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

Financial data Costco

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%.

Paid Membership Growth of Costco

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