Costco… More Than Just Samples?

Employing unconventional, but successful, business principles

Note: Source article — a lot of information presented in this article was inspired by my source material. My piece aims to put my own spin on key ideas presented in the original article.

What if I told you, right now, to go to your happy place?

Most of us would probably envision somewhere nice and sunny, or a night on the town with friends. Maybe even the happiest place on earth itself — Disneyworld.

But, could your happy place be… Costco?

With an abundance of samples, everything you could ever want in bulk, and an unconventional retail success story, there’s certainly a lot to love here.

Let’s Start With The Basics.

Costco is a multinational American corporation which operates a chain of membership-based warehouse stores. Known for its bulk quantities of merchandise available at discount prices, Costco dominates the warehouse club market — and, to some extent, the retail market as well.

In fact, in 2015, Costco was the 2nd largest retailer in the world after Walmart.

Even more shockingly… the company continues to experience steady growth in an era where brick-and-mortar stores are failing in the face of e-commerce.

So, how does Costco do it? By defying traditional retail practices, Costco has created its own set of business principles that seem to be effective in every sense of the word.

#1: Customers First.

Of course, most businesses claim to put their consumers above all else.

After all, it makes sense — if the consumer is happy, your company flourishes, and profits increase.

Costco takes it a step further.

No Markups

The business leverages its buying power to get discounts from vendors, with the goal of allowing customers to save more. At Costco, an average item is marked up a mere 11%, as opposed to the 25% to 50% seen in its competitors’ stores. Furthermore, even special products, such as wine, never go above a 20% markup — despite experiencing up to 300% markups from other vendors.

In fact, Costco, barely breaks even on a lot of its products.

For example…

Costco used to sell Calvin Klein jeans for $29 / pair, which was already well below the market average.

A change in their deal with the vendor allowed Costco to purchase the jeans at even lower price.

Instead of keeping the extra profit, Costco further lowered its sale price to just $22.

Reengineering Products

Costco has been known to personally work with the vendor to bring products to market at as low of a cost as possible, changing production processes and product design along the way.

For example…

Initial retail price of toy: $100 — Costco could buy the toy for $50, and sell it for $60.

However, Costco wasn’t satisfied with this exchange, and worked with the manufacturer to improve the efficiency of production.

New retail price of toy: $20 — Costco could now sell the toy for $30.

#2: Unconventional Profit Structure.

The Costco Membership

Costco took a major risk by charging people to enter their stores — an upfront cost that was virtually unheard of a few decades ago. However, the risk paid off, with consumers valuing access to Costco’s products that the membership allowed them to have over the fee of the membership itself. As of 2018, there were 51,600,000 Costco members, coupled with an astounding 90% renewal rate.

Less Is More

Costco’s merchandising strategy — less is more — is also in stark contrast with a lot of its competitors. Costco stores never stock more than 3,700 stock-keeping units at a given time, which is 1/10 of that of most supermarkets. Going back to the idea of customers first, this plays to consumer psychology as well, solving the paradox of choice that is born out of too many options.

Cutting Costs — The Costco Way

Lastly, Costco cuts costs in areas where most other retailers wouldn’t dare to; advertising and store beautification. It relies on word-of-mouth and good customer experiences to take care of any and all marketing. Moreover, Costco’s bare bones interiors for their stores serve to improve supply chain efficiency as well by minimizing contact. Items are simply removed from trucks and driven straight to aisles on forklifts, where consumers then choose products themselves — saving the company money in labour costs, such as stocking shelves.

#3: Employees = Assets.

Costco doesn’t miss a beat with reinvesting the money it saves from business operations into other aspects of the company — like human resources.

The average retail worker in America gets paid $10 / hour, with little to no benefits. As a result, retail workers have an extremely high turnover rate of 65%.

However, an average Costco employee earns $21 / hour, with 88% of employees receiving health insurance coverage as well. This translates into employees who stay on as part of the Costco family for years, some even decades.

Overall: Costco’s Recipe For Success.

The main thing to learn from Costco’s story is think long-term.

Costco is one of the few retailers that grows through scale efficiencies shared.

In other words, the business grows by giving back. Here’s how:

For most publicly-listed businesses, 50–86% of corporate profits go to shareholders. Costco went public in December 1985. Between now and then, it has consistently ignored calls for higher markups, worse treatment for employees, and other cost-cutting measures from its investors.

The result? Its stock has gone up by 387% since its IPO.

All in all, Costco’s success shows that valuing customers, having a unique profit structure, and investing in employees is a potent mix for market domination.

Written by Ridhi Gopalakrishnan, Writer for the Junior Economist