The other fascinating part of Costco’s model is inventory turns and payment terms.
Costco carries a remarkably small number of SKUs and sells enormous quantities of each. That gives it tremendous purchasing leverage, but more importantly, the inventory turns so quickly that Costco can often sell the merchandise before it has to pay the supplier.
In effect, the supplier finances much of Costco’s inventory.
That means Costco can earn relatively thin margins on merchandise and still generate very attractive returns on the capital actually tied up in that merchandise. Add billions of dollars of recurring membership fees and you get a very different model from a conventional retailer.
That’s why I think “loss leader” understates what Costco has built. The genius isn't losing money on products to sell memberships. It is turning inventory and cash so efficiently that Costco can offer unusually low prices, still make money on the products, and make the membership increasingly valuable.
Two weeks ago a new Costco opened in Guilderland, NY after a roughly 20 year period of buying the land, obtaining!,losing and regaining building permits and fighting local opposition from competing businesses. Prior to this, the closest CostCo's are in Syracuse and Springfield which are at least 1 1/2 hours away.
They brought in 50 experienced employees from other locations and hired 200 locally-having received 10,000 ( yes, TEN THOUSAND ) applications for 200 positions.
In one day before the store opened they sold 14,000 memberships, the most they have sold in a single day at any location.
The lines in the store appear long but their checkout lines are amazingly efficient. It really is eye opening.
ha, I wrote about my visit to Costco yesterday. The gas station opens before the store does. I always get gas at Costco; fill up my tank, then fill up my car w/ goodies from Costco. I always get their boneless, skinless chicken thighs. And always get their vacuum-packed leftover rotisserie chicken breast meat. W/ these pkgs of breast meat, I put in my earbuds, listen to audiobooks, get my food scale out, w/ a bunch of Ziploc bags & package up 3 oz servings of the meat to go into the freezer. These bags can then be quickly thawed for salads, tacos, burritos, enchiladas & other various meals. I get 3 of the vacuum packages, which provide at least 40 little baggies for the freezer. I go on Mondays 'cause that's the best day to find the leftovers. Along the back wall, you'll also find all the prepared meals; they use the leftover dark meat or small bits of the breast: lots of Mexican dishes, potpies, so many!! I never buy those, 'cause I make 'em myself, but they're a quick grab for others, are yummy (we've had some at friend's house) and are a good price. Then the sales, such as yesterday, the Bounty paper towels... since it's just 2 of us I don't purchase a lot of the canned goods. We don't eat sweets so I don't go into the snack area. I do purchase most paper products & laundry/dishwasher soap.
eta: when renewal time comes up, we always get a $50 credit
The other fascinating part of Costco’s model is inventory turns and payment terms.
Costco carries a remarkably small number of SKUs and sells enormous quantities of each. That gives it tremendous purchasing leverage, but more importantly, the inventory turns so quickly that Costco can often sell the merchandise before it has to pay the supplier.
In effect, the supplier finances much of Costco’s inventory.
That means Costco can earn relatively thin margins on merchandise and still generate very attractive returns on the capital actually tied up in that merchandise. Add billions of dollars of recurring membership fees and you get a very different model from a conventional retailer.
That’s why I think “loss leader” understates what Costco has built. The genius isn't losing money on products to sell memberships. It is turning inventory and cash so efficiently that Costco can offer unusually low prices, still make money on the products, and make the membership increasingly valuable.
Two weeks ago a new Costco opened in Guilderland, NY after a roughly 20 year period of buying the land, obtaining!,losing and regaining building permits and fighting local opposition from competing businesses. Prior to this, the closest CostCo's are in Syracuse and Springfield which are at least 1 1/2 hours away.
They brought in 50 experienced employees from other locations and hired 200 locally-having received 10,000 ( yes, TEN THOUSAND ) applications for 200 positions.
In one day before the store opened they sold 14,000 memberships, the most they have sold in a single day at any location.
The lines in the store appear long but their checkout lines are amazingly efficient. It really is eye opening.
ha, I wrote about my visit to Costco yesterday. The gas station opens before the store does. I always get gas at Costco; fill up my tank, then fill up my car w/ goodies from Costco. I always get their boneless, skinless chicken thighs. And always get their vacuum-packed leftover rotisserie chicken breast meat. W/ these pkgs of breast meat, I put in my earbuds, listen to audiobooks, get my food scale out, w/ a bunch of Ziploc bags & package up 3 oz servings of the meat to go into the freezer. These bags can then be quickly thawed for salads, tacos, burritos, enchiladas & other various meals. I get 3 of the vacuum packages, which provide at least 40 little baggies for the freezer. I go on Mondays 'cause that's the best day to find the leftovers. Along the back wall, you'll also find all the prepared meals; they use the leftover dark meat or small bits of the breast: lots of Mexican dishes, potpies, so many!! I never buy those, 'cause I make 'em myself, but they're a quick grab for others, are yummy (we've had some at friend's house) and are a good price. Then the sales, such as yesterday, the Bounty paper towels... since it's just 2 of us I don't purchase a lot of the canned goods. We don't eat sweets so I don't go into the snack area. I do purchase most paper products & laundry/dishwasher soap.
eta: when renewal time comes up, we always get a $50 credit