Exploring the Costco Effect

As Matthew Phillips at Freakonomics points out, the phenomenon whereby the arrival of a Walmart in a neighborhood leads to a drop in general consumer goods prices locally has been well-studied and widely discussed in the media. However, what of other big box retailers? According to a working paper titled Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices by Charles J. Courtemanche and Art Carden, the impact in some cases is much different. From the abstract:

Prior research shows grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big box retailers – Costco and Walmart-owned Sam's Club – are quite different. Using city-level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers, and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along non-price dimensions such as product quality or quality of the shopping experience. We find no evidence that Sam’s Club entry affects grocery stores’ prices, consistent with Sam’s Club’s focus on small businesses instead of consumers.

So, it appears that Sam's Club has little impact on prices in area stores. The authors believe that this is due to that store's targeting small businesses, a sensible conclusion. However, the authors note that in the case of Costco, prices in the surrounding area actually rise. I have been to a number of Costcos before and will admit that they aren't typically the most aesthetically pleasing of places, but is the warehouse chic look really enough to drive potential customers into the waiting arms of green grocers armed with itchy price gun trigger fingers? At first blush, I doubted that customers would be so picky in these economic times, but I have also been inside Whole Foods stores and will say that harried young mothers running rampant with carriages aside, such visits are typically a very pleasant experience.

Maybe the cosiness of, for example, a Whole Foods is enough of a stimulus to get customers to open the wallets and purses a bit further to avoid a trip to Costco. However, does this by extension suggest that people feel that the Walmart experience is just comfortable enough that they will happily take the lower prices there? Are there other factors such as geography at play? I feel like more data might be necessary before some of these questions are answerable, but they are not insignificant in a multi-billion dollar business.

In the meantime, what do our readers think? Will you save a buck at the expense of shopping in a wood-panelled, tile-floored environment? Is Walmart that much more comfortable than Costco? Any high-end green grocer fans out there? Any comments below would be appreciated, as always.

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