After rave reviews from good friends, I finally got to the Costco episode of the Acquired podcast. It justified the rave reviews – thank you Acquired team. Here were my reflections –
- The first part of the Costco story is the story of Sol Price – probably one of retail’s most prolific inventors. He invented modern retail as we know it with the creation of Fedmart (that inspired “Walmart” and “K mart” ) and then Price club which led to Costco.
- Sol Price was an inventor who was very aware of the fact that he wasn’t as good at running his inventions. However, I loved the anecdotes of just how principled he was. Sam Walton – the founder of Walmart – famously said he stole the most ideas from Sol Price. Sam Walton’s tape recorder was once confiscated at a Price Club. When Sol heard of this, he immediately mailed it back.
- Jim Sinegal, Costco’s co-founder, famously corrected someone who said he learnt a lot from Sol to emphasize “I learnt everything from Sol.” Costco’s origin and biggest ideas – memberships, the warehouse concept, unique approach to inventory, etc., can be traced in a straight line to Sol Price’s innovations.
- One of the magical parts of Costco’s strategy is the warehouse concept. As they’re a warehouse, suppliers deliver directly and items are immediately available to sell. They turn items over roughly 1 in 26 days – i.e., before supplier bills come due in 30 days. It is wild how beautifully their cash flow system works.
- Costco has a mandate of a maximum of 14% margin with an average at 11%. So, for every dollar they save, 89 cents of value goes right back to the customer.
- Costco doesn’t do loss leaders – goods sold at breakeven or at a negative profit – to bring customers into stores as it means fleecing the customer elsewhere. The only place where they barely break even is $1.50 hot dog – a tradition that has lasted four decades.
- Costco have been reducing their SKUs over time – they’re currently in the range of 3000-4000 (other retailers store 50,000+). It is a mark of how much their customers trust them to pick the right thing. This also means each buyer REALLY understands the cost of every ingredient and monitors it carefully. And while they have tremendous power over suppliers given they go big on few SKUs, they are known to be tough but fair. Their objective is passing value to the customer.
- Kirkland Signature is the largest consumer packaged goods brand in the US – $52B in sales out of ~$230B in 2023. Again, a symbol of how much customers trust Kirkland.
- Costco rarely vertically integrates. One of the few exceptions is with chicken where they’d otherwise have to deal with a small group of firms (who then have pricing power). They produce 200 million chickens in-house a year.
- They pride themselves to be learning machines. Stores in year 1 today are doing better than stores in year 5 from 2014. This shows up in their $ per squarefoot. They live in rarefied air – it is closer to Tiffany’s (who sell diamonds!) and are orders of magnitude above other retailers.
- Their memberships are a profit center which contributes to 70% of their operating income. Their memberships also ensures record low shrinkage/stolen goods. Another reason for that record is staff who are paid $26/hour vs. $19/hour in other places with fantastic benefits. This means 4x lower turnover and high loyalty.
Finally, Costco’s executive membership costs twice the normal membership. And if you don’t get enough value to make up for the extra cost, they give the money back to you. Only at Costco.
- It is amazing how much Costco has inspired amazon. When Amazon was going through a difficult time after the dot com bust, Jim Sinegal and Jeff Bezos met for coffee and Sinegal explained to Bezos that there are two kinds of companies. The first focus on extracting value to customers and the second focuses on always giving customers value. Costco was firmly the second kind.
That day, Bezos went back and sent an email to his team that Amazon would be the kind of company that was always focused on giving value back to customers. Prime memberships, of course, have strong parallels to Costco’s memberships.
- Most of Costco’s senior executive team started 30-40 years prior. Their current CEO started as a forklift driver.
- This, then, was the part I found most inspiring. The Costco exec team is such a phenomenal example of a quiet group that isn’t showy. Instead, they’re quietly focused on improving the retail experience for their customers. They’ve grown 10% every year, an incredible feat over a period of 30 years with no end in sight.
I loved this because it is a beautiful counter example to job-hopping every 2 years. Complex fields take time to master. And I’m both inspired and grateful for the Costco executive team’s mastery over the business.
