The recent changes in the beauty industry have not gone unnoticed by Costco. Even before the pandemic, Costco was building up its beauty department to fatten up baskets and bolster margins. But when many beauty purveyors were forced to close during COVID-19, as an essentials operator, Costco had a captive audience.

While 2020 was focused on bulking up on utilitarian beauty fueled by the pandemic like hand soaps and moisturizers, the push this year is on luxury items—especially high-end skincare.

The $190 billion retailer is one of the country’s largest purveyors of beef and organic foods through its 809 warehouses worldwide. But beauty and personal care has been growing consistently. Although the country’s largest wholesale club doesn’t break out sales of health and beauty care, the category is grouped with the hardline segment. For all of 2020, that sector outpaced corporate sales in growth. For the first three quarters of 2021, hardline sales increases were about 29% versus corporate gains of 18%.

Sales for the fiscal year escalated 17.7% to $192.05 billion, up from $163.22 billion. Basket totals expanded 5.6% in the US, and traffic, or shopping frequency, increased 8.8% in the US. Also, bright news was that membership fee income for the fourth quarter rose 9.7%, and the US and Canada renewal rate was 91.3%, which is an increase of 0.3 percentage points.

During the year hardline sales increases were in the high 20% range versus about 18% in corporate sales. Costco also just announced it is putting limits on key items due to anticipated uptick in demand as the delta variant surges (such as toilet paper, bottled water, and some cleaning supplies), according to Richard Galanti, Costco’s Chief Financial Officer. The limits are more linked to supply-chain hiccups versus production shortages.

Beauty’s appeal is multifaceted. Costco currently has more than 105 million members. The age range skews higher than competitors like Amazon, Sephora, Ulta Beauty, or Walmart, but beauty is seen as a ticket to attract a younger audience. Also margins across the gigantic stores are thin—15%—where beauty produces margins closer to 25%. Costco’s main revenue is derived from memberships; beauty helps drive renewals while its attractive profits help cover operational costs.

An informal survey of consumers reveal beauty is part of their planned purchases when hitting the massive club stores. Mentioned most frequently were Olay products, Neutrogena, and Kirkland house brand skincare and wipes.

But many also mentioned (and were surprised and delighted to find) prestige logos including RoC, Kate Somerville, Perricone, and even SK-11.

Online Costco also offers La Mer, Clé de Peau, and other premium names. Members can access prices online; nonmembers cannot.

Interviews with retail experts, brands, distributors, and shoppers reveal Costco is a savvy beauty marketer. Strict rules are in place to validate that products are fresh (must be produced within 16 months) and not counterfeit—a contrast to nagging problems of online merchants like Amazon.

The retailer puts out a wish list of brands it wants to see on its shelves. Costco wants name brands, although its Kirkland Signature brand is a top performer. Indie brands have been huge producers at specialty and mass, but Costco primarily seeks items with proven track records. There are exceptions such as bioClarity, an indie plant-based skincare brand sold on Costco’s website.

With the beauty business changing as department stores close, there are also more opportunities for Costco to score premium brands.

Costco also cherry-picks only the best SKUs and wants brands to be open to selling online. Anecdotes emerged that Levi’s refused to open the online gates and Costco walked away from a reported $100 million business.

The perks for brands willing to meet Costco’s stringent checklist is tremendous: foot traffic producing big sales and prompt payments said to be unheard of in the industry. There are no chargebacks or returns, which are endemic to mass-market retailing, unless goods are damaged.

“They pay like clockwork. They are great partners,” says one company who has worked for Costco.

Beauty has undergone a metamorphosis over the years. In the beginning, the club dabbled in premium names, such as Borghese and Elizabeth Arden, that caught the attention of shoppers. At that time Elizabeth Arden’s Visible Difference was the buzziest in beauty and Costco offered a two-pack that sold hundreds of thousands of units, sources say.

Hatch Beauty helped clear a path into the business with celebrity hairstylist Orlando Pita (still sold today) and a program called Beauty’s Most Wanted that bowed out in 2013.

A few years later, Costco added lines like SK-II and jumped onto the demand for Asian beauty with a special section. Recently, the company has been working hard to nurture direct programs. Those familiar with the assortment say names such as Perricone MD, StriVectin, Boscia, and Surratt are direct. Boscia co-founder Lan Belinsky told Glossy that Costco was “too tantalizing” to ignore.

Discover Night, a brand that is defined as textiles that interact with skin and hair for beauty and wellness benefits, has been direct with Costco since 2018. Discover Night’s pillowcases and skincare items are a perfect fit for the consumer Costco wants to attract—educated consumers who like the treasure-hunt nature of the clubs. They have a high interest in anti-aging and skincare and do their homework.

“Our partnership with Costco has been and continues to be an important part of our business,” said Kalle Simpson, founder and CEO of Discover Night. “We enjoy working strategically with Costco to provide top quality at a sharp price point. Costco has a great pulse on what their customer is interested in; allowing us to provide unique beauty offerings that surprise and delight." 

While direct is the direction at Costco, it is not the only path for brands.

The retailer has a separate arm that procures merchandise (National Distributors). There are also vendors of record who are authorized brokers. The process involves making offers on products complete with pricing to see if the deal is accepted. Costco’s team goes to great lengths to confirm validity of products after a sample is provided. The retailer does not planogram beauty and does not have auto-reorders, sources say.

Currently, there is not an emphasis on makeup, rather skincare and fragrances at holidays.

A third party is desired by some brands who can then distance themselves should there be any flack about the brand being sold at wholesale club prices. The system, however, still guarantees consumers will find the real deal in stores.

Last year, Costco introduced Costco Next, a joint venture with retail Platform LiveChannel that could open doors for beauty brands, including emerging lines. Under the program, members have access to buy direct an expanded assortment of brands at value pricing. Beauty brands participating include Sumbody and Zaaina.