Brick-and-mortar retail is being decimated by e-commerce yet Costco has experienced consistent growth. Costco prioritizes the interests of its customers and employees over those of its shareholders.
Costco is a weird business model. You can buy a 27-pound bucket of mac and cheese, a casket, a quart of gin, a tank of gas, a new car, hearing aids, prescription medications, life insurance, a $1.50 hotdog, and a $250,000 diamond ring. Items sit on pallets in dark, unmarked aisles. Brand selection is limited and irregular. And you pay a $60 annual membership fee for the privilege of just getting in the door.
Today, Costco has 770+ locations, 245,000 employees and more than $140 billion in sales. Costco’s immense buying power allows it to negotiate very deep discount deals with vendors, and the savings are always passed down to its shoppers. Costco caps its margins at 14% for brand-name items, and 15% for its in-house Kirkland brands — even wine, which is notorious for its 200% to 300% markups elsewhere. But the average item in the store is only marked up 11%, compared to the 25%-50% often seen in retail.
Because Costco buys such large volumes, its purchase price is often lower than other retailers to begin with; add in reduced markups, and you have considerably lower prices. In fact, Costco’s prices are so low, it barely breaks even on its merchandise sales. Recently, Costco was selling Calvin Klein jeans for $29, already $20 less than anywhere else. The vendor reduced the price by $7.00 so Costco lowered the jeans’ price to $22., now $27 cheaper than anyone else.
How does Costco make money?Firstly, they charge annual fees of $60 for “Gold Star” and $120 for “Executive” to shop there. Currently, some 60 million people pay Costco membership fees… $4 billion in annual revenue. The renewal rate is an incredible 90%.
The majority of cardholders are affluent and college-educated. They’re also devoted. This built-in brand loyalty has served them well. By charging shoppers a fee upfront, they tend to indulge in as many deals as possible. At Costco, this often means buying products in much larger volumes.
Costco stocks 3,700 SKUs, less than 10% of most supermarkets’ 40,000 to 50,000 items. Costco usually provides only one or two brands in a given category. With less selection, there is considerably lower labor. In retail, every hand that touches an item (stocking, organizing, rearranging) costs money. While Costco stocks less, it sells items in titanic quantities. If you want eggs, expect a 90 pack. Waffles? 60 to a box. Mayonnaise? 4-pound tub. And Cheetos only come in packs of 64.
Because Costco stocks limited inventory in massive amounts, it reengineers products to be cheaper. Costco often spends months working with the vendor and its factories to both reduce the price of an item and improve its quality. For example, Costco found a toy that retailed for $100. They could buy it for $50 and sell it for $60. But, over a period of months, Costco worked with the vendor and its factory to redesign the toy from the ground up for ways to cut costs. In the end, Costco got the vendor to reduce the price by 50% and sold it for $30. The profit margin Costco made from the toy at $30 was the same it would’ve made at $60: The time and resources the company invested to lower the price were strictly for the benefit of their shoppers.
Retail workers are among America’s lowest-paid employees, earning around $10 per hour. They rarely get full benefits, and turnover rates up to 65%). But Costco pays them a livable wage. The average pay among its 245,000 workers is $21 per hour, double the national retail average and double Walmart’s going rate. Moreover, 88% of Costco workers receive health insurance. Costco has some of the highest retention rates in the industry.
Costco investors complain the company has been “too generous” with customers and employees. They’ve called for higher margins on goods, steeper prices, and reduced benefits for workers. But Costco insists their policies are good for business: By sticking to their principles, stock has gone up 387% since 2000.
People who eat Tide Pods are idiots. The Costco brand pods are half the price. Just saying . . .