 SKUs (versus 100,000+ in typical supermarkets), Costco streamlines its operations and maximizes bargaining power with suppliers. This efficiency reduces overhead costs, enabling them to keep wine prices low and respond quickly to consumer demand.
Private Label Power with Kirkland Signature Wines: Costco’s Kirkland Signature wines exemplify their ability to offer high-quality products at lower prices. By partnering directly with reputable wineries and minimizing marketing and distribution expenses, they provide wines that match or surpass national brands in quality but at a fraction of the cost. This reinforces Costco’s value proposition in the wine market and attracts consumers who prioritize price over brand prestige or expert ratings.
Sip, Shop, Repeat: Customer Behavior Uncorked
Now, let’s swirl the glass and examine how customer behavior intertwines with Costco’s wine strategy.
Value Perception Over Prestige: Customers at Costco are conditioned to expect deals. When they see a well-regarded wine at a lower price than usual, it reinforces the perception of getting exceptional value, prompting more frequent and larger purchases. The stark contrast between Costco’s pricing and the median DTC prices in Napa and Sonoma counties only amplifies this effect.
Price Sensitivity Trumps Scores: The disregard for displayed wine scores suggests that consumers are more interested in a good deal than a prestigious label or a high rating. Even a one or two-dollar difference swayed choices, highlighting extreme price sensitivity.
Bulk Buying Mentality: Costco’s environment encourages stocking up. The notion of “buy more, save more” is deeply ingrained, and when applied to wine, it means customers are more willing to purchase in quantities that outpace typical retail behavior.
Trust Factor: Over the years, Costco has built a reputation for quality and consistency. This trust extends to their wine selection, where customers feel confident trying new labels, including the Kirkland Signature offerings, knowing they’ve been vetted for quality.
The Wider Wine World Implications
Costco’s bullish approach to wine doesn’t just shake up the retail landscape; it sends ripples through the entire wine industry.
Pressure on Competitors: Other retailers must grapple with matching Costco’s prices or differentiating themselves through unique offerings and experiences that a warehouse store can’t replicate.
Opportunities for Producers: For wineries able to meet Costco’s volume demands and pricing structures, the exposure can be significant. However, this often suits larger producers more than boutique wineries.
Shift in Consumer Expectations: As shoppers grow accustomed to lower prices for quality wines, their expectations shift, potentially challenging the traditional pricing models within the industry. The significant savings customers experience at Costco could drive a demand for lower prices elsewhere.
Redefining Quality Metrics: The apparent consumer indifference to wine scores may prompt a reevaluation of how the industry markets quality. If price overshadows ratings even in regions with high wine literacy, the traditional reliance on scores might need reconsideration.
A Toast to Lessons Learned
So, where does this leave us — the small to mid-sized producers, the boutique retailers, the wine enthusiasts who relish the stories behind each bottle?
Costco’s strategy underscores the power of accessibility and value perception. While we may not match their pricing or scale, there’s an opportunity to emphasize what can’t be replicated in a bulk-buy environment:
Personalized Experiences: Wine is as much about the story as it is about the taste. The ability to take each of our customers on that journey when they visit instead of just offering a favorable price is one of the aspects that makes tasting at a winery truly special. The chances of a winery visit forging a core memory and brand connection will always be exponentially higher than if someone bought the same bottle in a retail environment.
Available Variety: With an environment that’s purposefully designed to limit available products, Costco will never be able to match the breadth and depth of your back catalog. Where they choose to offer a very narrow scope of each producer’s product line, wineries provide access to an entire treasure trove of options for each customer.
Educating Consumers: Hosting workshops, wine classes, and pairing events can deepen customers’ appreciation and loyalty, fostering a community around shared passion. By emphasizing education, wineries can either reconnect consumers with the nuances that make each bottle unique or provide a perfect onramp for new consumers that may still be unfamiliar with wine’s unique lexicon.
At the end of the day, my trip to Costco was an eye-opening journey into the microcosm of affordability and consumer behavior. The warehouse giant has leveraged its strengths to create a wine shopping experience that’s accessible and enticing for their customer base, prioritizing price and perceived value over traditional metrics like brand prestige or expert ratings.
For the rest of us, it’s a reminder that while the market evolves, there’s always a place for authenticity, connection, and the unique narratives that only we can offer. After all, wine is more than a commodity — it’s a conduit for stories, experiences, and the occasional investigative adventure through the aisles of a warehouse store.
Cheers to that!
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