David Messner, Costco’s Real Estate Chief, On Store Sites and More
The members-only retailer has had a good pandemic, and expects to continue to grow
There’s a good chance that you’re reading this piece with a Costco membership card sitting in your wallet. You’re not alone.
A warehouse club model that began in a converted airplane hangar in San Diego in 1976 has evolved over the years into a multinational corporation with 300,000 employees.
While the pandemic was the death knell for many retailers, sales for Costco’s 2021 fiscal year totaled $192 billion — an 18 percent annual increase. It also took the No. 10 spot in the Fortune 500 rankings of the largest U.S. corporations by total revenue last year.
In March 2020, while the world was turned upside down, Costco was busy acquiring Innovel Solutions — now known as Costco Logistics — in a $1 billion deal. The purchase further expanded its already impressive geographic reach, and improved its delivery times and prices in the process. (Nobody could have predicted exactly how fortuitous the timing of that acquisition would eventually turn out to be.)
Today, the company prides itself on its commitment to quality, its entrepreneurial spirit, its motivation to exceed its members’ expectations, and its strong employee focus. The latter translates into loyal and committed employees who “never leave,” David Messner told Commercial Observer, and the proof is in the (Kirkland Signature-branded?) pudding.
Based in Costco’s Seattle headquarters, Messner oversees the firm’s real estate portfolio and has a 20-year tenure with the company. While the majority of the senior vice president’s time is spent sourcing sites and developing Costco’s retail property portfolio, his group is behind every real estate acquisition Costco makes, from logistics properties to offices to manufacturing assets.
With Covid-19 driving competition for industrial assets through the roof, Commercial Observer chatted with Messner to find out how Costco is staying ahead of its retail and real estate competitors, whether its 18-acre requirement still applies, and why he’d rather be building a Costco than remodeling his own house.
Commercial Observer: When did you join Costco?
David Messner: In 2001 I went to work for Northwest Atlantic Partners, which is Costco’s exclusive broker for North America. From there I began working in-house for Costco in 2010.
How has Costco’s real estate portfolio evolved since then?
The first thing I’d note is our international expansion during that time. Costco is very much an operator-driven company, with the real estate group right behind it supporting our [location] goals and decisions, and since 2010 we’ve opened in Spain, France, Iceland and China, and we’re now under construction with new locations in New Zealand and Sweden.
The second thing I’d note is the amount of logistics work we’ve done. We have an 11 million-square-foot logistics portfolio that’s responsible for replenishing stores and e-commerce, and in March 2020 we bought [middle-mile and final-mile delivery business] Innovel Solutions from [Sears Holdings Corporation] Transform Holdco. Innovel has since become Costco Logistics, but that acquisition came with a portfolio of 14 million square feet, and it got us into the big and bulky delivery business. So, if you buy a dishwasher, a huge TV or furniture, you can order online and we’ll deliver it to your house. Our network now gets us to 95 percent of the U.S. population within a day’s drive. The Innovel acquisition really resulted in a huge increase for our portfolio.
It must have been interesting putting a deal of that size together at the start of the pandemic.
We were very fortunate, in that with the pandemic came huge increases in e-commerce sales and we’d doubled our logistics network. It was great to pick up that business, and add not only the real estate but also the people who knew how to run it and take that online order, deliver it to your house, and get [your purchase] installed.
What makes an ideal Costco location today?
Our goal is to be proximate to the highest number of affluent households in a market. Our average Costco member has a household income of just over $100,000. Affluence varies from market to market, of course — it’s different in Manhattan, N.Y., than in Manhattan, Kan. — but we approach all of our markets by asking: Where is the affluence, and is there enough to support one of our buildings?
Generally, our trade areas [the longest drive a customer is willing to make] go out around 20 minutes in urban areas, but in places like Billings, Mont., that trade area can go out for hours. We look at every market differently, but it really comes down to finding the trade area that we can compare to another trade area we already operate in, so we can have a good idea of what the potential is there.
Someone once told me that you have an 18-acre rule for suitable Costco sites. Is that right?
These days it’s getting closer to 20 acres. We provide oversized parking stalls and our members like it because those spaces are roomy, you don’t get door dings and you can get cars through the middle easily. What we’re finding is that the number of spaces is really a determining factor regarding how much business we can do, so our sites have gotten larger over time. Now, it’s 18 to 20 acres, and that’s our U.S. standard. But, as we’ve ramped up internationally, we’ve learned more about vertical development and in Asia our typical site is eight acres, where we’ll do a single-level sales floor and then do two or three levels of parking above.
I did wonder how you navigate space-constricted markets, such as New York City.
In Brooklyn we have a two-level sales building, which is not our first choice but it works great. I think the rule of thumb for any retailer is the more desirable the market, the more creative you’ll get regarding how to serve it.
As you expand into new markets and cities, how are you handling the red-hot competition for industrial assets today?
Generally, what we’re finding is there’s room for a lot more Costcos than we thought [laughs] so we’re continuing to infill existing markets, and as we take market share that allows us to build more buildings. The logistics market, going back to the beginning of the pandemic through to now, really has been super hot and property values have doubled in some places. So that’s been tough, but a lot of the big-box retailers we were previously competing for space with — Walmart, Target, Home Depot — are not doing nearly as many retail locations as they once were.
When we go into a new location, we like to work with cities and we have a great story to tell in terms of us being a good community addition. We’re a great employer, a great sales tax generator, a best-in-class retailer, and we treat people and all stakeholders the right way.
A lot of our opportunities today are retail properties that are being redeveloped — so, malls or strip centers — and from a shopping center owner’s perspective, we attract an affluent customer base, which is generally what every retailer wants. Plus, our frequency [of customers visiting a Costco] is great, and the draw for those members stretches typically farther out than other retailers. Another advantage of being a membership club is we can say, exactly, “Here’s how far people are driving, here’s how often they’re coming, here’s how much they’re spending,” so it really gives us a good base from which to pitch why you should work with us as a retailer as opposed to retailer X.
Do you use brokers to source potential new sites?
Northwest Atlantic is our exclusive broker for North America. Generally, there will be a Northwest Atlantic person who is responsible for an operating region in the U.S. and they will partner with local brokers in all the major markets. It’s funny, we just had a local broker meeting here in Seattle last fall and we handed out 20-year service awards to these guys, so we’ve had relationships with local brokers in major markets for 20-plus years — which is rare but it’s typical in the way that Costco does business. We’re loyal, and we expect loyalty in return.
And, I assume you’re an all-cash buyer and don’t utilize the debt markets?
Yes, all cash.
I read that you’re rumored to be opening a new location on Aurora Avenue in Seattle?
We made an application to the city because we wanted to talk to them about what it would take for us to renovate the former Sam’s Club at that location and turn it into a Costco. But, it’s still too early to say whether it will happen. There are some things we still need to get over the hump on.
Is it difficult to redevelop an existing building into a Costco?
We’ve taken over a few Sam’s Clubs. The two that come to mind are in Fairbanks, Alaska, and Dallas, Texas, but there are others. Generally they’re a little bit smaller than we are, probably more like 13 or 14 acres in size, so we have to acquire additional property to make it work as a Costco.
What you hope for, generally, is a flat site. We normally replace the parking lot, and end up with four walls and a roof but the rest of the building we’re tearing up and redoing — kind of like a home remodel. And, sometimes you wish you’d just torn it down and started over [laughs]. There are some benefits to redevelopment, but not as many as you might think.
How has Costco handled supply chain issues through the pandemic?
Our merchants have done a great job of being nimble, and one of the biggest benefits we have is that we don’t have designated shelf space in the same way that when you walk into a Target they’ve got a spot for 40,000 products. We only carry 3,500 SKUs [stock-keeping units], so if we have to change from one paper towel to another it’s not a big deal. So, we took what we could get and was available in the supply chain, and we kept the stores full. It surprises me when I walk through a Safeway or a Walgreens and see how much empty shelf space they have. When you go into a Costco, its shelves are full.
I hear that Kirkland Signature-brand whiskey is actually Macallan 12-year in disguise? Can you tell us any other product secrets?
[Laughs] That’s kind of out of my range, but I know the theory in developing Kirkland Signature is it has to be as good or better quality than the national brand, and we partner with distillers or winemakers who are bottling for other brands you’d recognize. Not every product works, but there are certainly enough that do, where it’s a super productive part of the business — whether it’s apparel or whiskey.
How did your portfolio fare, broadly speaking, through the worst of the pandemic?
There were a couple of things that I think really helped us. One is the sheer size of our stores. You grab a big shopping cart and go down these super-wide aisles, and that’s social distancing in itself. We also took the employees who gave out samples — we couldn’t do samples at the time — and we didn’t lay them off but instead assigned them to constantly cleaning the stores. We didn’t have to tell members we were keeping stores clean, because you would see them constantly cleaning carts and scrubbing down countertops. So, I think that combination of big-size stores and going above or beyond with our cleaning standards really helped set us apart. We stayed open the whole time.
Who are your biggest competitors on the retail side?
Amazon and Walmart. We’re number three, they’re one and two.
One day Costco will overtake those two, I’ll bet.
Thank you for your support [laughs].
Has same-day delivery by Amazon and Walmart impacted your business strategy?
We partner with Instacart so you can go on either the Costco or Instacart website and get same-day delivery, and we also have our own two-day grocery delivery, primarily for pantry-type items.
Did you make any tweaks to your real estate portfolio due to the pandemic?
Not really. The Costco box just works well. You can walk into one of our stores, whether you’re in the U.K. or here in the U.S., and you know it’s a Costco. We do the same thing everywhere and the categories are generally the same. We may go with more local brands and tailor to local tastes, but it is the same in terms of assortment and layout and feel. And what we’ve learned is instead of tweaking the box to try to get into new markets, we’re better off sticking with what we do and just going into different places. It works great all over the world, so there’s no point compromising what we do well here.
What’s your favorite part of your job?
I love making deals. My career as a corporate real estate person has primarily involved working on grocery, drug and warehouse club deals. I’ve always enjoyed starting with an idea and then working through it, having to get buy-in both internally and externally, and then watching it get built. Then you walk by that building, and it’s productive with happy employees. It’s not instant gratification by any means; it takes years sometimes to complete, but it’s something tangible and something I take a lot of pride in.
How many people are on your team?
If you count Northwest and the real estate team, it’s 75 people, which is not a lot of people for a company of this size, but we run a very flat organization. Any of our people who are negotiating deals will present those deals to the CEO. So, our people usually come to us with 10 years of big-box experience and we’d rather have fewer people who are more productive. That’s our philosophy.
Are you from Seattle, originally?
I went to Newport High School in Bellevue, Wash., and the University of Washington and I now live in [hip Seattle neighborhood] Capitol Hill, so I didn’t go very far.
How did you first get interested in real estate?
When I graduated from university I got an internship at a real estate brokerage company. I was a lousy broker, then I worked for a developer for a short time, then I landed at Safeway. They had a local office here, and I wasn’t qualified but I was lucky and I got the job. Once I found my niche in corporate real estate, which is really working on behalf of the user, that’s what got me enthused about the business. The five years between graduating and Safeway I was floundering but then it all kind of fell into place.
What appealed about Costco, specifically?
It was the opportunity to work with [Costco Founders] Jim Sinegal and Jeff Brotman. Jeff was real estate, finance and legal, whereas Jim was operations and merchandising. These guys were not only great businessmen, but they also created that Costco culture of doing the right thing, and taking care of employees, vendors and members. That’s why nobody ever leaves. I’ve been here 20 years and I’m still the new guy.
What’s next for Costco?
We’ll continue to expand in the U.S. As I mentioned, we’re further from saturation than we would have thought 10 years ago, and we’re continuing to get market share. One thing that we’ve learned through tough times — the housing meltdown and now the pandemic — is we tend to excel during the times when others don’t, so we’re picking up market share and there are a lot more deals in mature markets than we would have expected 10 years ago. Our goal now is if we open 25 to 30 new locations a year, half of those will be domestic locations and half international.
We only opened 13 locations in our 2020 fiscal year, as one thing about the pandemic was that it was difficult to get permits and things processed. City council meetings were delayed, and plan checkers were out. In fiscal 2021 we opened 20 locations, and this year the goal is 28. So, we’re continuing to build that pipeline. One supply chain issue we faced was that we had to build in additional time to construct a Costco. Pre-pandemic we could do it within 110 days — build it, stock it and open it — a really fast process. But just getting those building components has been really tough, so we’ve had to relax those standards a bit.
A hundred and ten days seems super fast!
Yes. I’m doing a house remodeling right now and it’s taking way longer than 110 days.
Do you wish you were building a Costco instead?
Cathy Cunningham can be reached at email@example.com.