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
By selling only high-quality items you can eliminate the need to advertise
You can also reduce the returns
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-readypallets shipped directly from the supplier
Saves employee time spent sorting and organising stuff
No backrooms. Every square inch of space is used to sell and earn revenue
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