Costco Soars by Breaking Rules

Costco Soars by Breaking Rules

Would you have bet on Costco?

Dank atmosphere. Limited selection. Wooden pallets. Pay an annual fee for the privilege of shopping. It’s contrary to every established rule of retail. 

Yet it worked! Costco now has 770 stores, 245,000 employees and $140 billion in sales.  The secret to its success? Breaking the rules. 

The inspiration for Costco came from Sol Price, a San Diego attorney. In 1954 Sol raised $50K to buy a disparate array of merchandise and sell it from a San Diego airport hangar he got by inheritance. He named it Fedmart. 

Lousy location. Crazy array of merchandise (jewelry to liquor). A $2 annual membership fee. You needed a government ID to buy stuff. Nobody thought Sol’s venture had a chance. 

How wrong they were! Twenty years later Sol had 40 locations and was doing $350 million/year in sales. Sol’s Fedmart business model inspired Price Club, which inspired Costco’s founding in 1983. 

What’s the Costco magic? 

FEW CHOICES, BIG QUANTITY 

The average supermarket stocks 50,000 items. A typical Costco stocks 3,700 items. 

Traditional retailers offer customers lots of choices in small quantities. Costco does the opposite. It gives you fewer choices in larger quantities. 90 eggs. 60 waffles. 5 pounds of butter. 

Costco prides itself on knowing what you want, and selling you a lot of it. 

SLIM MARGIN, SMALL PROFIT 

Retailers typically mark up products 25%, 50%, or more. Costco’s average margin is 11% (according to its 2018 annual report). 

How does Costco profit on margins no other retailer could tolerate? It doesn’t have to. It prospers by selling memberships.

SAVE, BELONG

Costco’s annual membership fee is $60 for a “Gold Star” and $120 for an “Executive.” I was stunned to learn that Costco has over 50 million members paying $3 billion+ a year in membership fees. 

Costco’s prosperity isn’t about selling merchandise, it’s about selling memberships. It leverages low prices to drive membership sales.   

Costco membership sales aren’t fueled only by the opportunity to buy low price merchandise. Memberships are also driven by culture. Costco’s blogs and forums are brilliantly managed to create an aura of community, a feeling of belonging.  

People don’t join country clubs just to play golf. They join for a sense of community, prestige, and identity. 

Similarly, people don’t join Costco just to save money. A Costco membership card says something about you. Regardless of your income or wealth, you are value conscious and thrifty. 

Ever read the book, Blue Ocean Strategy? It’s about developing  a business model that attracts  customers, not because you are better, but because you serve an established need in a way nobody else does.

Cirque Du Soleil did it by blending elements of theater and the traditional circus. Uber did it by recruiting everyday people to drive around everyday people. And Costco does it by using low price merchandise to sell memberships.

Many believe entrepreneurism is about being better. I believe entrepreneurism is about being different. 

“Make the competition irrelevant by opening up an uncontested marketplace.”
–W. Chan Kim, Blue Ocean Strategy

(Facts in this article about Costco are from a blog by Zachary Crockett, a freelance writer in San Francisco. I checked out his website. Talented guy.)

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