The Resilience of Costco | A Summary

I recently came across a fascinating review of Costco's business model, which will be of broad interest to just about anyone in retail. It's probably tough to find immediate applicability of everything given that they are the second largest retailer in the world on the back of 36 years of hard work and the fact that a lot of their business model relies on scale at this point. However, there is much of interest here for everyone from operational lessons through to what can be achieved over time with a relatively simple and focused strategy. At $129B USD in revenue they are still growing and opening new stores, and indeed experiencing significant same store sales growth. I've itemized a few of the key things I found interesting,  however please refer to the excellent 146 slide source presentation which can be found on the Mine Safety Disclosures blog: The Resilience of Costco. Full credit to Mine Safety Disclosures for this work.

• Costco is a retailer, yet barely look to break even on product sales - with a maximum margin of 15%, moving closer to breakeven after paying employees and warehouse costs.
• Effectively they've created an environment where it's guaranteed to be the cheapest price for the consumer, yet also appear to have created a scenario where it is mathematically impossible to make money.
• That is true until you take into account that shoppers must pay a $60 p.a. annual fee to shop there, and that they have 50 million members - generating $2.9B for them in 2017. This is where their true profit is generated, and the more successful they are in reducing prices the more members they attract in a virtuous cycle (and of course increasing their leverage with suppliers at the same time).
• Costco carries 4,000 SKUs whereas Walmart carries 600,000+ SKUS The flow on benefits this provides with respect to supplier leverage and staff efficiency can be found on slides 53-51. They generate a massive $559K revenue per employee versus $217K for Walmart.
• Bulk Size - while driving down price also makes people spend more (slides 57 - 63).
• The benefits of custom packaging in terms of efficiency in supply chain and labor costs (slides 64-69). This would have to be interesting for anyone in retail.
• Their warehouse format is super efficient and generates more revenue per square meter than any of the major big box retailers (slides 69-76).
• Average inventory turn of 26 days, means suppliers fund their business (slides 74-76) with massive impact on working capital requirements.
• They look after their employees - their workforce is the highest paid in the industry ($22 per hour + sizable benefits versus $12 an hour for the industry). Unsurprisingly rather than sharing the industry's revolving door average attrition rate of 59% they experience 5% attrition. Obviously this also means they can be more selective in who they employee resulting in a higher calibre workforce ( Slides 77 - 83)
• An illuminating quote from the former CEO Jim Sinegal - "Many retailers look at an item and say I'm selling this for $10. How can I sell it for $11? We look at it and say, How can we get it to $9? And then, How can we get it to $8? It is contrary to the thinking of a retailer, which is to see how much more profit you can get out of it." (Slide 99)
• Interesting analysis on the competitive threat posed by Amazon (slides 102 - 140) Particularly interesting on Slide 115 between price difference of products at Costco versus Amazon with one analyst finding prices on Amazon are 56.48% more expensive on Amazon than in a Costco store.
• The prestige of their private label Kirkland Signature brand is impressive and I suspect unrivalled by any other retailers store brand (slides 128- 130). On paper the store brand of a warehouse style retailer doesn't sound like the place to start if you are looking for a mark of quality, yet at Costco this is absolutely the case. The advert example on slide 130 where they compare the actual performance statistics of their Kirkland golf ball with Titleist brings this all into focus - a statistically superior ball on all measures for 1/3 of the price. It would seem they've successfully broken the linkage between price and quality, product by product - to the extent that if a consumer buys Kirkland they know they are buying quality - something which may be an aspiration for many retailers with store brands, but unlikely to be the objective reality in very many cases.
• There are some interesting conclusion slides on slide 140-146 outlining the enormity of what they've achieved. 
• I personally conclude that it's amazing what a retailer can do in 36 years, and continue to do even in a supposedly bloodbath retail environment with a simple and focused strategy well executed.