Costco

Costco traces its lineage through Sol Price, whom the hosts rank among the top two or three most influential American retail capitalists. Sam Walton wrote in Made in America that he stole more ideas from Sol Price than from anyone else, and Jim Sinegal said he learned everything he knows from Price. The naming convention of Walmart and Kmart derived from Price's FedMart brand. Price founded FedMart in 1954 as the first scaled quasi-national discounter, predating Walmart, Kmart, and Target as a retail category. FedMart used a membership structure to legally circumvent laws allowing manufacturers to set minimum retail prices. The first San Diego store did three million dollars in sales in its first year against a one million dollar expectation. FedMart also pioneered below-cost gasoline to drive traffic, a house brand called FM that directly preceded Kirkland Signature, and a pharmacy priced to undercut industry margins so aggressively it generated death threats.

After a German partner named Hugo Mann fired Sol Price and his son Robert from FedMart, changed the locks, and stripped the company for its real estate, the Prices identified that nearly all FedMart's margin was generated at the warehouse level rather than the store level and built Price Club around that insight. The original Price Club plan served small businesses only, stocked around 3,000 SKUs, and charged meaningful membership fees because it delivered genuine logistical value. The consumer membership model emerged when a San Diego credit union proposed offering Price Club access as a member benefit, which unlocked word-of-mouth growth and became the foundation of Costco's no-advertising model. Sol Price called Hebrew National after noticing hot dog vendors at the exit, originating the hot dog and soda combo that has remained priced at one dollar fifty for 47 years and now sells 130 million units annually.

Jeff Brotman and Jim Sinegal founded Costco in Seattle in 1983 after Price Club declined to franchise in the Northwest. Costco's business plan was essentially a clone of Price Club. The company hit one billion dollars in revenue in under three years and three billion in under six, described as the first company ever to reach that milestone. Costco and Price Club merged in 1993, with Costco shareholders receiving 52 percent of the combined equity. At the time of the merger the combined entity was only slightly larger than Sam's Club, which was expanding aggressively. Sam's Club today generates roughly half the revenue per unit of a Costco store, and that gap has widened over time.

Costco enforces a hard internal cap of 14 percent maximum markup above supplier cost, with electronics marked up only six to eight percent and an 11 percent overall gross margin target. Department stores commonly apply 100 percent markups and Walmart marks up approximately 25 percent. Jim Sinegal argued that raising the ketchup price by just 3 percent would add 50 percent to pre-tax income but compared doing so to heroin because it destroys customer trust. Costco generates approximately 7.5 billion dollars of operating income on 230 billion dollars in sales, making it the third largest US retailer behind Amazon and Walmart. A 10,000 dollar investment at the 1985 IPO would be worth approximately 3.3 million dollars today, a 330x return excluding dividends.

Costco carries approximately 3,800 SKUs, down from 4,500 a decade ago and still declining, compared to 100,000 to 150,000 at Walmart supercenters. This low SKU count is the operational foundation of the business. Suppliers deliver directly and invoice on roughly net 30 terms, while goods sell immediately upon delivery. Costco turns inventory 12.4 times per year versus approximately 8 times for Walmart, meaning inventory is effectively free or profitable while it sits in the warehouse. Ninety-two percent of merchandise moves through a cross-dock pallet system where supplier trucks unload on one side and Costco trucks load on the other with no overnight storage, compared to only 10 percent at Walmart despite Walmart's tens of billions invested in logistics. Revenue per employee is approximately 730,000 dollars and revenue per square foot is approximately 1,800 dollars, compared to 600 dollars at Walmart and 450 dollars at Target.

Kirkland Signature generated 52 billion dollars in sales last year excluding gasoline, exceeding Nike by approximately one billion dollars, making it by one measure the largest consumer packaged goods brand in the world. Costco is the largest seller of fine wines in the world, sells one third of all jumbo cashews globally, and owns three optical grinding labs to vertically integrate eyeglass production. The executive membership costs 120 dollars annually versus 60 dollars for standard, returns 2 percent cashback on purchases, and was priced so its break-even point of 3,000 dollars in annual spending matches the average household spend at Costco. Executive members are 55 percent of US members, account for 73 percent of sales, and renew at higher rates. Overall US member renewal is 93 percent annually. Costco is believed to receive payment from Citi and Visa for the card relationship rather than paying standard processing fees, leverage that traces back to Price Club's original cash-only policy.

Costco's average hourly wage is 26 dollars versus Walmart's 19 dollars and 50 cents, it offers a 401k with match and healthcare for hourly workers, employee attrition after the first year is 7 percent versus a typical retail 20 percent, and shrinkage is 0.15 percent of sales.