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0:18

40 years ago, the founders of Costco

0:20

hoped their membership-based warehouse store would catch

0:22

on. But it's hard to

0:25

say if anyone could have predicted just how

0:27

popular the brand would become. Today,

0:29

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0:32

small businesses and growing families to stock up

0:34

on bulk goods. It's

0:36

a beloved cultural institution with

0:38

customers across every demographic. And

0:41

with virtually no paid advertising, Costco

0:43

has commanded strong profits and growth

0:45

year after year. But when

0:48

Costco first opened its doors in Seattle, Washington

0:50

in 1983, the

0:53

now-common pay-to-play shopping model was only

0:55

just catching on. The company

0:57

had to earn customers' trust by

0:59

making some unconventional business choices

1:02

while also keeping quality high and

1:05

prices low. The founders

1:07

weren't afraid to take on losses

1:09

in order to build and maintain

1:11

shoppers' satisfaction. It's a strategy that

1:13

has paid off, with more than

1:15

800 Costco locations throughout

1:17

North America and the world. Today,

1:21

we're uncovering how this wholesale giant

1:23

went from a humble experiment to

1:25

a brand worth $345 billion. Stick

1:30

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One Tree, I'm David Brown, and this is Costco's Wholesale

3:10

Revolution. With

3:26

a membership count of nearly 128 million people, Costco has become

3:28

a staple for so many

3:45

households. It's an O'Frills

3:47

warehouse, but by the time a customer

3:49

leaves, they've filled a gigantic shopping cart

3:51

with items they didn't know they needed.

3:54

Many people describe Costco as their favorite

3:56

place to shop. But where

3:59

did it all begin? The

4:01

story of Costco begins with a guy named

4:03

Saul Price who was a lawyer in San

4:06

Diego. That's David Schwartz. He

4:08

and his wife Susan are Costco super

4:10

fans and co-authors of The Joys

4:13

of Costco, a treasure hunt from A to

4:15

Z, which chronicles the company's

4:17

history. The foundation for Costco

4:19

was actually late in the 1950s

4:21

when soon to become titan of retail

4:24

Saul Price was working as an attorney.

4:27

He'd acquired a warehouse and was

4:29

wondering what to do with it. He

4:32

had a number of clients,

4:34

small business clients, and

4:36

they came to him and said, listen, you know,

4:38

we'd love to use your warehouse to sell our

4:40

goods. They were small retailers.

4:42

I think they were jewelers. And

4:46

Saul Price said, okay, well, why don't you do that?

4:49

And that was really the first

4:51

of the big box stores. Price

4:55

named his store Fed Mart, inspired

4:57

by a Los Angeles based shop

4:59

called Fedco. Fedco was

5:01

a discount store and you had to be a

5:03

government employee to shop there. San

5:06

Diego was home to nearly 5,000 government

5:08

employees at the time, many of whom

5:10

would drive up to Los Angeles for

5:12

the Fedco discounts. Price

5:15

tried to join forces with Fedco, but was

5:17

ultimately turned down. So

5:19

he decided to go out on his own

5:21

and launch Fed Mart. He

5:23

decided he would also make it membership based

5:26

and only available to federal employees.

5:29

You see, Fed Mart believes if you give folks

5:31

quality at a low price, you've got a customer

5:34

for life. In

5:42

1959, Fed Mart was thriving and Price

5:44

took the company public. In

5:47

1963, Fed Mart raked in

5:49

more than $1 million, an all time

5:52

high for the chain. This

5:54

was the same year they dropped the federal

5:56

employee requirement, opening the store up to all

5:58

shoppers and did the membership fee.

6:01

They opened stores in California, Arizona, and

6:03

Texas, totaling around 45 locations by 1974,

6:06

making nearly $320 million in annual sales.

6:13

Business was booming, but Price

6:15

was getting frustrated with some of the headaches

6:17

of running a public company, and

6:20

he toyed with the idea of going private again.

6:22

So when some foreign investors came

6:24

knocking, Price took the meeting. A

6:27

German supermarket chain called

6:30

the Man Group decided that they

6:32

wanted to buy FedMart

6:35

and get involved in the US market,

6:37

and they negotiated with Saul and his son

6:39

Robert, and they bought them out.

6:42

And the plan was for Saul and Robert to

6:44

stay and work with the Man Group, but

6:47

unfortunately they didn't get along at all

6:49

with Hugo Mann or with any of

6:51

the other senior executives from Germany. Mann

6:54

was a former Soviet prisoner of war

6:56

who made a fortune when he brought

6:58

the concept of large American supermarkets to

7:01

Europe. FedMart would eventually go out

7:03

of business in 1982, with most storefronts turning

7:07

into targets. But by

7:09

this time, Price had developed a new

7:11

store, one that would revolutionize

7:13

the way people shopped for years

7:15

to come. The Price

7:18

Club is not an athletic club. It's

7:20

a club for retailers. It's

7:23

a wholesale operation that tries to prove

7:25

once again that everything

7:27

is cheaper by the dozen. In

7:30

this 1976 news clip from San Diego's

7:32

CBS 8, a reporter takes

7:34

viewers inside the first-ever Price Club.

7:38

After leaving FedMart, Saul Price and

7:40

his son Robert brought back the

7:42

membership model of FedMart's early days,

7:44

only this time anyone could

7:46

join. Opening up

7:48

membership to everybody in 1976 was

7:50

a radical, radical

7:54

idea. And I think it was Robert who

7:56

came up with the idea of a members

7:59

Owned. The Club. Saw.

8:01

Always gave Robert see the credit.

8:04

In. Those early days, Price Clubs target

8:07

demographic was small business owners. Prior

8:09

to that, restaurant and shop owners

8:11

had to purchase products from a

8:13

few regional wholesalers who sold with

8:15

high markups. At Price Club. they

8:17

could pick up snacks for their

8:19

vending machines or grab office supplies

8:22

in bulk at a discount. is

8:24

Robert Price from a Cbs Aid

8:26

News. We think that

8:28

it's time that the independent businessmen be

8:30

given an opportunity to compete with the

8:32

chain stores because we think it's good

8:35

for the community to have independent businesses

8:37

and it's good for the nation. and

8:39

it's also good for the business people.

8:42

The. First Prize Club was set up in

8:44

a converted airplane hangar in San Diego. It's

8:47

industrial shelving, pallets of merchandise,

8:49

and bare concrete floors would

8:51

become standard issue for all

8:53

future wholesale clubs. They.

8:55

Were cash only with a product selection

8:57

that was limited yet high and quality.

9:00

And they also had another groundbreaking

9:02

feature. That still around and

9:05

stores today. The initial idea for

9:07

food courts was saw price. In

9:09

Price Club. What happened was he noticed that

9:11

people were walking around and then they were

9:13

leaving for lunch and what he wanted to

9:16

do was keep him there for months and

9:18

so he said well let's let's serve pizza.

9:20

So. Price Club started their food

9:22

court with pizza. Price. Club

9:24

was also renowned for treating

9:27

it's employees extremely well, offering

9:29

competitive pay an exceptional benefits

9:31

something you rarely saw the

9:33

big grocery store chains. Author:

9:36

Susan for it's explains. Solely.

9:38

To say you don't train. Employees you train

9:40

A seals you teach employees. And

9:43

there's a real party placed on

9:45

promoting from within and making sure

9:47

that your further people's careers. In

9:50

Nineteen Eighty, Price Club went public. And.

9:52

With that move, investors really started

9:54

to notice just how lucrative a

9:56

members only wholesale club could be.

9:59

people who were analysts of the

10:01

retail industry at places like Solomon Brothers or

10:04

Goldman Sachs Began to look at

10:06

what was going on a price club and thought wow This

10:08

is an interesting business model. This may be the future

10:11

of retail Soon other entrepreneurs

10:13

were sniffing around to see if they could

10:15

start their own kind of price club operation

10:17

There was the Massachusetts based BJ's wholesale

10:20

club that launched in the Northeast and

10:22

in the Midwest Sam Walton

10:24

was inspired to start his own warehouse

10:26

called Sam's Club Saul

10:28

was gracious enough to give Sam Walton the tour of

10:31

The operation and show him everything until the day he

10:34

died He kept saying he should have gotten

10:36

royalties from Sam Walton because Walmart

10:38

resulted So that was a direct

10:40

result of Saul's generosity and

10:43

up in the Pacific Northwest David Schwartz

10:45

explains that a businessman named Jeff Brotman

10:47

was flirting with the idea of a

10:49

wholesale club in his own neighborhood Jeff

10:52

came from a retailing background. His father was

10:55

a retailer He was a retailer and

10:57

they had taken a look at what was going

10:59

on in San

11:02

Diego and Southern California and

11:04

thought gee you know the price club model

11:07

would work really well in Seattle and Jeff

11:10

was looking around for someone who could

11:12

help him set up a

11:14

competitor to Price Club

11:16

in the Seattle area and

11:18

he called Jim Senegal This

11:21

was the call that would change everything

11:24

Jim Senegal had been working in retail

11:26

for decades. He got his start at

11:28

Fed Mart working under mr. Price Club

11:31

himself Saul Price in

11:33

the Fed Mart days Jim Senegal

11:36

actually became Saul Price's right-hand guy

11:38

and was his real

11:40

golden boy and Jim

11:42

Senegal is a Retailing genius. There's

11:44

no question about it and you know

11:46

Really on top of operations and marketing

11:48

all aspects of retail and he learned

11:51

everything he knew from Saul and

11:53

he'll say that to this day Senegal

11:56

remained at Fed Mart for a couple of years after

11:58

it was sold to the German man group After

12:01

that, he went back to work for price

12:03

at Price Club for a few years before

12:05

branching out on his own as a broker,

12:07

selling goods to shops like Price Club. And

12:10

this is when Senegal got

12:12

the call from Brotman. Jim

12:15

had gotten a lot of calls like this over the

12:17

several years that he was on his own and had

12:20

rebuffed most of them. I mean, he spoke with

12:22

those guys because he thought that those connections would

12:24

be interesting over time. But there

12:26

was something about the conversation with Brotman that made

12:28

him decide he wanted to meet. So

12:31

Senegal and Brotman met up and hammered out

12:33

a business plan that was very similar to

12:35

that of Price Club, effectively laying

12:37

the groundwork for their own wholesale chain

12:39

that they would keep regional. Here's

12:42

Jim Senegal speaking about the plan in a talk

12:44

he gave at San Diego State University back in

12:46

2017. The idea

12:48

was to clone the Price Club. We

12:51

didn't want to do anything fancy in the first

12:53

instance. Let's just do what they're doing and do

12:55

it well. And if we can do

12:57

that, we'll have time to innovate later. In

13:01

1983, Costco opened its first warehouse

13:03

in Seattle, Washington. At

13:05

the time, the membership was $25 and anyone could join. Like

13:11

Price Club, the space itself was pretty

13:13

bare bones, which helped to keep

13:15

costs low and wages

13:17

high for employees. They

13:19

also implemented a food court. Only

13:22

instead of peddling pizza, they

13:24

hawked the now famous $1.50 hot dogs. What

13:28

became an iconic Costco staple was actually started

13:30

by an employee who wanted to set up

13:33

a stand at the warehouse in Portland, Oregon.

13:36

It started out because somebody had an idea to

13:38

just bring up a hot dog cart and set up out in

13:40

front of the warehouse and sell hot dogs. And they thought, oh,

13:42

sure, we'll sell a hot dog in a beverage for $1.50. Just

13:45

pulled that number out of the sky. It was

13:47

called Warm Wonderful Gene. He

13:50

had this hot dog cart. I'm not sure why he had a

13:52

hot dog cart, but he did. And when management

13:54

came through and saw they were doing this, they said, what

13:56

are you doing? And they said, we're selling a lot of

13:58

hot dogs. And they said, carry on. And

14:00

then it's bit lumbar dogs. They

14:02

were wonderful and as they say

14:04

the rest is history with a

14:06

hotdog stand quickly evolving into a

14:08

full fledged food court. By.

14:10

The time Costco went public in Nineteen Eighty

14:12

Five. They. Had seventeen warehouses

14:15

and nearly two thousand employees

14:17

across the North West, California,

14:19

and even Canada. Although they

14:21

had planned to keep Costco

14:23

Regional Gym Senegal explained in

14:25

that twenty seventeen lecture that

14:27

the market had other plans.

14:30

You might say, well I thought you

14:32

were gonna be a Northwest company. We.

14:34

Concluded that that point it became obvious

14:37

to us that there was a significantly

14:39

bigger market that was available to us

14:41

and significantly more investors who were interested

14:44

in. And. Coming along with us

14:46

at that point to this was our

14:48

and free not only and to and

14:50

states but also have an entry into

14:52

Canada in a new contract. There was

14:55

no denying it. Costco was a hit.

14:57

The Nineteen Eighty sobbed boom for wholesale

15:00

clubs in general. Sam's Club, Bee Jays,

15:02

and Cause Go all launched around the

15:04

same time. They. Found massive

15:07

success in their respective regions with

15:09

Costco leading the pack that got

15:11

Sam Walton to come knocking on

15:14

Cause Cove door this time with

15:16

an offer that he hoped they

15:18

would refuse but David sword says

15:21

Senegal wasn't biting. He.

15:23

Was sitting in his office one day and

15:25

he gets a call out the blue from

15:27

Sam Walton. I'm going to be in town

15:29

tomorrow. I want to talk to you and

15:32

just about Costco and they had breakfast next

15:34

morning and. Sam. Laid it

15:36

out that he wanted by

15:38

Glasgow and merged with with

15:40

Sam's Club and Just and

15:42

Gym. Considered. It. Added

15:45

got back to sound very politely said.

15:47

Listen, you know we just love running

15:49

our company. We're not going to sell

15:51

it to anybody. Gym. Says that

15:53

Sam so sad though like a gentleman and

15:55

never approached the subject again with them. While.

15:58

Costco wasn't looking to. Well. Saw.

16:01

Price of Price Club was starting to

16:03

consider a step back from the family

16:05

business. He saw Cost

16:07

was a real serious competitor and he

16:09

was getting old and Robert was really

16:11

in charge. and the two of them

16:13

were thinking that this is gonna be

16:15

a long term struggle. they weren't all

16:18

that eager to do that. And

16:20

they what we're looking for,

16:22

a way to productively And

16:24

that competition. So. They saw

16:26

an opportunity to partner up with

16:28

people who thought about retail the

16:31

same way they did, and to

16:33

try to share the load of

16:35

running a major major company. So

16:38

in Nineteen Ninety Three, Price Club

16:40

merged with Costco and Price. Costco

16:42

was more. This particular era was

16:45

short lived with the name changing

16:47

back to just Costco. Not long

16:49

after, Susan. Sword says

16:51

there was a little friendly rivalry among

16:53

shoppers in the beginning, despite the similarities

16:55

between the two brat they had a

16:57

saying when they merged or you read

17:00

or are you blew. The. Press

17:02

Club people were blue and cost or

17:04

and initially there was some tension but

17:06

it was really they're often the same

17:08

base. Culture. A. Few

17:10

years later, Robert and saw Price

17:13

step down from Costco and by

17:15

Nineteen Ninety Seven, all remaining Price

17:17

clubs were turned into Pasco Warehouses.

17:20

Under. The Merger: Saul and Robert

17:22

Price spun off Price Enterprises which

17:25

owned and operated stores called Price

17:27

Smart Overseas. When Robert and Saw

17:29

Price left Costco, those International Price

17:31

Mart shop stuck around. In fact,

17:34

a chain still exists to this

17:36

very day as the last remaining

17:38

piece of the Price retail empire.

17:41

Overall, the merger was quite seamless, david

17:44

towards as. With. Price Club

17:46

and Costco truly becoming

17:48

one. It's. A perfect merger.

17:50

Now I mean, it's real years one

17:52

company. And there's no

17:54

legacy. Logistics. systems

17:56

are legacy operational differences or

17:58

anything like that It

18:00

is one company and it operates

18:02

seamlessly. Even with

18:04

the Price family out of the picture,

18:07

Jim Senegal kept the spirit of Saul

18:09

Price's business philosophy alive within his stores,

18:12

which, according to Susan Schwartz, has

18:14

largely contributed to the company's success

18:16

over the years. Costco

18:18

didn't just arise up out of the ocean like Venus on a

18:20

half shell. Costco is the product

18:22

of a lot of years of retailing Venus. Somebody

18:25

once said to Jim Senegal, he must have learned

18:27

a lot from Saul Price and Jim very carefully

18:29

said, no, that's not correct. I learned everything

18:31

from Saul Price. Throughout

18:34

the 80s and 90s, Costco continued to

18:36

grow, implementing the gas

18:39

station, pharmacy, optical department, and

18:41

other amenities. They

18:43

expanded worldwide, opening locations in

18:45

Mexico, the UK, South Korea,

18:47

China, and more. And

18:50

not once have they threatened to

18:52

raise their markups. So

18:54

how have they managed to sell all of

18:56

this good stuff so darn cheap? They

18:59

sell you stuff. They're not selling it at a

19:01

loss. They're making their money back on what they

19:03

buy, but they're not

19:05

relying on those sales to

19:07

really make or break their

19:10

business. Next, more

19:12

on how Costco's economic model

19:14

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19:16

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terms apply. Hi,

21:18

welcome back to Business Wars. When

21:20

you're inside Costco, moving through the aisles can

21:22

feel like moving from a Best Buy to

21:25

a regular grocery store to a TJ Maxx.

21:28

Business Insider reporter Dominic Reuter covers

21:30

big box stores and he puts

21:32

it like this. It's just

21:34

not like a normal store. The

21:37

idea going into it is that everything is

21:39

bigger. The carts are bigger,

21:41

the aisles are bigger, the products

21:43

are bigger. It's the event for the week

21:46

for some folks and they

21:48

will, you know, get in

21:50

there and browse and get samples and fill

21:52

their carts with a bunch of stuff that

21:54

they weren't thinking about getting. And I think

21:56

that's all part of the whole experience. But

21:59

unlike rival big-box stores, the

22:01

wholesaler maintains very slim margins

22:03

compared to its competitors. Because

22:06

they charge a membership fee, they're able

22:08

to sell products wholesale for an extremely

22:10

low cost. In a

22:13

lot of ways, Costco is selling you

22:15

access to consume these

22:17

other sort of products and

22:19

merchandise and services more

22:21

or less at a very low,

22:23

low markup for them. So

22:26

they're basically giving it to you for what it

22:28

costs them for not much more, about 10%

22:30

more than what they're getting. And that

22:33

is almost nothing compared to a normal

22:35

retail shop where you're looking at 30% or

22:38

40% markups versus 10%. The

22:40

annual membership fee pioneered by Saul and Robert

22:42

Price back in the Price Club days has

22:45

become Costco's primary revenue stream

22:47

and investors can't get enough.

22:51

Costco does really well in terms of profit thanks

22:53

to this warehouse club model. In

22:55

large part, because it's something that

22:57

they have a lot of control

22:59

over and these membership fees are

23:01

effectively pure profit. It's just money

23:03

coming in. They don't have to

23:05

buy anything. They don't have to maintain

23:08

anything. They just get you to pay

23:10

and that solves the story. If they can

23:13

get more people to pay, then that's good.

23:15

And that's a model that investors really, really,

23:17

really have loved over the years. So they

23:20

sell you stuff. They're not selling it at

23:22

a loss. They're making their money back on

23:24

what they buy, but they're

23:26

not relying on those

23:29

sales to really make

23:31

or break their business. When

23:34

it comes to keeping low overhead

23:36

costs, Costco is king. There's

23:38

evidence of this strategy in the overall feel of

23:40

the store. The retail

23:42

environment inside Costco is no-fruels.

23:45

Goods are piled high on tables

23:47

or stacked up and finding what

23:49

you want requires significant legwork. This

23:52

combined with the membership fee helps

23:55

to maintain some unbelievable practices that

23:57

other retailers wouldn't dare attempt. For

24:00

example, Dominic says they maintain a very

24:02

limited selection of products compared to the

24:04

average big-box store. They

24:06

only carry roughly 4,000 SKU stockkeeping

24:09

units. That's 4,000

24:12

different items, whereas you go into a typical superstore and

24:14

you're going to see 30,000 or 40,000. That's

24:18

just a wild amount of variety and choice, but I

24:20

don't need 1,000 flavors of potato chips.

24:22

I just want a really good potato chip, and

24:24

they sell you one. And

24:26

then there's the one-year-no-questions-asked return

24:28

policy, where people can take

24:30

back a used mattress, an

24:33

open container of hummus, or even a

24:35

gifted item they don't really want. Costco's

24:38

generous return policy is certainly

24:40

something where on that transaction,

24:43

it probably will lose money, because there's a lot of

24:45

stuff that they'll take in and that's just going to

24:47

get salvaged out. The important thing

24:49

to Costco is that you're happy, that you'll

24:52

renew, that you'll tell people,

24:54

go ahead and buy that thing, because

24:56

you can just return it. And they're betting

24:58

that you might not, because a lot

25:01

of times, you're just not going to do that. Of

25:04

course, they've also got the food court, featuring

25:06

those $5 rotisserie chickens

25:08

and the $1.50 hot dog

25:10

combo, a price that

25:13

Costco has somewhat infamously vowed

25:15

to never change, despite rising

25:17

inflation. Ian

25:19

Sinegal very famously told his

25:21

successor, Craig Gellinik, that, I

25:23

will effing kill you if you raise the

25:25

price of the hot dog, because that one

25:27

is just a thing that people have

25:29

come to expect. They come to expect it so much

25:31

that if you go to Canada, it's $1.50 in Canada,

25:33

even though with the exchange rate,

25:36

it should be $2. So

25:38

they're getting even more of a loss lead on

25:40

the Canadian thing, just in order to keep that

25:43

visual cue of it being $1.50 for

25:45

a hot dog and a soda combo.

25:48

Eyeglasses, pharmaceuticals, travel deals, you name

25:50

it, and Costco is selling it

25:53

way cheaper than everybody else. Even

25:56

the gasoline comes at a significant discount,

25:58

a huge perk in a market. where

26:00

gas prices have reached all-time highs,

26:03

although the way they price the gas

26:05

is different from pricing items in the

26:07

warehouse. Their goal in that

26:09

case is to simply give you a

26:11

discount relative to the market around you,

26:14

even if that's giving them a little

26:16

bit of extra money, a little bit

26:18

extra margin on that particular gallon of

26:20

gas at that time. But

26:22

gas is a highly, highly volatile, pardon

26:25

the pun, market and they have a

26:27

very, very, very careful and strategic operation

26:29

there that makes a point to

26:32

save the customers money that they would

26:34

have otherwise paid without that membership in

26:36

their local area. An

26:38

even more important draw and piece of

26:40

the Costco puzzle is the Kirkland brand.

26:42

That's Costco's private label brand named after

26:45

Kirkland, Washington, the city in which they're

26:47

headquartered. There are Kirkland

26:49

dress shirts, Kirkland tuna, the

26:52

super popular Kirkland French style vodka,

26:55

which despite the rumors is not the same

26:57

as Grey Goose, although Costco

27:00

has been known to source

27:02

from some high-end distilleries. You

27:04

know, they'll put a batch label or

27:07

they'll put a distillery label on some

27:09

of their other products. You could

27:11

create a nice bar where

27:14

they just sell Kirkland beverages,

27:17

wines and beers and spirits and

27:19

I think it would do pretty well. Customers

27:22

appear to love the Kirkland brand.

27:25

Sales of the products made up about 25% of

27:28

the company's total revenue in 2022, about

27:31

$58 billion in sales

27:33

in that fiscal year and Costco

27:35

makes sure that the quality is

27:37

very, very high. Oftentimes

27:39

when consumers trade from

27:42

a sort of national brand or

27:44

a name brand to a

27:46

store's private label, people

27:48

or analysts and experts usually call that trading

27:50

down. Costco will very quickly correct

27:52

you that when you say,

27:55

are you trading down to Kirkland? No, they're trading up

27:57

to Kirkland because Kirkland is...

28:00

is just Costco's way of

28:02

finding the absolute very best

28:04

products that they can find

28:06

for even less. But

28:09

how does this benefit Costco's bottom line?

28:11

Well Dominic Reuter explains that it's all

28:13

about keeping customers coming back for more.

28:17

Costco enjoys a really high, high

28:19

degree of customer loyalty. Something

28:21

like nine out of 10 people, you know,

28:23

renew each year and I think they

28:26

keep that number even higher than that.

28:28

Several big reasons for that are, you

28:30

know, they just work very hard to

28:32

keep people happy and offer

28:34

a good value, offer a competitive

28:37

proposition for when you're there, for what you're buying every

28:39

day or every week, every month. Unlike

28:42

its competitors, think Walmart, Target and

28:44

Amazon, you won't see any

28:46

commercials or pop-up ads online. The

28:49

company largely deploys a word of mouth

28:51

strategy and lately there's been a

28:53

whole lot of chatter on social media. It's

28:57

Costco's way. I

29:01

hit y'all with the remix today baby because

29:03

it is time for me to go into

29:06

Costco. And then there are

29:08

the people who take things even further. One

29:11

couple even took their engagement photos

29:13

there. Kareen Tarshish and Dan

29:15

Clement picked a unique location for

29:17

their photo shoot, choosing their local

29:19

Costco to capture the moment. While

29:22

another couple used the store to host their wedding,

29:24

literally walking down the aisle of

29:27

their local Costco. They

29:29

love Costco so much it's where they decided

29:31

to declare their love for one another forever.

29:34

The North Carolina couple got hitched right

29:37

in between all those yummy samples and

29:39

great clothing deals. Just

29:41

search hashtag Costco haul on YouTube, TikTok

29:43

or Instagram and you'll be along for

29:46

the ride. Or you can

29:48

find yourself down a rabbit hole exploring

29:50

Costco products recommended by parents, dieticians, foodies,

29:52

people looking for a deal, you name

29:55

it. Everyone from influencers to

29:57

regular shoppers have posted about their

29:59

favorite. finds, creating a

30:01

frenzy of products that suddenly go

30:04

viral. Everything from a gilded mirror

30:06

to giant teddy bears to Starbucks

30:08

sous vide egg bites. Costco

30:11

keeps very quiet online and that's part of why

30:14

things are so cheap there. They

30:16

don't pay for advertising. They do have

30:18

a marketing department but it's not nearly

30:20

the kind of ad buys and you

30:22

know big expenditures that other big-box brands

30:24

will use and spend

30:26

on. So the benefit that Costco

30:28

gets is that TikTok, you

30:30

know influencers and news companies and

30:33

blogs and you know everybody else

30:35

loves to talk about this place for a

30:38

variety of reasons and that ends up

30:40

giving them what is in the business

30:42

called earned media a free kind

30:44

of promotion that you know a lot

30:47

of companies would absolutely die to get.

30:50

Given its high level of earned media and

30:52

strong revenue, the company could

30:54

be pushing harder to expand and

30:56

edge out competitors. Now

30:58

that's never been the Costco way. Will

31:01

that need to change for Costco to keep up

31:03

in the future? Coming

31:05

up, we talk about what's next for

31:07

this legacy brand and their plan to

31:10

keep the growth going. That's when

31:12

business wars return. This

31:18

episode is brought to you by State Farm. episode is brought to you by

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State Farm. You might say all kinds of stuff when things go wrong,

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but these are the words you really

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there. you

32:01

Welcome back to Business Wars. Costco's

32:03

membership model has been holding up

32:05

the company's operation since the start.

32:08

That annual fee is their golden

32:10

goose, serving as the most consistent

32:12

revenue stream. But they

32:14

only raise it every five or six years. Right

32:17

now it's $60 annually for the base membership and

32:19

$120 for the executive membership. Dominic

32:23

Reuter, a Business Insider reporter covering

32:26

big box stores, describes why Costco

32:28

is judicious in raising its fees.

32:31

Analysts keep asking them, investors keep asking, when

32:34

are you going to raise the fee? Because

32:37

it is basically pure profit for them.

32:39

But what Costco has been particularly

32:42

acutely interested in is improving

32:46

renewal rates, keeping that number

32:48

up, getting people to sign up again, getting

32:50

new people to sign up. In

32:52

terms of looking forward, while

32:55

they probably could

32:57

or should or might raise their

32:59

membership fee from the $60, it's

33:02

really hard to see a way where they

33:04

do that because the competitors are nipping at

33:06

their heels like Sam's Club, like BJ's, both

33:09

of whom have somewhat lower

33:11

prices already. And so if they raise

33:13

their fee, that puts them a little

33:15

bit that much farther out in front

33:17

of their competitors and then starts to

33:19

risk sort of losing some of their

33:21

members over to one of their competitors.

33:24

And recently, Costco has made moves

33:26

to retain their edge over competitors

33:28

by making sure every person who

33:30

walks in their doors has actually

33:32

paid to be there. So

33:35

earlier in the summer of 2023, there

33:38

was a bit of a membership

33:41

sharing crackdown and it

33:43

looked a lot like the Netflix crackdown that

33:46

happened in the months before where Netflix was

33:48

saying, is this TV part of your household?

33:51

Well, what shoppers were finding at

33:53

Costco, especially in the self checkout

33:55

areas, people were borrowing

33:57

someone else's card to, you know,

34:00

make their transaction. Now Costco really

34:02

doesn't like that. And

34:04

so they started having folks at the

34:06

registers, check the photo, make sure that

34:08

you were the person who was paying

34:10

for the stuff and that your membership

34:12

was current, and that you were an

34:14

authorized card user. This all again goes

34:16

back to the question of trying to

34:18

avoid people using their sort of service,

34:21

using their access for free or without

34:23

paying for it. Because if they

34:25

aren't getting that fee, they do

34:27

start to lose money. Another

34:30

key part of Costco's retention strategy

34:32

is making sure its customers not only feel

34:34

like they're getting good deals on premium products,

34:37

but get a sense of delight

34:39

and surprise that they're experiencing a

34:41

treasure hunt every time they shop.

34:44

David and Susan Schwartz, authors of The Joys of

34:46

Costco from A to Z, got to

34:48

see this play out in real time while

34:51

visiting a warehouse in Sterling, Virginia a few

34:53

hours before the doors open. You'd

34:55

have no idea the chaos that was taking place right

34:57

before that with forklifts safely

34:59

going every different direction, restocking the

35:01

shelves. They intentionally moved things around

35:04

in the warehouse not to trick you

35:06

into buying new things, but just to keep the shopping experience

35:08

fun. It's part of what makes it a treasure hunt. There's

35:11

also a financial incentive behind

35:13

this curation. Dominic Reuter, a

35:15

business insider, says folks are more

35:17

likely to impulse buy this way. And

35:20

at Costco, that adds up quickly. The

35:23

Costco concept of an impulse buy, as they say on

35:25

the hundreds call, is like $15 to $20, which

35:28

is ridiculous. Well, you get three or four

35:30

or five of those, you're now $50 of $100 more on

35:35

your register bill than you would have been

35:37

if you just didn't pick those things up.

35:39

Your carts add up really fast when you

35:41

walk around the Costco. And that's

35:43

just different. Whereas like, you know, you

35:45

go to a store, a normal grocery

35:47

store, grab some impulsive things, you might

35:49

be up $10 or $20. That's just

35:52

one item when it comes to

35:54

the impulses at Costco. And you're not going to just get

35:56

one. The importance of

35:58

the impulse buy. also helps

36:00

explain why Costco has been slow

36:02

to develop its e-commerce site. They've

36:05

developed a strategy where they have a

36:07

website, they fulfill orders from devoted dedicated

36:09

warehouses that are set in the sort

36:11

of market zone of where they are.

36:14

They have a partnership, I believe, with

36:16

Instacart for some groceries, you can buy

36:18

certain things on there. But

36:20

the prices aren't the same, the sort

36:22

of sense of discovery is not the

36:24

same. There's a lot of things about

36:26

Costco that really depend on that warehouse

36:28

experience, on that in-person

36:31

shopping dynamic that goes on.

36:34

Costco has also tapped into some

36:36

product stunts that have been highly

36:38

effective at getting shoppers through their

36:40

virtual doors. They occasionally

36:42

carry items like gold bars, collectibles,

36:45

and other random items on their

36:47

website that help them sell through

36:49

their stock. Every

36:51

so often they will take a

36:53

release of gold bars, post

36:56

them on their website, they sell out in minutes. That's

36:58

pretty wild, but they can reach a

37:01

much wider audience and sell through their

37:03

stock pretty quickly online. And

37:06

so then that sort of helps drive

37:08

some interest and awareness in their web

37:11

store. But it's still

37:13

just not the same and the prices aren't

37:15

as low and the shipping isn't quite there.

37:18

Costco knows what they're doing in the warehouse, they're

37:20

very, very good at that. It's

37:23

not clear yet that that has translated

37:26

equally well to the internet. The

37:29

warehouse experience is what Costco does

37:32

best. For several decades

37:34

now, the company's been exporting that experience

37:36

to other countries where it's quickly caught

37:38

on. The company now has

37:40

272 warehouses outside the US and counting. David

37:45

and Susan Schwartz have visited several of

37:48

them themselves and they were stunned by

37:50

just how popular Costco was in

37:52

Asia in particular. We were

37:55

in Korea for about two or three weeks. It

37:57

was impossible to meet anybody who didn't know. and

38:00

love Costco. I think you can do that

38:02

in the United States, but not in Korea, not in China.

38:05

I think it's no secret that I think

38:07

it's even mentioned in the annual reports and

38:09

certainly in the CFO's talks

38:11

with Wall Street analysts that

38:13

they believe that the international growth is where

38:15

it's going to be over the next decade.

38:19

Its latest expansion has been into China.

38:21

A lucrative market it hadn't touched

38:23

until opening its first store in

38:25

Shanghai in the summer of 2019.

38:27

The opening day frenzy was

38:30

substantial. Signs warned shoppers in

38:32

the parking lot that the wait to get

38:34

in could be three hours long. Midway

38:36

through the opening day, the store was forced

38:39

to shut down because the crowds just got

38:41

too large. In January

38:43

of 2024, there were also three

38:45

hour long lines on opening day

38:47

in Shenzhen to accommodate the tens

38:49

of thousands of people wanting to

38:51

get inside and shop. And

38:54

look at the lines. This is very much

38:56

like a rock concert or a sporting event.

38:58

In addition to locals, the Shenzhen location saw

39:01

an influx of members from Hong Kong, according

39:03

to the magazine Fast Company. Travel

39:05

companies offered hotel and bus fare deals to

39:07

visit the store for a weekend. And

39:10

even though Hong Kong is known for its

39:12

micro homes, customers were still

39:15

drawn to that bulk shopping. Why

39:17

the seeming contradiction? Susan

39:20

Schwartz explains. The

39:22

thrill factor about Costco in Asia is

39:24

really quite stunning. And people don't

39:26

understand. They think, oh, the apartments are so small, the

39:28

houses are small. What happens is people share. So

39:31

two friends will go to the warehouse and they'll buy something and they'll

39:33

split the pack. They really figure out how to make

39:35

it work. The quality and the value

39:38

is not lost in them. There are

39:40

now six Costcos in China and expansion. There

39:42

is a key part of the company's strategy.

39:45

Now whether it can win the market remains

39:47

to be seen as competitors

39:49

like Sam's Club at Walmart also

39:51

vie for customers. But

39:53

David and Susan say that Costco is

39:55

a well oiled machine, especially when it

39:57

comes to their product network at home.

39:59

home and overseas. The

40:03

international market is fascinating to

40:05

me because Costco sends products over there

40:07

that are American. But nowadays,

40:09

in the United States, you can also find

40:11

the international projects coming here and that's really

40:13

fun. Their logistics system is unbelievable.

40:16

We joked about having a fake blurb

40:18

from Napoleon on the back of our book that

40:21

said, If I had only had Costco's logistics

40:23

system, I wouldn't have lost the Battle of

40:25

Waterloo. But we didn't do that. Since

40:28

its inception 40 years ago, Costco

40:31

has weathered plenty of storms. The

40:33

savings and loan crash, the dot-com

40:35

bubble, the Great Recession, the COVID

40:37

pandemic, and of course recent inflation,

40:40

among other crises that have rocked

40:42

other companies. Costco's

40:44

survival and its ability to thrive

40:47

comes down to its solid model, one

40:49

that they have no plans of straying

40:51

from, says Dominic. This company

40:54

has been around for 40 years and

40:57

it's basically the same as it was

40:59

on day one with that first warehouse

41:01

in so many fundamental ways. They

41:03

offer more stuff, but the principles have

41:05

not really moved. And the

41:08

business model and their retailing strategy hasn't

41:10

departed much from what they

41:13

did in that one warehouse in Seattle in 1983.

41:17

Even the leadership has held steady,

41:19

with only three CEOs in 40

41:21

years, all coming from within

41:23

the Price Club and Costco family. Susan

41:26

Schwartz explains that current CEO Ron

41:29

Vakris, a former Price Club employee,

41:31

has technically been with

41:33

a company longer than his predecessor Craig

41:35

Jelenik. Ron Vakris has

41:37

been with a gold badge, which means he's been with the company 40

41:40

years, whereas Craig Jelenik has a silver

41:42

badge. He doesn't yet have a gold badge because he

41:44

didn't make it to 40 years. Maybe he's got one

41:46

now, but it's sort of amusing. This

41:49

is the kind of corporate longevity you

41:51

just don't see anymore, says Dominic. forklift

42:00

driver. So he's been there and been

42:02

working here in this business for longer

42:04

than this business has been a business.

42:07

Dominic was actually surprised when earlier

42:09

this year Costco tapped a former

42:11

Kroger executive to join as their

42:13

CFO. The former CFO had been

42:15

with the company for nearly 40

42:17

years. In

42:19

the warehouses, people start as cart pushers and

42:21

they end up as managers. There's a lot

42:23

of that mobility within the company, but it

42:26

sounds to me that there's a

42:28

little bit less of that because people

42:30

live a long time, they have long careers and the

42:33

company only grows so fast. You know,

42:35

the company has grown at these very

42:37

slow and measured pace that

42:39

is not nearly as fast as everything

42:41

else. It's worked out for the

42:43

company quite well, but it's

42:45

leaving a lot on the table that

42:48

other players are very keen to pick

42:50

up, whether they be Amazon, whether they

42:52

be Sam's Club, you know, BJs or

42:55

Walmart or Target. There's a

42:57

lot out there that is left

42:59

sort of uncovered by Costco. The

43:03

National Retail Federation puts Costco in

43:05

third place on its list of

43:08

the top 50 retailers of 2023

43:10

just behind Walmart and Amazon, but

43:13

Costco's sales growth left almost 17% from

43:16

2021 to 2022. That's

43:19

a big jump compared to its competitors.

43:22

Walmart and Amazon's growth in the same

43:24

time period was less than half that.

43:27

For investors, that growth

43:29

and the predictability of strong

43:31

sales numbers makes Costco especially

43:34

attractive, says Dominique. They

43:36

are still the number three retailer

43:38

in the country in terms of revenue.

43:40

They are making a lot

43:43

of money and their

43:45

share price is doing Really,

43:48

really well. Investors Have No qualms

43:50

whatsoever about this company or its

43:52

outlook. Melody.

44:00

It costs. When a

44:02

couple met founder Gym Senegal for hotdogs

44:04

if the food court across from Hq

44:06

and Twenty sixteen a left in shock.

44:09

To validate parking than he said there's no

44:11

book here. So. We didn't believe him,

44:13

but two weeks later he called us. He said i

44:15

thought about it, I don't want a book written. David.

44:18

And Susan were crushed. But they

44:20

kept up with their research and

44:22

three years later they got an

44:24

email with. Easter weekend. Twenty twenty one when

44:26

we got an email out of the blue from

44:29

same saying regular talks about we think which. Makes

44:31

for the book is accurate which like the com for

44:33

a meeting of he said when we were there. It

44:38

was fun and fascinating as the history

44:40

of Costco is. It wasn't

44:42

the first major retailer to run with

44:44

a discount membership only model and

44:46

every time I get a we're for

44:49

that fresh earthy smell the comes before

44:51

a big thunderstorm. It. Takes me

44:53

to the back seat of the family Volkswagen

44:55

beetle back in the day and mom digging

44:58

to her purse for her Dx card. Gtx

45:01

and it's siblings V S M G

45:03

M first opened in Denver and Nineteen

45:05

Fifty six. If you work for the

45:07

government, a church, school, or the military

45:10

you could get a card to for

45:12

a small thing. But. The

45:14

discounts available. This was quite the bonus

45:16

for my school teacher parents. And

45:19

it was a real event to with

45:21

islands of gas pumps outside and a

45:23

cannoli bird on a out front. the

45:25

place was much bigger than a supermarket

45:27

or department store them all. I remember

45:29

mom proudly handing her card to the

45:31

lady at the front desk and with

45:33

Christmas just round the corner ending the

45:35

Santa might be doing some since been

45:37

bad day. My search

45:40

for sanity and that great big warehouse

45:42

of a story kept me occupied for

45:44

what seemed like an eternity as no

45:46

doubt Santa shopped away. When

45:50

I was a teenager, Gtx quietly

45:52

disappear out retailed buy a new

45:55

wave of competitors. Had

45:57

passed the empty parking lot at.

46:00

There and pinch of nostalgia. So

46:02

these days when I hear people

46:04

express their affection for a big

46:06

box store like Costco, I gotta

46:09

wonder if it's not just the

46:11

discounts because over the years those

46:13

memories and began to add up

46:16

Since. Coming

46:18

up on business wars turmoil it

46:20

open a i over the vision

46:22

for the company create an opening

46:24

for competitors eager to unseat to

46:26

the industry leader in artificial intelligence.

46:40

From. Wonder if this is Business

46:42

Wars and I'm your host? David

46:44

Brown. A big thank you to

46:46

authors Susan and David Schwartz and

46:48

Dominic Reuter of Business Insider. Karen

46:51

Low is our senior producer and

46:53

editor. Written and produced by Emily

46:55

Frost and Telly Tile. Sound design

46:57

by Josh Morales. Our senior managing

46:59

producer is Ryan Lower. Our managing

47:01

producers Mad Dance or senior producer

47:03

is Dave Schilling or executive producers

47:05

are Jenny Lauer, Backlund and Marshall

47:07

Louis For Wonder If. Hey

47:17

there! Did you know Kroger always gives you

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savings and rewards on top of our lower

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than low prices? And when you download the

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