„If you raise the effing hot dog, I will kill you“

– Jim Sinegal, Founder of Costco

4’000.

That is how many items you can buy at US based Costco. One of the largest wholesalers in the world.

By comparison, Coop has 50,000 and Walmart, the largest wholesaler in the world, has 140,000.

Costco was founded in 1976 by Jim Sinegal and has become one of the retail industry’s biggest success stories. Costco can zig when the rest of the retail industry zags because it sells primarily things that customers need at unbeatable prices. That is their edge, their cost advantage. They sell only a very limited number of products and at a very small markup. Costco sets its retail prices at no more than 14% above the company’s costs, with no exceptions. Competitors are at 20% or more.

When you are done grocery shopping, you have a tradition to fulfill: Get a famous soda-hot dog combo.

Why famous?

Costco has never – and likely never will – raise the price of its $1.50 hot dog combo since its inception in 1985.

The current CEO tried once.

The founder’s answer?

Today’s quote.

Chart 1: Costco’s inflation hedge: $1.50 hot dog combo, same price since 1985

The membership model

This price discipline is what makes Costco’s business model so special.

You also must be a member and pay an annual fee to shop there. The company has close to 70 million members. With a unique membership model predicated on offering the lowest-priced goods in bulk quantities and a strong presence in food and beverage categories, the firm’s value proposition tends to resonate with consumers regardless of the economic backdrop.

All of this translates into excellent customer loyalty. Membership renewal rates have barely budged from an enviable 90% in recent decades.

Another distinctive feature of Costco?

The brand.

With some of the arvy founder’s family living in Canada, we can attest that in a funny way, people are proud to be members and to shop there. When family members go shopping at Costco, they tell you about everything.

Has that happened to you in conjunction with Migros/Coop?

I do not think so.

So, it is not far-fetched that occasionally a video about Costco goes viral.

Example?

Here’s a clip from a 2022 video of a guy flirting with a Costco gold membership card during an NBA game. With 20 million views in a short period of time, it won the hearts of people on social media.

Free Marketing.

Chart 2: Viral Twitter video with a guy flexing his Costco membership

The customer is king – and provides interesting data

Retailers love to boast that the “customer is king,” but none live it like Costco.

The real strength of Costco’s strategy, and the source of its competitive advantage, lies in how it reinvests the benefits of growth into its relationship with consumers.

As Costco opens new stores, the cost savings from suppliers are passed on to customers through even more competitive prices. Customers then respond to the lower prices, which increases sales at both the new and old stores.

When we analyze companies on what they would do with windfall profits, almost no one aims to pass them on to customers. But Costco does.

In sync with clients and because of both their concentrated inventory of 4,000 units and a membership fee, respectively, Costco comes up with some very interesting data.

They sense when a recession is around the corner by simply looking at the shift in sales mix from beef to poultry and pork.

An interesting recession indicator, isn’t it?

Chart 3: Costco Earnings Transcript, Q2 2023

Flywheel Effect

Costco is built like a flywheel.

In theory, once a flywheel starts moving from a standstill, it gradually builds momentum. Over time, the wheel can spin on its own, creating even more momentum in a self-reinforcing loop.

In practice, Costco management uses its membership fees and low-cost approach to keep selling prices below those of competitors. The lower prices attract more consumers to the stores. This dynamic has led to a long history of increasing membership. This, in turn, is used to lower prices further.

Known as the “flywheel effect,” this customer-centric business model has led to brilliant success.

A perpetual growth machine.

Chart 4: Costco over the last five years

arvy’s takeaway: In a world where wholesale constantly shifts, Costco’s steadfast commitment to its customers and unique pricing strategy have created a retail legend. With a focus on giving back to consumers and building unwavering loyalty, Costco’s frugality-driven flywheel keeps spinning. For better or worse: The $1.50 hot dog and soda combo will always be a bargain.

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