The resilience of Costco Notes
Recently came across a deck on the Resilience of Costco, I have tried summarising my learnings on the same below
Gross Margin vs Membership Fees – How Costco Makes Money
Costco is the second-largest retailer in the world by sales volume – 149B USD.
Costco doesn’t make much money on the 149B product sales. Their gross margins are in the 11% range. Instead, it makes money out of the 60$/yr membership which totals to around 3.3B that goes directly to the bottom line. Costco has 50M members and 27% of US household are cardholders. 75% of the bottom line or Net Income is from membership sales. The renewal rate of membership is around 87%.
The Costco Flywheel
It is this membership fees that allows Costco to lower the cost of the products it sells thus initiating a flywheel. Lower Costs > More Memberships > More Sales > More Leverage on Suppliers > Lower Costs
"For every dollar we save, we give 0.90$ to the customer"
Key aspects of Costco Operations
- Limited selection – 4,000 SKU vs 120k of Walmart and 600M of Amz. Most products have just one choice
- This means they are the largest customer of their suppliers and hence enjoy better prices
- Efficient employees as there is less reordering, figuring out suppliers, tracking orders from suppliers etc – leads to the highest rev/emp and profit/emp
- Surprisingly lesser choices mean less cognitive load for customers and thus keeps them happy and confident in their selection
- High quality
- By selling only high-quality items you can eliminate the need to advertise
- You can also reduce the returns
- Bulk Sizes
- Bulk sizes end up making customers spend more
- It makes it difficult to steal stuff. Costco has a 0.2% of rev theft rate annually
- Custom Packaging – display-ready pallets shipped directly from the supplier
- Saves cost
- Saves employee time spent sorting and organising stuff
- Warehouses
- No backrooms. Every square inch of space is used to sell and earn revenue
- Labour
- Wages of 22$/hr compared to 15/hr for Amz and 14/hr for Wmt
- Annual employee turn over rate of 5% compared to 59% for the industry thus saving on hiring, training and replacement costs
- Good employees with longer tenures provide better customer service
- Inventory turn over time in Costco is around 26 days. If you consider Net60 payment term for vendors, then essentially the vendors finance the whole operations
https://www.dropbox.com/s/vfp35g2kq5yx78c/COSTCO%20Deck.pdf?dl=0