October 2018, Las Vegas
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Costco lures middle-income travellers to make a play for OTA market share
Could an established player from the world of wholesale online merchandising be a new force to be reckoned with in online travel? Sally White reports
The online travel agents (OTAs) could have done without it, but there is a fast-growing new player on their block.The US membership-only wholesale club group, Costco, has spotted what its brand strength can bring it in the online travel market. With around 90 million captive members on its books, well over 40% of the 25-and-older US population, (mostly in medium-to-upper income brackets), becoming an OTA was a no-brainer.
The numbers stack up very nicely: 63% of affluent Americans say they go on holiday over three times a year, reporting spending on average more than $13,000 and around $3,000 a trip, according to figures from Alliance Travel Insurance and Conde Nast Traveller. Add in OTA commissions, thanks to the lucrative hotel sector, that can reach 30%. Even on the cost-cutting, ultra-efficient business strategies employed by Costco, the gross margin in its core consumer goods business is around 13% gross.
The vast majority of Costco’s net income comes from its membership fees. These range from an annual $120 for executive membership down to $60 for the rest. Costco is beginning to expand its merchandise business into South America and Europe, so Costco Travel will follow.
Perhaps it might not sound like the most glamorous way to book a trip, but its customers seemingly can't get enough of it
Started some years ago, Costco Travel has only recently attracted headlines because of its rapid growth. The retail giant is offering members deals on hotels, flights, cruises, and rental cars. Perhaps it might not sound like the most glamorous way to book a trip, but its customers seemingly can't get enough of it. As yet it has not disclosed how large its business has become, but its presence is certainly felt.
In Costco's most recent report to the stock market, chief financial officer Richard Galanti explained that the quarter's margin improvements were partly thanks to its travel business. "It's not the value of that plane ticket and hotel, it's the broker commission," he said.
Merchandising and memberships
Following the same philosophy as in its merchandise business, Costco offers a limited number of products “in an effort to consistently produce high-quality, exceptional value and superb service”, Costco coordinator Nikki Chellew told a press conference. "Costco Travel adds to the overall value of the membership with savings that can exceed the cost of an annual membership," he said.
To further boost the attraction of its travel offer, Costco has also recently started offering benefits like a 2% cash-back bonus on travel purchases for executive club members and gift cards for all members on specific purchases.
Costco was able to grow into a strong online travel player while bypassing the traditional barrier to entry of user acquisition costs because of the strength of its membership club. It does not hurt, either, that no other OTA allows customers to purchase bathing suits, luggage, and other travel essentials!
Costco was able to grow into a strong online travel player while bypassing the traditional barrier to entry of user acquisition costs because of the strength of its membership club
Increasingly, Costco is the main source for its travel division’s business incoming traffic. For the past two years, Costcotravel.com received 98% of its referral traffic from costco.com, according to its press releases. Brokers describe the numbers as “pretty outstanding”. In 2016, Costco sent an average of 770,000 monthly visits to Costco Travel, and in 2017 890,000 visitors were directed to Costco Travel monthly.
The company’s business model is to buy in bulk, and then pass off the discount to its members. When it comes to travel that means the company is able to secure hotels, car rentals, and more for its members at a group rate.
Costco Travel’s offer even applies to cruises, theme parks, vacation packages, and all-inclusive resorts. Costco offers special rates on cruise lines such as Disney Cruise Line, Royal Caribbean, and Viking River Cruises. Costco members can search for the lowest rate available from Alamo, Avis, Budget, and Enterprise rental car companies. Costco offers theme park packages from Walt Disney World, Disneyland Resorts, and Universal Orlando. Packages might include seven nights for the price of five, or complimentary theme park tickets with a room reservation. Costco members can also shop a global array of specialty vacation offers from Trafalgar Worldwide Guided Vacations, Lion World Travel, and Guided Vacation.
Another advantage is the opportunity the model creates to charge fees.
Currently, travellers who book through Costco Travel will probably still need to shop around to check flight deals, but airfares can also be purchased as add-ons.
The membership model (which, of course, is also employed by Amazon) has attracted Stephen Scott, owner of www.travelhub365.net. To him another advantage is the opportunity the model creates to charge fees. Scott has launched a membership programme designed to let every customer choose a fee that fits his needs and his budget.
But it is other retailers that are the focus of Wall Street rumours as being next to tap the travel market following Costco Travel’s success. Their email databases, suggest brokers, could be put to work to provide a pool of travel-related purchases.