What company is a global reaching, wholesale powerhouse that not only beats out Wal-Mart but was also described as “Amazon-proof” by the Deutsche Bank?
“Welcome to Costco! Can I see your membership card?”
With a market capitalization of $100 billion and over 600 locations worldwide, investors are chucking fistfuls of dollars at the wholesale giant.
Here’s the thing: Costco doesn’t make much profit. Investors aren’t drawn to Costco because they’re sucking up revenue like the shop-vacs they have on sale. It’s the company’s solid business model—not high profits—that makes this wholesale nirvana so attractive to investors.
Less profit margin, less employee turnover, less brand diversity—Costco teaches us that, sometimes, less is more. More stable, more sustainable, and more attractive to investors.
Membership
Costco’s membership system ensures a reliable group of return customers. If someone’s paying a monthly fee for store access, they are more inclined to shop there regularly to get their money’s worth. With an 87% renewal rate in 2018, Costco can tell that most members view the annual $60 fee as a fair trade-off for the savings they get.
Plus, membership gives the perception of exclusivity. Costco has this over Sam’s Club. As a direct competitor, most people view Sam’s as simply a wholesale version of Wal-Mart. Why bother with a Sam’s Club membership when you can get the same product and price at Wal-Mart? That’s one reason Costco made over double the net sales as Sam’s Club in 2017.
Operating margins
Despite more sales, Costco doesn’t turn a big profit. They margin cap at 11.4% on average. It’s less money for the company, but guarantees lower prices than anywhere else so customers feel like their membership is worth renewing—making for a stable customer base.
Staff treatment
At $21/hour plus perks, Costco treats their workers like royalty. Beyond the intangible benefits companies get from happy employees, Costco saves money with a low turnover rate. Companies burn 40%-150% of an employee’s annual salary in recruiting and training new staff. Costco avoids this headache by giving their employees reasons to stay.
Fewer Products
Costco provides everything a family needs, but they offer few options in brands. There are two benefits to this. First, it’s less inventory that the company needs to spend money and man-hours managing. Second, brands actually compete with each other for Costco’s business. Brands know that, if they get their product in the store, high sales are guaranteed since they won’t be sharing shelf space with competitors. With brands fighting to get in the door, Costco gets to choose products that are high quality and inexpensive—two things that make members happy.