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Every October, thousands of dead strip malls,
Blockbusters, and Radioshacks crawl out of
their graves and spring to life with orange
signs.
While Halloween spending has steadily grown
in recent years, the number of pop-up stores
has absolutely exploded.
Companies like Party City and Spirit Halloween
have no trouble finding empty 50, 60,000 square-foot
buildings in the middle of town.
For that, they have to thank the so-called
Retail Apocalypse.
In the last three years alone, Sears lost
142 of its stores, Toys-R-Us filed for bankruptcy,
J.C. Penney lost about 200, Payless ShoeSource
closed all 2,000, and RadioShack, about a
thousand.
The obvious question is Why? and the obvious
answer is Amazon.
But not exactly.
It’s not retail stores that are dying.
All these brands have something in common:
they suck - usually because they failed to
adapt.
Sears tried to do everything and ended up
doing everything… terribly,
J.C. Penney forgot its customers,
and Toys-R-Us thought the internet was a fad.
Millennials didn’t “kill” your business,
they stopped putting up with its 18th-century
practices.
Other companies are thriving, like Ross, Lush,
Aldi and Dollar General.
One, specifically, Costco - succeeds against
all odds not by copying Amazon but doing almost
the opposite.
While both sell just about everything - from
food, to tires, vacations, and lawnmowers,
Costco’s strategy could hardly be more different,
and that’s exactly why Amazon should be
paying attention.
Most grocery stores - cheap, premium, big,
and small - have the same basic strategy.
They know everyone buys milk, eggs, bread,
and bananas, and almost everyone knows what
they cost.
So they lure customers in with cheap prices
for these staples, even at a loss, and then
profit from their large volume, repeat business.
Costco is no different, with its five dollar
rotisserie chicken and bargain gas stations,
which usually attract long lines.
But unlike almost all of its competitors,
Costco’s deals aren’t aimed at the general
public.
While the average grocery store does anything
to get you in the door, Costco charges you.
You won’t even be allowed inside without
a membership, which starts at $60 a year,
or $120 for Gold Star Executive.
This, like Amazon Prime, triggers a sunk-cost
fallacy.
Once you’ve already paid the 60, $120, you
feel invested - why shop around when you already
have Prime?
By not using it, you think, you’re just
wasting money.
Soon, you stop comparing prices and automatically
go to Amazon.
But what’s really genius about Costco’s
membership is that it’s mandatory.
Amazon users will self-sort - each individually
calculating whether buying Prime will save
them enough money to be worth it.
This does create loyalty but doesn’t fundamentally
change the company’s business model.
Costco, on the other hand, makes 75% of its
money from membership fees.
Membership isn’t its loyalty program.
Membership is its business model.
In 2018, Costco had 94 million members, a
little less than Prime’s 100 million, despite
having only 700 stores around the world.
That’s significantly more than cheaper,
digital subscriptions like Apple’s Music’s
60 million or Hulu’s 25, and yet 90% renew
each year.
Why?
Because its prices are so, ridiculously low.
Not because it’s a charity or makes money
from more expensive items while you’re already
there, but because it’s incentives are aligned
with yours.
Its first priority is getting its customers
to renew their membership - which means impressing
them time after time with low prices and high
quality.
Raising prices would only generate a few cents
today and cost the company $60 next year.
That’s why it has a self-imposed rule: No
item can be marked up more than 15%, or 14%
for branded items, giving it an overall average
markup of 11%, far lower than Walmart’s
24%, 30 across all supermarkets, or Home Depot’s
35.
Almost everything about its stores is designed
to accomplish this goal.
True to its name, Costco stores are, in every
sense of the word, warehouses - there is no
”back-room”.
Instead, forklifts move pallets of products
directly onto store shelves.
There are no fancy decorations and aisles
deliberately feel crowded - basically the
opposite of an Apple store.
But for as big as its warehouses are, their
selection is surprisingly sparse.
Your neighborhood supermarket will sell, on
average, about 30,000 unique items, a Walmart
Supercenter, 140,000, but Costco, only about
4,000.
Many of its stores have a gas station, pharmacy,
hearing aid center, optometrist, photo processing
center, tire garage, liquor store, and food
court, but for each “kind” of item, there
will usually be only one or two choices.
Rather than paralyzing shoppers with an endless
row of similar brands, Costco offers large
quantities of whatever it considers the highest
quality.
Not only does this make shopping and stocking
shelves simpler, but it gives Costco immense
buying power, and by extension, immense negotiating
leverage with its suppliers.
Companies want so badly to be the one or two
choices at Costco, they’ll lower prices
and work to adapt their product to its needs.
At one point, for example, Costco reengineered
a container of cashews so it could fit more
in the same space, ultimately saving 24,000
pallets a year - money it passed onto the
customer.
If Costco is unsatisfied with a product, it
just creates its own.
Its store brand, Kirkland Signature, accounts
for about 25% of its annual sales and has
a reputation for being high quality.
The other major ingredient to Costco’s success
is the way it encourages high spending.
Because getting around the store is so confusing,
you have no choice but to wander through most
of the aisles.
The large quantities attract business owners,
who makeup just over one third of its total
members, but account for two-thirds of its
sales.
The $60 up-front fee, meanwhile, selects for
an affluent demographic, with an average household
income of nearly $100,000.
And that’s the genius of Costco: it turns
nearly every seeming obstacle into a competitive
advantage.
Its membership fee should make acquiring new
customers fatally difficult.
Instead, it creates loyal, deep-pocketed patrons
who praise the company for its free samples,
generous return policy, and, of course, low
prices.
Its cost-saving warehouse layout should confuse
and annoy shoppers.
Instead, it makes them feel like deal-hunters,
much the same way IKEA’s do-it-yourself
model makes its customers proud of their work.
It’s a winning formula that’s now being
exported to 13 countries, including, as of
this year, China.
Its grand opening in Shanghai was so busy
that the store had to temporarily close for
safety.
Ultimately, Costco will never be as big or
exciting as Amazon, and that’s largely why
it’s so adored.
Shareholders love it as a solid low-risk,
predictable long-term investment.
And its customers can feel good about its
low prices knowing they don’t come at the
expense of workers.
While Amazon ruthlessly sacrifices everything
for lower prices, Costco sees its employees
as a crucial ingredient to its success.
The average wage of all 245,000 workers is
$21 an hour, double the U.S. retail average.
It also gives better health insurance and
retirement benefits, which Costco is rewarded
for with employees three times more productive.
In an era of overvalued startups, reckless
desire for growth, and questionable business
practices, Costco is something else entirely:
refreshingly boring.
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