Costco has enthusiastically embraced hearing aids as store-in-store revenue builders in all of its burgeoning warehouse locations since the mid-90s. The rate of Costco hearing aid center growth (feature image, red) has outstripped warehouse growth (blue) in recent years. Both are on fast tracks.

 

Last Giant Standing, Building-Wise

 

Figure 1. Proliferating big Boxes and booths-in-boxes.  Costco locations as of 12/31/2016.

Costco’s Big Box footprint is large on the land (Fig 1). There’s a booth in every Box. Hearing aid prices are low, revenues are high. Those facts are established.

Other economic facts are harder to come by; some are still emerging. On its own, the building-and-booth growth strategy does not automatically conjure increased consumer demand for hearing aids and services. Spikes in consumption do not automatically translate to increased satisfaction and shifts in Demand.  

Big store retail chains of all varieties are failing or drastically reducing their infrastructures (think Sears, JC Penney, Radio Shack, Macys, WalMart, Kmart, Kohl’s, Safeway, Staples), due to changing shopping patterns (think Amazon and probably drones). This year is expected to bring  a “giant wave” of closings in the US to reduce the square feet of retail space per person, which is the highest in the world (23.5 sq ft per capita).

In the middle of this, Costco is building more boxes and booths-in-boxes? Is it possible that hearing aids are the last frontier on in-store retail?  Are they a serious part of the Costco expansion strategy? Inquiring minds wish to nail down Costco’s share of the hearing aid market and know in what ways its presence is influencing the goods market and sending shocks to the supply side.  

The last post left hanging the question of whether Costco’s growth of market share signals a growth of the market itself or just a loss of share for other providers.  Today’s post takes a swag at an answer.

 

Costco Market Share

 

Figure 2.  US hearing aid sales growth for private practices, Costco and VA. (from Hearing Review treatment of HIA data)

Costco sales have indeed kept pace with its infrastructure expansion, at times at the expense of existing practitioners. In 2014, 1.9% of private sector growth (3.4% total) was attributed to Costco.  One can interpret this to mean that the traditional 3-4% expected annual growth at retail held steady that year, but only because Costco took market share from dwindling private practice sales. Those grew a paltry 1.5%.  

Everybody did better in 2015 (Fig 2).  Private sector sales grew by 7.83%, racking up $2.65M sales. Hearing Review pegged Costco’s market share at 11% and noted 20-25% year-over-year growth for 2015 and the previous five years.  

One could interpret 2015 to mean that the pie was growing, thanks to all involved. Rather than posing a threat to private practices, perhaps Costco was doing its share to grow the pie and spread the wealth.   Or maybe not.  What if it’s growing the pie but wants more pie?

 

Eat More Pie!

 

Figure 3. Estimated and forecast Costco market share of US retail hearing aid market. Reprinted with permission from Clive LB et al, Bernstein & Co, 2017.

Financial analysts peg Costco’s current market share at 11-12% of US commercial sales and rising (Fig 3). To put that in bottom-line perspective, 11-12% translates to about 322,000-350,000 units sold by Costco in 2016. That in turn drills down to 600-700 aids/store (assuming all 506 US stores have hearing aid centers), or monthly sales in the mid 50’s (53-58 aids/month) for every single store in the US.  Wow.  It is no wonder that one insider reports being “…told on more than one occasion, that 

on a square foot basis the Hearing Aid business is by far the most valuable real estate in the warehouse.”

The overall commercial US hearing market grew at a healthy pace in 2016 — 10.6%, which beats the almost 9% growth of 2015.  Hearing Review estimated 15% internal growth in sales at Costco. On that basis, HR assigned Costco 12% of the market in 2016. Running the numbers, Costco alone accounted for almost 1% of total 2016 retail growth.  

More pie for all, but Costco’s slice keeps getting bigger.

 

A New Price Point

 

The hearing aid market, as we know it, is famous for low, static penetration and highly inelastic Price Elasticity of Demand. In such a market, it’s not unreasonable to wonder whether Costco itself is a Demand shifter and not just a market encroacher.

A prior Econ 101 post discussed the distinction of this important difference.

  • Sliding up and down the Demand curve is what happens in a stable market: sales rise as Price falls (and vs).  
  • Shifting the Demand only happens when the market is “shocked”:  sales rise for a determinant other than Price.

The US hearing aid market is shifting in a positive direction thanks to several economic determinants familiar to all of us in the profession.  Baby Boomers are hitting 65 and the aging population in general is growing healthier and proportionally larger.  Even without Costco, more hearing aids are bound to go out the door.

 For these and other reasons1, financial analysts forecast future market growth in hearing aids. In addition, Costco is identified as another determinant shifting Demand, believed to be

“…expand(ing) the market by opening up a new price point.”  

 

As Always, It’s Not (Just) About Price

 

The price point determinant is interesting and deserves data drilling in another post.  Price, by itself, does not shift Demand. Price is an independent variable that slides consumption up and down a given Demand schedule. In the equation, there is a one Quantity demanded for a given Price. That may sound like an academic distinction (which it is), but it’s one of consequence.    

Conversely, Price of a substitute (similar) good is a determinant that can shift Demand, meaning that Quantity demanded changes for a given Price.  The more Costco hearing aids are perceived as similar to traditionally dispensed instruments, the closer the substitute and the more it is consumed, which shifts the overall hearing aid Demand curve “up.”  If the Price of substitutes drop, the Price of the “other good” usually drops as well, with expected result: lower Price, more consumed.  This effect is evident in recent times in the hearing aid market, too.  

One other Demand shift determinant is change in consumer preference. In the present case, consumer preference is expressed in access as well as price.  If consumers prefer lower price in combination with a non-medical, store-in-store dispensing model, this too will shift the hearing aid Demand curve out.  

Costco’s success may be more significant than just taking market share from existing providers by putting pressure on Price.  Instead, it’s success (or audiologists’ failure) may be due to a new, frequently-preferred distribution channel for a substitute good which is undifferentiated from traditionally dispensed hearing aids in the minds and wallets of a growing group of consumers.

One way to test that idea is to look at market growth in states with lots of Costcos versus states without Costcos (yes, there are a few still out there).  Look for a rudimentary analysis along these lines in a future post.    

 

References & Footnotes

 

Clive LB, Wielechowski R & Morse A. EU Medtech (Re-Initiation): Fix the Cost Problem, Don’t Cause It. Bernstein & Co. March 2017.

1In addition to Costco’s low price point, other reasons for expected market growth are: 1) retail marketing to draw in more and younger consumers, 2) aging baby boomers, 3) destigmatization due to technological advances and entry of “non-specialty” retailers. (from Bernstein report)

 

Costco growth has always been spectacular since its inception as a single warehouse in Seattle in 1983. Starting from scratch, Costco was the first company to grow sales to $3B in less than six years. By 2015, it ranked #2 in global retailing, just behind Walmart. 

 

The Big Box That Always Thinks Outside the Box

 

Costco’s success is formulaic and time-tested. A limited selection of low-priced items, ranging from bulk (e.g., toilet paper) to luxury (e.g., diamond rings and watches), are offered in membership-only warehouses which themselves seem to reproduce as fast as bunnies (Fig 1).  Item selection is far from static — new lines of business come and a few go (e.g., Costco Home).  Hearing aids are a business that came and stayed.  

Figure 1.  Costco Wholesale warehouse locations in US and Canada as of 12/31/2016, per Costco Annual Report

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Hot Dogs and Hearing Aids

 

 Hearing aids were introduced as a luxury item when Costco merged with Price Club in 1993/4.  Keeping with its egalitarian success formula, Costco tossed hearing aids into its “ancillary business sales” section, right alongside hot dogs and gasoline.1  

“Hot Dogs and Hearing Aids” isn’t a slogan or natural marketing approach for most, or maybe any, audiologists.  Too bad for us.  By 2004, Costco’s Annual Report was able to boast of: 

“…our giant Kosher dogs regularly being named ‘Best Hot Dog’ in local competitions across the country. And our …Hearing Aid centers … showed double-digit gains last year.”

Double-digit gains were, and remain, the result of the low-price formula, which Costco customers expect for hearing aids as well as hot dogs.  The Costco 2003 Annual Report noted that “…ancillary business sales … increase(d) 20% over fiscal 2002…. Our members like to shop Costco for …hearing aid(s)… because they know we offer the best quality at the best price…”.  

And the rest is history, as Costco’s cryptic annual reports2, let on once in awhile:

  • 2007: “…ancillary businesses…increased sales by more than 9% in fiscal 2007 to nearly $9bil.”
  • 2011:  “ancillary businesses…showed a sales increase of 24 percent in 2011.”
  • 2012:  “Costco’s low prices on both brand-name and generic prescriptions are well-known, and we have gained our members’ trust for their healthcare needs.  Such a relationship is invaluable when it comes to health-related services, and we have extended that trust into our optical and hearing aid businesses as well.  Sales in our 469 hearing aid centers exceeded $200 million in 2012, an increase of 22 percent from the previous year.”
  • 2013:  “Costco Hearing Aid Centers…increased profitability at a higher rate than the rate of sales increase.  Such results were aided by the newest version of our highly rated, top-of-the-line Kirkland Signature digital hearing aids.”
  • 2014:  “Warehouse ancillary … gross margin when expressed as a percentage of net sales increased by six basis points, predominately in our optical and hearing aid businesses.”
  • 2015:  “Costco’s ancillary businesses (hearing aid centers) all performed well… Sales increased in all these operations”
  • 2016:  “…ancillary businesses … are all key components of our warehouses.  (They) produced strong sales and profits performance in 2016 and helped drive incremental sales throughout the warehouse.  We include …ancillary offerings in new warehouse openings, whenever possible; as well as add these operations to existing locations, as part of planned remodels and relocations.”

 

Do Hearing Aids Drive Hot Dog Sales?

 

It would seem so, based on the 2012 and 2016 quotes above. Costco uses hearing aids and eye-glasses to get members to make a warehouse trip to fulfill their healthcare needs. And why not get the shopping done and have a couple hot dogs while they’re there? The double-digit annual revenue growth in ancillary services and the ripple effect to sales of other products raises several points:

  • Weight gain?  Hearing aids are a form of healthcare but a possible unhealthy link may exist between hearing aids and hot dog -induced weight gain. Whether this adverse effect exists cannot be substantiated at present due to lack of available data.  
  • Profitability.  Double-digit revenue growth with low margins proves that store-in-store healthcare is a good line of business for Costco.
  • Access:  Burgeoning sales growth deflates the claim in public policy discussions that access to hearing healthcare is limited. Access is only a problem for those few who don’t have a Costco card or live in Wyoming3 (see Fig 1).

 

A New Distribution Channel 

 

Figure 2. Annual growth of US Costco warehouses (blue) and Costco Hearing Aid Centers in US and Canada. (data from Costco Warehouse Annual Reports)

Thanks to store-in-store hearing aid center distribution, the problem of access to hearing aids diminishes with every year that goes by. In the beginning, Costco hearing aid centers were few and far between. Once the revenue and profit-driving force became evident, they became ubiquitous (Fig 2).  

As fast as Costco warehouses have multiplied, Costco Hearing Aid Centers have multiplied faster.  It’s reminiscent of the old quip about the Starbucks location in the bathroom of a Starbucks (which hopefully is apocryphal). 

And sales have kept up with infrastructure, too.  In January of 2015, Hearing Review reported five years of 20% year-over-year growth of Costco hearing aid sales.  With all that profitability, investment in infrastructure, and specialized employee training to fit a healthcare product, it makes you wonder what Costco’s thoughts are on over-the-counter instruments. 

Tune in again for the next Costco installment, when we consider whether Costco’s growth of market share signals a growth of the market itself or just a loss of share for other providers.  

 

 

 

 

Footnotes and References

 

1Pharmacy; optical dispensing centers; one-hour photo; food court and hot dog stands; hearing aid centers; copy centers; print shops; and gas stations comprise Costco’s ancillary business division.

2Most Costco Wholesale Annual Reports can be found by clicking here and downloading the desired pdf. Early reports are harder to find but most exist and can be found with the right Internet search terms.

3Wyoming is interesting and we’ll get back to it in a future post.

Boyle M.  Why Costco is so addictive. Fortune Magazine, Oct 25 2006.

 

feature photo by Tony Talbot, Associated Press, as seen in the Houston Chronicle