I finally crawled out from under the rock I was hiding and visited my first Costco last week, albeit in Veracruz, Mexico. Their business model seems to focus on stocking only profitable items that can be bought and stored in bulk. They do not relish the idea of the loss leader or the cross subsidy, but instead they evaluate items in stand-alone terms and look for high turnover. Inventory costs are low because what they have is right there in the store on pallets. They don’t seem to stock much in the way of competing brands and you see "Kirkland" — their house label — frequently; presumably buying from a single vendor lowers their costs further. As for the store I visited, two thirds of the stuff was hard to find and half of it was hard to reach. There was a surfeit of cranberry juice, which is otherwise uncommon in Mexico. There was lots of U.S. Grade A beef and canned goods. No one asked me to become a member. It would be a good place to stock up for a party but I can’t imagine shopping there regularly: too many of my favorite items are missing and they don’t have the hardcore best of Mexican foodstuffs, which are found in the traditional markets. Since they have over thirty stores in Mexico perhaps the formula is working.
Here is an NYT article about the U.S. phenomenon of Costco chic.
a good place to stock up for a party
When you have lots of kids, every day is a party.
Also, another dimension of the Costco experience is subsequently breaking down the unit purchased to give or exchange the surplus with familiars outside the household.
It took you this long to discover Costco
I’m fascinated by your “two thirds of the stuff was hard to find and half of it was hard to reach” comment. What do you mean by “hard to find”? I find that most goods are within reach, so I’m confused by the “hard to reach” comment.
Perhaps the formula is working? Um, a resounding yes.
I’ll second Ral’s comment.
The book “Trading Up” claimed that CostCo moves more premium wine than any other US retail. Or was it more amazing that that … more than others combined?
The weird thing about CostCo is that it mixes cheap staples with mass luxuries.
when you’re back home, try the $1.50 hot dogs. Also at the food court, teenage daughter likes the pizza and the chicken bakes. We often see people leaving with between 4 and 15 freshly baked $10 pizzas.
The romaine lettuce is usually good and very inexpensive compared to elsewhere. The fresh frozen blueberries are a bargain, as are the Kirkland almonds.
Costco is a good deal for small businesses, especially small restaurants and food stalls. Our $100 membership pays for itself every year in rebates.
“No one asked me to become a member.”
I wonder if this is true at US stores. I thought they wouldn’t even let you into a Costco without a membership card. They won’t let you into Sam’s Club.
I oppose membership stores on principal, which is why I’ve never bought anything at either a Costco or Sam’s. (Don’t think I’ve ever been inside a Costco.)
Another way to view Costco is that they have re-discovered the modern definition of staple goods, and sells these in decent quality and bulk quantity. Modern staples include pizzas, TVs, drugs, office supplies, eyeglasses, socks, and detergents in addition to the more traditional meats, grains, etc. I find that the combination of Costco, Trader Joes, and the local vegetable/fruit/dairy market meets my needs quite well for foods. The large sizes sold means that you need either a house (for the storage area needed) or a large family. I’ve resurrected and expanded by air-tight cannister collection.
You will find that Costco is sensitive to regional differences. The mix of goods is different in different parts of the country.
Oh Geez, the CostCo lunch counter is the cheapest in town, but the sat fat … even when I walked 2mi from the office to CostCo for a hot dog I felt guilty. (I think those are 6mi dogs.)
I’m curious: What’s the economic intention behind the “membership models”? Aka costco , sam’s club et al. I doubt the membership is a big revenue stream. So then is it some form of price discrimination? Why do they not want me in there?
Costco has a very low staff turnover rate because they pay their people well and offer them opportunity to a career path.
Real drawback with the business model is that your home becomes a warehousing facility.
Generally I like Costco. However, I also notice they don’t carry a lot of desired items. Take Low Sodium V-8 Juice. Costco has never decided to stock it. Instead they have a good deal on regular V-8 juice, nice except for all the sodium.
Another important piece of CostCo’s financial picture — their payment terms on goods they purchase are longer than their inventory turns. In other words, by the time they’ve paid for the merchandise it’s already been sold. This makes them incredibly efficient for a retailer in terms of working capital needs — their inventory is essentially at zero cost.
One little nitpick: I’m pretty sure Kirkland Signature products aren’t bought from just one company. For example, I read a while back (not sure where) that their Kirkland Signature coffee is bought from Starbucks, despite being placed on the shelf right next to the retail-packaged (read higher costing) Starbucks coffee. KS products are generally good quality, so I’d be surprised if there was one company with such a rare commitment to quality.
Another aspect of Costco and other warehouse stores is that they are redefining the inventory-shipping optimization model. Instead of just considering just the single enterprise, they include the potential that end user inventory can result in a lower total system cost. In this model, the end user buys in bulk and provides some short term storage. It does reduce the shipping, inventory, labor, and transaction costs for storable products and the warehouse stores compete by lowering prices to reflect this advantage.
A few people may increase their consumption because the quantities are large. Most of the Costco customers that I know invest in extra storage tools at home and make fewer and larger purchases. This reduces the transaction costs, reduces the packaging and shipping costs, and reduces the number of visits to the store for them. This is consistent with the warehouse store origins (a long time ago) when most of their customers were very small retailers. Now the bulk of their customers are purchasing for personal or group consumption, but it is still common to see someone in line with a flat carrier holding 200 lbs of flour, 100 lbs of rice, etc. That person is likely to be a small business of some sort.
The Costco membership allowed them to set up shop in cheaper industrial zoning in cities by maintaining the illusion that they are wholesalers not retail. Now many cities have created a property zoning for big box stores. In this city so far Walmart is banned but Costco expands.
I wonder what other Costco type stores might emerge. Could there be mega-
restaurants? Here in Boston MA area we have some Jordan’s furniture stories that are gigantic, but quite nice inside, and some what one might call mega-car-dealerships, it seems. What can take on a gigantic scale and what can’t?
One other advantage of Costco is that you don’t have to waste time and stress choosing among similar products. They usually just have one item in each category, and it’s typically of above average quality, but at a price that’s no more than what you’d pay for the average product in other stores.
For example, I wanted to get a freestanding basketball backboard/hoop for the driveway. I have zero expertise in this product. In fact, I only want to buy one in my lifetime. I went to a sporting goods store and they had a number of competing items. I had no idea how to decide among them. So, I went to Costco, where the implied promise is that they’ll pick out a good quality item for you so you don’t have to bone up on it.
Now, if you are an aesthete like Tyler who lives to shop (e.g., ethnic restaurants), all this sounds anathema, but if you shop to live, the lack of choice is pretty wonderful.
On the downside of the Costco model, it minimizes its prices by minimizing its inventory, transportation, and handling costs by handing them off to consumers. But those are still real costs. So, you might end up buying an SUV instead of a sedan to haul the huge loads home. Or buying another refrigerator for the garage. Or you add a room onto your house because you need more storage space. Or my wife and I will go to Costco together because we’ll need two shopping carts worth of stuff.
I think there is room for the opposite business model where a retailer takes on the role of just-in-time supplier to the customer. You could mount a UPC scanner on your kitchen wall and scan each product as you open it up. Your JIT supplier will then track your inventory for you and send a truck around with just what you need to replenish your minimal home inventory. You’d seldom have to go to the store, and could have a smaller house and car. But there’d be a need for infrastructure changes — for example, refrigerators could be built into the outside wall of the house, so the deliveryman would have a key that opens the refrigerator from the driveway, so he can stock frozen and chilled foods while you aren’t at home.
It’s also possible the membership fee tilts the customer mix toward more affluent shoppers.
Certainly the average customer purchase must be pretty high. A few years back I was in walking distance of one and would occasionally hike over for the mixed greens, and I felt pretty conspicuous buying one item amid all the piled-up carts. The fee plus sizes of things means your customers have to be liquid (they don’t take credit cards for obvious reasons). They take checks and debit cards; it’s also possible the fee commitment means much lower rates of bounced checks than supermarkets face.
I write this drinking a cup of Kirkland Japanese green tea. I <3 Costco and am a very loyal customer. Back in college one of the sample ladies divulged to the roommate and myself that they were specifically forbidden to deny us more samples. For three years in school I had a 7+ course meal for lunch five days a week at an annual cost of $40 plus transportation one and a half miles. We called the process “Pigeoning” as in the birds that would be all to happy to eat scraps of bread you throw to them (also the same term we would use to describe the women that would show up to drink all your beer, then leave when it was gone). Eventually we would develop rules to be a more effective pigeon, like “never attempt to out-pigeon an child, they are naturals and it will only give you bad press” and even team tactics. We chatted with all the ladies and were on a first name basis, even bringing them mothers day cards. We used their gallon containers of hand soap and bulk deodorant to keep the fraternity house stocked. A semester worth of Ramen for $5. I get at least gas, eggs & orange juice every week. It is the happiest place on Earth.
Colin Danby says:
“It’s also possible the membership fee tilts the customer mix toward more affluent shoppers.”
Yes, affluent customers are always good. But let’s say u removed the “entry-barrier” and welcomed in the riff-raff (like me!) Would that scare away a significant portion of the “affluent customers” A test that comes to mind: “Does Sam’s club have more affluent customers than Walmart on a absolute numbers basis”?
Note, that a larger %age of affluent customers is not what you shoot for but a larger absolute number.
Finally, assuming it does tilt the demographic, does it justify the forgone sales from the less-well-off crowd?
I had a membership at BJ’s, a similar store, in undergrad — partially because I was stuck in a small town and didn’t drive. When I managed to get a ride I’d stock up on things I used in quantity (food, drinks, toiletries, office supplies, etc.) and not have to do more than incidental shopping again for weeks.
@colin
They do accept a credit card: american express.
I do the numbers every year and I end up saving around 300 to 400 dollars over the membership fees picking up things such as staples, prescriptions, and gas at costco. Plus the service compared to most businesses is phenomenal. Efficient and friendly. And they actively adopt new technologies and processes.
It’s probably not the membership fee that tilts the customer mix towards more affluent shoppers, it’s the bulk purchasing model itself. After all, you’ll often spend the equivalent of the membership fee or more in a single shopping trip. You need to have enough financial margin to pay for stuff well before you will consume it. It also helps if you have a large SUV to haul away large quantities and a McMansion to store it all.
I grew up in San Diego and saw first hand the entire Costco history which I will share with those who may find it of interest.
The key to the Costco business model is to keep as much of the business on a cash basis as possible while turning over inventory as fast as possible and paying suppliers under normal payment conventions (net 30). Suppliers are happy because they get high sales but Costco is able to finance store expansion using the capital which is freed up on the float. In effect, suppliers are financing long-term capital needs of a growth company.
We buy virtually the same items about every two weeks and eat their $1.50 kosher polish sausage and coke. It has become something of a family tradition. We know they don’t have everything you need so you supplement your Costco purchases with an occasional trip to the supermarket.
One bi-product of shopping with Costco is you can tell what average Americans consume just by looking at what is on the shelf. It is amazing to see how atypical a consumer we are by how little of their product offering we consume. That’s more a reflection of the average American consumer than any criticism of Costco.
Another interesting side story is that Costco was a spin-off competitor created by more ambitious executives from Price Club which was founded by Sol Price which in turn was a descendant of FedMart in San Diego back in the 1950s. FedMart was kind of the retailing counterpart to GEICO as a federal employee member based discount store. Sol Price sold it to a German investor who immediately ran the company into the ground. The proceeds of the sale funded the start-up of Price Club. Price and his sons didn’t expand the franchise fast enough to suit some of the other ambitious senior executives who bolted to start Costco. Costco eventually bought out the Price family and re-united the two under one name Price-Costco and eventually dropped the Price name returning it to the upstart Costco name. For what its worth!
BR, my local Costco has light peanut butter (Calgary, Canada).
You do know it has a higher sugar content though.
One interesting angle is how well American logistics genius firms like Wal-Mart and Costco are doing in Mexico. The modern American big box retail model, which has been our most important source of productivity growth other than Moore’s Law, exports very well to Mexico.
Also, they don’t play music over the PA at Costco, so, despite its spartan furnishings, it’s more serene than most stores, and infinitely more pleasant than the beeping buzzing hell that is Best Buy.
@Dirk: I’m pretty sure they oppose you on principle too!
Tyler, what a great post. It’s like you woke up and discovered electricity having never seen it before! You can’t fake that kind of innocence.
the first mistake is thinking that Costco and Sams Club are similar. they are not, they have very different. The main thing they have in common is the membership fee.
Costco sells retail, though it tries to give the feeling of selling wholesale. It sells primarily things that a family would use. Anyone can join.
Sams model is to be a warehouse for business. Membership is restricted. In theory, you need to 1) Own a business or 2) work for a business that has an agreement with Sams or 3) work for the gov’t. When I joined, they wanted to see my business license. Since I didn’t have it with me, and since my wife is a teacher, we joined in her name. In reality, it seems like it is pretty easy to get a membership.
Second is the mix of merchandise. If you run a restaruant and need to buy cooking oil in 5 gallon pails, plastic bags in boxes of 1000, Styrofoam takeout trays, food service grade pots and pans, food and other products in bulk labeled for individual resale etc.
Yes, there is lots of overlap but, if you go to both stores with open eyes, you will notice a big difference.
Cost of the membership is negligible. I am a member of both Sams and Costco. I pay about $45/year at each for a family membership. I use about 2 printer cartridges a month and save $10 each compared to Office Max. So, $70/yr for membership vs $240/yr in savings on ink (only)? Sounds like a good deal. I also by 800 sheet packs of 24# copy paper there for $5 vs $7 for 500 sheets of 20# paper at O Max.
My wife and I shop at Sam’s Club for groceries about once a month.
I am a BIG fan of both stores.
People have mentioned staff turnover. I do not have recent figures but in the 90′s I used to teach about Wal-Mart. At that time their hourly employee turnover was about half of what most similar retail business was. They had a very satisfied and motivated workforce.
Re selection and things disappearing: This is a concept called “treasure hunting” that some retail stores as well as Sams/Costco practice in various forms. The idea is to get you to come in to see what is new and interesting.
John Henry
john@changeover.com
Another bit to add is that the various stores stock goods based on the local demographics, so if you can’t find your salt free V8 at one, you might at another. The best neighborhood in our metro has a Costco that sells HDTVs for fantastic prices and they stock single malt scotch; at a lowerw SES area Costco, they don’t even stock 48″ HDTVs or single malt, but they do have great deals on meat.
One reason Costco does not sell petty items separately (though it routinely sells them in bundles) is to use labor (and even business systems) more efficiently. It takes just as much time for a cashier to ring up a pack of gum as a bundle of 4 quarts of olive oil, and it would take just as much register-tape to record either of those, and so-on. A cashier selling chiefly big-ticket items can be much more productive than one who sells low-value goods. A stock clerk who chiefly positions and unwraps pallets of gallon-sized goods is more productive (in proportion to the value of those goods) than one who, say, has to poke packs of gum into the slots of a display rack.
Since Costco doesn’t have to load the excess costs of selling low-value goods into the prices of higher-valued goods it can price all the goods it does stock more competitively (that is, lower).
High labor productivity can support high wages and a genuine promote- from- within policy. Despite constant criticism from stock-market analysts who think Costco should cut wages to boost short-term profits, Costco runs on a high-productivity model– careful hiring of highly productive staff, who are worth their high wages. This has the nice side effect that high-value (that is, big-spending) customers enjoy dealing with Costco staff and are happy to come back for more shopping– Costco’s workers are commonly sharper and more personable than workers in competing retailers.
Part of the reason Costco requires membership is to shoo away customers too poor to fill their shopping carts. Labor again: it’s better to spread the fixed cost of charging a credit card, or taking a cheque, or even counting change over a large order. People who can’t afford the annual membership (it’s only about $50) might come in once in a while to buy eggs or soda-pop but would be wasting Costco’s time.
Costco has a very generous return policy, which customers like. Costco uses a bit of social pressure (those likeable workers, again) to discourage abusive returns, but Costco’s main shield against excessive returns is serious attention to product quality. If you go to Costco’s headquarters in Issaquah, WA and visit the lobby where suppliers’ representatives come in to talk with Costco’s buyers, you will see Costco’s wholesale-purchasing policy posted on the wall. It is not retail advertising. Costco will only source goods which are either (a) the high quality line of a leading brand, or (b) of quality matching or exceeding (a). Costco requires suppliers to credit all returns and drops suppliers whose goods are returned too often. The terms are really stiff but suppliers cope with them because Costco will move large volumes to high-quality retail customers.
(To some extent suppliers risk the loss of goodwill by appearing in Wal-Mart. It really depends on the category of goods– e.g., staples and recreational goods don’t seem to suffer, but fashion or luxury products can be tarnished by association with such a retailer. By contrast, very few suppliers regard Costco sales as déclassé. That is mainly because Costco attracts high-class customers.)
I will never forget listening (about five years ago?) to Rush Limbaugh speak at length about how much he liked Costco and how he always went there to stock up for parties but ended up buying stuff for personal use. It was not a paid advertisement. Besides the fact Rush usually gets paid for endorsements (and besides the fact that I don’t usually listen to Rush, so tuning in that day was just luck), I was impressed that Rush Limbaugh did so much of his own shopping. He actually considered it worth his time to go to Costco, at least once in a while. That had to have made them happy in Issaquah.
Whatever their plan, Costco has kept our business now for decades. In So. CA we had both a Costco and a Price Club membership, a business, and kids. Now, the business is closed, the kids are grown, and we still shop there weekly. Mostly we buy healthy food – fresh berries, veggies and fruits for juicing, salad greens, raw nuts, etc. A cool techie item now and then for fun, like cameras or disk storage. Essentials like trash bags, TP, printer cartridges. Love this store for making our middle-class status a tad higher!
He is right a good place should tell all the people
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