WEBVTT 00:00:00.000 --> 00:00:02.620 Welcome to the Deep Dive. Today, we're going 00:00:02.620 --> 00:00:05.339 to zero in on something you see everywhere. One 00:00:05.339 --> 00:00:08.720 of the most, well, defining structures of modern 00:00:08.720 --> 00:00:12.099 shopping, the big box store. Yeah, those giant 00:00:12.099 --> 00:00:15.740 concrete buildings, hardly any windows, you know. 00:00:15.779 --> 00:00:18.579 Yeah. The ones dominating the suburbs. Exactly. 00:00:18.820 --> 00:00:21.079 And we've gathered a whole stack of sources for 00:00:21.079 --> 00:00:23.359 you today. We're looking at the history, the 00:00:23.359 --> 00:00:26.800 architecture, this kind of shoebox design, its 00:00:26.800 --> 00:00:29.679 global reach. And really digging into the operational 00:00:29.679 --> 00:00:33.899 secrets of the most successful version. The membership 00:00:33.899 --> 00:00:36.979 -only warehouse club. We'll be using Costco as 00:00:36.979 --> 00:00:39.420 our main example, naturally. Right. So our mission 00:00:39.420 --> 00:00:42.399 here is to unpack how this seemingly really simple 00:00:42.399 --> 00:00:44.820 building, just a massive box, actually holds 00:00:44.820 --> 00:00:47.039 one of the most sophisticated, maybe even controversial 00:00:47.039 --> 00:00:49.119 business models out there. It's fascinating because 00:00:49.119 --> 00:00:50.840 you see the low prices, right? That's the surface 00:00:50.840 --> 00:00:52.979 level. Yeah. But the real power of the secret 00:00:52.979 --> 00:00:55.340 sauce, it's kind of hiding in plain sight. So 00:00:55.340 --> 00:00:58.079 what's the key takeaway we need to grasp right 00:00:58.079 --> 00:01:00.079 from the start? Okay, the main thing is this. 00:01:01.020 --> 00:01:03.659 The success isn't just about selling stuff cheap. 00:01:04.349 --> 00:01:06.969 I mean, that's part of it, sure. But the real 00:01:06.969 --> 00:01:10.450 strategic genius, it's that membership fee. Oh, 00:01:10.709 --> 00:01:13.909 the fee. That fee provides this solid, predictable 00:01:13.909 --> 00:01:16.909 river of cash. And that allows the rest of the 00:01:16.909 --> 00:01:20.260 business. The stores, the inventory, the pricing, 00:01:20.340 --> 00:01:23.060 even how they treat employees to operate under 00:01:23.060 --> 00:01:25.739 these really strict, almost revolutionary internal 00:01:25.739 --> 00:01:28.280 rules. OK, so it's the membership that unlocks 00:01:28.280 --> 00:01:30.640 everything else. Pretty much. Yeah. So let's 00:01:30.640 --> 00:01:33.260 let's dive into the anatomy of the big box itself. 00:01:33.579 --> 00:01:35.620 All right. So architecturally, when we say big 00:01:35.620 --> 00:01:38.099 box, everyone kind of pictures the same thing, 00:01:38.159 --> 00:01:39.799 don't they? It doesn't matter if you're in, say, 00:01:39.879 --> 00:01:42.719 the US or Australia or the UK. What are those 00:01:42.719 --> 00:01:45.439 like essential features, the real basics of the 00:01:45.439 --> 00:01:47.810 shoebox look? Well, the sources are pretty. clear 00:01:47.810 --> 00:01:50.450 on this the design is all about efficiency like 00:01:50.450 --> 00:01:52.870 pure function over form okay so you've got these 00:01:52.870 --> 00:01:54.989 large freestanding buildings usually just one 00:01:54.989 --> 00:01:57.469 floor built on a simple concrete slab foundation 00:01:57.469 --> 00:02:01.230 real basic stuff totally basic high ceilings 00:02:01.230 --> 00:02:04.349 usually flat steel roof steel trusses holding 00:02:04.349 --> 00:02:08.430 it up and the walls just clad in cheap materials 00:02:08.430 --> 00:02:11.210 you know metal siding or maybe precast masonry 00:02:11.210 --> 00:02:14.539 panels Big box is literally what it is, a container 00:02:14.539 --> 00:02:17.360 built cheap to hold a ton of stuff. And the scale 00:02:17.360 --> 00:02:20.060 is just immense. These aren't your local shops. 00:02:20.139 --> 00:02:22.259 Oh, no, they're huge. In North America, you're 00:02:22.259 --> 00:02:24.379 typically looking at anywhere from 50 ,000 square 00:02:24.379 --> 00:02:27.860 feet up to maybe 200 ,000. Wow. You need that 00:02:27.860 --> 00:02:30.569 size for the economics to work. Bulk storage, 00:02:30.930 --> 00:02:33.409 high turnover, all that. But that massive size 00:02:33.409 --> 00:02:35.590 must cause headaches in other countries where 00:02:35.590 --> 00:02:37.849 land is expensive. It definitely does. And the 00:02:37.849 --> 00:02:40.030 sources point this out. You see adaptations like 00:02:40.030 --> 00:02:42.270 in the UK or parts of Asia where space is really 00:02:42.270 --> 00:02:44.289 tight. The stores often have to go vertical. 00:02:44.750 --> 00:02:46.969 Two or more floors. Which must make logistics 00:02:46.969 --> 00:02:49.569 inside way more complicated. Absolutely. Moving 00:02:49.569 --> 00:02:51.689 bulk goods between floors efficiently. That's 00:02:51.689 --> 00:02:54.650 a challenge. But it's the only way to fit that 00:02:54.650 --> 00:02:57.090 required volume onto a smaller, pricier piece 00:02:57.090 --> 00:02:59.699 of land. And if the building's the box. The land 00:02:59.699 --> 00:03:02.280 around it is all about the car, isn't it? 100%. 00:03:02.280 --> 00:03:06.620 And that's a major point of criticism from urban 00:03:06.620 --> 00:03:08.819 planners, as you can imagine. Right. These stores 00:03:08.819 --> 00:03:10.900 basically sit like islands in these enormous 00:03:10.900 --> 00:03:13.740 paved parking lots. The whole design assumes 00:03:13.740 --> 00:03:16.580 you're arriving by car. So tough luck if you're 00:03:16.580 --> 00:03:19.840 walking or using public transport. Yeah, pretty 00:03:19.840 --> 00:03:21.840 much. It makes them inconvenient or sometimes 00:03:21.840 --> 00:03:24.460 just completely inaccessible for people without 00:03:24.460 --> 00:03:27.580 cars. That dependence on vehicles is really baked 00:03:27.580 --> 00:03:30.219 into the design. It's a defining feature. OK, 00:03:30.280 --> 00:03:33.099 so how do these stores fit into the bigger picture 00:03:33.099 --> 00:03:36.479 of retail? The sources mention. Two main categories. 00:03:36.800 --> 00:03:39.319 Right, two broad types. First, you've got your 00:03:39.319 --> 00:03:41.919 general merchandise stores. Like Walmart or Target. 00:03:42.099 --> 00:03:44.099 Exactly. Selling a bit of everything, groceries, 00:03:44.400 --> 00:03:47.199 clothes, electronics, housewares. They compete 00:03:47.199 --> 00:03:50.020 on having a wide range and, you know, being a 00:03:50.020 --> 00:03:52.560 one -stop shop for lots of different needs. And 00:03:52.560 --> 00:03:54.819 the other type, the specialists. Yeah, the specialty 00:03:54.819 --> 00:03:57.520 stores. Sometimes people call them category killers. 00:03:57.879 --> 00:04:01.039 Ooh, sounds ominous. It kind of is, for smaller 00:04:01.039 --> 00:04:03.460 shops anyway. They use the same big box format, 00:04:03.599 --> 00:04:06.199 massive scale, but they focus intensely on just 00:04:06.199 --> 00:04:09.379 one sector. Think Home Depot for hardware and 00:04:09.379 --> 00:04:11.460 home improvement or Best Buy for electronics. 00:04:11.919 --> 00:04:14.500 So they just dominate that one area. They have 00:04:14.500 --> 00:04:17.180 such deep inventory and volume in that specific 00:04:17.180 --> 00:04:20.319 category that they can often drive local, smaller 00:04:20.319 --> 00:04:23.259 competitors out of business. They kill the category 00:04:23.259 --> 00:04:25.759 for others. It's really something how this basic 00:04:25.759 --> 00:04:28.620 model has spread globally, but the name for it 00:04:28.620 --> 00:04:30.600 changes all over the place. It really shows how 00:04:30.600 --> 00:04:34.860 local shopping habits and regulations shape things. 00:04:35.360 --> 00:04:37.779 Take Australia. They generally call it large 00:04:37.779 --> 00:04:40.259 format retail. Large format retail. OK. Yeah. 00:04:40.259 --> 00:04:43.240 Covering chains like Kmart Australia or Bunnings 00:04:43.240 --> 00:04:45.819 Warehouse for hardware. Mitre 10 Mega is another 00:04:45.819 --> 00:04:47.939 big one there. But then you hop over to the UK 00:04:47.939 --> 00:04:50.800 and big box store isn't really a term they use. 00:04:50.980 --> 00:04:53.819 Not commonly. No. They're more likely to say. 00:04:54.669 --> 00:04:56.730 Superstore. Usually for a really big supermarket 00:04:56.730 --> 00:04:59.089 or maybe an outlet of a chain that's just way 00:04:59.089 --> 00:05:00.949 bigger than their normal stores. And where do 00:05:00.949 --> 00:05:03.370 you find these superstores? Often clustered together 00:05:03.370 --> 00:05:06.490 in what they call retail parks, which are basically, 00:05:06.529 --> 00:05:09.329 you know, big developments centered around shared 00:05:09.329 --> 00:05:11.490 parking, sort of the British version of the power 00:05:11.490 --> 00:05:14.310 center concept. Okay. And continental Europe, 00:05:14.470 --> 00:05:17.250 especially France, where the idea kind of started. 00:05:17.769 --> 00:05:20.470 There you often hear the term hypermarket. Think 00:05:20.470 --> 00:05:23.879 Carefour or Auken. These are often even bigger. 00:05:23.980 --> 00:05:27.019 What makes them hyper? Crucially, they usually 00:05:27.019 --> 00:05:29.839 sell both the full grocery line and general merchandise, 00:05:30.160 --> 00:05:33.680 all under one enormous roof. And frequently, 00:05:33.779 --> 00:05:35.899 they're actually built into larger shopping mall 00:05:35.899 --> 00:05:39.439 complexes. The idea is total one -stop shopping. 00:05:39.579 --> 00:05:42.319 And Asia must require even more changes given 00:05:42.319 --> 00:05:44.800 the population density. For sure. Our sources 00:05:44.800 --> 00:05:46.939 talk about China, where big box grocery stores 00:05:46.939 --> 00:05:49.579 can be like three stories high. Three stories. 00:05:49.680 --> 00:05:52.420 Wow. How do people manage with carts? They have 00:05:52.420 --> 00:05:54.899 these moving sidewalk -style escalators designed 00:05:54.899 --> 00:05:57.259 specifically for shopping carts. And get this, 00:05:57.339 --> 00:05:59.360 some stores even run their own free bus fleets 00:05:59.360 --> 00:06:01.579 to bring customers in from surrounding areas. 00:06:01.879 --> 00:06:03.560 That's incredible. What about somewhere super 00:06:03.560 --> 00:06:06.199 dense like Hong Kong? Well, they're the store. 00:06:06.250 --> 00:06:08.709 Shores have to be smaller just because land is 00:06:08.709 --> 00:06:11.410 astronomically expensive. Yeah. So they compete 00:06:11.410 --> 00:06:14.370 by emphasizing that one -stop convenience, making 00:06:14.370 --> 00:06:16.189 sure they have absolutely everything you might 00:06:16.189 --> 00:06:19.310 need, and offering services like really efficient 00:06:19.310 --> 00:06:21.810 parking. which is critical there. It's amazing 00:06:21.810 --> 00:06:24.370 how adaptable that simple rectangle is, really. 00:06:24.509 --> 00:06:26.689 It really is. It bends to fit the local needs. 00:06:26.910 --> 00:06:29.730 OK, so to really get the warehouse club model 00:06:29.730 --> 00:06:32.250 like Costco, we need to understand where it came 00:06:32.250 --> 00:06:34.189 from. And that starts with wholesaling, right? 00:06:34.290 --> 00:06:37.240 The business to business world. Exactly. Wholesaling 00:06:37.240 --> 00:06:40.860 is kind of the hidden plumbing of retail. Hidden 00:06:40.860 --> 00:06:42.660 plumbing. I like that. It's basically selling 00:06:42.660 --> 00:06:45.720 goods in really large quantities in bulk. But 00:06:45.720 --> 00:06:48.040 the key is it's usually sold to other businesses, 00:06:48.199 --> 00:06:51.639 retailers, institutions, maybe restaurants, who 00:06:51.639 --> 00:06:53.319 are then going to resell it or use it themselves. 00:06:53.680 --> 00:06:56.180 Not typically to the end consumer walking in 00:06:56.180 --> 00:06:58.279 off the street. And it's all about volume and 00:06:58.279 --> 00:07:00.800 efficiency. Totally. High volume, super efficient 00:07:00.800 --> 00:07:02.680 handling. That's the name of the game. And that 00:07:02.680 --> 00:07:05.959 volume means lower prices, obviously. There's 00:07:05.959 --> 00:07:07.740 a tax advantage, too, isn't there? Especially 00:07:07.740 --> 00:07:10.079 in the U .S. Oh, yeah. The financial mechanics 00:07:10.079 --> 00:07:13.379 are key. Wholesalers buy direct from manufacturers 00:07:13.379 --> 00:07:16.959 in huge amounts so they get big discounts. Then 00:07:16.959 --> 00:07:20.120 on the tax side, in the U .S. at least, if the 00:07:20.120 --> 00:07:22.199 business buying from the wholesaler has a resale 00:07:22.199 --> 00:07:24.819 license, the wholesaler generally doesn't have 00:07:24.819 --> 00:07:27.220 to charge sales tax. Which is an immediate saving 00:07:27.220 --> 00:07:29.899 for the buyer. Right. Now, internationally... 00:07:30.040 --> 00:07:32.259 It gets way more complex. You're dealing with 00:07:32.259 --> 00:07:35.240 things like value -added tax, VAT, in Europe 00:07:35.240 --> 00:07:38.699 or China, which might be 9 % or 13 % in China. 00:07:38.860 --> 00:07:41.540 Plus, they have extra consumption taxes on luxury 00:07:41.540 --> 00:07:44.279 goods. Managing all that complexity is part of 00:07:44.279 --> 00:07:46.339 the business model. The profit comes from volume 00:07:46.339 --> 00:07:48.560 and navigating those rules. So the Warehouse 00:07:48.560 --> 00:07:50.680 Club genius was figuring out how to take that 00:07:50.680 --> 00:07:53.399 B2B model and kind of tweak it for regular shoppers. 00:07:53.540 --> 00:07:56.000 Who's the key figure here? The name you absolutely 00:07:56.000 --> 00:07:58.339 have to know is Sol Price. He's widely considered 00:07:58.339 --> 00:08:00.339 the father of... the warehouse club concept. 00:08:00.779 --> 00:08:02.740 He'd already started a members -only discount 00:08:02.740 --> 00:08:05.379 store called FedMart back in the day, but his 00:08:05.379 --> 00:08:07.379 biggest legacy is probably mentoring the guy 00:08:07.379 --> 00:08:11.019 who co -founded Costco James, Senegal. Ah, Senegal. 00:08:11.259 --> 00:08:13.920 His story is pretty amazing, starting right at 00:08:13.920 --> 00:08:16.720 the bottom. It really is. Senegal started as 00:08:16.720 --> 00:08:20.079 a grocery bagger at Sol Prices FedMart way back 00:08:20.079 --> 00:08:24.060 in 1955. Ah, bagger. Wow. Yeah. And he just worked 00:08:24.060 --> 00:08:26.779 his way up over decades, became executive VP 00:08:26.779 --> 00:08:29.500 for merchandising and operations. He didn't just 00:08:29.500 --> 00:08:31.800 learn the nuts and bolts. He absorbed Price's 00:08:31.800 --> 00:08:34.779 whole philosophy. Senegal himself said he learned 00:08:34.779 --> 00:08:37.039 everything from Saul Price. And what was that 00:08:37.039 --> 00:08:39.360 core philosophy? That you didn't have to make 00:08:39.360 --> 00:08:41.799 money by marking things up massively. You could 00:08:41.799 --> 00:08:44.639 succeed by being brutally efficient, driving 00:08:44.639 --> 00:08:47.759 massive volume, and passing savings to the customer. 00:08:48.000 --> 00:08:50.720 Well, in this case, the member. So after Price 00:08:50.720 --> 00:08:53.639 left FedMart, she started the real precursor. 00:08:53.639 --> 00:08:56.419 That's right. In 1976, he launched Price Club 00:08:56.419 --> 00:08:58.899 in San Diego. And the first location was pretty 00:08:58.899 --> 00:09:00.659 unique, wasn't it? Yeah, it was actually inside 00:09:00.659 --> 00:09:02.700 some old airplane hangars that belonged to Howard 00:09:02.700 --> 00:09:05.000 Hughes on Marina Boulevard. No way. Airplane 00:09:05.000 --> 00:09:07.299 hangars. Yep. And believe it or not, that location 00:09:07.299 --> 00:09:09.559 is still operating today. It's Costco Warehouse 00:09:09.559 --> 00:09:11.799 number 401. That's incredible. Who was Price 00:09:11.799 --> 00:09:14.529 Club aimed at initially? Primarily small business 00:09:14.529 --> 00:09:17.090 owners. You paid an annual fee and that got you 00:09:17.090 --> 00:09:19.129 access to buy bulk goods at discounted prices. 00:09:19.629 --> 00:09:22.450 The core model was there from the start. Then 00:09:22.450 --> 00:09:24.909 fast forward seven years and Senegal takes that 00:09:24.909 --> 00:09:27.710 model and runs with it himself. Exactly. Senegal 00:09:27.710 --> 00:09:29.769 teamed up with an attorney named Jeffrey Brotman 00:09:29.769 --> 00:09:32.610 and together they co -founded Costco Wholesale 00:09:32.610 --> 00:09:35.409 up in Seattle in 1983. Brotman wasn't just a 00:09:35.409 --> 00:09:38.429 lawyer, though, right? He had retail chops. Yeah, 00:09:38.549 --> 00:09:41.090 Brotman came from a Seattle retail family background. 00:09:41.350 --> 00:09:44.049 He was also, interestingly, an early investor 00:09:44.049 --> 00:09:46.809 in Starbucks. He brought a lot of business savvy 00:09:46.809 --> 00:09:49.350 and served as Costco's chairman until he passed 00:09:49.350 --> 00:09:52.090 away in 2017. So now you have these two companies, 00:09:52.250 --> 00:09:54.870 Price Club and Costco, running on basically the 00:09:54.870 --> 00:09:57.750 same playbook and both super successful. Right. 00:09:57.850 --> 00:10:00.610 Parallel tracks, very similar concepts. A merger 00:10:00.610 --> 00:10:03.070 seemed almost inevitable. Which happened in 1993. 00:10:03.799 --> 00:10:06.340 Creating Price Costco. Yep, a massive merger. 00:10:06.620 --> 00:10:09.519 But it's interesting, before that, Saul Price 00:10:09.519 --> 00:10:12.419 actually turned down an offer from Walmart to 00:10:12.419 --> 00:10:15.240 merge Price Club with Sam's Club, which was Walmart's 00:10:15.240 --> 00:10:17.299 own attempt at the warehouse model. He turned 00:10:17.299 --> 00:10:20.299 down Walmart. He did. He went with Senegal instead. 00:10:21.179 --> 00:10:23.960 The combined price Costco was instantly huge, 00:10:24.120 --> 00:10:27.960 206 locations, $16 billion in annual sales right 00:10:27.960 --> 00:10:30.320 off the bat. But the name Price Costco didn't 00:10:30.320 --> 00:10:32.700 stick around for long. No. The Price family ended 00:10:32.700 --> 00:10:35.879 up leaving the merged company in 1994. And by 00:10:35.879 --> 00:10:38.559 1997, the company officially changed its name 00:10:38.559 --> 00:10:41.820 back to just Costco Wholesale. So it really consolidated 00:10:41.820 --> 00:10:44.919 Sol Price's original vision with Senegal's operational 00:10:44.919 --> 00:10:47.519 drive. Pretty much. And that set the stage for 00:10:47.519 --> 00:10:49.820 the global giant it is today. Okay, now we're 00:10:49.820 --> 00:10:51.519 getting into the real core of it. The secret 00:10:51.519 --> 00:10:54.580 weapon. Most shops obsess over how much they 00:10:54.580 --> 00:10:57.440 mark up each item. Costco. They're playing a 00:10:57.440 --> 00:10:59.340 different game. a completely different game. 00:10:59.500 --> 00:11:01.759 They are laser focused on that annual membership 00:11:01.759 --> 00:11:03.759 fee. That's the paradox, right? How so? Because 00:11:03.759 --> 00:11:06.059 as our sources show, it's the membership fees 00:11:06.059 --> 00:11:08.000 that generate the vast majority of the company's 00:11:08.000 --> 00:11:10.519 actual profit. Okay. Define vast majority. In 00:11:10.519 --> 00:11:14.899 the 2024 fiscal year, get this, 65 .5 % of their 00:11:14.899 --> 00:11:17.360 entire net operating income came directly from 00:11:17.360 --> 00:11:22.000 membership fees. 65 .5%. Seriously. So like two 00:11:22.000 --> 00:11:24.039 thirds of their profit is locked in before they 00:11:24.039 --> 00:11:26.639 even sell a single product off the shelves. Exactly. 00:11:26.679 --> 00:11:29.000 That number is just... staggering when you think 00:11:29.000 --> 00:11:31.139 about traditional retail. Yeah. It completely 00:11:31.139 --> 00:11:33.240 flips the script on how you'd approach pricing. 00:11:33.360 --> 00:11:35.779 It changes absolutely everything. Yeah. Because 00:11:35.779 --> 00:11:39.039 they have this reliable, centralized profit engine 00:11:39.039 --> 00:11:41.799 from the numbers, they can afford to run the 00:11:41.799 --> 00:11:45.000 actual stores, the warehouses, selling the goods 00:11:45.000 --> 00:11:49.000 on incredibly thin margins, like razor thin. 00:11:49.220 --> 00:11:52.429 So the goal isn't profit per item. No. The goal 00:11:52.429 --> 00:11:55.210 shifts. It becomes about delivering enough value, 00:11:55.330 --> 00:11:59.049 low prices, unique items, good experience to 00:11:59.049 --> 00:12:01.629 make absolutely sure that Memberfer renews their 00:12:01.629 --> 00:12:03.990 subscription next year. That's the prize. And 00:12:03.990 --> 00:12:06.009 they actually have a formal rule about this low 00:12:06.009 --> 00:12:07.629 markup, right? It's kind of famous. Oh, yeah. 00:12:07.649 --> 00:12:10.269 It's legendary retail circles. The rule is ironclad. 00:12:10.710 --> 00:12:13.409 No regular item in the warehouse can be marked 00:12:13.409 --> 00:12:16.909 at more than 14 % over Costco's cost. 14%. And 00:12:16.909 --> 00:12:19.110 for their own private label brand, Kirkland Signature. 00:12:19.659 --> 00:12:21.799 The maximum markup is just slightly higher at 00:12:21.799 --> 00:12:24.299 15%. That seems incredibly low. What are their 00:12:24.299 --> 00:12:26.700 overhead costs like? Generally around 10 % of 00:12:26.700 --> 00:12:28.980 revenue, according to the sources. So when you 00:12:28.980 --> 00:12:31.740 factor that in, you see just how slim the margin 00:12:31.740 --> 00:12:34.139 is on the actual goods sold. Their overall net 00:12:34.139 --> 00:12:37.639 profit margin as a company, barely 2%. 2%, wow. 00:12:37.960 --> 00:12:40.259 They're just pure volume players then. Total 00:12:40.259 --> 00:12:43.080 volume fanatics. Driven entirely by that membership 00:12:43.080 --> 00:12:45.700 guarantee. It's a high wire act, honestly. If 00:12:45.700 --> 00:12:47.519 membership ever seriously dropped, the whole 00:12:47.519 --> 00:12:50.639 model could collapse. Clearly, it works. I mean, 00:12:50.659 --> 00:12:52.600 Costco was the third largest retailer in the 00:12:52.600 --> 00:12:55.419 world back in 2021. And they hit historical milestones, 00:12:55.639 --> 00:12:57.820 too. They were the first company ever to go from 00:12:57.820 --> 00:13:01.039 zero to $3 billion in sales in less than six 00:13:01.039 --> 00:13:04.139 years. That's just meteoric growth. And the membership 00:13:04.139 --> 00:13:07.600 numbers today reflect that scale. Hugely. As 00:13:07.600 --> 00:13:11.399 of 2024, 136 .8 million cardholders worldwide. 00:13:11.860 --> 00:13:14.360 But managing that scale means making some really 00:13:14.360 --> 00:13:17.899 tough, almost ruthless decisions. especially 00:13:17.899 --> 00:13:19.679 about what they choose not to sell. Right. You 00:13:19.679 --> 00:13:21.700 walk into a normal supermarket or big box store 00:13:21.700 --> 00:13:24.019 and you're hit with this wall of choice. 50 kinds 00:13:24.019 --> 00:13:26.740 of jam, 20 brands of laundry detergent. Costco 00:13:26.740 --> 00:13:28.679 is the opposite. That super limited selection, 00:13:28.840 --> 00:13:30.960 that's on purpose. Oh, absolutely deliberate. 00:13:31.080 --> 00:13:33.940 It's fundamental to how they operate. A typical 00:13:33.940 --> 00:13:36.940 Costco warehouse might only carry around 3 ,700 00:13:36.940 --> 00:13:40.000 distinct products. They call them SKUs, stock 00:13:40.000 --> 00:13:43.360 keeping units. OK, 3 ,700. That sounds like a 00:13:43.360 --> 00:13:45.539 lot until you compare it. Exactly. Compare that 00:13:45.539 --> 00:13:48.000 to a typical Walmart supercenter, which might 00:13:48.000 --> 00:13:50.919 have something like 140 ,000 different SKUs. 00:13:51.039 --> 00:13:55.659 Whoa. OK, 3 ,700 versus 140 ,000. That is drastically 00:13:55.659 --> 00:13:58.600 different. It's a chasm. Costco might only carry, 00:13:58.659 --> 00:14:01.759 say, one or two types of ketchup instead of 20. 00:14:02.080 --> 00:14:04.779 And by limiting that choice so severely, they 00:14:04.779 --> 00:14:07.399 can buy absolutely massive quantities of those 00:14:07.399 --> 00:14:10.039 few specific items they do stock. Which gives 00:14:10.039 --> 00:14:12.240 them incredible bargaining power with the manufacturers. 00:14:12.879 --> 00:14:15.580 Immense power. Costco essentially becomes the 00:14:15.580 --> 00:14:17.679 gatekeeper, the arbiter, as one source put it, 00:14:17.720 --> 00:14:20.080 between the manufacturer and millions of consumers. 00:14:20.340 --> 00:14:22.279 So manufacturers have to play by Costco's rules. 00:14:22.600 --> 00:14:24.639 Pretty much. If you want your product in Costco, 00:14:24.759 --> 00:14:26.779 you have to package it in the large bulk sizes 00:14:26.779 --> 00:14:29.029 they demand. And critically, you often have to 00:14:29.029 --> 00:14:31.850 prepackage it on pallets ready for easy forklift 00:14:31.850 --> 00:14:34.490 deployment straight onto the sales floor. Minimizes 00:14:34.490 --> 00:14:36.970 their handling costs. Exactly. It turns their 00:14:36.970 --> 00:14:39.230 warehouse floor almost into an extension of the 00:14:39.230 --> 00:14:41.590 distribution center. The reward for the manufacturer, 00:14:41.889 --> 00:14:44.409 if they comply. Potential access to international 00:14:44.409 --> 00:14:46.590 distribution through Costco's massive global 00:14:46.590 --> 00:14:49.620 network. But you follow their rules. That constant 00:14:49.620 --> 00:14:52.500 rotation of some items, especially the non -essentials, 00:14:52.500 --> 00:14:54.480 creates that feeling. Senegal apparently called 00:14:54.480 --> 00:14:56.340 it the treasure hunt. Yeah, there's a stroke 00:14:56.340 --> 00:14:58.919 of marketing genius baked right into the operations. 00:14:59.899 --> 00:15:02.379 They deliberately bring in limited quantities 00:15:02.379 --> 00:15:04.559 of certain items, maybe fancy kitchen gadgets, 00:15:04.700 --> 00:15:07.840 seasonal clothing, outdoor gear, even furniture 00:15:07.840 --> 00:15:09.980 or electronics. And when it's gone, it's gone. 00:15:10.159 --> 00:15:12.929 Creates urgency. Totally. It creates this sense 00:15:12.929 --> 00:15:16.029 of urgency, as Senegal put it. You see something 00:15:16.029 --> 00:15:18.330 interesting, maybe a really good deal. You feel 00:15:18.330 --> 00:15:20.490 like you have to buy it now because if you wait, 00:15:20.549 --> 00:15:22.049 it probably won't be there on your next trip. 00:15:22.190 --> 00:15:25.289 It encourages impulse buys and drives up the 00:15:25.289 --> 00:15:27.950 average amount people spend per visit. Speaking 00:15:27.950 --> 00:15:30.169 of urgency and membership, they made some pretty 00:15:30.169 --> 00:15:33.509 big changes recently in September 2024. Seems 00:15:33.509 --> 00:15:35.149 like they're doubling down on that membership 00:15:35.149 --> 00:15:38.210 model. They definitely are. The changes hit on 00:15:38.210 --> 00:15:41.659 two fronts. Price and access. First, they bumped 00:15:41.659 --> 00:15:44.259 up the membership fees. How much? The basic gold 00:15:44.259 --> 00:15:46.259 star and the business memberships went up five 00:15:46.259 --> 00:15:50.100 bucks from 60 to 65 dollars a year. And the higher 00:15:50.100 --> 00:15:53.139 tier executive membership went from 120 to 130 00:15:53.139 --> 00:15:55.600 dollars. OK, not huge jumps, but noticeable. 00:15:55.820 --> 00:15:58.500 What about access? This got more attention. They 00:15:58.500 --> 00:16:00.820 started rolling out barcode scanners at the entrances. 00:16:01.100 --> 00:16:04.000 The explicit goal is to crack down on people 00:16:04.000 --> 00:16:06.840 sharing membership cards. Ah, the non -member 00:16:06.840 --> 00:16:09.340 sneaking in with a friend's card. Right. And 00:16:09.340 --> 00:16:11.840 maybe the most talked about change? They restricted 00:16:11.840 --> 00:16:14.639 access to the food courts. Now you officially 00:16:14.639 --> 00:16:16.919 need to be a member to buy that famous hot dog. 00:16:17.159 --> 00:16:20.000 Wow. End of an era for some people just popping 00:16:20.000 --> 00:16:21.860 in for lunch. They're also adding perks for the 00:16:21.860 --> 00:16:23.679 higher paying members, right? Yeah. That's key 00:16:23.679 --> 00:16:25.700 to justifying that executive membership price 00:16:25.700 --> 00:16:28.740 hike. They announced plans starting June 2025 00:16:28.740 --> 00:16:31.100 in some busy locations. They mentioned Manhattan 00:16:31.100 --> 00:16:33.820 specifically to offer exclusive shopping hours 00:16:33.820 --> 00:16:36.600 just for executive members, like getting in at 00:16:36.600 --> 00:16:38.960 9 a .m. before the main crowds. So paying more 00:16:38.960 --> 00:16:41.779 gets you a less crowded shopping trip. Exactly. 00:16:41.799 --> 00:16:43.980 It's a tangible benefit, especially in high traffic 00:16:43.980 --> 00:16:46.279 stores. It reinforces the value of that higher 00:16:46.279 --> 00:16:49.240 fee and helps lock in that crucial high margin 00:16:49.240 --> 00:16:51.120 membership revenue. All right. Let's talk about 00:16:51.120 --> 00:16:53.759 probably the most visible symbol of Costco's 00:16:53.759 --> 00:16:57.659 power besides the giant building itself. Kirkland 00:16:57.659 --> 00:17:00.320 Signature, their own brand. It's not just a store 00:17:00.320 --> 00:17:02.720 brand. It's huge. It doesn't even begin to cover 00:17:02.720 --> 00:17:05.160 it. Kirkland Signature, they launched it back 00:17:05.160 --> 00:17:07.799 in 95, named it after their original headquarters 00:17:07.799 --> 00:17:10.920 city in Washington state. It is an absolute behemoth. 00:17:11.019 --> 00:17:13.779 Okay, give us the numbers. In 2024, Kirkland 00:17:13.779 --> 00:17:17.059 Signature alone recorded $86 billion in revenue. 00:17:17.480 --> 00:17:20.079 $86 billion? Just the store brand? Just the store 00:17:20.079 --> 00:17:22.240 brand. To put that in perspective for you, that 00:17:22.240 --> 00:17:25.579 single private label brings in more money. than 00:17:25.579 --> 00:17:28.160 the entire annual revenue of a global consumer 00:17:28.160 --> 00:17:31.440 goods giant like Procter & Gamble. That is absolutely 00:17:31.440 --> 00:17:33.319 mind -blowing. How did they build that level 00:17:33.319 --> 00:17:36.359 of trust? Usually, store brands are seen as maybe 00:17:36.359 --> 00:17:38.960 a bit cheaper, maybe lower quality. Well, their 00:17:38.960 --> 00:17:42.640 strategy was multi -pronged. First, the core 00:17:42.640 --> 00:17:46.440 promise, deliver quality comparable to the national 00:17:46.440 --> 00:17:49.039 brands, but at a noticeable discount. Second, 00:17:49.240 --> 00:17:51.440 the packaging is often very simple, minimalist. 00:17:51.599 --> 00:17:54.420 It conveys value. Okay. But the really clever 00:17:54.420 --> 00:17:57.519 part, especially early on, was how they overcame 00:17:57.519 --> 00:18:00.539 that initial skepticism people have about private 00:18:00.539 --> 00:18:03.160 labels. They used co -branding. Co -branding, 00:18:03.160 --> 00:18:04.960 like putting two names on the package. Exactly. 00:18:05.000 --> 00:18:07.500 They'd partner with well -known, trusted manufacturers. 00:18:07.880 --> 00:18:10.299 So you'd see Kirkland Signature Coffee Beans, 00:18:10.339 --> 00:18:12.880 but it would also say Custom Roasted by Starbucks. 00:18:13.240 --> 00:18:15.759 Or Kirkland Signature Batteries that also said 00:18:15.759 --> 00:18:18.480 Duracell. Kirkland Signature Jelly Beans by Jelly 00:18:18.480 --> 00:18:21.190 Belly. Ah, so they borrowed the credibility of 00:18:21.190 --> 00:18:23.430 the established brand. Precisely. It created 00:18:23.430 --> 00:18:25.490 this halo effect. People thought, OK, if Starbucks 00:18:25.490 --> 00:18:27.730 is making their coffee, it must be good. And 00:18:27.730 --> 00:18:30.170 that trust then extended across the entire Kirkland 00:18:30.170 --> 00:18:32.490 signature line, even for products that weren't 00:18:32.490 --> 00:18:34.890 co -branded. And they must guard that brand reputation 00:18:34.890 --> 00:18:38.309 fiercely. Absolutely. The sources say the quality 00:18:38.309 --> 00:18:40.660 control goes right to the top. Apparently, the 00:18:40.660 --> 00:18:43.539 CEO personally signs off on every single new 00:18:43.539 --> 00:18:46.160 Kirkland signature product before it hits the 00:18:46.160 --> 00:18:50.039 shelves. The CEO. Yeah. They simply cannot afford 00:18:50.039 --> 00:18:53.039 to have a dud product tarnish the image of that 00:18:53.039 --> 00:18:56.079 $86 billion brand. Beyond Kirkland, the sheer 00:18:56.079 --> 00:18:58.859 variety of stuff you find in Costco is just. 00:18:59.629 --> 00:19:01.769 Wild sometimes. You go in for paper towels and 00:19:01.769 --> 00:19:03.849 milk and suddenly you're looking at, I don't 00:19:03.849 --> 00:19:05.869 know, a diamond ring or a kayak. It's definitely 00:19:05.869 --> 00:19:07.750 part of the experience, that unexpected merchandise. 00:19:07.930 --> 00:19:10.609 You'll find the basics, sure, but then also things 00:19:10.609 --> 00:19:13.589 like coffins. Coffins, seriously. Yep, coffins, 00:19:13.690 --> 00:19:16.369 solar panel systems, hot tubs, high -end wine, 00:19:16.470 --> 00:19:19.130 expensive cheeses. And recently, a really big 00:19:19.130 --> 00:19:23.230 one, gold and platinum bars. Boolean. Ah, yes, 00:19:23.410 --> 00:19:25.569 the gold bars made headlines. How does that work? 00:19:25.710 --> 00:19:27.589 Are they making money on that? It's fascinating. 00:19:28.000 --> 00:19:30.140 They often sell the gold very close to the current 00:19:30.140 --> 00:19:32.380 market spot price, sometimes maybe just a 2 % 00:19:32.380 --> 00:19:35.339 markup. That's basically nothing. Right. And 00:19:35.339 --> 00:19:37.259 think about the executive members. They get 2 00:19:37.259 --> 00:19:41.339 % cash back on most purchases. So for them, buying 00:19:41.339 --> 00:19:43.700 gold at Costco is almost like getting it at cost. 00:19:43.819 --> 00:19:46.579 It functions as an incredible loss leader. A 00:19:46.579 --> 00:19:49.599 loss leader. It drives membership signups and 00:19:49.599 --> 00:19:52.240 renewals. People might literally join or upgrade 00:19:52.240 --> 00:19:54.480 just to buy the gold. It makes the membership 00:19:54.480 --> 00:19:57.000 fee feel like an investment that pays for itself, 00:19:57.220 --> 00:19:59.920 which is incredibly powerful for keeping people 00:19:59.920 --> 00:20:02.259 locked into the ecosystem. Okay, that makes sense. 00:20:02.460 --> 00:20:04.759 What about alcohol? That's a huge category for 00:20:04.759 --> 00:20:06.700 them, but it seems like it's always complicated 00:20:06.700 --> 00:20:09.799 by local laws. Oh, the regulations around alcohol 00:20:09.799 --> 00:20:11.859 are a constant headache for them, especially 00:20:11.859 --> 00:20:14.460 in the U .S. It varies wildly state by state, 00:20:14.519 --> 00:20:17.390 even county by county sometimes. Like what? Well, 00:20:17.450 --> 00:20:20.109 in some states, like Texas, the law says the 00:20:20.109 --> 00:20:22.190 liquor store part has to be technically a separate 00:20:22.190 --> 00:20:24.750 business, different entrance, maybe a wall separating 00:20:24.750 --> 00:20:27.410 it, its own staff. In other places, they can 00:20:27.410 --> 00:20:29.670 sell beer and wine right in the main warehouse 00:20:29.670 --> 00:20:32.250 aisles. And internationally. Even more varied. 00:20:32.509 --> 00:20:34.890 Like in West Auckland, New Zealand, there's a 00:20:34.890 --> 00:20:37.470 local trust that has a monopoly on liquor sales. 00:20:38.140 --> 00:20:40.319 So Costco isn't allowed to sell any alcohol there 00:20:40.319 --> 00:20:42.220 at all. It's a real patchwork they have to navigate. 00:20:42.420 --> 00:20:44.240 But it's clearly important enough for them to 00:20:44.240 --> 00:20:47.059 fight for. Didn't they spend a lot of money changing 00:20:47.059 --> 00:20:49.519 liquor laws in Washington state? They sure did. 00:20:49.880 --> 00:20:53.700 They poured over $22 million into a state initiative, 00:20:53.900 --> 00:20:58.000 Initiative 1183, back around 2011. And it passed, 00:20:58.240 --> 00:21:00.779 ending the state's monopoly on liquor sales and 00:21:00.779 --> 00:21:03.240 distribution. So yeah, they see it as a critical 00:21:03.240 --> 00:21:05.559 category. And they even have special staff for 00:21:05.559 --> 00:21:07.940 wine. In some of their warehouses with the biggest 00:21:07.940 --> 00:21:10.240 wine selections, yeah. They employ what they 00:21:10.240 --> 00:21:12.839 call wine stewards, maybe about 30 or so across 00:21:12.839 --> 00:21:16.059 the U .S. Their job is specifically to help members 00:21:16.059 --> 00:21:19.380 choose wines, offer advice. It elevates the service 00:21:19.380 --> 00:21:21.799 for that key category. Now, shifting gears slightly, 00:21:21.980 --> 00:21:23.880 there was a big dust up recently with the book 00:21:23.880 --> 00:21:25.880 publishing world. Costco wanted to change how 00:21:25.880 --> 00:21:27.859 they sell books. Yeah, this really highlighted 00:21:27.859 --> 00:21:30.460 Costco's relentless focus on operational efficiency 00:21:30.460 --> 00:21:34.079 and cost cutting. For decades, Costco was a major 00:21:34.079 --> 00:21:36.500 player for publishers. They sold huge volumes 00:21:36.500 --> 00:21:38.960 of books. Right. You always see those tables 00:21:38.960 --> 00:21:41.420 near the front. Exactly. But from Costco's perspective, 00:21:41.640 --> 00:21:43.640 stocking books is surprisingly labor intensive. 00:21:44.160 --> 00:21:46.819 New titles arrive. They had to be unpacked and 00:21:46.819 --> 00:21:49.599 manually displayed, usually every Tuesday. And 00:21:49.599 --> 00:21:52.180 crucially, any books that don't sell have to 00:21:52.180 --> 00:21:54.440 be gathered up by hand and returned to the publisher 00:21:54.440 --> 00:21:57.480 for credit. That's a lot of handling cost. So 00:21:57.480 --> 00:21:59.940 what was their proposed solution? was pretty 00:21:59.940 --> 00:22:04.039 drastic. The plan, announced in 2024, was to 00:22:04.039 --> 00:22:06.559 stop selling books year -round. They wanted to 00:22:06.559 --> 00:22:09.480 make books a seasonal category only. available 00:22:09.480 --> 00:22:11.859 just during the main four -month holiday shopping 00:22:11.859 --> 00:22:15.640 period starting in January 2025. Wow, just holidays. 00:22:15.740 --> 00:22:17.759 That must have panicked the publishers. Oh, it 00:22:17.759 --> 00:22:19.980 sent shockwaves through the industry. Publishers 00:22:19.980 --> 00:22:22.660 rely on that steady year -round volume and the 00:22:22.660 --> 00:22:24.839 discoverability factor of people browsing in 00:22:24.839 --> 00:22:27.319 Costco. Losing that shelf space would have been 00:22:27.319 --> 00:22:29.259 a huge blow. So what happened? Did they go through 00:22:29.259 --> 00:22:31.759 with it? Thankfully for the publishers, a compromise 00:22:31.759 --> 00:22:35.440 was reached later in 2024. Costco agreed to keep 00:22:35.440 --> 00:22:37.940 year -round book sections, but only in about 00:22:37.940 --> 00:22:41.619 100 of their 600 or so mainland U .S. warehouses. 00:22:41.779 --> 00:22:44.880 So still a big cutback, but not a total elimination. 00:22:45.500 --> 00:22:48.440 Right. But it clearly shows how ruthless they 00:22:48.440 --> 00:22:51.480 are in evaluating whether a category pulls its 00:22:51.480 --> 00:22:54.019 weight in terms of profit versus labor costs. 00:22:54.319 --> 00:22:56.539 Nothing is sacred if the numbers don't work. 00:22:56.890 --> 00:22:59.009 And beyond just selling stuff, the warehouses 00:22:59.009 --> 00:23:01.609 often have other services built right in, don't 00:23:01.609 --> 00:23:03.349 they? Yeah, they act as kind of integrated service 00:23:03.349 --> 00:23:06.210 hubs. You've got the gas stations outside, which 00:23:06.210 --> 00:23:09.230 are a huge draw. Inside, you often find pharmacies, 00:23:09.230 --> 00:23:12.309 hearing aid centers. Hearing aids, really? Yep, 00:23:12.390 --> 00:23:14.630 and optometry centers, too. Costco Optical is 00:23:14.630 --> 00:23:16.890 actually the fifth largest optical retailer in 00:23:16.890 --> 00:23:19.789 the entire U .S. Fifth largest, wow. And they 00:23:19.789 --> 00:23:22.269 also offer a free concierge service for electronics 00:23:22.269 --> 00:23:25.150 you buy there. Basically, tech support to help 00:23:25.150 --> 00:23:27.970 you set things up, troubleshoot problems. It 00:23:27.970 --> 00:23:30.009 helps reduce returns and keeps customers happy 00:23:30.009 --> 00:23:32.309 with those sometimes complex purchases. Okay, 00:23:32.369 --> 00:23:34.230 we have to talk about the food court. Maybe the 00:23:34.230 --> 00:23:36.650 most iconic part of the Costco experience for 00:23:36.650 --> 00:23:39.549 many people. The ultimate loss leader. Absolutely, 00:23:39.690 --> 00:23:42.109 the ultimate loss leader. And it really boils 00:23:42.109 --> 00:23:46.029 down to one specific item. The $1 .50 hot dog 00:23:46.029 --> 00:23:49.210 and soda combo. $1 .50? Hasn't it been that price 00:23:49.210 --> 00:23:53.819 forever? Since 1985. It has not changed. And 00:23:53.819 --> 00:23:56.880 the commitment to keeping that price is legendary. 00:23:57.140 --> 00:23:59.440 Isn't there a famous story about that? Yes. The 00:23:59.440 --> 00:24:01.599 current CEO, Craig Jelinek, apparently went to 00:24:01.599 --> 00:24:03.819 co -founder Jim Senegal years ago, suggesting 00:24:03.819 --> 00:24:06.819 they raise the price. Senegal's response reportedly 00:24:06.819 --> 00:24:10.000 was, if you raise the effing hot dog, I will 00:24:10.000 --> 00:24:13.099 kill you. Figure it out. Okay. Wow. He was serious. 00:24:13.720 --> 00:24:16.160 It sounds funny, but it really shows how much 00:24:16.160 --> 00:24:18.240 that price point means symbolically, doesn't 00:24:18.240 --> 00:24:20.420 it? Totally. It's not about the money they make 00:24:20.420 --> 00:24:22.759 or lose on the hot dog itself. It's a symbol 00:24:22.759 --> 00:24:25.660 of the value Costco provides. It tells members, 00:24:25.839 --> 00:24:28.359 we're relentlessly focused on keeping prices 00:24:28.359 --> 00:24:31.759 low for you. Raising it, even by 50 cents, would 00:24:31.759 --> 00:24:34.859 break that trust. It's worth way more as marketing 00:24:34.859 --> 00:24:36.819 and loyalty building than the extra revenue would 00:24:36.819 --> 00:24:39.900 be. And they apply similar thinking to the rotisserie 00:24:39.900 --> 00:24:42.180 chicken, right? Another huge draw. Oh yeah, the 00:24:42.180 --> 00:24:44.079 $4 .99 rotisserie chicken. That's another... 00:24:44.250 --> 00:24:47.049 major traffic driver. People literally plan trips 00:24:47.049 --> 00:24:49.109 around picking one up. And they've gone to extreme 00:24:49.109 --> 00:24:51.509 lengths to keep that price low, too. Extreme 00:24:51.509 --> 00:24:54.990 lengths is right. To guarantee that $4 .99 price 00:24:54.990 --> 00:24:58.269 and ensure a consistent supply, Costco actually 00:24:58.269 --> 00:25:01.349 moved into vertical integration. They built and 00:25:01.349 --> 00:25:03.930 now operate their own massive chicken processing 00:25:03.930 --> 00:25:06.410 plant in Nebraska. They own the chicken factory. 00:25:06.690 --> 00:25:09.450 They own the whole supply chain. Basically, from 00:25:09.450 --> 00:25:11.609 the farm to the spit. It gives them complete 00:25:11.609 --> 00:25:14.490 control over costs and quality, all to protect 00:25:14.490 --> 00:25:17.490 that crucial $4 .99 price point. But the food 00:25:17.490 --> 00:25:19.910 court menu isn't totally set in stone, right? 00:25:19.990 --> 00:25:21.930 Even if the hot dog is untouchable. There have 00:25:21.930 --> 00:25:23.690 been changes. Oh, yeah. There have been significant 00:25:23.690 --> 00:25:26.930 shifts. Back in 2013, they famously switched 00:25:26.930 --> 00:25:29.349 all their fountain drinks from Coca -Cola products 00:25:29.349 --> 00:25:32.170 to Pepsi. Why? Because Coke raised its prices, 00:25:32.250 --> 00:25:34.730 and Costco refused to pass that cost onto the 00:25:34.730 --> 00:25:37.980 $1 .50 combo. So they switched. Interestingly, 00:25:38.059 --> 00:25:39.839 though, there are reports they're planning to 00:25:39.839 --> 00:25:42.380 switch back to Coke starting in 2025. We'll see 00:25:42.380 --> 00:25:45.240 if that happens. Hmm. OK. Any other menu casualties? 00:25:45.740 --> 00:25:47.740 They've tried things that didn't stick. They 00:25:47.740 --> 00:25:50.099 tested a cheeseburger for a while around 2017, 00:25:50.140 --> 00:25:52.319 but apparently it didn't sell well enough or 00:25:52.319 --> 00:25:54.279 was too slow to make. So they cut it by 2020. 00:25:54.460 --> 00:25:56.759 And the menu changes depending on where you are 00:25:56.759 --> 00:25:59.700 in the world, too. Naturally. You'll find poutine 00:25:59.700 --> 00:26:02.640 on the menu in Canada and France. In warehouses 00:26:02.640 --> 00:26:04.859 in Korea or Mexico, you might find things like 00:26:04.859 --> 00:26:08.099 a bulgogi bake or pizza with al pastor toppings. 00:26:08.599 --> 00:26:10.980 They adapt to local tastes, even in the food 00:26:10.980 --> 00:26:13.680 court. So we talked about the basic shoebox design, 00:26:13.819 --> 00:26:16.460 but even within that, there's a pretty big range 00:26:16.460 --> 00:26:18.700 in the actual size and even the type of Costco 00:26:18.700 --> 00:26:21.279 stores out there. What are the extremes? Well, 00:26:21.299 --> 00:26:22.920 the heavyweight champion, the world's largest 00:26:22.920 --> 00:26:25.859 Costco, is in Salt Lake City, Utah. It's a massive 00:26:25.859 --> 00:26:29.299 235 ,000 square feet. Whoa, why so big? It's 00:26:29.299 --> 00:26:31.839 actually a hybrid store. It combines a traditional 00:26:31.839 --> 00:26:34.319 Costco warehouse with one of their specialized 00:26:34.319 --> 00:26:36.700 business center concepts under one roof. Okay, 00:26:36.799 --> 00:26:39.240 and the smallest? The smallest one still operating 00:26:39.240 --> 00:26:43.259 is way up in Juneau, Alaska. It's about 76 ,700 00:26:43.259 --> 00:26:45.980 square feet. Why so small? It's basically a leftover 00:26:45.980 --> 00:26:48.819 from an experiment they tried back in 1993 with 00:26:48.819 --> 00:26:51.490 smaller format stores. Generally, they found 00:26:51.490 --> 00:26:53.150 that size didn't really work well with their 00:26:53.150 --> 00:26:56.210 high volume pallet based logistics model. So 00:26:56.210 --> 00:26:58.230 they stopped building them. But the Juno one 00:26:58.230 --> 00:27:00.390 remains. You mentioned the business centers. 00:27:00.490 --> 00:27:02.349 What's the deal with those? Are they different 00:27:02.349 --> 00:27:04.650 from regular Costco's? They are different. Yeah. 00:27:04.970 --> 00:27:07.849 They're designed specifically to cater more to 00:27:07.849 --> 00:27:10.869 that original price club market, small, medium 00:27:10.869 --> 00:27:13.950 -sized businesses. So like restaurants, offices? 00:27:14.450 --> 00:27:17.250 Exactly. Any Costco member can shop there. But 00:27:17.250 --> 00:27:19.950 the product mix is heavily skewed towards business 00:27:19.950 --> 00:27:23.509 needs. Over 70 % of the items in a business center 00:27:23.509 --> 00:27:25.809 are things you won't find in a regular Costco 00:27:25.809 --> 00:27:28.509 warehouse. Like what kind of stuff? Think giant 00:27:28.509 --> 00:27:31.400 containers of cooking oil. Huge packs of disposable 00:27:31.400 --> 00:27:33.960 restaurant supplies, commercial cleaning products, 00:27:34.200 --> 00:27:36.759 office furniture, maybe even industrial kitchen 00:27:36.759 --> 00:27:39.119 equipment. They also have features businesses 00:27:39.119 --> 00:27:42.420 need, like dedicated truck parking and bulk delivery 00:27:42.420 --> 00:27:45.400 services, although they do charge extra for delivery 00:27:45.400 --> 00:27:48.779 on smaller orders under $250. So sticking to 00:27:48.779 --> 00:27:51.099 the big box idea mostly, but they are trying 00:27:51.099 --> 00:27:53.079 some newer concepts for the physical buildings. 00:27:53.180 --> 00:27:55.240 I read something about a mixed -use development. 00:27:55.660 --> 00:27:57.480 Yeah, this one is really interesting and potentially 00:27:57.480 --> 00:28:00.119 groundbreaking for this type of retailer. Down 00:28:00.119 --> 00:28:02.319 in South Los Angeles, they're building the first 00:28:02.319 --> 00:28:05.160 -ever project of its kind in the U .S. What is 00:28:05.160 --> 00:28:08.779 it? It's a Costco warehouse. A big one, 185 ,000 00:28:08.779 --> 00:28:11.539 square feet, but built underneath 800 rental 00:28:11.539 --> 00:28:14.200 apartments. Apartments on top of a Costco. Exactly. 00:28:14.339 --> 00:28:17.839 And significantly, about 23 % of those apartments 00:28:17.839 --> 00:28:21.039 are specifically designated as low -income housing. 00:28:21.259 --> 00:28:24.339 Wow. That seems like a direct response to that 00:28:24.339 --> 00:28:27.180 criticism about big box stores being anti -urban, 00:28:27.180 --> 00:28:30.180 car -dependent islands. It really does. It integrates 00:28:30.180 --> 00:28:33.220 the retail directly into a residential, higher 00:28:33.220 --> 00:28:35.720 -density urban setting. It'll be fascinating 00:28:35.720 --> 00:28:38.019 to see if they try more projects like this. It 00:28:38.019 --> 00:28:40.180 challenges the whole traditional big box footprint. 00:28:40.539 --> 00:28:42.420 Okay, let's shift to the inside, the culture. 00:28:42.759 --> 00:28:46.299 The sources really emphasize the founder, Senegal's, 00:28:46.380 --> 00:28:50.240 approach to employees. Almost humanitarian. Which 00:28:50.240 --> 00:28:52.440 seems odd for such a low -margin business. It 00:28:52.440 --> 00:28:54.259 does seem counterintuitive, but it was absolutely 00:28:54.259 --> 00:28:56.720 core to his philosophy. His belief was simple. 00:28:56.920 --> 00:28:59.140 Treat your employees well, and they will, in 00:28:59.140 --> 00:29:01.839 turn, provide excellent service to your customers, 00:29:02.000 --> 00:29:03.839 the members. And that translates into actual 00:29:03.839 --> 00:29:06.740 benefits. Big time. Compared to retail industry 00:29:06.740 --> 00:29:09.420 norms, Costco's benefits are exceptional. For 00:29:09.420 --> 00:29:11.900 instance, something like over 90 % of their U 00:29:11.900 --> 00:29:14.000 .S. employees qualify for company -sponsored 00:29:14.000 --> 00:29:16.460 health insurance. 90%. What's typical in retail? 00:29:16.779 --> 00:29:20.339 The industry average is often under 60%. So it's 00:29:20.339 --> 00:29:22.940 a huge difference. And that must impact employee 00:29:22.940 --> 00:29:26.779 loyalty. Massively. Costco consistently has some 00:29:26.779 --> 00:29:28.700 of the lowest employee turnover rates in the 00:29:28.700 --> 00:29:32.619 entire retail sector. One source from 2006 cited 00:29:32.619 --> 00:29:35.920 just 17 percent turnover overall and, incredibly, 00:29:36.160 --> 00:29:38.740 only 6 percent for employees who had been there 00:29:38.740 --> 00:29:41.480 for over a year. Six percent. That's basically 00:29:41.480 --> 00:29:43.900 unheard of in retail. It is. And think about 00:29:43.900 --> 00:29:46.240 the savings not constantly having to hire and 00:29:46.240 --> 00:29:49.640 train new people is a huge cost advantage, even 00:29:49.640 --> 00:29:51.680 if you're paying more in wages and benefits up 00:29:51.680 --> 00:29:54.160 front. And this culture extends to promoting 00:29:54.160 --> 00:29:56.539 from within. We mentioned the current CEO started. 00:29:56.640 --> 00:29:58.859 It's a forklift driver. Yeah. Ron Vakris, the 00:29:58.859 --> 00:30:01.500 current CEO, started at Price Club on a forklift 00:30:01.500 --> 00:30:04.259 back in 1982. That's very typical. They really 00:30:04.259 --> 00:30:06.140 emphasize promoting people up through the ranks. 00:30:06.220 --> 00:30:08.059 Even the headquarters seems different. No fancy 00:30:08.059 --> 00:30:11.599 corner offices. Nope. The headquarters in Iskawa, 00:30:11.740 --> 00:30:14.960 Washington. Apparently even the CEO works out 00:30:14.960 --> 00:30:17.660 of a cubicle, just like the other 7 ,000 or so 00:30:17.660 --> 00:30:20.400 employees there. Maybe a slightly bigger cubicle, 00:30:20.400 --> 00:30:23.240 but still. And there's a strong emphasis on executives 00:30:23.240 --> 00:30:25.339 spending most of their time out in the field, 00:30:25.420 --> 00:30:27.980 visiting the warehouses, staying connected to 00:30:27.980 --> 00:30:30.099 the actual operations, not just sitting in meetings 00:30:30.099 --> 00:30:33.099 at HQ. But this high -benefit, high -wage model 00:30:33.099 --> 00:30:35.420 must be under constant pressure, especially from 00:30:35.420 --> 00:30:38.099 Wall Street, maybe. And hasn't stopped all union 00:30:38.099 --> 00:30:40.799 activity, has it? No, that tension is definitely 00:30:40.799 --> 00:30:43.480 always present. While unionization drives have 00:30:43.480 --> 00:30:45.759 been relatively rare at Costco compared to other 00:30:45.759 --> 00:30:48.339 retailers, they do happen, and sometimes they're 00:30:48.339 --> 00:30:50.980 successful. Like in Norfolk, Virginia, in late 00:30:50.980 --> 00:30:54.319 2023, workers there voted to unionize, which 00:30:54.319 --> 00:30:56.910 was the first big organizing win in like... two 00:30:56.910 --> 00:30:59.190 decades. And the existing union members? The 00:30:59.190 --> 00:31:01.829 Teamsters union represents a significant chunk 00:31:01.829 --> 00:31:05.329 of Costco workers, over 18 ,000 of them. And 00:31:05.329 --> 00:31:07.750 they've shown they're willing to push back. In 00:31:07.750 --> 00:31:10.490 early 2025, their members voted overwhelmingly 00:31:10.490 --> 00:31:13.470 to authorize a strike if needed, demanding better 00:31:13.470 --> 00:31:16.650 wages and benefits, especially in light of Costco's 00:31:16.650 --> 00:31:19.549 big profits and those recent membership fee hikes. 00:31:19.670 --> 00:31:22.410 So it's a balancing act. Generous policies, but 00:31:22.410 --> 00:31:24.529 still facing labor pressure in a tough industry. 00:31:24.890 --> 00:31:27.079 Always a balancing act. especially when you're 00:31:27.079 --> 00:31:28.640 trying to maintain those low prices and high 00:31:28.640 --> 00:31:31.700 volumes. One last operational detail before we 00:31:31.700 --> 00:31:34.420 get to broader criticisms. The person checking 00:31:34.420 --> 00:31:37.559 receipts at the exit, what's their actual purpose? 00:31:37.839 --> 00:31:40.680 Is it just about stopping theft? That's what 00:31:40.680 --> 00:31:43.259 most people assume, but theft prevention is actually 00:31:43.259 --> 00:31:46.180 secondary. Their primary role, according to Costco, 00:31:46.400 --> 00:31:48.380 is customer service and accuracy verification. 00:31:48.759 --> 00:31:50.720 Oh, so. They're checking to make sure you weren't 00:31:50.720 --> 00:31:53.200 overcharged or double scanned for anything. They 00:31:53.200 --> 00:31:55.240 check that items needing a voucher, like maybe 00:31:55.240 --> 00:31:58.220 tires or batteries, were run up correctly. And 00:31:58.220 --> 00:32:00.900 importantly, they're looking for big, bulky items 00:32:00.900 --> 00:32:03.819 on the bottom rack of your cart stuff. The cashier 00:32:03.819 --> 00:32:06.609 might have missed scanning. Ah, the bottom of 00:32:06.609 --> 00:32:09.089 basket check. Exactly. It's really an efficiency 00:32:09.089 --> 00:32:10.829 and accuracy check that they've had in place 00:32:10.829 --> 00:32:12.710 since the very first store opened back in 83. 00:32:13.289 --> 00:32:15.930 Catching errors saves money and hassle later. 00:32:16.190 --> 00:32:18.230 Okay. Finally, let's touch on the criticisms. 00:32:18.549 --> 00:32:21.789 The big box model, Costco included, faces some 00:32:21.789 --> 00:32:24.269 significant pushback on societal and environmental 00:32:24.269 --> 00:32:26.450 grounds. Yeah. These are unavoidable consequences 00:32:26.450 --> 00:32:29.210 of the scale and format. As we mentioned earlier, 00:32:29.470 --> 00:32:31.650 urban planners are often the most vocal critics. 00:32:31.890 --> 00:32:33.950 They argue the whole model is just fundamentally 00:32:33.950 --> 00:32:36.049 unsustainable. Because of the car dependence? 00:32:36.809 --> 00:32:39.490 Primarily, yes. The reliance on huge parking 00:32:39.490 --> 00:32:42.650 lots, the location near highways. It actively 00:32:42.650 --> 00:32:45.089 discourages walking, biking, or public transit 00:32:45.089 --> 00:32:48.410 use. It contributes to sprawl and can make essential 00:32:48.410 --> 00:32:51.769 goods inaccessible for people without cars. It's 00:32:51.769 --> 00:32:54.210 seen as a failure of good urban design principles. 00:32:54.920 --> 00:32:57.079 Then there are ethical concerns, especially around 00:32:57.079 --> 00:32:59.299 sourcing, given the massive volumes they buy. 00:32:59.480 --> 00:33:01.920 Animal welfare seems to be a recurring issue. 00:33:02.180 --> 00:33:04.579 It definitely is. And Costco has made changes 00:33:04.579 --> 00:33:07.779 over the years in response to pressure from advocacy 00:33:07.779 --> 00:33:10.319 groups and consumers. They banned certain types 00:33:10.319 --> 00:33:12.940 of confinement crates for veal calves, committed 00:33:12.940 --> 00:33:15.579 to phasing out gestation crates for pigs, and 00:33:15.579 --> 00:33:18.240 made a global pledge to source only cage -free 00:33:18.240 --> 00:33:20.579 eggs. But the pressure hasn't stopped. Didn't 00:33:20.579 --> 00:33:22.539 shareholders sue over the chicken operation? 00:33:23.059 --> 00:33:26.700 Yes, that's ongoing. In 2022, some shareholders 00:33:26.700 --> 00:33:30.019 filed a lawsuit arguing that Costco's whole low 00:33:30.019 --> 00:33:32.660 -cost chicken program, the one supplied by their 00:33:32.660 --> 00:33:35.740 own Nebraska plant, relies on practices that 00:33:35.740 --> 00:33:38.579 violate animal welfare laws in Nebraska and Iowa. 00:33:38.839 --> 00:33:41.039 What's the argument? Essentially that the chickens 00:33:41.039 --> 00:33:43.440 are bred to grow so large, so fast to meet that 00:33:43.440 --> 00:33:45.920 $4 .99 price point that they inevitably suffer 00:33:45.920 --> 00:33:48.519 from debilitating health problems. The lawsuit 00:33:48.519 --> 00:33:50.880 claims the company knows this and is prioritizing 00:33:50.880 --> 00:33:53.460 profit over animal welfare, potentially misleading 00:33:53.460 --> 00:33:56.099 shareholders. about ethical sourcing. Wow, that's 00:33:56.099 --> 00:33:57.559 a heavy charge. What about other environmental 00:33:57.559 --> 00:34:00.170 or labor issues? Well, given their size, they 00:34:00.170 --> 00:34:03.130 face scrutiny on many fronts. They've paid fines 00:34:03.130 --> 00:34:05.809 for environmental violations, like mishandling 00:34:05.809 --> 00:34:08.730 refrigerants that leak greenhouse gases. They've 00:34:08.730 --> 00:34:10.809 been criticized by environmental groups for things 00:34:10.809 --> 00:34:13.630 like using pulp sourced from Canada's boreal 00:34:13.630 --> 00:34:16.670 forest for their Kirkland brand toilet paper. 00:34:16.789 --> 00:34:19.429 And labor standards in their supply chain. While 00:34:19.429 --> 00:34:21.170 their direct employee practices are generally 00:34:21.170 --> 00:34:24.030 praised, like any global giant, they've faced 00:34:24.030 --> 00:34:26.940 issues further down the supply chain. There were 00:34:26.940 --> 00:34:28.760 past controversies about suppliers potentially 00:34:28.760 --> 00:34:32.039 using forced or slave labor. And more recently, 00:34:32.199 --> 00:34:35.639 a tragic incident in South Korea in 2023 where 00:34:35.639 --> 00:34:37.880 a worker died from heat stroke while collecting 00:34:37.880 --> 00:34:39.900 shopping carts in extreme heat outside a warehouse. 00:34:40.219 --> 00:34:42.699 It highlighted potential gaps in safety enforcement 00:34:42.699 --> 00:34:45.539 under the pressure of global operations. Hashtag 00:34:45.539 --> 00:34:48.750 tag outro. So wrapping this up, this deep dive 00:34:48.750 --> 00:34:50.750 really shows that the big box store, while it 00:34:50.750 --> 00:34:53.289 looks simple on the outside, is this incredibly 00:34:53.289 --> 00:34:56.190 efficient, globally powerful retail machine. 00:34:56.449 --> 00:34:58.289 Yeah, it's a blueprint that works worldwide, 00:34:58.409 --> 00:35:00.730 but it's really the warehouse club model, especially 00:35:00.730 --> 00:35:04.409 as perfected by Costco, that represents the ultimate 00:35:04.409 --> 00:35:06.949 evolution of... that format. They took those 00:35:06.949 --> 00:35:09.809 old wholesaling ideas and brilliantly leveraged 00:35:09.809 --> 00:35:12.389 the membership fee, making most of their profit 00:35:12.389 --> 00:35:15.409 before selling goods, allowed them to hit unprecedented 00:35:15.409 --> 00:35:19.469 scale, build fierce loyalty, keep prices incredibly 00:35:19.469 --> 00:35:23.429 low. And remarkably, maintain pretty high standards 00:35:23.429 --> 00:35:25.630 for how they treat their own employees, even 00:35:25.630 --> 00:35:27.510 while juggling all the pressures of that scale, 00:35:27.590 --> 00:35:29.889 their urban planning critiques, the supply chain 00:35:29.889 --> 00:35:33.469 issues. It's this fascinating bundle of contradictions, 00:35:33.489 --> 00:35:35.630 isn't it? A company obsessed with efficiency 00:35:35.630 --> 00:35:39.210 that fiercely protects a $1 .50 hot dog price 00:35:39.210 --> 00:35:43.489 from 1985. A car -centric behemoth that's now 00:35:43.489 --> 00:35:45.610 experimenting with building apartments on top 00:35:45.610 --> 00:35:48.050 of its stores. It really is. Which brings us 00:35:48.050 --> 00:35:50.219 to a final thought for you, the listener. to 00:35:50.219 --> 00:35:52.519 chew on. Yeah, think about this. The founders, 00:35:52.800 --> 00:35:55.380 Senegal and Price, they explicitly said they 00:35:55.380 --> 00:35:57.639 were building Costco for the long haul. They 00:35:57.639 --> 00:36:00.599 wanted it to still be here 50 and 60 years from 00:36:00.599 --> 00:36:02.860 now, not just focused on the next quarter's earnings. 00:36:03.039 --> 00:36:05.659 Okay, so longevity was the goal. Right. We know 00:36:05.659 --> 00:36:07.880 the business model. The membership model is incredibly 00:36:07.880 --> 00:36:10.820 powerful and resilient. But what about the physical 00:36:10.820 --> 00:36:14.340 form they chose? That classic, sprawling, car 00:36:14.340 --> 00:36:16.789 -dependent, usually single -story... Big box. 00:36:17.010 --> 00:36:19.269 Does that structure itself have the same staying 00:36:19.269 --> 00:36:21.929 power? That's the question. Does that architecture 00:36:21.929 --> 00:36:24.570 represent a brilliant blueprint for immediate 00:36:24.570 --> 00:36:27.489 high volume success that can adapt? Or does its 00:36:27.489 --> 00:36:30.309 fundamental conflict with the growing need for 00:36:30.309 --> 00:36:33.250 walkable, denser, more sustainable urban living 00:36:33.250 --> 00:36:36.190 ultimately put a time limit on the lifespan of 00:36:36.190 --> 00:36:39.150 this incredibly powerful retail model? A tension 00:36:39.150 --> 00:36:41.230 between today's efficiency and tomorrow's urban 00:36:41.230 --> 00:36:43.550 reality. Something to think about next time you're 00:36:43.550 --> 00:36:45.489 pushing that giant cart through the aisles.