Why Costco is targeting the rich, with deals on Rolexes, 10-carat diamonds, and gold bars

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Costco chair Hamilton “Tony” James caused a bit of a stir this week when, in an interview, he mentioned a retail category that’s done surprisingly well for the big-box chain: luxury goods. “Rolex watches, Dom Pérignon, 10-carat diamonds,” James offered as examples of high-end products and brands that have fit into a discount-club model more typically associated with buying staples in bulk. “Affluent people,” he explained, “love a good deal.”

Courting that group may be particularly timely right now—and not just for Costco. According to a recent report from research firm Moody’s Analytics, the top 10% of U.S. earners (with household incomes of $250,000 and up) now account for almost 50% of all spending; 30 years ago, they accounted for 36%. Moody’s calculates that spending by this top group contributes about one-third to U.S. gross domestic product.

While that reflects a serious squeeze further down the income ladder, where the price of eggs and other basics remain high, it also suggests that the comparatively well-off not only have money to spend, but they’re spending it. As of September, the affluent had increased their spending 12% over the prior year, while working-class and middle-class households had spent less.

That’s having a clear effect on such sectors as travel, where the affluent have always been part of the mix but are now even more important. Delta recently reported that premium ticket sales are up 8%, much more than main-cabin sales. Bank of America found the most affluent 5% of its customers spent over 10% more on luxury goods than a year ago. “They’re going to Paris and loading up their suitcases with luxury bags and shoes and clothes,” BofA Institute senior economist David Tinsley told the Wall Street Journal.

For discounters and dollar stores targeting lower-income consumers, this has meant more competition for fewer dollars spent. (Dollar stores have struggled, and the discount chain Big Lots has filed for bankruptcy.) Addressing that challenge by courting the wealthy isn’t an easy move, but Costco isn’t alone in trying. Walmart CFO John David Rainey told Fox Business that the retail giant has expanded its selection of high-end Apple products, Bose headphones, and other items “sought after by more-affluent customers,” as part of a stab at “upleveling” the Walmart brand.

Of course, it may not be easy for most bargain-oriented brands to swiftly pivot, but Costco does seem to have more of a track record of pushing a more upscale-friendly element to its image. James noted that Costco has long counted affluent shoppers among its members—36% of them have incomes of $125,000 and higher, according to consumer-data firm Numerator. A Coresight analysis from a couple years ago found that Costco customers have higher average incomes than those who shop at rival Sam’s Club, and that’s reflected in its brand and product variety.

“Costco’s reputation for serving that somewhat higher-income demographic makes the chain more attractive to brands that target those shoppers as well,” Morningstar analyst Zain Akbari told CNBC. And of course it doesn’t hurt that the chain has famously been selling gold and platinum bars. (It’s also worth noting that Costco’s business is doing well in general, not just with high-end customers—and its reputation seems to have benefited from its reaffirmed commitment to DEI as a sound business practice.)

“We’ve always known we could move anything in volume if the quality was good and the price was great,” Costco’s James said, and that includes higher-end items that might seem like a stretch for a price-focused warehouse chain. In fact, he argued, it’s a natural part of the Costco brand: Both the company and its fans like to talk about the “treasure hunt”-feel of finding something unexpected that’s not necessarily cheap, but a bargain.

“We’re not interested in selling just anything at a low price,” James added. “If someone wants to buy a $500 TV for $250 at Costco, we want to sell them a $1,000 TV for $500 instead. We’re always trying to find better items to sell to members, giving them a great deal. We’re by no means a dollar store.” 

It (almost) goes without saying that from a macro perspective, the massive wealth and spending-power imbalance underlying Moody’s analysis points to potential problems that shifts in retail strategy won’t solve: Consumer debt in delinquency is rising, and the whole economy is vulnerable if splurging by the affluent were to plummet. So while retailers will likely continue to chase after wealthier customers, the majority of consumers are left to “treasure hunt” for reasonably priced eggs.

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