Welcome to the Deep Dive. Today, we're going
to zero in on something you see everywhere. One
of the most, well, defining structures of modern
shopping, the big box store. Yeah, those giant
concrete buildings, hardly any windows, you know.
Yeah. The ones dominating the suburbs. Exactly.
And we've gathered a whole stack of sources for
you today. We're looking at the history, the
architecture, this kind of shoebox design, its
global reach. And really digging into the operational
secrets of the most successful version. The membership
-only warehouse club. We'll be using Costco as
our main example, naturally. Right. So our mission
here is to unpack how this seemingly really simple
building, just a massive box, actually holds
one of the most sophisticated, maybe even controversial
business models out there. It's fascinating because
you see the low prices, right? That's the surface
level. Yeah. But the real power of the secret
sauce, it's kind of hiding in plain sight. So
what's the key takeaway we need to grasp right
from the start? Okay, the main thing is this.
The success isn't just about selling stuff cheap.
I mean, that's part of it, sure. But the real
strategic genius, it's that membership fee. Oh,
the fee. That fee provides this solid, predictable
river of cash. And that allows the rest of the
business. The stores, the inventory, the pricing,
even how they treat employees to operate under
these really strict, almost revolutionary internal
rules. OK, so it's the membership that unlocks
everything else. Pretty much. Yeah. So let's
let's dive into the anatomy of the big box itself.
All right. So architecturally, when we say big
box, everyone kind of pictures the same thing,
don't they? It doesn't matter if you're in, say,
the US or Australia or the UK. What are those
like essential features, the real basics of the
shoebox look? Well, the sources are pretty. clear
on this the design is all about efficiency like
pure function over form okay so you've got these
large freestanding buildings usually just one
floor built on a simple concrete slab foundation
real basic stuff totally basic high ceilings
usually flat steel roof steel trusses holding
it up and the walls just clad in cheap materials
you know metal siding or maybe precast masonry
panels Big box is literally what it is, a container
built cheap to hold a ton of stuff. And the scale
is just immense. These aren't your local shops.
Oh, no, they're huge. In North America, you're
typically looking at anywhere from 50 ,000 square
feet up to maybe 200 ,000. Wow. You need that
size for the economics to work. Bulk storage,
high turnover, all that. But that massive size
must cause headaches in other countries where
land is expensive. It definitely does. And the
sources point this out. You see adaptations like
in the UK or parts of Asia where space is really
tight. The stores often have to go vertical.
Two or more floors. Which must make logistics
inside way more complicated. Absolutely. Moving
bulk goods between floors efficiently. That's
a challenge. But it's the only way to fit that
required volume onto a smaller, pricier piece
of land. And if the building's the box. The land
around it is all about the car, isn't it? 100%.
And that's a major point of criticism from urban
planners, as you can imagine. Right. These stores
basically sit like islands in these enormous
paved parking lots. The whole design assumes
you're arriving by car. So tough luck if you're
walking or using public transport. Yeah, pretty
much. It makes them inconvenient or sometimes
just completely inaccessible for people without
cars. That dependence on vehicles is really baked
into the design. It's a defining feature. OK,
so how do these stores fit into the bigger picture
of retail? The sources mention. Two main categories.
Right, two broad types. First, you've got your
general merchandise stores. Like Walmart or Target.
Exactly. Selling a bit of everything, groceries,
clothes, electronics, housewares. They compete
on having a wide range and, you know, being a
one -stop shop for lots of different needs. And
the other type, the specialists. Yeah, the specialty
stores. Sometimes people call them category killers.
Ooh, sounds ominous. It kind of is, for smaller
shops anyway. They use the same big box format,
massive scale, but they focus intensely on just
one sector. Think Home Depot for hardware and
home improvement or Best Buy for electronics.
So they just dominate that one area. They have
such deep inventory and volume in that specific
category that they can often drive local, smaller
competitors out of business. They kill the category
for others. It's really something how this basic
model has spread globally, but the name for it
changes all over the place. It really shows how
local shopping habits and regulations shape things.
Take Australia. They generally call it large
format retail. Large format retail. OK. Yeah.
Covering chains like Kmart Australia or Bunnings
Warehouse for hardware. Mitre 10 Mega is another
big one there. But then you hop over to the UK
and big box store isn't really a term they use.
Not commonly. No. They're more likely to say.
Superstore. Usually for a really big supermarket
or maybe an outlet of a chain that's just way
bigger than their normal stores. And where do
you find these superstores? Often clustered together
in what they call retail parks, which are basically,
you know, big developments centered around shared
parking, sort of the British version of the power
center concept. Okay. And continental Europe,
especially France, where the idea kind of started.
There you often hear the term hypermarket. Think
Carefour or Auken. These are often even bigger.
What makes them hyper? Crucially, they usually
sell both the full grocery line and general merchandise,
all under one enormous roof. And frequently,
they're actually built into larger shopping mall
complexes. The idea is total one -stop shopping.
And Asia must require even more changes given
the population density. For sure. Our sources
talk about China, where big box grocery stores
can be like three stories high. Three stories.
Wow. How do people manage with carts? They have
these moving sidewalk -style escalators designed
specifically for shopping carts. And get this,
some stores even run their own free bus fleets
to bring customers in from surrounding areas.
That's incredible. What about somewhere super
dense like Hong Kong? Well, they're the store.
Shores have to be smaller just because land is
astronomically expensive. Yeah. So they compete
by emphasizing that one -stop convenience, making
sure they have absolutely everything you might
need, and offering services like really efficient
parking. which is critical there. It's amazing
how adaptable that simple rectangle is, really.
It really is. It bends to fit the local needs.
OK, so to really get the warehouse club model
like Costco, we need to understand where it came
from. And that starts with wholesaling, right?
The business to business world. Exactly. Wholesaling
is kind of the hidden plumbing of retail. Hidden
plumbing. I like that. It's basically selling
goods in really large quantities in bulk. But
the key is it's usually sold to other businesses,
retailers, institutions, maybe restaurants, who
are then going to resell it or use it themselves.
Not typically to the end consumer walking in
off the street. And it's all about volume and
efficiency. Totally. High volume, super efficient
handling. That's the name of the game. And that
volume means lower prices, obviously. There's
a tax advantage, too, isn't there? Especially
in the U .S. Oh, yeah. The financial mechanics
are key. Wholesalers buy direct from manufacturers
in huge amounts so they get big discounts. Then
on the tax side, in the U .S. at least, if the
business buying from the wholesaler has a resale
license, the wholesaler generally doesn't have
to charge sales tax. Which is an immediate saving
for the buyer. Right. Now, internationally...
It gets way more complex. You're dealing with
things like value -added tax, VAT, in Europe
or China, which might be 9 % or 13 % in China.
Plus, they have extra consumption taxes on luxury
goods. Managing all that complexity is part of
the business model. The profit comes from volume
and navigating those rules. So the Warehouse
Club genius was figuring out how to take that
B2B model and kind of tweak it for regular shoppers.
Who's the key figure here? The name you absolutely
have to know is Sol Price. He's widely considered
the father of... the warehouse club concept.
He'd already started a members -only discount
store called FedMart back in the day, but his
biggest legacy is probably mentoring the guy
who co -founded Costco James, Senegal. Ah, Senegal.
His story is pretty amazing, starting right at
the bottom. It really is. Senegal started as
a grocery bagger at Sol Prices FedMart way back
in 1955. Ah, bagger. Wow. Yeah. And he just worked
his way up over decades, became executive VP
for merchandising and operations. He didn't just
learn the nuts and bolts. He absorbed Price's
whole philosophy. Senegal himself said he learned
everything from Saul Price. And what was that
core philosophy? That you didn't have to make
money by marking things up massively. You could
succeed by being brutally efficient, driving
massive volume, and passing savings to the customer.
Well, in this case, the member. So after Price
left FedMart, she started the real precursor.
That's right. In 1976, he launched Price Club
in San Diego. And the first location was pretty
unique, wasn't it? Yeah, it was actually inside
some old airplane hangars that belonged to Howard
Hughes on Marina Boulevard. No way. Airplane
hangars. Yep. And believe it or not, that location
is still operating today. It's Costco Warehouse
number 401. That's incredible. Who was Price
Club aimed at initially? Primarily small business
owners. You paid an annual fee and that got you
access to buy bulk goods at discounted prices.
The core model was there from the start. Then
fast forward seven years and Senegal takes that
model and runs with it himself. Exactly. Senegal
teamed up with an attorney named Jeffrey Brotman
and together they co -founded Costco Wholesale
up in Seattle in 1983. Brotman wasn't just a
lawyer, though, right? He had retail chops. Yeah,
Brotman came from a Seattle retail family background.
He was also, interestingly, an early investor
in Starbucks. He brought a lot of business savvy
and served as Costco's chairman until he passed
away in 2017. So now you have these two companies,
Price Club and Costco, running on basically the
same playbook and both super successful. Right.
Parallel tracks, very similar concepts. A merger
seemed almost inevitable. Which happened in 1993.
Creating Price Costco. Yep, a massive merger.
But it's interesting, before that, Saul Price
actually turned down an offer from Walmart to
merge Price Club with Sam's Club, which was Walmart's
own attempt at the warehouse model. He turned
down Walmart. He did. He went with Senegal instead.
The combined price Costco was instantly huge,
206 locations, $16 billion in annual sales right
off the bat. But the name Price Costco didn't
stick around for long. No. The Price family ended
up leaving the merged company in 1994. And by
1997, the company officially changed its name
back to just Costco Wholesale. So it really consolidated
Sol Price's original vision with Senegal's operational
drive. Pretty much. And that set the stage for
the global giant it is today. Okay, now we're
getting into the real core of it. The secret
weapon. Most shops obsess over how much they
mark up each item. Costco. They're playing a
different game. a completely different game.
They are laser focused on that annual membership
fee. That's the paradox, right? How so? Because
as our sources show, it's the membership fees
that generate the vast majority of the company's
actual profit. Okay. Define vast majority. In
the 2024 fiscal year, get this, 65 .5 % of their
entire net operating income came directly from
membership fees. 65 .5%. Seriously. So like two
thirds of their profit is locked in before they
even sell a single product off the shelves. Exactly.
That number is just... staggering when you think
about traditional retail. Yeah. It completely
flips the script on how you'd approach pricing.
It changes absolutely everything. Yeah. Because
they have this reliable, centralized profit engine
from the numbers, they can afford to run the
actual stores, the warehouses, selling the goods
on incredibly thin margins, like razor thin.
So the goal isn't profit per item. No. The goal
shifts. It becomes about delivering enough value,
low prices, unique items, good experience to
make absolutely sure that Memberfer renews their
subscription next year. That's the prize. And
they actually have a formal rule about this low
markup, right? It's kind of famous. Oh, yeah.
It's legendary retail circles. The rule is ironclad.
No regular item in the warehouse can be marked
at more than 14 % over Costco's cost. 14%. And
for their own private label brand, Kirkland Signature.
The maximum markup is just slightly higher at
15%. That seems incredibly low. What are their
overhead costs like? Generally around 10 % of
revenue, according to the sources. So when you
factor that in, you see just how slim the margin
is on the actual goods sold. Their overall net
profit margin as a company, barely 2%. 2%, wow.
They're just pure volume players then. Total
volume fanatics. Driven entirely by that membership
guarantee. It's a high wire act, honestly. If
membership ever seriously dropped, the whole
model could collapse. Clearly, it works. I mean,
Costco was the third largest retailer in the
world back in 2021. And they hit historical milestones,
too. They were the first company ever to go from
zero to $3 billion in sales in less than six
years. That's just meteoric growth. And the membership
numbers today reflect that scale. Hugely. As
of 2024, 136 .8 million cardholders worldwide.
But managing that scale means making some really
tough, almost ruthless decisions. especially
about what they choose not to sell. Right. You
walk into a normal supermarket or big box store
and you're hit with this wall of choice. 50 kinds
of jam, 20 brands of laundry detergent. Costco
is the opposite. That super limited selection,
that's on purpose. Oh, absolutely deliberate.
It's fundamental to how they operate. A typical
Costco warehouse might only carry around 3 ,700
distinct products. They call them SKUs, stock
keeping units. OK, 3 ,700. That sounds like a
lot until you compare it. Exactly. Compare that
to a typical Walmart supercenter, which might
have something like 140 ,000 different SKUs.
Whoa. OK, 3 ,700 versus 140 ,000. That is drastically
different. It's a chasm. Costco might only carry,
say, one or two types of ketchup instead of 20.
And by limiting that choice so severely, they
can buy absolutely massive quantities of those
few specific items they do stock. Which gives
them incredible bargaining power with the manufacturers.
Immense power. Costco essentially becomes the
gatekeeper, the arbiter, as one source put it,
between the manufacturer and millions of consumers.
So manufacturers have to play by Costco's rules.
Pretty much. If you want your product in Costco,
you have to package it in the large bulk sizes
they demand. And critically, you often have to
prepackage it on pallets ready for easy forklift
deployment straight onto the sales floor. Minimizes
their handling costs. Exactly. It turns their
warehouse floor almost into an extension of the
distribution center. The reward for the manufacturer,
if they comply. Potential access to international
distribution through Costco's massive global
network. But you follow their rules. That constant
rotation of some items, especially the non -essentials,
creates that feeling. Senegal apparently called
it the treasure hunt. Yeah, there's a stroke
of marketing genius baked right into the operations.
They deliberately bring in limited quantities
of certain items, maybe fancy kitchen gadgets,
seasonal clothing, outdoor gear, even furniture
or electronics. And when it's gone, it's gone.
Creates urgency. Totally. It creates this sense
of urgency, as Senegal put it. You see something
interesting, maybe a really good deal. You feel
like you have to buy it now because if you wait,
it probably won't be there on your next trip.
It encourages impulse buys and drives up the
average amount people spend per visit. Speaking
of urgency and membership, they made some pretty
big changes recently in September 2024. Seems
like they're doubling down on that membership
model. They definitely are. The changes hit on
two fronts. Price and access. First, they bumped
up the membership fees. How much? The basic gold
star and the business memberships went up five
bucks from 60 to 65 dollars a year. And the higher
tier executive membership went from 120 to 130
dollars. OK, not huge jumps, but noticeable.
What about access? This got more attention. They
started rolling out barcode scanners at the entrances.
The explicit goal is to crack down on people
sharing membership cards. Ah, the non -member
sneaking in with a friend's card. Right. And
maybe the most talked about change? They restricted
access to the food courts. Now you officially
need to be a member to buy that famous hot dog.
Wow. End of an era for some people just popping
in for lunch. They're also adding perks for the
higher paying members, right? Yeah. That's key
to justifying that executive membership price
hike. They announced plans starting June 2025
in some busy locations. They mentioned Manhattan
specifically to offer exclusive shopping hours
just for executive members, like getting in at
9 a .m. before the main crowds. So paying more
gets you a less crowded shopping trip. Exactly.
It's a tangible benefit, especially in high traffic
stores. It reinforces the value of that higher
fee and helps lock in that crucial high margin
membership revenue. All right. Let's talk about
probably the most visible symbol of Costco's
power besides the giant building itself. Kirkland
Signature, their own brand. It's not just a store
brand. It's huge. It doesn't even begin to cover
it. Kirkland Signature, they launched it back
in 95, named it after their original headquarters
city in Washington state. It is an absolute behemoth.
Okay, give us the numbers. In 2024, Kirkland
Signature alone recorded $86 billion in revenue.
$86 billion? Just the store brand? Just the store
brand. To put that in perspective for you, that
single private label brings in more money. than
the entire annual revenue of a global consumer
goods giant like Procter & Gamble. That is absolutely
mind -blowing. How did they build that level
of trust? Usually, store brands are seen as maybe
a bit cheaper, maybe lower quality. Well, their
strategy was multi -pronged. First, the core
promise, deliver quality comparable to the national
brands, but at a noticeable discount. Second,
the packaging is often very simple, minimalist.
It conveys value. Okay. But the really clever
part, especially early on, was how they overcame
that initial skepticism people have about private
labels. They used co -branding. Co -branding,
like putting two names on the package. Exactly.
They'd partner with well -known, trusted manufacturers.
So you'd see Kirkland Signature Coffee Beans,
but it would also say Custom Roasted by Starbucks.
Or Kirkland Signature Batteries that also said
Duracell. Kirkland Signature Jelly Beans by Jelly
Belly. Ah, so they borrowed the credibility of
the established brand. Precisely. It created
this halo effect. People thought, OK, if Starbucks
is making their coffee, it must be good. And
that trust then extended across the entire Kirkland
signature line, even for products that weren't
co -branded. And they must guard that brand reputation
fiercely. Absolutely. The sources say the quality
control goes right to the top. Apparently, the
CEO personally signs off on every single new
Kirkland signature product before it hits the
shelves. The CEO. Yeah. They simply cannot afford
to have a dud product tarnish the image of that
$86 billion brand. Beyond Kirkland, the sheer
variety of stuff you find in Costco is just.
Wild sometimes. You go in for paper towels and
milk and suddenly you're looking at, I don't
know, a diamond ring or a kayak. It's definitely
part of the experience, that unexpected merchandise.
You'll find the basics, sure, but then also things
like coffins. Coffins, seriously. Yep, coffins,
solar panel systems, hot tubs, high -end wine,
expensive cheeses. And recently, a really big
one, gold and platinum bars. Boolean. Ah, yes,
the gold bars made headlines. How does that work?
Are they making money on that? It's fascinating.
They often sell the gold very close to the current
market spot price, sometimes maybe just a 2 %
markup. That's basically nothing. Right. And
think about the executive members. They get 2
% cash back on most purchases. So for them, buying
gold at Costco is almost like getting it at cost.
It functions as an incredible loss leader. A
loss leader. It drives membership signups and
renewals. People might literally join or upgrade
just to buy the gold. It makes the membership
fee feel like an investment that pays for itself,
which is incredibly powerful for keeping people
locked into the ecosystem. Okay, that makes sense.
What about alcohol? That's a huge category for
them, but it seems like it's always complicated
by local laws. Oh, the regulations around alcohol
are a constant headache for them, especially
in the U .S. It varies wildly state by state,
even county by county sometimes. Like what? Well,
in some states, like Texas, the law says the
liquor store part has to be technically a separate
business, different entrance, maybe a wall separating
it, its own staff. In other places, they can
sell beer and wine right in the main warehouse
aisles. And internationally. Even more varied.
Like in West Auckland, New Zealand, there's a
local trust that has a monopoly on liquor sales.
So Costco isn't allowed to sell any alcohol there
at all. It's a real patchwork they have to navigate.
But it's clearly important enough for them to
fight for. Didn't they spend a lot of money changing
liquor laws in Washington state? They sure did.
They poured over $22 million into a state initiative,
Initiative 1183, back around 2011. And it passed,
ending the state's monopoly on liquor sales and
distribution. So yeah, they see it as a critical
category. And they even have special staff for
wine. In some of their warehouses with the biggest
wine selections, yeah. They employ what they
call wine stewards, maybe about 30 or so across
the U .S. Their job is specifically to help members
choose wines, offer advice. It elevates the service
for that key category. Now, shifting gears slightly,
there was a big dust up recently with the book
publishing world. Costco wanted to change how
they sell books. Yeah, this really highlighted
Costco's relentless focus on operational efficiency
and cost cutting. For decades, Costco was a major
player for publishers. They sold huge volumes
of books. Right. You always see those tables
near the front. Exactly. But from Costco's perspective,
stocking books is surprisingly labor intensive.
New titles arrive. They had to be unpacked and
manually displayed, usually every Tuesday. And
crucially, any books that don't sell have to
be gathered up by hand and returned to the publisher
for credit. That's a lot of handling cost. So
what was their proposed solution? was pretty
drastic. The plan, announced in 2024, was to
stop selling books year -round. They wanted to
make books a seasonal category only. available
just during the main four -month holiday shopping
period starting in January 2025. Wow, just holidays.
That must have panicked the publishers. Oh, it
sent shockwaves through the industry. Publishers
rely on that steady year -round volume and the
discoverability factor of people browsing in
Costco. Losing that shelf space would have been
a huge blow. So what happened? Did they go through
with it? Thankfully for the publishers, a compromise
was reached later in 2024. Costco agreed to keep
year -round book sections, but only in about
100 of their 600 or so mainland U .S. warehouses.
So still a big cutback, but not a total elimination.
Right. But it clearly shows how ruthless they
are in evaluating whether a category pulls its
weight in terms of profit versus labor costs.
Nothing is sacred if the numbers don't work.
And beyond just selling stuff, the warehouses
often have other services built right in, don't
they? Yeah, they act as kind of integrated service
hubs. You've got the gas stations outside, which
are a huge draw. Inside, you often find pharmacies,
hearing aid centers. Hearing aids, really? Yep,
and optometry centers, too. Costco Optical is
actually the fifth largest optical retailer in
the entire U .S. Fifth largest, wow. And they
also offer a free concierge service for electronics
you buy there. Basically, tech support to help
you set things up, troubleshoot problems. It
helps reduce returns and keeps customers happy
with those sometimes complex purchases. Okay,
we have to talk about the food court. Maybe the
most iconic part of the Costco experience for
many people. The ultimate loss leader. Absolutely,
the ultimate loss leader. And it really boils
down to one specific item. The $1 .50 hot dog
and soda combo. $1 .50? Hasn't it been that price
forever? Since 1985. It has not changed. And
the commitment to keeping that price is legendary.
Isn't there a famous story about that? Yes. The
current CEO, Craig Jelinek, apparently went to
co -founder Jim Senegal years ago, suggesting
they raise the price. Senegal's response reportedly
was, if you raise the effing hot dog, I will
kill you. Figure it out. Okay. Wow. He was serious.
It sounds funny, but it really shows how much
that price point means symbolically, doesn't
it? Totally. It's not about the money they make
or lose on the hot dog itself. It's a symbol
of the value Costco provides. It tells members,
we're relentlessly focused on keeping prices
low for you. Raising it, even by 50 cents, would
break that trust. It's worth way more as marketing
and loyalty building than the extra revenue would
be. And they apply similar thinking to the rotisserie
chicken, right? Another huge draw. Oh yeah, the
$4 .99 rotisserie chicken. That's another...
major traffic driver. People literally plan trips
around picking one up. And they've gone to extreme
lengths to keep that price low, too. Extreme
lengths is right. To guarantee that $4 .99 price
and ensure a consistent supply, Costco actually
moved into vertical integration. They built and
now operate their own massive chicken processing
plant in Nebraska. They own the chicken factory.
They own the whole supply chain. Basically, from
the farm to the spit. It gives them complete
control over costs and quality, all to protect
that crucial $4 .99 price point. But the food
court menu isn't totally set in stone, right?
Even if the hot dog is untouchable. There have
been changes. Oh, yeah. There have been significant
shifts. Back in 2013, they famously switched
all their fountain drinks from Coca -Cola products
to Pepsi. Why? Because Coke raised its prices,
and Costco refused to pass that cost onto the
$1 .50 combo. So they switched. Interestingly,
though, there are reports they're planning to
switch back to Coke starting in 2025. We'll see
if that happens. Hmm. OK. Any other menu casualties?
They've tried things that didn't stick. They
tested a cheeseburger for a while around 2017,
but apparently it didn't sell well enough or
was too slow to make. So they cut it by 2020.
And the menu changes depending on where you are
in the world, too. Naturally. You'll find poutine
on the menu in Canada and France. In warehouses
in Korea or Mexico, you might find things like
a bulgogi bake or pizza with al pastor toppings.
They adapt to local tastes, even in the food
court. So we talked about the basic shoebox design,
but even within that, there's a pretty big range
in the actual size and even the type of Costco
stores out there. What are the extremes? Well,
the heavyweight champion, the world's largest
Costco, is in Salt Lake City, Utah. It's a massive
235 ,000 square feet. Whoa, why so big? It's
actually a hybrid store. It combines a traditional
Costco warehouse with one of their specialized
business center concepts under one roof. Okay,
and the smallest? The smallest one still operating
is way up in Juneau, Alaska. It's about 76 ,700
square feet. Why so small? It's basically a leftover
from an experiment they tried back in 1993 with
smaller format stores. Generally, they found
that size didn't really work well with their
high volume pallet based logistics model. So
they stopped building them. But the Juno one
remains. You mentioned the business centers.
What's the deal with those? Are they different
from regular Costco's? They are different. Yeah.
They're designed specifically to cater more to
that original price club market, small, medium
-sized businesses. So like restaurants, offices?
Exactly. Any Costco member can shop there. But
the product mix is heavily skewed towards business
needs. Over 70 % of the items in a business center
are things you won't find in a regular Costco
warehouse. Like what kind of stuff? Think giant
containers of cooking oil. Huge packs of disposable
restaurant supplies, commercial cleaning products,
office furniture, maybe even industrial kitchen
equipment. They also have features businesses
need, like dedicated truck parking and bulk delivery
services, although they do charge extra for delivery
on smaller orders under $250. So sticking to
the big box idea mostly, but they are trying
some newer concepts for the physical buildings.
I read something about a mixed -use development.
Yeah, this one is really interesting and potentially
groundbreaking for this type of retailer. Down
in South Los Angeles, they're building the first
-ever project of its kind in the U .S. What is
it? It's a Costco warehouse. A big one, 185 ,000
square feet, but built underneath 800 rental
apartments. Apartments on top of a Costco. Exactly.
And significantly, about 23 % of those apartments
are specifically designated as low -income housing.
Wow. That seems like a direct response to that
criticism about big box stores being anti -urban,
car -dependent islands. It really does. It integrates
the retail directly into a residential, higher
-density urban setting. It'll be fascinating
to see if they try more projects like this. It
challenges the whole traditional big box footprint.
Okay, let's shift to the inside, the culture.
The sources really emphasize the founder, Senegal's,
approach to employees. Almost humanitarian. Which
seems odd for such a low -margin business. It
does seem counterintuitive, but it was absolutely
core to his philosophy. His belief was simple.
Treat your employees well, and they will, in
turn, provide excellent service to your customers,
the members. And that translates into actual
benefits. Big time. Compared to retail industry
norms, Costco's benefits are exceptional. For
instance, something like over 90 % of their U
.S. employees qualify for company -sponsored
health insurance. 90%. What's typical in retail?
The industry average is often under 60%. So it's
a huge difference. And that must impact employee
loyalty. Massively. Costco consistently has some
of the lowest employee turnover rates in the
entire retail sector. One source from 2006 cited
just 17 percent turnover overall and, incredibly,
only 6 percent for employees who had been there
for over a year. Six percent. That's basically
unheard of in retail. It is. And think about
the savings not constantly having to hire and
train new people is a huge cost advantage, even
if you're paying more in wages and benefits up
front. And this culture extends to promoting
from within. We mentioned the current CEO started.
It's a forklift driver. Yeah. Ron Vakris, the
current CEO, started at Price Club on a forklift
back in 1982. That's very typical. They really
emphasize promoting people up through the ranks.
Even the headquarters seems different. No fancy
corner offices. Nope. The headquarters in Iskawa,
Washington. Apparently even the CEO works out
of a cubicle, just like the other 7 ,000 or so
employees there. Maybe a slightly bigger cubicle,
but still. And there's a strong emphasis on executives
spending most of their time out in the field,
visiting the warehouses, staying connected to
the actual operations, not just sitting in meetings
at HQ. But this high -benefit, high -wage model
must be under constant pressure, especially from
Wall Street, maybe. And hasn't stopped all union
activity, has it? No, that tension is definitely
always present. While unionization drives have
been relatively rare at Costco compared to other
retailers, they do happen, and sometimes they're
successful. Like in Norfolk, Virginia, in late
2023, workers there voted to unionize, which
was the first big organizing win in like... two
decades. And the existing union members? The
Teamsters union represents a significant chunk
of Costco workers, over 18 ,000 of them. And
they've shown they're willing to push back. In
early 2025, their members voted overwhelmingly
to authorize a strike if needed, demanding better
wages and benefits, especially in light of Costco's
big profits and those recent membership fee hikes.
So it's a balancing act. Generous policies, but
still facing labor pressure in a tough industry.
Always a balancing act. especially when you're
trying to maintain those low prices and high
volumes. One last operational detail before we
get to broader criticisms. The person checking
receipts at the exit, what's their actual purpose?
Is it just about stopping theft? That's what
most people assume, but theft prevention is actually
secondary. Their primary role, according to Costco,
is customer service and accuracy verification.
Oh, so. They're checking to make sure you weren't
overcharged or double scanned for anything. They
check that items needing a voucher, like maybe
tires or batteries, were run up correctly. And
importantly, they're looking for big, bulky items
on the bottom rack of your cart stuff. The cashier
might have missed scanning. Ah, the bottom of
basket check. Exactly. It's really an efficiency
and accuracy check that they've had in place
since the very first store opened back in 83.
Catching errors saves money and hassle later.
Okay. Finally, let's touch on the criticisms.
The big box model, Costco included, faces some
significant pushback on societal and environmental
grounds. Yeah. These are unavoidable consequences
of the scale and format. As we mentioned earlier,
urban planners are often the most vocal critics.
They argue the whole model is just fundamentally
unsustainable. Because of the car dependence?
Primarily, yes. The reliance on huge parking
lots, the location near highways. It actively
discourages walking, biking, or public transit
use. It contributes to sprawl and can make essential
goods inaccessible for people without cars. It's
seen as a failure of good urban design principles.
Then there are ethical concerns, especially around
sourcing, given the massive volumes they buy.
Animal welfare seems to be a recurring issue.
It definitely is. And Costco has made changes
over the years in response to pressure from advocacy
groups and consumers. They banned certain types
of confinement crates for veal calves, committed
to phasing out gestation crates for pigs, and
made a global pledge to source only cage -free
eggs. But the pressure hasn't stopped. Didn't
shareholders sue over the chicken operation?
Yes, that's ongoing. In 2022, some shareholders
filed a lawsuit arguing that Costco's whole low
-cost chicken program, the one supplied by their
own Nebraska plant, relies on practices that
violate animal welfare laws in Nebraska and Iowa.
What's the argument? Essentially that the chickens
are bred to grow so large, so fast to meet that
$4 .99 price point that they inevitably suffer
from debilitating health problems. The lawsuit
claims the company knows this and is prioritizing
profit over animal welfare, potentially misleading
shareholders. about ethical sourcing. Wow, that's
a heavy charge. What about other environmental
or labor issues? Well, given their size, they
face scrutiny on many fronts. They've paid fines
for environmental violations, like mishandling
refrigerants that leak greenhouse gases. They've
been criticized by environmental groups for things
like using pulp sourced from Canada's boreal
forest for their Kirkland brand toilet paper.
And labor standards in their supply chain. While
their direct employee practices are generally
praised, like any global giant, they've faced
issues further down the supply chain. There were
past controversies about suppliers potentially
using forced or slave labor. And more recently,
a tragic incident in South Korea in 2023 where
a worker died from heat stroke while collecting
shopping carts in extreme heat outside a warehouse.
It highlighted potential gaps in safety enforcement
under the pressure of global operations. Hashtag
tag outro. So wrapping this up, this deep dive
really shows that the big box store, while it
looks simple on the outside, is this incredibly
efficient, globally powerful retail machine.
Yeah, it's a blueprint that works worldwide,
but it's really the warehouse club model, especially
as perfected by Costco, that represents the ultimate
evolution of... that format. They took those
old wholesaling ideas and brilliantly leveraged
the membership fee, making most of their profit
before selling goods, allowed them to hit unprecedented
scale, build fierce loyalty, keep prices incredibly
low. And remarkably, maintain pretty high standards
for how they treat their own employees, even
while juggling all the pressures of that scale,
their urban planning critiques, the supply chain
issues. It's this fascinating bundle of contradictions,
isn't it? A company obsessed with efficiency
that fiercely protects a $1 .50 hot dog price
from 1985. A car -centric behemoth that's now
experimenting with building apartments on top
of its stores. It really is. Which brings us
to a final thought for you, the listener. to
chew on. Yeah, think about this. The founders,
Senegal and Price, they explicitly said they
were building Costco for the long haul. They
wanted it to still be here 50 and 60 years from
now, not just focused on the next quarter's earnings.
Okay, so longevity was the goal. Right. We know
the business model. The membership model is incredibly
powerful and resilient. But what about the physical
form they chose? That classic, sprawling, car
-dependent, usually single -story... Big box.
Does that structure itself have the same staying
power? That's the question. Does that architecture
represent a brilliant blueprint for immediate
high volume success that can adapt? Or does its
fundamental conflict with the growing need for
walkable, denser, more sustainable urban living
ultimately put a time limit on the lifespan of
this incredibly powerful retail model? A tension
between today's efficiency and tomorrow's urban
reality. Something to think about next time you're
pushing that giant cart through the aisles.