Costco Diversion Buying Strategy

A good friend of mine just sent me a very interesting article on Costco’s “Diversion” Buying Strategy where high-end goods (in this instance Crocs) are finding they were onto Costco shelves without the authorization of the retailer.  I couldnt find a link online so here is the full article. You can also read the article here (thanks Bryan)

 3/21/08
Costco’s “Diversion” Buying Strategy
By Tom Ryan

Crocs Inc. earlier this month became the latest company to freak out upon finding its hot selling shoes on the floors of Costco. Their arrival is apparently part of a long-standing strategy at Costco to look to secondary markets to acquire brands that won’t sell directly to Costco.

Crocs found some cases where it believes its products were sold indirectly to Costco. “We have not sold Crocs-branded products to Costco nor have we authorized any of our customers to sell our products to Costco,” said Croc’s CEO Ron Snyder in a statement. “We are continuing to take aggressive measures to prevent this from happening. I want to reiterate that Costco is not an authorized dealer of Crocs products.”

Mr. Snyder’s statement came a day after Richard Galanti, chief financial officer of Costco, told analysts that his company’s buyers were seeing more brands in the challenging economy that they historically could not access . “Somebody just the other day mentioned huge availability in apparel, things like name-brand jeans and name-brand women’s apparel and Crocs and the like,” Mr. Galanti said.

Mr. Galanti afterwards told the Seattle Post Intelligencer that Costco may not directly obtain Crocs, but Costco has acquired the shoes and other items with name brands such as Janzen, Hurley, Lucky and OshKosh because there is more availability in the market. Further prompted by the newspaper, Mr. Galanti wrote in an e-mail, “We did not and do not disclose how we procure them.”

This isn’t the first time Costco has found companies complaining about finding their goods diverted to Costco. Rollerblade, NordicTrack, Cannondale, Columbia Sportswear, Oakley, Rossignol, Teva and Trek have complained about the practice in the past, with several unsuccessfully filing lawsuits. Last year, both True Religion, the designer jeans marketer, and Camelbak, known for its high-end outdoor hydration products, became irate after finding their products selling at Costco without their authorization.

At the time, Layne Rigney, CamelBak’s director of sales for domestic recreation, said, “We keep a close eye on unauthorized distribution, but it can be tough to stop. The good news is that it looks like Costco has limited quantities of our product and what they have is only available online. We are determining how the product was diverted to Costco and we will stop it.” Many retailers worry that Costco’s reputation for diverting name brands and then slashing prices undercuts their business and is irresponsible to the consumer.

At the same time, Costco’s “diversion” buying appears to play a huge role in creating their vaunted “treasure hunt” shopping experience, where customers find unexpected deals with each visit. Many of Costco’s items are in the stores for only a short period of time.

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