Today’s newsletter is brought to you by the fact that my wife and daughter and I went to a Yankees game on Sunday, and stopped by Five Below on the way home to buy tennis balls on the way home ($7 for 8, can’t beat it). Only, we got stuck in a giant traffic jam outside the shopping plaza.
The reason, we realized when we finally got close enough: Five Below is around the corner from Costco, where cars were lined up like it was the 1970s oil crisis to get cheaper gas.
Loss leaders
I try to empathize. Not only because it’s a morally good thing to do, but because if you understand people you can better understand the world.
Case in point.
I’m not exactly a car guy. I work from home, I don’t have to commute anywhere, and so when gas prices spike the way they have this year — lucky me — it doesn’t hit me as hard as it hits many of my fellow Americans.
Still, I feel like I can put myself in other people’s shoes on this one, or maybe more aptly, in their driver’s seats, as the cost of filling your tank rises and rises.
In fact, it’s probably the easiest financial thing about which to be empathetic, given that we advertise the price of gas on giant signs outside every gas station in America.
All of which leads me to Costco, which at least according to one recent report tends to sell gasoline at a consistent 9¢ per gallon less than the five largest local competitors, and 24¢ below the state average.
O.K. now, in case you’re like me, and don’t have to pay super-close attention to the cost of a gallon of gas every day: The national average for a gallon was $2.84 in mid-January.
It’s now $4.10, according to the experts over at AAA. (And $5.62 in California!)
CEO Ron Vachris told analysts that fuel volume at Costco hit record levels for the quarter ended May 10. Some warehouses needed multiple fuel deliveries a day, and the final five weeks of the quarter were the busiest fuel-volume weeks in company history.
Now, I have to admit I am not a Costco member, either. Actually, I’m feeling less and less qualified as this newsletter goes on. But, again: empathy.
Because, Costco is the absolute king of the loss leaders.
Shall we count a few of the other ways?
Hot dog combos: Costco sold 245 million hot dog-and-soda combos at $1.50 each in 2025, same price they’ve been since 1985.
Rotisserie chickens: I’ve gone on a personal quest to figure out just how long Costco has been selling chickens for $4.99, and it’s at least as far back as 2000 — based on my looking up old newspaper ads on Newspapers.com.
Gold and platinum: Not what I would have originally thought of buying at Costco, but in August 2023, they started selling one-ounce, 24-karat gold bars at 2 percent above the spot price. In short, it’s basically impossible for ordinary retail purchasers to buy that commodity for 2 percent above spot anywhere else.
Quick digression: If you’d bought gold from Costco in August 2023 and just stuffed it under your bed, you would have more than doubled your money by now — and that’s even after it’s fallen the past few months.
(I did not do this.)
Anyway, of course Costco isn’t selling any of these things for less than the market might otherwise dictate out of pure kindness; instead, it’s all about showing customers one reason after another after another why they might find it prudent to pay their annual membership fees.
And gas might just be the ultimate loss leader.
Members who buy gas visit the warehouse more often, spend more once they’re inside, and renew their memberships at higher rates than members who don’t.
So, let’s do the math on membership:
$65 for a standard annual Costco membership and $130 for executive level.
With 85 million members, that’s roughly $4.6 billion in annual membership revenue before selling a single product.
Also, Costco apparently has about a 95 percent renewal rate.
A business that brings in roughly $4.3 billion in recurring revenue before selling the first hot dog, rotisserie chicken, ounce of gold, or gallon of gas sounds like a pretty good model.
It might be better than your business model.
If so, I empathize.
Other things worth knowing …
NYT: Dolly Parton, a rhinestone-studded, rags-to-riches daughter of Appalachia who for six decades ruled country music — and much of pop culture — with an outsize personality and down-home wit that enshrined her as one of America’s most cherished originals, died on Tuesday in Nashville. She was 80. No cause was provided.
NBC News: The Trump administration is threatening to demolish the Kennedy Center if courts don’t allow it to go ahead with its plans, including adding President Trump’s name to the building. In a court filing, DOJ attorneys called the center “structurally unsound, fundamentally unsafe, and embarrassing,” and said “President Trump’s efforts and prestige provide the sole hope for the Center’s financial survival, and structural renewal.”
AP via WPRI: Canada struck back at the United States on Tuesday with retaliatory tariffs on about $20 billion worth of American goods. Industry Minister Mélanie Joly urged Canadians to buy Canadian to protect jobs and launch a “movement of resistance,” adding that Canada selected specific American products to put political pressure on particular U.S. states.
NYT: Since C.T.E. was first scientifically linked to football about 20 years ago, a haunting question has lingered: just how many N.F.L. players will end up with the degenerative brain disease? New data provides a sobering indication: at least one in four.
Metro: The high-flying life of brothers Andrew and Tristan Tate is pure bluster and fantasy, manufactured to boost clicks on social media, their lawyers claim, as the brothers launch a long-shot bid to be released from jail on bond. The pair face 59 charges between them, with Andrew facing prosecution for alleged crimes including rape.
Hollywood Reporter: Rachel Cusk’s controversial new novel Life of M is an intimate, unvarnished character study of an A-list movie star depicted as hollow, immature, cynical, an intellectual poseur and an artist wannabe. The apparent inspiration: Natalie Portman, who selected Cusk’s works for her online book club and hosted her for a 2022 discussion, calling the author “one of my favorite writers.”
Frommers: A tourist faces a €1,500 fine for taking stones from Pompeii — just one vacation spot where taking stuff may unleash negative consequences.
Thanks for reading. Photo by Bharathi Kannan on Unsplash. I wrote about some of this at Inc.com. See you in the comments!
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.