Costco 03:01:09

i dont think i have ever been more in love with a company in a business model what are you Charlie monger its just the deeper you dig the more good things you find unusually its the exact opposite of that think the opposite of being an earlystage venture capalists， isyyouisyyouisyyousitting another storyoneway who got to welcome to season thirteen episode two of acquired the podcast about great technology companies and the stories and playbooks behind them im Ben Gilbert？

im David Rosenthall？

and we are your hosts what if i told you that there was one place where you could get all these things under one roof a two and a half pound container of cacheus prescription i glasses， a tank of gas new tires for your car 96 roles of toilet paper a new refrigerator an outdoor shed A10 carrot Diamond ring some fresh prepared Sushi fine wine at a great price and you could even grab a hot dog with a soda and a free refill on your way out forjustabout 50 ban i dont believe you hey， it has been the same price for forty years now 47 years yes， most of you are very familiar with this Disney land of consumer value that im referring to it is cosgo this company seems very simple on the face of it if you sell in bulk， you have the opportunity to offer great deals to your customers but what really makes it work are the fifty clever innovations that theyve refined over the years that all work together like an orchestra thats been rehearsing for decades nothing about cosco is an accident from the extra wide parking spaces to the whole rotisserie chickens and if your goal is to offer extremely great value to your customers on a highquality products at the lowest possible prices there are a lot of ways that you could go about doing that and today we will walk through the very specific path of decisions and trade offs that cosgo has chosen to accomplish just this solicitors remember that extreme value， highquality products， lowest possible prices and David my god does this method work well！

there is a reason Charlie mongerer loves this business oh does he ever you know the great warren buffer joke about cosq right？

oh no okay so here goes warren and Charlie are flying on a plane they gets highject my Cobra， the highjackers each grant one of them， one last wish and they ask Charlie first and Charlie says i would like to give my speech on the virtues of casgo one more time before i die and then the highcheckers turned toward and he says shoot me first its so great this actually happened at a berksory annual meeting its on you two will link to it in the showdance uh that is awesome i mean Charlie mongerof course on the board of cosco and long time fan of the bottle as you should be two so here are some insane states cosgohas grown revenue right about ten percent for over thirty years in a row。

there revenue per square foot of their warehouses belongs more in a conversation with Tiffany than Walmart they seem to have incredible running room ahead of them to expand internationally and here in North America and David heres one that is just for you their storebrand curclen signature does more revenue alone not including anything else in the store than all of Nike i know its OK i think i found that curclen signature as a unified brand i think might be the largest brand in the world by revenue its the largest consumer package brand in the world yes！

what is a misnomerbecause like they sell everything you know most other brands only sell like shoes but they 52 billion a year that they sell。

which inches by Nike by just about a billion dollars does it even include the current signature gas right listeners if you want to know every single time， a new episode drops you can sign up for email updates acquireddatafmslash email and two brand new things we will be including little hints at what the next episode will be to the email listnow and two will be including followups from episodes when listeners share things with us after release be it little corrections or just additional insights so sign up acquiredatafm slash email come talk about this episode with us acquireddatafm slash slack and learn from other listeners who may be closer to these topics than even David and i are if you want more from David and i check out our second show acq to available in any podcast player just search ack two and our next few episodes are about ai with ceos were leading the way as the world very rapidly changes in front of us so without further ADO this show is not investment advice Steven and i may have investments in the companies we discuss and this show is for informational and entertainment purposes only David Rosenthall what are the history in facts？

so cosgo was founded as many people know in Seattle lovely city of Seattle in 1983 by a retail veterans， Jim Synnigo and Jeffrey Brownman now Jeff came from a longline of Seattle retailers his dad was a retailer his brother is a retailer Jeff was one of the first investors on board members of Starbucks super cool yeah and Jim well well talk about Jim as we go here but if you were around and kind of of shopping age， shall we say in 1983 you know that the truehistory of cosgodates wayfurtherback then that to someone that we talked a lot about on our Walmart episode the legendary saw price and his two companies fedmark and price club and although costgoquodonquote was founded in 183， the organization that we know in love today is actually， the result of a merger between costgo and its predecessor company price club and price club is really of course， the actual result of sales previous company feed mark， which Fedmart itself really came out of feed co in the nineteen forties in some ways we sort of have to tell a whole industry history here， but another ways these kind of are all the same company because theyre all stacked learnings from sale price and his various brainchildren over the years to create the coscode that it is today totally we start history fax in January nineteen sixteenin New York city in the branch where one soloman sale price is born now sales parentes were Jewish immigrants from bellers they arrived just a couple years before at ls island as teenagers they had absolutely nothing they spoke no English they had no money nothing so sales parentes like many Jewish immigrants around than in New York ended up getting jobs in the garment factories in thelaryside and the conditions in these factories were like terrible， just absolutely terrible if you went to school here in the us， you might remember learning in American history class about the triangle short waste factory file yes， in nineteen eleven you remember that this is like the start of the American labor movement and the communist party in the socialist party emergeas a reaction to this in America because its a terrible disaster literally the factory owners had locked the doors to keep the workers inthebuilding so they wouldnt steal and then a fire breaks out a hundred and 46 people are killed mostly women in young girls like this is terrible so sales parents didnt work at triangle but they worketootherfactories just like this hmm crazy and you cant make this up sol maybe the most influential American Retail capitalist in history comes out of the triangle shortways factorymovemen and communis of unsocialism and everything thats happening in New York and Jewish community at this time wow！

and you say what the most influential i do think is TOP2， TOP3 with Sam Walton of course。

Sam Walton actually route in made in America that he stole more ideas from sale than anyoneelse in his business career。

alright， so very credible argument that he is the most important American retail capalist Jim senigalof course！

co founder， co of coscope Jim tells the story that a reporter once asked him if he learned a lot from sale and Jim replied no， thats inaccurate i didnt learn a lot i learned everything， absolutely everything i know i learned from sol， so we found this awesome biography of sale thats like really rare its out a print it was written by his son Robert and if you are a fan of cosgo or want a learn about retailing or just like all these business practices， you absolutely should try to get your hands on this thing its selfpublished to its selfpublished i dont think theres anywhere else in the world that lays out in detail exactly how cosgo works and its prodecessor companies its amazing also super fun blinkest sponsor the show made a summary for us yes！

i was texting David before this listeners and i was like i dont think a lot of people are gonna be able to like get this book if they want it and blink is agreed to order a copy and enter it into a blink so you can get the blink of summary will link to the shownotes on how to do that but David， the other crazy thing is i think Robert may have signed every copy of this book because he signed yours and he signed the one that i got oh amazing thats how rare this thing is so back to sales growing up years！

he says in the book， this quote from him in the New York Jewish community at the time there was no such thing as republicans， the socialist were the conservatives and the communist were the radials so it really illustrates where solls political ideology comes from absolutely， so as a youngchildhe develops， an idefact that causes his left eye to droop hes really self contise about this as you can imagine， but as a result， hechannels all of this insecurity into being like a massive over achiever in school， so he skips two grades in school growing up and then in the middle of his high school years his parents moved the family from New York city to San Diego， California， now Sandiago thats a townof like a hundred and fifty thousand people this is not the Sandiago we know today， theres no qualcomm， theres no Illumina， theres only like just the beginnings of the us navy and the defense industry there but its a small town when sale gets out there to say Diego in a parallel moment to Sam waltons earlylife sale meets his futurewife while is in high school and it turns out that sales futurewifesfirstname is Helen just like samswifname is also helid and saamswike would be very influential on him longwithher family same thing with sol so just like Helen Walton Helen moscowaits soon to be price comes from one of the wealthiest families in Sandiego this is literally just like Sandiago Walmart literally thats whatsabouttohappenhere just like ten years before samanwalmart wow， so helens family owns and operates a scrap meddle business a scrap meddle business in the nineteen thirties in San Diego is about as well positioned as you can possibly be because sandiego is about to go through a huge transformation during World War two its gonna become the principle port of the us navy specificfleet！

which is gonna be the main Naval Operations of fora war two the city is gonna absolutely bluemen its gonna be shipbuilding its gonna be navy its gonna be metal David you and i were just down in San Diego doing our episowith dog demiro and i went and stopped by the Midway museum because we had just on our lockid Martin episode and you can feel the history dripping off that thing on all the old airplanes and everything Sandiego has been obviously a huge navy culture for 75 years now totally during an after the war！

all these sailors in gis come through the city and them when the wars over and they come back home wherever they lived in the country before they look wait why am i living in Kansas， i should be living in Sandiego Sandiego is pretty great its really nice there so from a hundred and fifty thousand people when saw moves there after the war sandiegos on a path to becoming today its the eighth largest city in America， its largest in caddle， its largest in safety sysco how i would have guest that yep so this is gonna become quite the uh ferdle market shall we say for a new retail enterprise in postwar America， but before then saw goes to usc and gets his lawdegree they come back to sengigo and he starts practicing as a lawyer now sales timing is just uv you could not script this any better he becomes a lawyer right before this boom when youre a lawyer in a small town i mean my parents were lawyers in a small towngrowing up your alloyer for your clients but youkind also considery your advising on business real estate negotiations divorces trust states youlicks superdeep with your clients so after the war sale starts counceling all these entrepreneurs with these new retail concept startups that are emerging in cndago one of these startups is called the seven cys locker club， which ostensively the promise for this business is literally a club of lockers where navy sailors can store their uniforms when theyre onlyeven wearing their civilian clothes， and then when they go out to see， they can store their like personal clothes and effects， while they are away on the ships yep but actually， thats just a trojin horse to get all of these consumers into the door oh， its foottraffic and then they offer all kinds of goods and services to them within the locker club so， theres laundry， theres dry cleaning， theres clothing， theres jewelry， theres food， theres haircuts this might start to sound a little familiar here another client is a jewelrestore called for star jeulers now in addition to operating their own jewelrestore， these guys also sell jewelry wholesale to other retailers and it turns out that theres one account in particular that accounts for like the vast majority of their outsidewholesale business and its this on retail concept operating out of Los Angeles called feedco you know like feed code what is a feedco？

what is happening here？

its also like okay what how are they doing so much？

volume should go check it out and see whatgoing on yeah？

exactly well， feed co it turns out was a nonprofit membership club， it was a customer collective and it was called feed co because it was only open to federal employees primarily postworkers after the war about 80 postworkers in the Los Angeles area decided somehow that they wanted to pull their buying power together and their federal employees and so they start this club so that they can pull the buying power and get better prices on goodsthat they can all participate in together what turns out there a lot of federal employees out there especially in sandiagum they charged a membership fee they charged dues to join but unlike coscode today they didnt really make any money on the memberships remember there are a nonprofit so the cost was five dollars one time for a lifetime feedcomembership yeah hard to see that working。

but actually its not so different inflation adjusted from riesmembership today very clearly is not interested in making money off the membership program i pay what is it 85 dollars or something wants just to grant me sort of a higher affinity to the store and the money is not really relevant that is the perfect analogy thats exactly what fec co is yeah？

so has you can imagine feed co becomes quite popular amongst government employees in that la area and then not just the la area people start driving from all over sutting California， including San Diego sometimes up to like hundreds of miles round trip to do the majority of their shopping at feedcoe it was time to expand yeah， but feed cos in on profit theyre not looking to like expand in build this huge empire exactly so sale in the jewelry guys they see whathappening with all of the wholesale business that theyre sending to feed go up in la theylike man we gotta find a way to open a feed co here in San Diego and cells like actually， i might have just the location it turns out that helens family owned A210000 square district thats currently settingempty so the three them go over they check it out and theyre like oh， yeah， we could totally recreate feed co in this building right here in San Diego so if sale were sam Walton that would be the end of the story right there he does feel like great im in a clone feed co no this is how sale is different than sam and i think probably harkens back to his upbringing in New York and do everything that was happening he calls up the feed code board of directors in la and he says he we want a partner with you guys we think that a feed co would do great in San Diego can we create a joint venture together weve got the building will operate the storelets go into business together and be partners feed code though like you said theyre not profit， theyre not interested in expansion so they turn them down and saw a gobblessive he calls them back and hes like no no no guys we really want to do this how bout this you can own the whole business will just be a franchise down in Sandiego you get all the upside you get all the enterprise value like we dont care we just want to bring this to Sandiego and they say no again cause you thats like a nonprofit board the directors yeah on the one hand you might think saw price not a very savvy business person just take the gift and go with it on the other hand ridiculously principled guy this are really funny saw quote from a leader in his life hesastabout how he feels about essentially being the father of modern American retailing at his fix about it and he certainly you know maybe i should warn account？

oh so？

oh so， but its not that hes arube hes a really good business man hes just also incredibly principled yep and this is gonna flow through directly into coscow as well see OK back to feed code so after this second rejection solon the guys are like i guess we now can go do it ourselves so in November 1954 they open the store in this warehouselocation and they had to think about what to call it and theylike well basically， this is a clone of feed co but we cant use that name and itkind of a bad name anyway， what if we draft off the same brand recognition though and call it feed mart？

unecallybadname an ecallybadname that would have historic impact so why do you think Walmart is called Walmart？

why do you think Kmart was called Kmart？

oh， it was the first Mart its becauseof this yes！

literally having say im Walton talks about this in made in America by the time Walmart was starting people knew what feed marks were they were expanding， across the country and he was like oh， great， we were gonna draft off the feed Mart branding it was the same thing with kmark feed mart becomes the first scaled quasi national discounter and people like order discounters discounters are walmarts kmarts targets that is the industry that solr births here and so very specifically we are not talking about what cosgo is today as a wholesaler。

feedmart is not big pallets with enormous quantities of things it is much more like a Walmart you want to go grab a candidbeans off the shelif you grab， a candabeans off the shelf and importantly， it is both packaged food and sundares or general merchandise under one roof yes！

correct and on the one hand feed mardislya clone of feed co ontheotherhand the huge single key difference that makes all the difference its a four profit company its not a nonprofit and so just like all capalist for profit companies sollen the jewelry guys and feed Mars have the impitiance to expand that make sense and so just to put some other fine points around what it is in what it is in it is still only for federal employees right yes！

at this time OK and its not a membership club well。

so， it is still a membership club you do still have to be a federal employee you do still have to buy a membership i think they maybe took the lifetime membership rise down to two dollars so they undercut feed cover something like that， but obviously its not about the membership the reason they did this and the reason that no other discounters had really scalled before this is crazy they were actually laws on the books in the us at the time that manufacturers of goods could set a minimum selling price for retail， and it was actually illegal for retailers to offer products below that price to the general public wow， so the term discounors discounting meant selling below the manufacturers minimum price how did you get around this？

well， saw kind of stumbles in defiguing out that if you are a membership club youre not open to the general public so you can skirt these laws and sell below the manufacturers minimum price interesting huh so this is crazy and this is why？

i think theres a strong argument that saw really is the goat among American capless retailers we havent a price club and wholesaaling in coscode yet he also invested that later first， he invents the discounter， which then Sam Walden crazgey with kmark daten with target copy and becomes the dominant retail form of America two totally several things he invents both of them crazy so when solon the guys open the first feedmarding 154 in San Diego， it is a huge and immediate success theysort of wildest dreams expectations are that they do a million dollars in sales in the first year the stores threemillion dollars in sales in 154 in one year wow， and why do you get the sense that it worked it works because it was already working this was a no risk， but clearly feed co had prove the model in la they just did the same thing as a four profit company make sense so a year after Sandaego they open the second feed mark in Phoenix Arizona right off the bat going multistate they want to go big here its another absolute banner literally when they open it， there aligns half a mile long to go get into the parking lot of the storedly going out in every direction from the store they take it to Texas they go to sync in tonio they go to Houston they go to Dallas all of these stores are huge successes so at this point two things happen that are going approve very fatal both for feed mart and for coscope 1 sol fully stops practicing law and goes full time with Fedmart he becomes the president of Fedmart 2 he hires a young college student from San Diego city college， as a part time bagger in the Sandiego store， one Jim cynical and Jim would end up working for the next twenty two years at Fedmart directly for sol eventually， Jim ends up running fedmarts entire distribution and centalized warehousing operations warehouses you can see the coscode fixture coming together here put a pit in that so fetch margos public in 1959 there is two million dollars they plowed that money into both expanding the number of stores across the country， but also rememberback to 7 locker clubs the suite of goods and services that theyoffering under the roof or in some cases not under the roof this is when they add gasoline to fetch marks， so the cosgo gaslines like this started with fedmark they would intentionally price a few sense lower than whatever， the other gas stations were charging in the area and a few sense at that time was a lot because gas was like twenty five cents and unlike gas stations feedmardismakingmoney on consumershopping in the store as well， so they can price at cost on the gasoline get all the traffic coming to the store and then monetize to the store 嗯， they add a pharmacy to feed mart coska pharmacy today people arereligious about it， so theres a crazy story the guy who sets up the pharmacydivisionfor feed mart starts getting death threats from people in the industry he has a rock thrown through his window thats literal Mafia stuff because theyre undercutting the fat margins in these pharmacycounters so much that guys protoj who then takes over the pharmacydivisionforfeed mart when he retires that guy goes on to start coscos， pharmacy divisions and run， it amazing most importantly for the coscorehere after they go public fanbarr uses part of this capital to develop their own house brand for some of the popular products that theyre selling on the shelves its like the fmbrand is that right the fmbrand yep you ever see fmbranded old photos and stuff of like newspaper articles referring to fm Cola fm whatever， thats what is its fedmart and then one more piece of feed mart playbook shall we say that clearly makes its way over as sale is running the company during these first few years he starts to codify some retail management philosophies and he uh famously sort of canonizes these as fedmarts for priority order principles any teaches every new employee throughout the whole company about this number one first priority， provide the best possible value to customers number two second priority， pay goodwages to employees and provide good benefits including health insurance then this is in A50 like this is progressive stuff number 3 maintain honest business practices and then number 4 the last one make money for investors so if youre a cosgoal nerd out there and there probably many cosgoinvester nerds listing right now those all probably sound very familiar to coscos priority order values right not the same but kind of rhymes put a peninit when it comes to cosgoe？

will bring those up and going to each of them in depth so you might be listening and saying like yeah yeah！

yeah that sounds good but im thinking about you know， i dont know， maybe i go to Walmart today or i walk into target and i see some similar things written on the walls there isnt this kind of all the same if you really mean them， no， there are some very very clear tradeoffs that sale is gonna make with feed mart that cosko makes today that are very different from what their competitors do like one doyousell lossleaders in the store lossleaders being when you mark down items below your cost in order to attract people into the store with sales ifyoutheresotherretailers yeah， of course， this is like a time out tactic in retailing of course。

youre going to use this Sam Walton brayed about it and made an America about we could get this you know incredible number of anyvermer what the thing was but build a pyramid of in the parking lot and blow em out to get people to come in participate in the spectacle right if yousaw and cosgo today？

youre absolutely not gonna do this stuff no， they wont sell something unless they can make money on it because the flipside of doing loss leaders is that you gotta make up for it somewhere you gotta mark up other goods in the store to fat margins to make it worth doing the lost leader for you basically。

it means your treating your customers like theystupid totally thats exactly my read on this two i feel like David adquire number one tenit treat the audience like there smart if youre gonna ever do lost leaders， youre sort of violating that tenant and saying like yeah were gonna get one over on our customers totally！

this is an athmudasol he passes that down to jimcentical its a nathma to Jim OK so thats one tradeoff heres another really big one what do you pay your employees so in 206 harforbusiness review published a really great peace called the highcost of low wages were they very directly compare Cosgo and Walmart employee， salaries and benefits？

which for listeners if you want those numbers today coscos average arellywage is 26 dollars and wallmarts is nineteen fifty so huge huge difference if you are going to go get an equivalent job at one or the other on top of that at cosgo today you also are eligible for A4， A1K with a match and very very good healthcare shockingly good healthcare even for hourly workers so if youre gonna go workat one or the other。

today you be very lucky to go work at cosco so obviously the tradeoff of this is for fedmart at the time and straight through the coscode today this creates meaningfully higher per employee labor costs for the company yeah totally！

but what are the benefits and this is where we get？

this beautifully interlinked set of trade off the playwell together so what do you get？

will you get low employee turnover and when i say low i mean very low after the first year， cosgo today has only a seven percent attrition rate among their workforce this is wow！

this is for hourly labor yes！

typicalretail is twenty percent so it is a meaningfully lower cost to onboard and train new employees like you normally have to spend a lot of your money ramping people to get them up to speed Cosco price club fedmart doesnt do any of that because theyre really rewarding their employees employee loyalty also reinforces the idea that people shouldnt steal they feel grateful for this job theyre excited to be in it the shrinkage or the uh unaccounted for merchandise at cosgo today is astonishingly low it is zero point one five percent of sales thats crazy so merchandise does not walk out the door theyre strong bias also is to promote internally so if you look at cosgo today。

36 percent of us employees have over ten years of service and this is truly unique i think about cosco among major American at least corporations and was true at prize club in Fedmart before it the senior senior management this is the same story i mean Jim started as a grocery bagger in the fifties at Fedmart， Craig gelenix started his career as an hourly employee at fedmart this is how long the tenyears of these people and how linked these stories are if you look at their executive team at cosgo， today basically all of them have been there for over 25 years the only vice presidents at the company who have not are the digital ecommerce people that they had to bring in to address some issues decades ago its crazy so what happens feed mart truly was the first discounter that scale nationally all of these innovations even though sol came up with them as these other companies are scaling and i think particularly kmark they dont really have the large scale operational expertise nor the access to capital to really find off the competition kmart if you rememberback to our Walmart episode came out of the crazie department store chain which was huge so they had a so much more access to capital certainly thanfedmarr and even than Sam Waltonthan Walmart you know Sam had a fight bitterly last mile by last mile building out as distribution network to beat camera sol and fetch mart they dont really have a fire power to compete so they need capital or they need to sell the business one of the other and it seems like what they kind of did was accidentally both yeah in the biography saw comments to his son， Robert who would also joined the company joint feedmart at this time he says quote were good at creating businesses were not as good at running businesses yeah？

so what were about to get to is where theyre sort of looking for a capital partner and i think they accidentally find themselves selling the business but before we tell that story is time to thank one of our favorite companies stat seg and one common thread from all the retail companies that weve talked about Walmart Amazon and now costgo is there obsession with making decisions based on data even decades ago at the time， this was not cheap remember Amazon earlyoracle database or that Sam Walton buildout a private satellite network to get realtime sales data。

but there approach made it possible to take huge bats reinvesting the things that work and shut down the projects that failed these practices are now tablesticks for great retailers indeed and fortunately its a lot easier to build a data driven culture now than it used to be thanks to static thousands of companies from startups to large enterprises all use static seg to do experimentin their products automateanalysis launchnewfeatures analyze product performance if yourbuildingsoftware products static is the one stop platform you need for produc experimentation featureflags and analytics instead of expensive clunky and disjoinedpointsolutions are building internal tools that are always under resourcedforthis kind of stuff static just works and they help teams move fast with data they contrast yep so one of the worlds largest retailers flipcard part part the Walmart empire thats right actually uses stat sigtoday to run experimenting ship features to hundreds of millions of users when they started working with stat seg flip Cardi had a strong data driven culture。

but they needed better experimentation tools today they have hundreds of engineers， data scientists and pms who you stat sigg and helpthem dramatically increase their paces of launching new things and measuring them the static team has a crazy amount of expertise in the Syria we did a whole acq to episode in February with VJ Roji， there ceo and the rest the team is also made up of people who build things like Facebook ads office three 65 at Facebook marketplace so if youre startup。

they have a supergenerous free tier anespecial program for venturebactcompanies and if youre a large enterprise， they have clear transparent pricing with no seatbased feeds for small features acquirecommunity members can take advantage of a special offer， including five million free events a month and white love onboarding support just go visitstatom slash acquiredthats t a tsig dot com slash acquiredto get started on your data driven journey all right David so what happens with fedmart so like you say but a time we get to the end of the sixties early sevenes sales burned out he unrovered they dont want to be running this business its scale first， he brings in quotn quote professional management and moves up to chairmen to the board second starts looking around for a capital partner to help the business compete on a more level playing field with the other discounters they end up going to Europe and this is super important， both for the drama that happens， but also leading into price clovin cosql at the time in the seventies this new retail concept in Europe was getting going， actually pioneered by the French company carifor， which is still a huge global retailer today， and that concept is the hypermarket so what are hypermarkets？

hypermarkets are smashing together everything we are just talking about with the discounors the old general goodsretailing with a full scale growth restore supermarket so fresh food everything this is whatalmost every Walmart is today the supercenters its grocery and hardgoods in one huge enormous warehouse you might say！

which is funny you would have assume that the Americans would pioneyear that its hilarious at the French did it was the French of all people？

so this concept didnexist yet and it wasnuntil the late eighties that Walmart would really embraced unroled out across America so as sol and Robert are looking for partners to take feed Mart to the next level in going across Europe theyre meeting with all these hypermarket operators， so they end up getting into bed with one of the German clones run by a retail entrepreneur named Hugo man the idea was that man was gonna help sol and fetch Mart take this hypermarket concept and Morf the existing feedmart stores into hypermarkets， which Walmart would do to greatsuccess but like fifteen years later。

i had this happened we would be telling a very different story today and we might all be shopping at fetmarts totally in practice what did a happening is this weird thing where sale price was and innovator and a great merchant but not a deal guy and so it seems like theres two cardinal scenes that get committed one not really asking Hugo man why do you want to do this deal and what is interesting about this to you and what do you want to do with the combined company and then to selling the majority of it and treating them like a minority investor yeah sale is looking for a growth invester and he ends up getting a buy out yeah！

one with misaligned interests so within a few months of when the deal actually closes， perhaps predictibly sale and Hugo get in a huge fight at the very firstboard meeting the very firstboard meeting they like yelling at each other this is not going well may and fires saw literally， fires saw i think and Robert to and changes the locks on their office doors oh， literally boots saw out of his own company its super ugly then the person at fedmart of the remaining executives who they task with you think they like doing an all hands or the equiven of and you know inform the rest of the company whats just happened you know who that was no Jim senical no way wow isnt that another oh， my gosh oh！

that is crazy and i think what was going on here is Hugo man just realized that fedmart was sitting on a gold mind of real estate and just wanted the real state portfolio and what soul and Robert wanted was operating capital from the parent company from Hugo man to invest more and aggressively openingmore fedmart stores and pioneering hypermarkets in America yeah， which of course。

Hugo man had no interest in yep so had this not gone down like this i think so probably would have just retired as new management took over at feidmardinall would have been amicable he wasnreally interested in continuing his career but but becauseof how this went down with him getting locked out of his office he is sed he is now sixty years old at this point and he is a man on a mission great time to be a founder totally amazing i love that hes like the uh mortise Chang of American retail yes， morestangofcoursebeingthevatderanceoftsmc whois booted out a Texas instruments a age fifty six i think something like that yeah and i will go on the start tsmc so sale and Robert together they get a lease on an office literally the next day after theybooted out and theyre like wedoingit again were back in the sale lets go， but they know they not Gonna compete directly with feed Mart because Fedmart is faaling at that theyve Gonna get steamrolled by Walmart in Kmarden target everybodyelse by the way Fedmart within five years was like completely dead after this acquisition totally ran into the ground and Hugo man did make the fortune on the real state but yeah！

fedmarts dead！

yeah！

so solon， Robert are sitting around in their new office brainstorming whatstheirangle of attack here and they keep coming back to one part of the feod mart business that they felt was under appreciated they didnt really exploit enough， while they were at feed bark and that is the division the Jim cinegalreadon the centalized warehousingoperations so the two of them are like you know if we zoom out， there really is kind of a different enorthagonal way to think about the feed mart business you really could say the Jim ran are warehouse operations final link its own business they were supplying the individual feed mart stores， which were sort of smaller businesses and when you look at it， that way almost all of the margin that we made at the company was at the warehouselevel the stores themselves were not particularly profitable and pretty hard to compete with the competition out there i dont realize that they thought to sort of slice the margin up into those two almost like places in the value chain yeah， so theylike well is there a way that we could take James operation recreate it and make that the core business instead and so the business plan that they come upwith is literally that createwarehouses for otherindividualsmall businesses otherretailers and theyre invisioning like gas stations restaurants small variety stores in the lake independent chains that they can come and shop to stock their own shells at this centalized warehouse that were going to operate so just business owners can be members just business owner like man if we did that i think that would be providing a huge service to these small businesses because one of their big problems that we know from operating the feed mart stores is actually how you manage your inventory like physically where you put it you need a centalize warehouse to hold your inventory if youre a small gas station？

you dont have your own warehouse we can be your warehouse right and to put a finer point on it the reason why its awesome to just run warehouse operations is because the logistics are simple， you are taking palots of stuff and you are moving it to a location in a warehouse and then the customer comes in takes a huge amount of it off your hands you dont really have to turn and make sure the labels are facing out and you dont have to deal with oh little one off you know weve only sold 16 units， but theres actually a hundred and twenty 7 units on this thing so that you just everything is nice easy big quantities doesnrequire a lot of attention from your staff being in the wholesale business is good if you can get it。

but there inclination at this time is well the only people who would be willing to shop and buy in that way are business owners this would never work as a consumer concept yup all that totally true and amazing parts the coscode model theres one piece in particular that really really makes this a croundual and its the reason why they were so enamored of what Jim was doing if youoperating a wholesale warehouse you dont have to operate any logistics the manufacturers delivertheproductrightinto your warehouse you dont need to run trucks you dont need to operate other warehouses you dont need to move stuff around the country writes and the business owners just come to you and pick it up right from the warehouse where it was delivered right from the manufacturer totally and becauseof all this becausethisnew businessthis Costco bryceclube it gonna be called bryceclube is providing such a valuable service to the small businesses that are shopping there inmanagingall these logistics for them or i should say managing because price club doesnmanagedeither the manufacturers do theylike we can actually go back to that original feed co membership idea and instead of having it just be like a way to skird around the law we can charge real muddy for this membership because were providing real value out of this to the businesses yep so once they hit on this business plan sol and Robert post a few people from feed mard and elsewhere including they hired this super bright young guy from Harvard business school name Giles Batman as their cfo and then they go get started files would later go on to become chairman of do you know this Ben no cop usa really big part of my childhood and part of the enormous diaspora of retailers that come out of not only feed mart but price club Jim senical after i think he was probably locked up at Fedmart under new management for a while after that he would come over and briefly work at prize club a couple years later， so like the best of the best are coming through this place 哼， so they decide as theygetting started that in order to keep the operations really tight and realize the maximum benefit benefeverything you are describing of how these warehouses operate theyre only gonna stock about three thousand of the highest volume items that they think most other retailers are gonna sell to their customers so at the time walmarts and kmarts had on the order of about fifty thousandskys and even fedmart had probably closetothat many at the time going all the way down to 3 this is a nonconsensus move totally！

but if youre only someone of businesses and they have small stores is not like we need to stock basically everything under the sign it just needs to kind of be sufficient right super important remember theyare not thinking about consumers just yet however。

when they launch the first store when they open the first price club in San Diego unlike fetmark， its not an initial gang bustersuccess turns out its a lot harder to sell in recruit businesses to come be your customers then it is just putting out a single unattracting consumer and theres not like a viral word of mouth necessarily among these business owners are not just encounering each other everywhere all the time exactly so theyre worried after a couple months that this thing might not work they might need to shut it down and then they have the greatest stroke of luck so theyre going around San Diego try and sell memberships to businesses and they get a meeting with the Sandiego city credit youdon and the credit union management elike were a credit union were not a retailer we dont really buy much stuff， were not interested in this but you know what are members if we could find a way to get them access to what youre doing here that might be a really good benefit that we could offer of like oh， you can get wholesale prices on goods so jilsthe wonderkin young CFO he goes over to the credit union hammers out a deal whereby any credit union member can qualify for a new quota quota group membership plan at price club and be allowed to shop there just at slightly higher prices than the business members it turns out that this does two things one this unlocks the gusher of consumers into price club！

which allows for not only volume but word of mouth this is the seeds that are sown of Costco today doesnt really advertise and this is the first moment that they realize oh！

my gosh consumers are going to tell each other about this thing exactly and its even better than that because not only do consumers tell other consumers it turns out that a lot of small business owners are also consumers， so it also drives small business owner membership， and because the business members get slightly better pricing on things all of a sudden all these consumers are running around be like oh hey， i think my aunt owns a nail salon or something like that like let me get her to go sign up and get a membership and then i can use her card and get better phrases yup and David！

do you know what i did this week uh？

i suspect that you drive to a cosco and you know what now has a business membership to cosko oh！

hell yeah， where is my card？

actually， i think you need to go and have your picturetaken i was on a personal one before， but oh i was there i was like you know would be appropriate this week so we now have a business membership hey？

we are a small business right？

i love another fun story as this unlocks the viral consumer word amount channel of course， traffic at this first cnd ego price club store starts growing and growing and growing solon Robert start getting calls from local hotdog venders that wanna setup carts at the stores exit if you got traffic， you know you may as well uh youre getting a tracktopdog ventures thats right so at first they ignore them eventually， though they start getting enough calls theylike huh maybe we should do something about this and maybe rather than letting these guys come set up their cards what if we do it ourselves so sale calls of Hebrew national hot dogs and ask them if they can supply them with hot dogs to sell at the stores and Hebrew says not only will we sell you hot dogs to sell well supply the cart to and does the cosgo dollar 50 hot dog and soda deal is born and still to this day its a bug fifty 47 yearsyear theres a decent chance this is the one in only a loss leader that coscocells today yeah， there a little cagy about what the actual cost yes， i do know that theyve gone through many many iterations in housing all the operations to trankeep the costdown oh！

they actually make the hot dogs now yep， they also sell a hundred and thirty million of them per year wow， thats not all in America but if it were thats like a third of America going to cosco and getting a hot dog every year yup， so there is this interesting question that has now been answered， which is theres this kind of horrible way of shopping where i need to go by in bulk directly from the warehouse no good， retail experience are consumers actually going to do that you know this whole thing was intended for business owners and theres all these benefits that come from selling to business owners again you dont need a separate retail area and wholesale area the logistics are all much easier you know you dont have to ever have your own logistics to move stuff from your warehouse to a different store to sell it， but are consumers going to do this and they learn immediately yes， its sort of this shocking thing where its like wow！

consumers are willing to just go to a warehouse and buy stuff right off the pallet thats a pretty unexpected thing that happened it turns out that there is really one pretty sure thing at least in America probably the whole world that if you sell something at lower prices than anywhere else。

youget us a lot of it no matter what whoops people have to jump through yep one otherfun thing do you know what the building that this warehouse was in was previously i do it its super cool it is listeners the airplane hangers of the howardhues aircraft corporation one of them many im sure that hardhuese had but yes！

we got a cover hues at some point on acquired definitely so on the back of this wild success in Sandiago， once again sol and price club quickly expand just like with bedmart first Arizona and then beyond this time though its way different than Fedmart visav competition in capital dynamics so whereas Fedmart was capital constrained relative to the competitors because of the genius aspects of this price club model they are cashflow guysers these stores so the suppliers handle the logistics deliverdirectly into the warehouses so lets just follow the cache flowcycle they delivered the warehouse the moment they drop off that pallet is when they invoice price club and invoice is tend to be about net thirty so that means the pallet get dropped off and you have thirty days to pay the supplier， but the minute that the pelic gets dropped off in the warehouse those goodser for sale right？

no more internal supply chain， no more unpacking？

no more shelving its just available to buy now so in many if not closeto all cases with price club in them with coscode today， those goods are sold before， price club has to pay the invoice to the supplier its amazing all right？

David， i got a bunch a great stuff for you on this one so were gonna flash for a little bit to today， but i have a huge thank you for the coscode chief financial officer Richard Galante spent an entire afternoon with me walking through a lot of these characteristics that really make cosgo work so i got a bunch of great tidbits while i was hanging out in there campus outside caddle that all where was my invite i invited you？

you could get on a plane uh alright， so heresauitall works today so cosco actually turns their inventory twelve point 4X per year and just for comparison Walmart turns their inventory 8X per year home depos more like five times per year so at this number north of twelvetimes year David exactly what yous saying it means cosco can sell through its inventory faster and more often than every thirty days to be specific there are about A20 六 27DAYSALE this is amazing， so with typicalpayment termsbeingnet 30 imeanstheyliterally have zero dollars tied up in inventory and in fact theyabletoyourpoint to make a few box on the float， so this is of course， an average there are somethingsthat will sell in a weaker to other big ticket items might sit for a month or two sometimes coscocan even turn things to or threetimes before they have to pay a supplier for it， so this is called a negative cache conversion cycle where vendors effectively finance coscos inventory for them you know what i mean i capitally im with charlieon this one he can come in here and give the speech ten times in a row about how great cosko is i will listen to all of it i am in love with this company so theres a couple interesting components here there are companies that can achieve a negative cache conversioncycle but the way they do it is by having preditory terms where they go to their suppliers and say im not gonna pay you for like three or six months and that is one way to do it coscos using standardpayment terms here right 30 days and so theres two unique things that enable them to do it one is this warehousemodel where things are instantly available for sale customerscome right to the place where they were dropped off not quite anymore and will get to that later but at price club thats definitely what it was and grab stuff right off the pilot the other thing that makes it all work is to this day cosgo has kept their SKU count very low sku sku being a unique item that a store has forsale i think David you mentioned before about three thousand a price club is what they had available for sale if you look at a Walmart today they have something like a hundred thousand to a hundred and fifty thousand different skys that they sell supersenders indeed Cosgo in the last ten years was around 45 and then they sort of looked and said can we bring it down and went to four thousand and today theyre sitting at 30800 so this number is still going down not up and if you do the math and you start thinking well， jeez if youre not selling a lot of skies， but you have a lot of customers coming through your stores what is that mean？

it means that any given item is gonna turn faster its sort of this magical unlock in addition to the instantly available for sale in the warehouse thing it is the low sku count that directly gives you the ability to turn your inventory over quickly its just so awesome i mean like if you look at a price club then and certainly a coscode today capital lightquota quote would be the farthis thing from your mind you like these are massive structures there must be so much money that goes into this well。

yes， thats true but its a capital late business model its wild its allbeing financed for you by your suppliers becauseof these dynamics and of course。

today as cosco opensnew warehouses they can very tightly predict how theyre perform because they know how the all the other ones performance so sure theres a lot of outfront money in openinga new store but once it happens you sort of know， exactly what its going to mature to， and exactly how your positive online your fix costs to invest in that new location and you have this negative cache conversionslical with all of your inventory being effectively free if not profitable for you。

while it sits there amazing alright， so lets take the story now from this price club moment of genius initial success through the coscode today but before we do we have one of our very favor companies to tell you about blinkist and we are doing something pretty special with them this season blink est as most of you know by now takes books and contentes them into the most important points， so you can read or listen to the summarys its really great if you want to read more books and just dont of the time。

totally we have a couple of very cool things to announce today， one David and i have made a blinkest page that represents our bookshelf so if you want to read the books that influences David and i you can go to blink us dot com slash required for this particular episode on cosco this is point to we mentioned that theres basically one book about cosco and price club and it is selfpublished by sale prices on Robert price as you can imagine its out of print we managed to get our hands on threeof them two of the copies are held by David and myself to do the research and the third is at blinkest hq and blinkest has turned this booksale price retail revolutionary and social innovator into a blink where you can get access for free eblink as dot com slash cosco， theyre also including otherbooks in that collection that are about doing a few things but very well like the book essentialism， which is from friend of the show Brad gersner that is one of his favorite books if you click the link， you will get free access to cosgoblinkistcollection and anyone who uses that link or uses the couponcode cosgo will get fifty percent off a premium subscription to all 65 titles in their library supercool and for those of you。

who are leaders at companies checkoutblinkistforbusiness this gives your whole team the power to tap into world class knowledge rightfrom their phones anytime they need it on top of that theres also coaching by blinkist， which is great for leaders this is tailedforpersonal and organizational goals its like having a coaching yourpocket helping with everything from management to leadership。

and its used by over 15 anizationsfromhondaytocheckfully arcencer thankstoblinkest in their new parent company go one where David and i are huge fans and Angel investors go one and blinkist are both amazing ways for your companies to get access to the most engaging and compelling content in the world， click the links in the shownotes OK！

David so takeus from the first price club through the cosco so on the back of these eighth wonder of the world like cashflow dynamics that these price club warehouses have price club gospublic in 179 three years after founding and i say go public not in an ipo not in a direct listing they dont listanywhere they dont raise any money because they dont need any capital so what happens is there so much buying and selling activity among the original shareholders because this thing is become so valuable that this is the first time ive actually， ever heard this happening priceclub crosses the five shareholdermark that at the time the sec mandated if you had more than 500 separate shareholders of a company you had to start filing as a public company surprise clubs just like OK well file well， be a public company they dont list on an exchange theyjust like really sure we dont need the money thatcrazy so theyregistered with escc， but theyre not listed on a yes traded over the counter theyre not on the New York stock exchange or on the nastacker and hang like that wow so for those first three years。

i need to know a price club shareholder in order to buy the shares yeah！

theyprobably are some market making systems i think this is what the over the counter market kind of does but yeah， you cant discotraded on an exchange wow hilarious so nineteen eighty two they do ultimately list on nasdag probably just to get more liquidity in the trading also， in 1982， sol gets a call from his old bodysaim Walton he wants to come out he wants to see saw wants to have dinner with the two hellensget the families together he wants to shop his competitor like he always does yeah you know and hes like you doing so great with these price clubs i love your second act i want to come see it in action and so is like sure come on out i think he knows what save is up to but he doesnreally care whats gonna stop him from going into a store you know totally so sayamin Helen come out they all of a nice dinner in lahoya sale tells him all about price club how the model works the cash flow dynamics everything save of course， goes back to bentinvel and within twelve months guess， what pops up， sams close of basic and this is really the wager difference here between solid sam sawdoescare hes like sure you dont again what am i gonna do stop you they stay friends theres this amazing story that saymtells in made in America were a few years later， sam is going around again to price club shopping his competitors with his tape recorder making notes about how theyre doing priceing an imitori and stuff and the security at the store confiscates sayamsday， recorder sales up just mailin it right back to say him hes like keep you now its talking uh its so funny right around the same time another person comes out to San Diego to visit sol and price club a guy named Bernie Marcus and for some listeners that is going to ring a lot about Bernie has a story very much like sales he was the president running the handy dan hardware store chain and he had gotten kicked out by the board and was pretty salty about it and was looking for a second act so sale has about the sin Diego heshowsamtheprice clubwherehouse he givesome the playbook and he says look Bernie youve got all this hardwhereexpertise take the price club playbook go kick their button open the price club of hardware stores Bernie Marcus of course， then goehome turns around and startfrom listeners ten times that we need to do the Home Depot story at some point i actually did not know birdin at markesname or that he was the founder of home depos so i think now we have to now we have to so this now brings us finally to one more call thatll get also in nineteen eighty two theys like yearsinretailing 1962 walmartkmartin targetstart 182 whenallthishappiting another Bernie， this time a Seattle retailer named Bernie Brotman and his son Jeff callubsol and they say sol this price club thing is fantastic were retailers up in the northwest， up in Seattle wedlove to open a franchise up here a prize club franchise in Seattle is just like the feed cofeed mart days and solas the price club management team think about it and they make the very poor decision to say no and in a same echo of what happened gosh thirty years earlier Berni and Jeff say OK， we understand were gonna do it anyway， were gonna close the price called model and start the same thing up in Seattle and again i think sales totally fine with this Cuz was price club growing aggressively they were， but they wert planning to go to the northwest they were following the old sort of trade routes of the Fedmart playbook of Arizona， Texas， Florida going out across the south in the Midwest 哼， so what happensnexis pretty hilarious Jeff Brownman cold calls price clubs head of merchandizing and says hey， my family announce were starting up a price club clone up in seeadl we actually think the northwest is a great market for this would you be willing to leave price club and come up and be my cofounder and the header merchandizing is like well， no， not because i dont think its good idea but you see saw prices my uncle hes like but let me give you the number of somebody else who you really should call i think this guy is the right guy for you wework with him for a longtime here at fedmardemprise club hes now left hes doing some retailconsulting so healprally bewillingto talk to you hisname is Jim cynical， but a name and this is how it all comes together jeffcalls Jim convinces him to come up to seeadl hes ready hes ready to run his own show as they say so Jim moves up to seeadl they start costgo and the business plan is really pretty much exactly just clone price club and Jim really is sales protojey its like clone price club。

but with a guy at the helm who was built for scale and absolute focus on the details yep and not only was he sales protoj！

not only is he a tremendous generational talent executor he also is the guy who ran the division that inspired the whole thing he reallyis the perfect guy and so listeners you might be realizing now when we were saying at the top of the episode。

this really is kind of all one company story it really is there is a straightline through from feed code of feedmart or lets even just started at feedmart since its all the same people through to coscode today so Jim movesuptoseeado he in the broadminsraised seven and a half million dollars to get going yep they sell fifty percent of the company to do that they recruit 8 people immediately mostly from feedmartsum from price club and theyre all sort of forties and fifties this is like a gang of ten twelvepeople who have all work together before industry veterans have short hand and they are just like weve got the money okay go we know exactly what to do i mean literally its like the tsmc story or like the Zoom story its like air Huaon finding 40 people who knew exactly how to build Zoom and then just doing it yep so great so within a couple months they open the first coska warehouse in Seattle then a few months later they open the second import lint of course。

both of them takeoff immediately then they go to you Tao to northern California to British Columbia and this is where you can see that what saw said about being really great creatively in business at the prices in price club， but not created execution whywaspricclubnotinnorthern California given that they started in southern californio these the kind of mistakes that they made so this new cosgo under Jim hitsabillion dollars in revenue in less than three years after getting started this is in the eighties and threebillion in less than 6 years， which is the first company ever to hit that milestone two its a wild theygopublic and what two plus years after founding yeah， nineteen eighty five they go public crazy once this plays out and of course， samz club is also becoming a jugger not at this point in time price club is doing fine again capital is not the competitive vector here but theyre not being as aggressive theyre not expanding as fast as cosco and sams club what happens with price club is in someways sort of the same as what happened with fedmart you know as all readily admits he enrobered are great at creative ideas in retail theyare not so graded scale execution now its different in that capital is not a competitive vector here back in the feedmart days fetch Mart was constrained you know the whole reason they went looking for a capital partner was they needed more capital in order to be able to grow stores and compete with Walmart and kmark these price club warehouses were paying back there capital investment quite quickly， especially relative to feed mark because of the cash flow dynamics that we were talking about so price club was certainly doing fine it wasnt declining， but Jim and Jeffat cosgo and certainly Sam at Walmart sams club they are paddled to the metal aggressively expanding and thats not really solin Robert demo no and it does if you kind of read between the lines and some of this stuff it does kind of seem like cosqa wasnpoaching people from price club， but a lot of really good people sort of found their way and wouldngot jobs at cosco so cosco definallyhad at this point the base of the sort of most aggressive talented wholesalers of the west coast yep totally and saw at this point in his life he sort approved himself again hes made his point after his terrible exit out of feed mart hesteps back from the day to day of the business hands that over to Robert hegets really into real estate hes not as aggressiveas he once was so in June 1993 cosco and price club merge together to form the united price cosco and as weve talked about this really is a reuniting of them and at the end of the day price club was either going to land with Walmart or with cosco and sale price didnt want it to be Walmart and very very much wanted to join forces with Jim Sanagal and so they sort of made that happen this was the natural successor for this combined business in jimcentical now interestingly the transaction really is about as close to a merger of equals as i think whatever seein on the show with the caveout that Jim is clearly going to be the ceo thats gonna run the combined company at the transaction 52 percent of the equity in the combined company ghost cosgoshareholders 48 percent to price club shareholders thereabout the same size about hundredstores each at the time of the transaction but cosgo is growingwayfaster so had they just waited a couple years the balance of favor would have been wayfar in the coscoside of things yeah and you sort of get the sense that the cosco folks were being very respectful of the price club folks because i believe it was something like a thirty plus percent premium paid for price club stock and so i think it was everyone sort of looking at each other and cosgo sort of knowing that they could really buy price club for much smaller relative percentage in the future but why dont we just do this today i know its a good deal for prize club folks and lets just say sudo merger of equals lets call it and lets be one team from now on yep and there was a forcing function to this it wasnt just that jem had a soft for his mentor solid for price club， sams club and Walmart was aggressively expanding at this point in time and so if they had waded too much longer， samz club would have just gotten huge and potentially runaway with the market so after the merger happens even the newly combined pricecos go is still only a hair bigger than sams club in terms of number of stores in revenue so they kind and needed to do it pretty quickly or sams was gonna run away with it fascinating。

which is so funny because its a much less disciplined business every bit of dna in cosgo and price club is just so unbelievably disciplined and an admirable way to run a business and sams club strikes me as a bunch， a cowboys who are changing strategies all the time well。

you know its a second business line under Walmart ofwhichthemainwalmartsupersennerbusinessline is one of ifnotthegreatest retailbusinessofalltime its certainly the biggest still to this day yep sol kind of amazingly lives to be 93 years old he passes away in 209 after the merger he really devotes the rest of his life the next fifteen plus years to fulanterbean politics， so he does a ton of charitable development in sandiago， he gives back to usc uscis public policy school is the price school of public policy because he also becomes super involved in democratic politics and actually when Obama is running for president in his first campaign in two thousand he comes through San Diego and meets with sale price you know 92 year old sale price thats how influential he is how much money hes giving to the Democratic Party in this kind of last chapter of his life do you know who speaks at the 2012DNC when Obama is getting reelected， i do Jim cynical yep。

so they really are when i say ideologically similar or the natural successor or almost like another son of sale price Jim send a goal on sale price really are of one mind in many ways except Jim is a way better executor alright， so lets talk about the execution of this business a little bit and there are some concepts that i think weve talked about at a high level， but we haverreally drilled into why they work so well and honestly i have like ten or twelveof these David so were gonna talk about two important ones now and then well get into more as we sort of make our way to modern day a little bit yeah， lets do it so one that we havent talked about is the economics of membership and theres the obvious ones that everyone sort of realizes today the base level membership is sixty dollars and as a consumer， i assume im getting some kind of good deal by paying sixty dollars and that even before learning too much about COSCO， im aware that that sixty dollars is something im paying outfront to get the benefit of some low prices later， but lets analyze some of the second order effects of membership， which i think are potentially even more interesting than the obvious ones theres a lot of psychology happening here yes， the first one is that it actually selects for wealthy customers yes， this is amazing as does buying in bulk so the items that your buying are literally cheaper per unit so youre saving money but you need to buy a lot of it upfront just like you need to pay a membership feedup front， which means that they tend to get members who are not sensitive to cache flow and they also tend to get members who have spaced to store stuff at home and so i looked into some of the data on this to try and put some numbers to it there was an independent research firm that found that the typical cosgo consumer makes about a hundred five thousand dollars， a year in household income and has a four year degree Walmart by comparison has a media income of about eighty thousand dollars and keep in mind the medianussn com is seventy one thousand dollars so coscoppers have A70PERCENT higher income than the us medium yeah！

this is one of the most surprising things about cosql they have the lowest prices， but they have the wealthiest consumers of any major retailer yes！

its totally fascinating in very smart consumers people who can kind of look at the deal and go actually， i know im coming out ahead on this another interesting psychology around this is when you pay sixty dollars up front， it encourages you to come and use the membership you are more likely to shop because youve prepaid some of your margin dollars i think this is called the endomen effectify remember back to my psychology classes yes， you just sort of assume that yougetting some kind of good deal by prepaying for a membership but front so you want to go maximize the margin dollars that youre able to get on their discounts， which is totally fascinating another one is that membership further decreases shrinkage we already talked about the fact that employee retention is great for making sure people dont steal things so this membership， makes it so members dont lose our membership you sort of feel like your part of some sort of club on top of that these items are huge theyre hard to steal how do you steel a tv？

how do you steel a two and a half pound thing of nuts， and so theres like all these factors membership is one of them that really contribute to low shrinkage yes！

now you mentiongetting getting a good deal we talked earlier back in the feedmart days about how lossleaders and sales was kind of an anathema to solve price how does that play into this？

yes， this is super interesting so cosco basically wants to provide insane value to consumer they want you to get a better deal as a member than you could possibly get by shopping anywhere else and so， how do they go about doing this？

they have enforced a strict cap on the margin that they are willing to make on any product so they have decided internally that they are not allowed to mark up anything more than 14 percent above what these suppliers sell it to them for and ill tell you they are tough but fair with their suppliers in making sure that they get a great price for their members and so coscode decides we will only mark up anything a maximum A14 percent they actually do mark other things up less than that because things like electronics they actually can only mark up 678 percent so maximum 14 percent the only exception to this is curtain signature where they cheat a little bit and let themselves go up to 15 percent quite indulgent so how does this compare i think thats the interesting thing here a common practiceat department stores is literally one hundred percent markup someone gets a good for fifty box they sell it for a hundred box i mean even at Walmart， a discounter quote on quote marks up 25 percent， which is almost twice as much as coscos margin and so Jim senigalle has a great quote on this he was asked about it and his response was you could raise the price of a bottle， a catch up to a dollar in three cents instead of one dollar and no one would know raising prices just 3 percent would add fifty percent to our pretexincom why not do it its like heroine？

you do it a little bit and you want a little more raising prices is the easy way what i think also back to the membership it all comes back to membertrust the members have to trust that they are going to get the absolute best price on everything and that cosco isnt going to be playing these games otherwise they would just go shopping Amazon or wallmarder whatever！

youre exactly right the value proposition forty years ago was youaregoing to get the very best deal possible on the goodseyourebuying here extreme value proposition is what they like to say and the fact that theyve just made that true every year for forty years is something that really does stick in people sikey and i totally get the hero in line i think its so easy to decide to cheat one year and then in all the future years youve gonna cheat cause youbroke an expectations with customers with shareholders theres something kind of magical even in the relationship between cosgoon a supplier where a supplier nosed that when coscos being really tough on them to give the lowest price。

coscos not gonna turn around and then market up 50 percent make a bunch of money coscoe is going to make the same margin that theyve always made on that good totally its worth double clicking on the supplier relationship for a sec coscos relationship with their suppliers is worlds apart from walmarts relationship with their suppliers yougotobentinfill as a supplier and youaregetting putthrough the gotlet it is designed to squeeze you as much as possible， that is not how the supplyer relationships work with cosql theyll work with their suppliers theyll understand yourbusiness theyll come see you yeah okay i was gonna save this for later。

but we gotta do it now the coscode of ethics as it exists today largely inspired by the feedmart values from 4050 before are in order obey the law number one first and foremost obey the law and we will save that from moment ive got a fun story of how that came to be number two take care of our members and listeners when youlistingthrough these the order is important， the subject of each statement is important， and the phrasing of each statement is important so one， obey the law to take care of our members three take care of our employees for respect our suppliers and i find it fascinating that they use the word respect because they have a posture of tough but fair and so theres this great anecdode and i mean i heard one， but theres fifty examples of this that you can find in various teggest calls or talking with people heresuppliers to the company where cosco buyers always ask why when a supplier tries to increase the price and that parts not that novel i imagine a Walmart buyer also tries to ask why the buyers are very deep so they actually know the commodity prices of ingredience from suppliers so lets take like a chocolate company for example that sells a chocolate product if the chocolate company said hey， the chocolate costs more now， the coscode buyer would say well i know the price of coco ive been watching the commodities market i understand milk sugar butter why is it more expensive just give me feedback on that and a lot of the times it is like a commodity prices gone up or they use labor in a certain area thats gone up or maybe they have a long datedcontract with a supplier of their own that you know has an artificially high price for some reason until the contract expires and so the cosco buyers will write all of this down will keep track of it and because they manage so few accounts they actually can keep track of it like each buyer is only really adding three 50 maybe 15 newskusiyear， but youve manage a very tight set of relationships so theyll just call a supplyer back and say hey last time we talked youd mention that Coco prices were high Ive， noticed theyve gone down are you lowering the prices so that we can lower it for our members its like this really amazing side benefit of having the lowest you count is that they can be tough but fairy with suppliers and really stick to it so awesome and becauseof coscos growth margins always being targeted at A1 percent capped AT14 percent this means that for every dollar that cosgo gets a supplier to reduce the price on something again toughbutfair， the customer actually sees most you know 89 percent of the benefit and so cosco really does just get to pass whenever they get a benefit 89 percent of that benefit goes to the member so the way i look at this is some companies always look for ways to make more margin coscos specifically does the opposite they look for ways to provide more value to members and retain them for members as longer and get them to get their friends to be members and they try hard across the board to get lower overhead cost through cleverness and efficiency not through squeezing or underpang or anything like that so theres a really fun acquiredcanon acquiredcinematic universe story related to this。

which is the famous as chronicaled by bradstone in the everythingstore coffee date between jimcenagall and Jeff Bezos in 2001， which occurs at the Starbucks inside of the bellvue barns， a noble of all places thats right， so perfect and at the time this is 201 Amazon stock was in the dumps they were under pressure from walstry Jeff and the organization were embarking on a campaign of raising prices on Amazon dot com to get profitable and they just started this rolling out of a super important Jeff has this coffee with gem and gem explains this philosophy to Jeff Jeff comes back to Amazon hq the next day， and is like ireversing the policy and says exactly what you just said there are two types of companies in this world， companies that work are decharge their customers more， and companies that work hard to charge their customers less henceforth as of today， Amazon is a company that works hard to charge its customers less， and that is directly from Jim cynical wow！

thats awesome so on this point number four of suppliers heres some quick math that illustrates why they do have to be so careful and why they do will such an enormously large stick so walmarts revenue today is about three times cosgo in the us， but since coscos sells so few items there are a massive customer for any given supplier they always have this superlopsided relationship theaveragerevenueper product becauseof the sku count at cosgo is about ten times Walmart wow， so anytime there are negotiation i mean like almost every time the person sitting across the table is looking at coscode like you are my largest customer youlike fifty percent of my business i think they try not to have that be the case， but its very easy for it to become that so what is really important that they have it as one of their sort of formain tenets respect are suppliers now notoriously missing from these four is the notion of a shareholder and Jim senigao articulates if we do these four things throughout our organization and again those four things are obey the law take care of our members， take care of our employees respect our suppliers in that order then we will achieve our ultimate goal。

which is to reward our shareholders its so funny goadback to our previous episode in robstrasers ten principles at Nike and like on the onehand the Nike principles in the gosk of principles are about as far parties you could imagine on the otherhand robstraser Nike principle number ten is if we do the right things will make money dam near automatic right！

and that really is the same thing i gosgo hundred percent so fun story of how these code of ethics keyed to be so in the mid eighties the Washington state licker controlboard was putting cosgo through the ringer when cosko was applying to sell alcohol， and i think at the time it was just beer in wine and basically the licker controlboard was looking for any possible reason to deny them and i think there might have been some corruption going on the state had invested interest in preventing very large retailers from becoming the volume of selling beer in line and cosgo because they were started with this ethos came through squeaky clean and actually got the permit there was literally nothing that you could sort of drug up on them to deny them and so the company was fortunate to realize it very earlydays howmuchit would payoff to be truly above approach no matter how tempting anything was they had to build a culture that was completely obsessed with this code of ethics and you just see it everywhere i mean the wages。

the way they treat suppliers the fierce fix cap on markups the discipline not to raise memberships constantly i think its been like six years between the last two times they raise the membership even fivedollars its a luder crisley squeaky clean and long term oriented mindset so back to the story at the time of the merger the combined company was about 16 billion in revenue that was up from cosql alone was threebillion in nineteen eighty nine so by the merger in 93 coscoon price clubber each about 8 billion in revenue and then sixtein together so fastgrowingimpressive scale already and stores more concentrated on the west coast but around America by this point yeah， it combined 20 stores so pretty large footprint theyre in Canada theyre in Mexico theyve already started international expansion， which then is going to become huge throughout the two thousand says Wes see for cosco but right around the time dimerger cosco takes a pretty important step that unlocks a huge part of the next chapter for the company and that is the creation of the famous Kirkland Signature housebrand it is a fun story around this when they were talking about creating their housebrand the companies corporate headquarters was in Kirkland Washington read your belview read across the lake from Seattle and so thats where the curclant signature name came from i think by the time they actually launched it they had relocated to Isequa a little further south and theyre like we cant call this Isequoa signature no curken signature is good！

but it was tied in with international expansion because they needed a brand name and a trademark that they could clear across all the countries that they were operating in and planning to operate in and so curclant signature like that works in Japan that works in Korea that works in Taiwan itsound so generic like i dont even put it together when i first moved a twelve years ago that the curtain over there was of curtain signature because curclem kind of just meant nothing to be it meant you know whats the um Whole Foods version the three sixty five interestingly overtime curtain signature has come to mean something and that is a certain level of quality nobody is a testing that this curken signature sweechart is a lululemon switchert that has fancy materials and the most cutting edge technology in it but it is of a certain bar of quality that is sufficient for cosco members and that is sort of the ethos that cosco has around curtain signature that were only going to put something out there if we feel that we can create value for you。

that its going to be a lower price than what you could get otherwise or the flipside of that that we can make a better product than you could get from any of these branded products that we were either previously stocking or evaluating stocking and maybe the most obviously and perhaps most famously where this comes to bear is in a wine and licker sales the carcline signature wine you know youll get people who are wine stobs thatll drink carcline signature wine theyre like yeah！

yeah！

yeah！

cosco but like this is actually good stuff from to keyala in vidcats。

the same thing oh and especially for these things that are very clearly difficult to make and therefore its made by one of a few people like a made by a real winemaker or like the batteries definitely made by a company that makes other batteries its not like there are low quality battery so i do think much like there eleven percent target growth margin on everything cosgo looks at their housebrand as an opportunity to provide value to members。

not an opportunity to capture more margin for themselves yup now they also have a pretty unique opportunity they realized with their housebrand becauseof the very small number of skies that theyre putting in the warehouse， theres much less competition on the shelves for any given product category for the housebrand so like yeah， you mentioned you know Whole Foods has the three 65 housebrand Walmart has their housebrand did a blah these big retail is too safe way certainly does but in a standard retail environment， the housebrand is going to be one of like five or six or ten different brands of a given product category on the shelves at cosgo its one of two。

three or one of one i mean if you go by the mixnuts， the mixnuts are curken signature， mix nuts， the jumbo cache are curtain signature， jumble cache， and in part because the buyers were evaluating the whole landscape， and they determined we can do something better for less i think the coscope fancy mix nuts is the best mix not blend but i think that that was an enterprising buyer who was being creative and working with suppliers and thought like i actually think we can provide a better product for a lower price than what exists on the market and i dont know i think theres a lot of scenarios where they have certainly consumer agree， fifty two billion dollars of curclement signature sales were done last year that does not include the curtain signature gas so out of coscos 2030 billion topline a little under a quarter of it was curken signature sales and closer to a third if you include the gas well。

thats incredible its americaslargest consumer package brand so at the same time two is there spinning up current signature and the kind of mid to late 九十 they also start expanding internationally， so firstly they go to the uk， then they go to Korea， to Taiwan， to Japan， ultimately China， which is now a big initiative for them whatinteresting is i think at the time i suspect they were very few other western style global or globally aspiring retailers that were entering Asian markets because its not exactly obvised that a huge warehouse with bulk packaging would work in cultures like Saijapan where people live in tightly packed dense urban environments much smallerhouses in apartments than an America this is not the land of suvs and sub herbs right， but it works great yeah！

i mean at the end of the day people really like value high quality products at a great value is a supercompelling value proposition for anyone in the entire world totally， i want to go back to something that weve been wading into in the discussion of curtain signature which is why is it OK that at cosql they can only have thirty 800SKU like why are people OK with this deal where i dont need the selection when i shop here and i think theres a few illustrative examples of the story from here that get into that but first， this is a great time to think our final sponsor of this episode crusal？

which is honestly one of the coolest companies in the world right now crucial is a cloudinfrastructure provider just like AWS and Azure that is one hundred percent purpose built for ai training and inference yep just like coscowarehouses are purpose built to drive down their costs and sell highquality products at the absolute lowest prices criso does the same thing with their data centers so for many ai workloads youll get significantly better performancefor your costs from cruise than any traditional cloudprovider and with a really cool environmental benefit yeah！

the way they do this is nuts first on the quality front theyspecifically for ai literally their data centers are nothing but rows and rows of the latest Nvidia a one hundreds and h one hundreds so they have the benefit of focus and specialization Chris was also among the first deploy cutting edge networking fabrics like infinaband， which accelerates performance of large ai trading clusters dramatically think 200 movies per second between servers crazy， fast stuff and two this is what is very special about cruise so they use energy that would otherwise be wasted or stranded to power the data centers heres what cruser does theyve gone out to energy sites？

think like Texas， Montana， Argentina and more and built their data centers right on top of oilling gas force， which before crusal was just an enormous waste of energy the generated tons of unnecessary greenhouse gas emissions it takes some crazy ingenuity to pull this off true vertical integration crusoe manufacturers， their own designs of modulardata centers like building data centers out noilfields they own the servers the networking the sofforstack even trenching last mile fiber to get connectivity out to these sites and bonus they also improve role connectivity for the communities that they work in they do all the work to build the data centers， build the onsite infrastructure。

and then ultimately power crusocloudallinhouse crazy we discussed all of this in depth over on ack two with crusos ceo chase lockmiller funny we had reached out to chase two years ago to have more acq two and it took us this long to actually get it scheduled so go give that a listen weve been fasated by this company for a longtime， we will link to it in the shownotes his increso story is totally amazing and if you or your company or any investments， youve made have ai workloads that could use lower cost and more performance infrastructure， which is all of you gotocrusoclouddotcom slashaquiredthatcru soeclouddotcom slashaquiredor click the link in the shownotes so David lets talk about low selection and how thats OK so Walmart and other retailers operate it under the assumption that shoppers require selection it seems like a reasonable assumption， unless you started your life as a B2B wholesaler that then fell backwards into consumer， and then realized it was fine for consumer to so obviously if you have selection， it makes the life of a retailer very difficult at a lot of ways， but it was just assume that you had to but cosco makes the opposite bet they bet that you dont need selection as long as you ensure that everything you can buy is highquality and that is the crazy thing that is worked cosco essentially has its entire buying teams， ethos sort of shopping for you there preselecting the best one or two items in every category and consumer， because they do all that work ahead of time are basically just OK sacrificing selection entirely and saying yeah as long as you give us good value on great stuff were totally OK with that thats it important unlock you cant just have low selection and be like well its all cheap stuff it has to be like high quality in its category and the best deal on the market in order for people to be OK with low selection， which drives low skeyou count， which drives all the amazing things we talked about so far yeah！

it comes back to trust im part of this two also hearkens back to sol in the feedmart days saw developed this kind of principle back in fetch Mart that he called the intelligent loss of sales yes！

i was waiting for you to bring this up yeah。

so this isnt necessarily the number of brands in terms of the selection out there this is about product sizes so today coski was taken this to the extreme of like you can only buy the two and a half pound jar of nuts theres no like eight ounce jar of nuts now you can buy a whole bunch of little packs of afternoon packs of nuts either way youre walking out with a lot of nuts yes， but other retailers and everybody back in the feedmart days had all sorts of different sizes of products in the idea was that by having different sizes， you would maximize the surface area of customers in market that you could reach like sale uses the example in the book of household， lubricating oil like kind of WD 40 type stuff hes like we only carried the eight ounce can even though there was like a threeounce can out there we lost some sales from customers that only needed one or two ounces and us would only buy a three ounce can then they just didnt buy the eight ounce can but it was worth it to us to forego that becauseby only having the adeounce can we could reduce the number of skies that we hadnget all these benefits that youtalking about Ben i mean yes！

you and i have been trying to do this without having a name for it for years people sponsoracquiredseasons there are lots of other podcast let you do all kinds a crazy stuff and were just like look we have a skill its called the season we would love to work with you on that and it makes our lives so much better and we can run our business in a completely different way by having a loast you count totally if we didndo it this way we would need to have an adsale team or workwiththedo it outsourcedsnetwork or something like that that would add waymoreoverhead darebusiness that we dont want right this stuff is all about the tradeoffs you are willing to make and just daisy chaining them together such that the benefit of each tradeoff plays into the benefit of another trade off that you are making in a way thats aligned Yup i knew we were gonna love cosql i honestly its like maybe my favorite business that weve studied lets wait till the end to talk about that but theres a few more things along the way that happened in the nineson two thousands before we get to today that i think are important to touch on web mentionlogistics a few times and that the lowest queue count means that they can meaningfully simplify their logistics and to put a point on that they only have so many suppliers who are bringing goodstocos go the fact that they sell in bulk means that they can bring a whole pallet and do a warehouse and consumer is just sort a comment pluck it off the pallet its wholesale is a wholesale club but there something we havent talked about which is coscos distribution centers so they use something called across docsystem for their distribution centers now member i mentioned back in the price club days its a little bit more complicated today not all the suppliers just show up to the one store， the one warehouse with all the goods they actually do need some system to receive things from suppliers and bring on the stores yeah back in the price club days there were no distribution setters exactly but heres how the distribution setters work trucks pull up on one side and on load pallets and thats where the suppliers trucks are on the other side the warehouse there， coscode trucks and so what happens is since they moved stuff entirely by the pallet no partial pallets know these few things go to this store these few things go to that store the supplier trucks on load the pilots they just get scooted across the dock to go directly to a cosco warehouse and then within minutes to hours that truck leaves and theres no unrapping of individual boxes theres nothing sitting overnight in the facility， this is so much simpler， and it really plays into that cache flow dynamic where things can be available for sale so fast and just to understand how differentiated the system is 92 percent of coscodes merchandice is crosstocked only 10 percent of Walmart has crosstocked merchandise on a pallet system like this and its not like Walmart has an invested many tensibillions in their distribution and logistics systems totally， its just that cosco has made a tradeoff that makes it so that they just have a much simpler operation and theyve got all the downsides they come with the tradeoff no selection， but they get all the upside that comes from it to and so this also plays into this labor thing you can totally pay your employees more when you need less people to generate the save amount of sales you dont have wasted manpower on wrapping items from pallets no one turning the labels out to look pretty the customersdo all of this so it legitimately means they just need less people and this is why they generate over 730 dollars of revenue per employee theyre just efficient it aligningtheir tradeoffs i love it this is the brick some morderretailversionof the SaaS business fallacy。

which we fall prayed to all the time on the show， which is if you invest in our builder around SaaS companies and SaaS company margins you can fall into the trap of thinking well， why would i ever want to be involved in a business that doesnt have 90 percent margins？

but actually， what you should really care about？

especially as an invester is not your margin percentage but your absolutely margin dollars and so， yes， cosco has much lower margins than their competitors， but the volume that they drive any actual dollars and up being worth it yeah！

even though cosgo is only an eleven percent growth margin business and only ever will be at eleven percent growth margin business its still a pretty amazing business to own yeah minutes what did you say two hundred and thirty plus billion dollars of revenue and seven and a half billion dollars of operating and comeoff that so again tiny little sliver mergeons but seven and a half billion dollars of operating income falling out the bottom is pretty awesome yep， especially seven halfbillion dollars of highly defenssible operating income yeah seriously and as youve been talking about becauseof the way that there inventory is financed a reasonably capital light business all things considered i mean theyre building these warehouses on huge pieces of real estate you know with gigantic shelving and all this headcount and its an amazingly capital efficient business its weird yeah OK！

i think its time to talk about investing nerds favorite aspect of the coscode story， which is that there really are two different businesses here under one ref there is the retailer and then there is the membership business its almost like way back solon Robert sitting in the office after feed Mart thinking you know what we actually had two different businesses of Fedmart Cosgo is also two different businesses there is the operations of the retailer。

and then there is the membership business right and psychologically there one thing its one experience for the customer， but financially its too entirely different things yeah， so a lot of people like to make a lot a hay about the idea that cosgo generates all their profit on memberships and that retail is just a breakeven business and this is been popular to say because they run the retail business at such thin margins and memberships are nearly A100PERCENT marginbusiness i mean really what does it take to run a membership business yeah with like a what 90 percent reneural rate something crazy highlike that talk about a SaaS company yeah， but its not quite true it is accurate to say that membership fees represent about 70 percent of the companies operating income with the other thirty percent of the profit marginescoming from retail its been a little bit more than thirty percent in recent years， but thats sort of the historical split think about as sort of a seventy thirty thing it really is staggering that a business that does two hundred and thirty billion dollars topline 70 percent of the prophets can come from the four billion dollars of revenue they generate from memberships that tells you how razer than the margins are on their retail business almost to the point where like why do they care about growingsales at all all they should care about is increasing retention of members the split is just significant enough for the retail business when youre like OK， yeah， we should care about growing sales in the retail business but if it wasnt seventy thirty if it was 90，而 95 youd kind of be like well im actually not sure why we care about making a single another sale of toilet paper because unless， it is increasing the likely had someone retains i doncare about it and theyre not quite there， but theyre almost there well！

except though the way that you grow memberships is you grow retail sales right？

but for the last several years， they have totally been growing retail sales， per member and if it was like A955 split， you sort of couldmake the argument of like why did they care about growing the retail sales， per member but at this sort of more seventy thirty split theres just enough profit dollars coming from the retail side of the house for you care about that too i love it its like Amazon in AWS first is Amazon Retail？

yes， in the last twenty five years， membership has grown from nearly nothing if you look at what the numbers were and the early nines compared to today 4 billion dollars yeah！

i mean when we were talking about the feedmart days like it was two dollars for a lifetime。

membership crazy and again David this membership business takes almost no investment they dont do any advertising right to quote our friend and remarks i basically think that cosco has decided to only be a decent return on invested capitalretailer， which allows them to have it insane return on invested capital membership club business yep its so true again to quote Andrew insanely stablegrowth on a huge capital light feestream i mean that sounds like a venture capital management company its pretty wild alright speakingof membership lets talk about the last big innovation piece of the puzzle before we get to the business today。

and that is the two tiered cosgomembershipsystem and the executive memberships， which they launch in 1998 sorry！

yes， 998 the executive membership so what is the executive membership？

and why are we bothering to spend time on it isnt just a second higher price membership it is super illustrative of managements thinking so i love this as a microcosm for all of cosco so you can spend an extra sixty dollar so total a hundred instead of sixty and what you get for that is two percent cache back on your transactions now that two percent cacheback is limited。

but its limited its something crazy like you can only get a thousand dollars back a 60 dollar Anker metal investment for a thousand dollars back is pretty good！

right and if you actually hit that thousands dollars， it would mean your spending fifty thousand dollars at cost oh！

a year oh， wow！

im sure theypeople decide so the break even point of this sixty dollars is three thousand dollars， which is not that hard to hit in fact， its right around i suspects this is why management price it that way its right around the averagehousehold spend at cosgo so they want to make it basically break even for basically everyone！

which is so awesome and also different than other retailers i mean now theres all sorts of fancy technology systems to do this but cosco has always been able to track customer spend at the individual level。

because theyre all members they have accounts for all of them a hundred percent and other people might invent something like this to say well， were gonna betthat they wont use it they wont shop here enough and well get to make some money on the people who are infrequentshoppers and were excited about that and will basically get the breakage on people who pay for the operated membership but dont you know shop enough thats not at all what cosco is doing here and to illustrate that heres the insane part of it if you do not use it， they will refund it so good is there anything more Costco than that it is an amazing value for members， it is such a good value that 55 percent of us members now do it but much like everything else weve talked about with cosco it is also amazing for cosco because they get your money at the beginning of the year further advantaging their cash flow position and it gets even better because it makes you more likely to go shopping there now since you get even better deals with the cache back you effectively instead of getting the 14 percent growth margin coscos now only making a twelve percent margin on you when you shop there so as long as your spending three thousand dollars or more it basically just makes coscos margin even lower for everything you purchase interestingly 45 percent of paid members worldwide are executive members， but those members represent 73 percent of sales so weatherby causeational correlation executive members just spendmore and estimates are that regular members by less than one third of what executive members do so its this facade in customer segmentation thing where cosgo just gets to know and reward the most frequent shoppers who do the highest volume purchasing executive members as you would guess also renew at a higher rate and so it helps with retention on top of that which they call the triple play membership these guys are so foxy i love it if you get the cosgo issued city visa card， you were new at it even higher rate， so they have these layers of letting you opt into loyalty and all of this David as you mentioned earlier is on top of a highreneural rate anyway！

93 percent of members in the us renew every single year amazing and you can really see the fingerprincifthisdna in Amazon prime， obviously the whole thing is inspired by the coscomembership rate large。

but these same dynamics definallyplay out for prime members at Amazon of order more frequently much more likely to renew access a whole suite of services it keeps you in the Amazon ecosystem in it makes sure that youre buying more stuff yep Amazon makes money on the stuff Costco makes money on the membership but at the end of the day it is nice to retain a loyal customer to contextualize the 93 percent member attention again thats just all members thats not even the executive members or the credit card owners subscriptions to streaming services renew like half of their customers every year so consumer subscriptionsretaining at 9 十三 plus percent is not thats the monthly retention of most streaming services its crazy on top of all this im pretty sure that this is never been disclosed and i havent anyone about it but if you sort of read trade publications， people seem pretty convinced that cosgo is making money which of course， they are on the deal that they cut with city and visa in order to have the cosco card be the city visa card i mean most of the time when you are processing payments， you own two to three percent of each transaction to the issue of the card i think the dynamics are actually the opposite way with cosgo where cosgo gets to hold an auction and say we have any enormous amount of payment volume with enormously good customers with good credit would you like to do business with us and who would like to pay us for the privilege of being the coscode card rails yeah！

i imagine theres not a lot of defaults in the uh cosgocustomersegment base， theres also some fun history to all this to so that deal or you may know Ben used to be with American express， and then they essentially kind of help an auction as he say i think the origins of this though start all the way back with the original price club business plan not to offer credit， but specifically not to offer credit another one of the big benefit of moving to this business wholesale model was they could get out of the credit card game that they had to play a fetch mark when they were only selling the businesses when that was the plan it was like hey cash or check thats it no credit card exchange fees that were gonna have to bear and them when they open the consumeres in the group model and they kept that so for a long longlongtime you couldnt use credit cards at all in price， club。

coscos and thats the importance of doing the hard thing first by proving that they could exist and set customer expectations around were only cache and check it meant that they never had some scary moment were if credit card companies were put the screws to um they had a bunch of fear around well customers not shop here they were just from the Barry beginning getting getting a hundred percent of the dollars rolling in and so they knew the counterfactual they knew customers are gonna shop with us no matter what credit cardcompanies if you want to work with us your welcome to， but we do not need to pay for the privilege because wed know that our customers are not going to leave us for effect yep youd be happy to have our business not theother way around hiscrazyofcoursewithcoscosmarginstructure they literally couldnti mean its speaking of tradeoffs they literally couldnt ever accept credit how within 11 percent growth margin are you gonna go give three percentage points of that eleven percent to a visa like it actually would flip the business upside down we talked about a minute ago they make what seven and a half billion dollars of operating income on two hundred and thirty billion dollars of sales the credit card companies eat all your profitability if you let them in the door and so its a pretty incredible position toughing it out and doing the hard thing first and then being able to sort of flip to the other side of the table yep anyway， i love that point on the payment processing i think its an amazing playbook that coskgo ran over the years an unnecessary one every single time the coskgo does something amazing they needed to because of the trade offs that they chose yup so i think thats the last big peace lets take it to the business today definitely so taveantior Boyd we talked about very few things between to be honest like the late eighties and today， and its because the model was basically cast in stone i mean they added things like gas they added ancillary services and you can go get glasses and you can go by diamond rangs and i dont maybe sub that was done earlier i think a lot of that was from the feedpart days， big yard good i bought a schedthere， but the story is intentionally boring its what if you grow it tenpercent for decades doingexactly the same thing having a well understanding set of trade offs and a strong culture where does it go yep and you operate in arguably the second or maybe third biggest market in the world right？

which is global retail right？

and your the thirdbiggest player in the largest market？

you know America behind Amazon and Walmart so this acquiredepisode is different because so much of it is just nerding out over the awesome nuances of coscos， business bottle and actually less of， and then this crazy thing happened because it was a bunch of like standupguys， Makinga intelligent set of trade offs really thinking hard？

and then a whole bunch people working hard for a long time thats the story once all got things figured out the second iteration with price club really straightline to today so lets paint the picture today。

and then i think whatinteresting to talk about next is OK everybody knows how this all works how is it defenssible why does only cosco do cosco but first tell us about cosco today so i dont think people realize maybe by this point of the episode they do but certainly not before how big Costco is its sort of a sleep story since its tucked away in a seeadall serverb they dont do a lot of chestpounding they just are quiet and they do two hundred and thirty billion in revenue theyre the thirdlargest retailer the us they have one hundred and twenty four million members worldwide， one third of usshoppers are cosco customers they have a little over three hundred thousand employees at 860 stores we talked about this they do 750 dollars of revenue per employee yeah！

thats well， if i remember from our Walmart episode Walmart i think has over two million employees i believe Amazon has well over a million yeah！

so coscos doing some more between a third and a half the total revenue of Walmart but theydoingit with what almost an order of magnitude fewer people yeah， its crazy they have the highest revenue dollars per square foot of any wholesaler or discount store targets about 四五 0 dollars per square foot of revenue walmarts about 6 dollars COSCO is eighteen hundred dollars per square foot of revenue wow， said a cosco were an apple store and they have a lot of square feet yeah and this is up from let me look at this graph in 198 theyhad 6 dollars a foot and now theyre at eighteen hundred dollars a foot so meaningfully grown it its important to point out you made the comment about apple coscos margins are a lot lower than apple， so theyre generating a huge amount of revenue dollars not so much on the margin dollars but as weve been talking about thats the point yeah！

the individual warehouseis these days you may have these stats exactly but think of an average coscowarehouse generates over two hundred million dollars in revenue， and the top ones generate three four hundred million dollars of revenue 4 a single story single coscos could be scaled public companies on their own yeah！

2069 million dollars of sales per store on average per year wow！

nuts so just for fun lets go north of 180 just to see who else is out there Tiffany is three thousand so kind of within spitting distance like its only two x sorts less than two x and they sell diamonds well， so discuss thats true apple of course， is the goat at 55 dollars a square foot with high margins i mean that the apples just did not sbusiness but its worth pointing out Lulu lemon is approaching cosco level two there around 16 dollars a foot， but of course， much smaller stores than cosco COSCOS 是 unbelievably efficient we talked earlier about how thats illustrated in the headcount efficiency， but now we see it in the real state efficiency to yep this point on growingrevenue perfoot is interesting you know， i mentioned it went from 618 的 last twenty five years， because it reminds us to look at an important similar metric in retail， which is same storesales so coscode grew this by 14 percent last year wow， same storesales fourteen percent， which is how you get to that 269 million dollars of revenue per store？

they are so good at this that they actually publish their stores by cohort ear and their annual report， which almost no other company and certainly no other retailer does and they clearly illustrate that not only does the average store increase meaningfully over the previous year in most years， but new stores also inherit a lot of the learnings so the first year of a new store is dramatically better than what firstyears of stores were years ago until last year was better than year five of a store opened in 2014 wow！

its crazy its also wild that these stores are still growing at those rates year over year given that many cosco stores have been open for like thirty plus years at this point right its crazy i mean part of it is the addition of gas and the other big anslary items are selling， but part of it also is just being really good merchants and finding these little things that members love and findvaluing and doing little optimizations everywhere yeah and exactly to that point in a one of the sort of famous aspects today of the cosgo shopping experience is the treasure hunt nature of it and this is something that theyve learned over time you know the original salprise price club business plan was just the three thousand coreskys for businesses and then opening that up to consumers along the way they kind of realize that hey， if in addition to the course stables we have， which pretty much dont change we could change the brands we could change the exact details of what they are but were always gonna have nuts you know well， always gonna have chicken stuff like that if we have a small number of additional uinar wow， one time items such that every time as a member you come into the store theres something new unknown different for you defined and buy at a really low price that would drive repeat traffic and make covering the cosco more of a novelty！

more of an entertainment event and so today i think about 25 percent of their skies are these treasure hunt items huh i did not realize that i mean i know theyve sort of learned a bunch of things over the years like when they brought in fresh food for the first time， they didnt optimize the place in the store where they put that but they still saw a huge spike because it group repeat when you have fresh food people come in， they want to buy that they add some other stuff， but theyve been very clever in figuring out where to put it in the store to make sure that you have to walk by a bunch of other stuff to get having the fresh food is in the back right， so like if youre coming in for freshfood congratulations， you get to see all these other cool things that are buyers have managed to find out in the world for you and of course。

you get some of those two yep and i think for the items again the nonstaples the treasure hunt type items they intentionally want to run out， so that theyre not going to be there next time you come yes！

thats a good point OK analysis time analysis lets do it because we have a bit handlizing this business yet uh yeah， so the first segment that were gonna do in our analysis here is power， which is adapted from Hamilton Helmers seven power sbook which is an amazing framework for business strategy the question here is what is it that enables the business to achieve persistent differential returns or put another way how can a business be way more profitable than their closescompetitor and do so sustainably the seven options are counter positioning scale economies， switching costs network economies process， power branding and cornered resource there is one here that is so painfully obvious that it has been observed over and over again over the years and the original credit goes to investor nick sleep and the power is scale economies is Hamilton helmers notion that cosgo has the ability to leverage their scale to compete for items that there competitors cant get or perhaps get a better price from suppliers than any of their competitors nick sleep has this phrase that i think is possibly the best way to describe cosgo scale economies shared with customers and the flywheel looks like this cosgo has enormous volume and what they do with that volume is they go to the supplier and they say what is your absolute lowest price where youre still making an honest margin on this but youre willing to sell it to us and then cosgo make sure of that and they do their research and they come to a price and they say great and then cosco looks at their own business and they say how can we have the lowest possibleoverhead？

what is the smallest amount of dollars？

we can spend at our headoffice turning the lights on a facilities what is literally the leanest we could possibly run and still break even or generate a small profit thats how they come up with this eleven percent target， growth， margin number， and so what they do then as they mark up the goodsliterally the smallest amount that they can in order to share the most value with their shoppers， with their members， and then the cycle repeats they get more members they get better deals from suppliers and to be honest this scale economies that they then share with customers i dont know how anyone could ever catch them in this mode that theyve built from that well。

because this we are talking about for most of not all of their suppliers they are by far the biggest buyer of their goods even bigger than Walmart because they have so many fewer skies in the store yep， this is so fun i feel like there is such a resiance between Cosgoe and Nike even though on the surface there so different maybe this is like a Pacific northwest thing but i really think Nike has incredible brand power but they choose not to use it to increase their margins they choose to use it to keep prices low and accessible for customers and cosgodoes the exact same thing here cosgoe could definallymake a higher margin than they do now and still charge lower prices than Walmart but they choose not to and instead they share that benefit back with customers and that is an investment in their enterprise value coscois choosing to invest those dollars in making the franchise more durable by getting more customer love yup it really is a choice in durability i think yes in fact its what Jeff basios meant when he said your margin is my opportunity。

but COSCO just runs the playbook so consistently and when you look at there overhead， the fact that cosco runs at ten eleven percent overhead an Amazon runs closer to like thirty percent overhead COSCO has choice in a business model where they actually can just have lower margins on stuff because they dont need to do things like ship goodstoyourhome they need wafewer people they need wafewer investments in technology to do crazy robotic sorting at warehouses， picking and packing the coscobusiness model is one where theyve just gotten rid of all of that they say we were not even going to play that game our goal is to lower our overhead so we can pass along the most savings to customers lower are overhead and lower the prices that were paying suppliers we can pass that on to customer to this is amazing。

so this might be the first example， i think that weve found in the history of the show i think cosgo has incredible counter positioning power today as a large incomment in a way that they did not have when they got started oh， this is rare they probably had some counterpositioninganotherways but today i think they have huge counterpositioningverses Amazon and ecommerce and we should talk as we go here about coscos e commersoperations but they are famously sparken shall we say to me the whole point of cosgo is you go to the cosco and the cosko hq believes that two yeah it is completely counter positioned to amazons whole reason for being， which is convenience certainly if priceis no objectedisway more convenient to just click click click in the shopping card in Amazon and have it showup at your door yes！

different set of trade offs for sure， but it is rare that as a incomment you have the counter positioning power is usually a thing that startups do against in comments， but cosco is A230 billion dollar company that none of the other big companies can copy i mean Walmart is trying and still is not succeeding at it。

so as we been researching this episode nievelyin the past i always thought uh yeah coscos great， but they really dont get the internet！

which i think that also was kind of true like fifteen years ago i think they thought the internet was gonna be a fad， which is why they missed it at first and now theyre sort of intentionally missing it but i will get into it but theydoing it in their own way but i actually do think they underestimated at first yep but i think where theyve ended up is actually in a pretty good place and in a better place。

i think than Walmart and that place being that no， no， no the whole point is we are not an ecommerce company and the whole point is you come to the warehouse and because you come physically to the warehouse and you take the stuff off the shells youve got to be able to get absolutely the best price versus anywhere else an Amazon today has really become something else from what Jeff wanted it to be after his coffee with Jim cynical its not always the lowest price often you are paying for convenience far far from it you are very much paying for the convenience of shopping on Amazon i think on almost every product！

these days or the brand very often i will buy something thats a little bit more expensive on Amazon because im like well itll be easy to return or well i trust this company thats a very different promise than the original idea yeah！

so yeah， i really think that cosco amazingly as this huge in comment has developed a lot of counter positisting power yeah！

thats a good point switching costs i guess theres some im not gonna go join bjs， wholecell club or cms club when i already have a membership so to some extent， but i dont think thats the reason that they win network economies not really no i think it scale economies yeah， process power definitely i mean theres a culture at cosco that others have failed to replicate or haventriedhard enough to replicate yep。

i dont think theres a cornered resource， but branding is an interesting one lets talk about that right so recently。

a bunch of folks from casgo got to go ring the bell at the nasdac， and theyre all wearing their curtain signature， swecharts and the joke is made about the idea of a curcleant cator， its birthfootnotingthis its not the main point here but it is weired how curclint sort of has a passionate following in a way where its turning into a real brand when that was not the intention， the brand identity is that its the antibrand right theres a lot about our current consumerism climate that i think fullsthat also quick aside cosco has never tweeted the account has a lot of followers in zerotweets theyre not really a participant and social media， but they have a massive tail wind from all the coscode tiktalkers theres people constantly sharing videos about herethis amazing thing i found or herehow i structured my day to work coscoan or his myhall yes！

theyve benefited enormously from influencers what this has always been part of the strategy even going back to the feed Martin price club， days sol， and then now， cosco doesnadvertise either at all or like very very minimually， but they very intentionally back in the day 绪 local six oclock news stories valid oh， the lines at cosgoe oh， this crazy treasure hunt item it cosgoe， and it always worked whenever， there is a store opening news cruise would go nuts and its kind of like the Nike atletswearing the shoes on the cover of sports illustrated sort of thing thats worth a lot more in earned media than anything you could ever buy all right？

David well， were here we have to tell the hopdogstory so this comes up literally everytime theres any sort of writing or podcast or book or anything about cosco very famously as David and i talk about the hot dog and trink combo has been a dollar fifty for many many years and when Jim said goal handed over the rains to Craig， jolinec krag went to him and said you know hey， were close on margin here huh or maybe we were upside down nobody really knows on the hot dogs we might need to raise the price and of course， James a looks at him and goes if you raise the price of the hot dog and drink combo i will kill you 哈哈哈 so that is why it is so pricethe way it is today and this story has gotten so much airtime and its classic coscodes like im sure this didnt actually happen they just kind of like made up this story it might have actually happened oh having Craig has been workeding fedmartsids the 70 he would never raise the price in the hot dog right he would have known anyway back to branding you know earn media branding theres this kind of interesting thing where its almost like Nike where i think they have a latent branding power and im not talking about curclen here im talking about the buyers like trusting the buyers members trussed the preselected inventory from cosco and i dont know where that shows up he definitionally doesnt show up impress cosco will never generate access margin because of their brand but there brandarns them something mean people become members and trust them and that leads to something i assume it leads to volume， it leads to willingness to buy， which leads to volume， or it leads to vertension so this is the second episode where its not branding power under hamiltons definition its latent branding power yep just like the big one with scale economy here yep in a vlot of ways i think what Costco is sort of doing is they realize that they have latent branding power and latent scale economies and they sort of choose not to recognize short term prophets from those and i think its all this superlong term game where this is why the market is willing to pay a much higher multiple forcoscode than any of their competitors there are a lot of ways that if cosco wanted to they could make more money today than they currently do， but theyve decided not to and so you know its the same result whether you look at it as lets assume that they did take a little bit more margin or lets assume that they did raise prices on members or lets assume that they leaned into their branding power in some way and actually charge the prices that they verned would the multiple then be reasonable yes， absolutely or the other way to look at it is is this business just going to be around predictibly for a longer period of time than any of their competitors because theydoingall this things you get to the same answer， which is it is worth paying a higher multiple of the dollars that are recognizing today for a company that has made these choices totally！

i mean lets just say i dont think weve talked market cap yet coscode is what tuner 40 billion in revenue today yep and Walmart does 620 billion they go cosco obviously trades at a much higher multiple than Walmart youexactly right i think its becauseof this， its becauseof the durability， its becauseof the membership model， its like you know that that revenue is not going anywhere。

and there are prophets that they could take today and they choose not to yes cosgo！

i think is pretty unicallypositioned in that theyre gonna do well i think in any economic climate， because in a resessionary environment， theyre gonna do well， because they are the lowest priced retailer of goods out there in a boomonenvironment， i think theyre also gonna do well， because of the nature of their customer base as more people become affluent， theyre gonna be more likely to shop at cosgo！

i think thats exactly right and you can see it in the numbers they do very well in every economic environment whereas Walmart is kind of getting squeezed on both directions i think in resessionary times they probably do well。

but not as well as cosco。

because they dont have the labs loop lowest prices and then in boomtimes i think people migrate out of Walmardinto shopping on Amazon shopping a cosko well should we move into playbook themes lets get awesome well to start i want to say a huge thank you to Alex Morris who writes the investment substack the science of hitting he has two pieces that were just excellent written analyzing coscos financiels and he was also very kind David i spent a lot of his Sunday last Sunday， emailinghim and asking clarifying questions and he shared a bunch of data with me it was super helpful so thank you Alex well put a link to the science of hitting in the shownotes to open this section i want to say a Jim senigao quote this isnt a tricky business we just try to sell highquality merchandise at a lower cost than everybody else and i think its hilariously farcical hes both right and so cheaky this is a extremely tricky business yeah！

i have heard him say that many times to in my research and i occasionally hear him say the second part of the quote that he selectively leaves off the second part is anybodycansell goodsfor cheap the trick is to make money while doing so wetalked about a bunch on this episode its the fifty little things that they do that all sort of synchronized with each other that makes it work you dont do one of those it falls apart oh！

i want 10THOUSES！

oh， i want to be a leader in ecommerce！

oh， i dont want a membership fee！

oh， i want a blow out a bunch merchandise and do a sale any of these tradeoffs you break on the whole thing breaks yep there are so many fun little paradoxial things about this company they sell goodsat the lowest possible price， but that means that they have a wealthy customer base it always breaks my brain when i keep coming back to this point and i think it broke the brain of a lot of name brand companies to who refuse to sell at cosgo i mean until like ten years ago， a lot of brands they just had this idea that low prices had too much of a negative signal about their brand， and it took decades for coscode approve that they really did care about quality that was part of their valueproposition， and also， it took decades to prove that they could facilitate a huge amount of volume and you know theyve won over everyone from apple to dom paring on yeah。

i think this is a critical playbook theme for them theyve managed to create this sort of walled garden inside a cosco， and i used that in not the typical walled garden term of being like consumer on friendly， youkeepingthemin the wallgarden， its exactly the opposite within the garden walls of a cosgowarehouse whatever！

price products are doesninconsumersmindequitetolinketheirvalueorwhattheirprice should be outsideofthewalls of the garden a hundred percent you can go and buy right now 500 dollars on south west airlines 4450 dollars at cosgo you can literally buy dollars for smaller dollars and with a enormous company that a huge swap of the us uses is not so obscure restaurant or movie theater something its like heres thing that youre likely gonna spend money on anyway， and this company has decided to put it in here for a lower price and that works somehow yeah and another big piece of this is that for the majority of suppliers coscomandates that the item you sell them is a unique sku that the shopper cant buy anywhere else， so theres not even any comparison shopping if youre buying a blender， the cosco version will come with you know some extra cups or maybe the two pack of sonic cares comes with the bunch extra toothbrush heads you know its these things that are custom uniquely made 4 COSCO shoppers it is such a Walldgarden， David check this out Nike normally refuses to sell at COSCO becauseof course， they do theyre Nike they wont even sell an Amazon accept right now as we talk about on our last episode they have a lot of inventory and they need to discount it to move it through the channel Nike cant really discount anywhere， i guess they have there like Nike outlets but for the next couple years， theyre gonna be moving a lot of merchandise through cosgo because you know itcosgo its all its different oh， people pay to get in there its a whole different thing this isnt just like whatever the psychology is Nike is actually willing to sell through cosgoe until they work through these inventory challenges and then im sure that they wont do business with cosgo again for a while， but even Nike the most brand conscious company in the world plays ball sometimes yep you mentioned apple apple cells through cosco in by ipads there by computers there OK， so there is a thing that we havent addressed yet and that is the conflict between operationally light you know low overhead and a tremendous amount of vertical integration and when youselling fifty billion dollars of curcleant， you have some vertical integration you do somethingsyoursells the finest illustration of this is chickons yes！

i knew you were gonna get to the chickins i was just waiting the whole time like when is Ben gonna talk chickens i wanna do a whole episode on coscode chickins we need to have Richard coscos CFO on the show to talk tikens i dont right we should ask him OK so when do they vertically integrate。

they will do it when they can provide enough value to members to make it worth increasing the overhead and so heres the chicken example， they sell five hundred million chickens a year not pounds chickens thats like a usn Canada population worth of chickins a year that is exactly right and dont think about it too much thats also the thing with the chickens a hundred and thirty million of which are rotistrychickins so even just the rotisserie chicken business alone thats a third of the us eater otistary chicken every year the rest of course are chicken brass， chicken thighs and legs and everything the chickens used in the food court for the chicken bake because of course， when they make stuff， they actually make it themselves we do go by muffins those are baked at cosgo in there bakery there are really only for five chicken processing companies in America and when you have supplier concentration like that prices can get artificially inflated you know you could be on the wrong end of the stack as the buyer when theres so few suppliers， so cosco decided were gonna be doing this for a long time we think our members might be getting a raw deal so what should we do we can provide more value to members by doing the insane work of processing this ourselves so first， they sort of figured out we can rent a hundred percent of the capacity of a plant in Alabama to kind of learn the ropes of like you know， were warehouse merchants now were becoming chicken processors how does this work they learned and then they preceded to build their own fully owned facility in free mod Nebraska， outside of Omaha and build relationships with one hundred and fifty local farmers in the surrounding area i mean this is nuts that facility processes two million chickens a week now it worked well to take that even further theres two other dedicated facilities that they dont fully own， but that just are for cosql they can now process two hundred million chickens a year so well， theyre still working with the other big chicken processors at least cosgo can keep monust on pricing now by taking on this huge amount of vertical integration themselves wow！

we are gonna convert a lot of people to vegins in this part of the episode yeah！

and we dont even talk about the hot dogs yeah！

who boy OK lets move on！

lets move on so a much niceexample is like the fancy mix not that i was talking about earlier so on opportunity to make a better product work directly with farmers and suppliers and kind of clean up that whole supply chain they do the same thing and coffee bring down the price increase the amount of fair trade stuff going into the little current pods is just like fastname and watch when they are willing to leverage their scale to take on additional complexity like when they feel thats in the interest of members versus when they say you know what i think weve going to be a merchanon this one go so thats the chickins one thing is whenever you talk to any of these current or former cosgoemployees， who are you watch any of the YouTube videosofthetalks or you read anything they talks incense its the craziest thing you hear most executives talk they talk in dollars especially like you know genset and Nvidia you listen to him talk he has CEO speaker exactly， what he said CEO language something like that but its all in these like plus erminus ten percent swags fewbillion here fewbillion there you know whatever were talking 70 percent growth margin business for Nvidia yes， exactly i love the concept previous to the episode of CEO math its like get the highlevel concept right in the rest will follow you talk to someone accoscope and that what they tell you is that that cost three dollars in 89 since its not just three dollar things theyll tell you that that cost a hundred eighty dollars in a nine sense its ingrained in the culture that every cent matters and i kind of love that cause its just so different that other companies dump whats so fitting to the nature of the business and their margins when you have eleven percent growth margins you like yeah i care about every penny you bat the thing that kept echoing my head is that these people and you know this isnt quite a heroes journey the way that some of our episodes are its not the same person all the way through because its sale prize its Jim senigulets all the executives who are currently on the team today because most of them have been there for thirty plus years the way that all these people think and act are sort of a different type of heroes journey because there are a different type of hero mean a lot of the times in our society， the people weve built up， were these crazy sociopath shoot the moon type people and this is just a group of people who spent their lifework all working at the same combined company just trying to improve the model in little ways theyre so little personal ambition i mean none of these people have LinkedIn profiles they do but like they have one job on it no picture and no description or like you know the cosgo？

twitter account made no tweets ever theres a crazy consistency to the culture i walk into the headquarters and the coffee was curclened pods from a cure like when you sit down in the lobby and you know someone who says oh would you like a water and like you bet the water that they hand you is a curken signature water bottle i mean the executives you walk by the executives they are in cuticles gets exactly as you would imagine it， its perfectly consistent with cosco yes！

its so great a few more things to say on this one i literally just looked up as your talking Craig gelenix likedimpprofile， itstill says hes an evp at cost the dude has been co for like a decade， amazing yeah， the reason i look up is linked in profile is that the backgrounds of these people are so different to then what you would typically think of as like the management team of an American fortune fifty company Jim went to San Diego city college right Craig went to San Diego state university they started as Baggers at Fedmart when they were teenagers and theyve just work through the business all the way through yeah occasionally theres somebody like jobs Batman who comes in who went to harvr business school but like that is the exception not the rule and its a hundreds of billion dollar market cap company now yep amazing i will say to that theres this famous quota about Amazon being a charity thats running for the benefit of customers do you remember that i do its actually COSCO its actually COSCO right on two 30 billion of sales they keep seven and half billion on operating income ive just never seen a company give more consumer surplus than gosgo they just leave so much on the table for the ego system around them yep while were talking about the people here i think a related but separate playbook theim is truly the promoting from within culture there its always been the case going all the way back to feed mark and really carries through to the state and its just astonishing to me that A250 billion dollar market cave company this is so ingrained in the culture other companies talk about this but then youll see like oh they go to a ceo search and they bring in somebody from a kinsi or something like that nobody walks the walk on this except cosgo and there are very noble company and all the decisions they make are very noble and you get the sense that theyre having a lot of fun being noble but you only earn the right to be noble if your machine works and their machine really works。

and i think thats kind of the point is theyve earned the right acting this nobly partially got them to where they are but where they are earns them the right to continue to be noble the company is never done a layoff if they needed to， they would have done a layoff， but theyve run the business in such a way and figured out the way that theyve never needed to do that even after they did a merger they merged to nearly identical companies and they did not lay anybody off right thats wild its crazy so amazing management alright， my last big playback item is an old quote there was a duichia bank analyst that said it is better to be an employee or a customer than a shareholder， which cosco management would say uh yeah， thats literally like weve printed it its in a pdf on our website， thats called our code of ethics yeah！

do you read our and your report？

so in the short term， maybe that is a totally reasonable thing to say and know what would argue with it but in the longterm， it is been fantastic to be a shareholder， i did the math if you bought ten thousand dollars of shares in there ipo in 1985， you would have three point three million dollars today， a three hundred and thirty x and this does not include the dividends you would have earned the longthe way， which theyve actually done a lot of dividends including for ish special dividends two that were huge i dont know its funny how if you want to dip in and out of the stock in a year to its not going to be great for you itll be predictable itll be high priced when you come in but you know its not gonna be worldchanging but theres a chance that over thirty years it is worldchanging for you you know there are no heart and fast roles in investing obviously and if you think。

there are thats a great way to lose your shirt but its funny to note that every time weve used aversion of that phrase on acquiredwhen studying a company that while street analyst think xyz company is a charity being run for the benefit of x turns out that those are pretty great stockdown and great for the long term yep those are the ones theyre the most enduring as our friends at ncs capital would remind us yeah！

did all right David bearable yeah lets do it you wanna start with Barry case yes！

starting with Barry case how you ever gonna find a Barry case about this company i would get of like can we bring tarley in here and lecture you on？

this well for better for worse they have been very slow to ecommerce maybe forbetter as we talk to about， but maybe force and we talked about most of it but theres a thing that we havent really discussed yet which is amazons overhead is like thirty percent targeted walmarts is something like 20 percent the fact that cosgo needs to run at 一 percent for it to work really did blind them to ecommerce i dont think this was a conscious choice this was a miss that they got really lucky on and happened to work out well， for them where they could continue to run their same playbook and kind of skip ecommerce for a long time i mean they were fifteen years late to ecommerce and structually cosgo can provide things at a far lower cost the name is on， but at the end of the day like there really is no way that cosgo can do ecommerce like these other companies i mean even walmarts figured it out Walmart is as good for most use cases as Amazon， but theyre paying the price it is a huge amount of overhead to setup the infrastructure to do home delivery， so one of the things were going to talk about here in bear boll but i think we should transition is what cosco is doing that is cosco flavor dcommerce instead of Amazon flavor dcommerce but i will save that for my ballcase a second barecase it was popular the path to say that cosgo would have an issue with young people， but i mean i guess this is not really a baircase this is false for a couple reasons， thereisnothing more gency than Casql i know Casql has been blowing up on TikTok as wetalked about， but also from all available data， young people are getting memberships at the same rate they always have like of course， the bulk of members will be people in there forties and fifties with a family in a house but that hasnt really changed over time if you liked the coscode business in the last decade， is of an investor， all signs are its going to be pretty similar in the next decade， two in terms of you know the ramp of when people become members， theres another one thats like ill put it in bearcasebut again im not really sure its a baircase it is worth pointing out it is either true that this business can not grow at more than ten percent per year on average theyhad little years where they spiked， but sort on average or management just doesnt want it to， which also would be fine because there are lots of benefits to slow steady durable， but the company has a lot of cache on the balance sheet and regularly does dividends in bybacks theres crazy stat from the science of hitting that the company has returned eighty percent of ned income to shareholders in the last decade， rather than reinvesting it in growth and the key reason for this is that its just really really hard to expand they need to hire the people like the right people train them well， promote internally and the work to scale is so physical the new construction expanding suppliers， shipping， large pilots in a new geographies and cache is not the constraint stopping them from expanding there is a physical limit to the speed at which this company can grow so im calling that a bare case because its more like you know， you should be aware that this thing cant scale like zoom scaled during the pandemic thats like the polar opposite of the spectram， zoom or slackeries has like basically no bottle next to infinit instant growth or Instagram launching threads you know instantly has hundred million members cosgo is the literal opposite there are bottlenecks everywhere to scaling and no amount of cache is gonna solve that problem yup got any Barry cases uh i think im gonna quote Charlie on this one and say i have nothing more to add i thought you might go there alright bolcase i mean the biggest one is the flywheel is spinning and im not really sure who can catch them so heres again from the science of hitting substack quote the average Sams club only generates about half the revenues of a cosco and that gap has widend over time given the unit economics of the business thats a tough hurdle to overcome， which explains why Samz club has a smaller unit base today than it did a decade ago crazy right over the same period cosgo increased its uswarehousecount by one third anyone who could have challenged them is just done yeah！

babypart of that is because Walmart has just been placing their resources elsewhere， particularly in the ecommerce fight against Amazon like i think Walmart has basically decided look were not going to kill the sams club business。

but this is not where were focusing our competitive energies right now and to be more fair this is no longer a market share fight for the warehouseretailbusiness this is global retail， and then the question is how much of global retail can coscos modeladdress its not cosgoverses a specific competitor its cosgoverses human behavior yeah！

how big is this market exactly， and that i think is actually， a both case for cosql because you could argue maybe they are maybe they arent saturated in like North America， but theyre not theyre totally not yeah i think theyre not， and they are definitely not saturated in Asia， in the rest of the world， in Europe， in Africa， in Australia they have a lot of global room to run so this is my second ballcase！

which you touch on the dobastic thing just as an aside every fiveyears on earnings， calls an an annual letters coska management reveals that theyre surprised by how unsaturated they are in the us market theyll open a store in a city where they already have three or four stores and theyre like and this one did just as well and of course， it doesnt have as many members because you do actually saturate the population of a city but the convenience of having the store closer means that you know it hits the payback targets that youd wanted to hit just as fast as a store that was in a brand new market for them and at some point theyll stop being surprised or at some point they actually will set rate the North America market， but its amazing that they keep thinking its soon and its never soon my third one is international expansion exactly as yousaying in particular China there is incredible pend up demand so heres a illustration from the science of hidden， which is just so good the average usstore has 68 万 members the first store in China opened in 2019， which popped to 400 members within two years the us at Matsurety is it 68 万 members China right！

i misdoing our China Tech episodes cause i feel like every ten minutes in those episodes we just be like China who like things are of a different scale there if you can operate there？

i mean thats the big thing is like it for us companies， it is very complicated operate there so there is going to be six stores in China within the next year and all indicators are that this concept performance just as well if not better than it doesntheus， they have a lot of running room so much running room and theyve been very deliberate about the China strategy theygot a permit to open their first store twentyyears before they actually did the Chinese government issued them a permit what is more cosgo than waiting twenty years after youallowed to do something to do it when you feel youre in a good place to do it well。

a theyplayin the long game be the executives at the time probably were reasonably assured they were still going to be the executives twenty years from then so like why not oh！

its awesome alright， heres my fourth ballcase and its actually ecommerce bear with me for minute on this theyre approaching ecommerce in a very cosgoway and they have a bunch of different approaches but theres two specific ones i want a highlight one where they have differentiation， which is on big and bulky items thats where theyput a lot of their energy they spent a billion dollars to buy a company that became cosco logistics and they do things like deliversheds to your house and this is a pretty difficult thing to do from a traditional ecommerce company or any commerce native company this is shards！

this is refrigerators， this is washingmachines， this is waterheaters right， didnyou almost refridged this morning on cosgo exactly im saying this because i almost had to replace my refrigerator turns that i was able to get it repaired thankfully， but i was briefly in the market for a refrigerator and it was super interesting dynamics cosgo had the lowest price on the model that i was looking at but only by like 20 dollars first is best by an home debow like 15 dollars something yeah like A 15 dollar refrigerator， which igh glad i didnt buy but all the other players clearly the manufacturers a Samsung refrigerator was running a promotion， so the msrp was two thousand dollars and all those other retailers were saying oh this week only its on sale for 15 and cosko had a for like 1470 next week coska will still have a for fourteen seventlbe 2000 best by yep exactly right and so i do think this is an interesting area for coscoe anycommerce the second one is cosconextdot com do you know what this is David hmm no！

i didnfind this it allows you to shopdirectly on other websites and put in your cosco number and get a discount oh， thats awesome cosgoe cuts a deal with those companies to say were gonna send you traffic as long as the traffic we sendyouonce you verify it you give those people a discount wait！

so this is literally like ebates a racutin for cosco yes！

so cosco looks at it like oh great！

we get to give another value to our members without having to take on the ecommerce logistics that they hate that complicates their business that changes peoples impression of what cosgo is fascinating its like the obvious way for them to play this market for anyone whos willing to partner with them！

which again to the supplyer dynamics its the same thing here like on the surface if your xyz ecommerce player that be crazy， but then you think about it you like were we could get a lot of very high valuetraffic maybe we should do this its like selling through cosgo without having to selo！

without having to physically dropstofit their warehouse and its the internet way to sell through cosco amazing so my last ble case really is coscos culture it just outlives any given quarter year， economic cycle？

or even any ceo normally when companies get bigger things get worse standards of excellence fall and execution get sloppy headcoscois just been exactly the opposite of that i mean cosco was sort of technically founded in 176 with price club you can really say it was started with feed martbeforethat lets just say it was 1976 here we are in twenty twenty three there been threecos in the history of cosco salprise Jim cynical courage elec all of whom worked at fetch Mart yes！

crazy OK， i have a bunch of coscode trivia before we get to carvouts yeah， lets do it alright cosco is the largest seller in the world of fine wines fine wines are defined as 2030 bottles like what cosco is the？

but theyre just a largest seller of things what that is the most amazing incapsolution of their demographic yes， its wealthy people who like value are deal yes！

exactly do you know there refund policy？

no questionsast right？

no questionsast how long do you think it less infinite？

infinite， there is an exception on things like electronics those are 九十 days， but thats 75 moredays thananywhere else yeah， apple is two weeks if i buy a macbookpro at COSCO， its a ninety day return policy if i buy at apple， its a fourteenday return policy yep， in fact， im sitting here i really want to buy a thirteen inch MacBook air， but im afraid that the thirteeninch MacBook air is about to become the m three later this year i should just go by it at cosgo now that is not really the behavior that they want to encourage and i do know that if you sort of take advantage of it over and over and over again， they do sort of take you aside and say hey， it teams like were not providing in a value to you let us refund the membership or so sorry！

we can do a great job 哈哈哈 what a great way to phrase taking you out？

but i will tell you the infinite return policy includes things like diamond rings wow！

wait if you get divorced！

you can return the engagement ring last year they sold a ten carat diamond ring and that diamond ring to my knowledge has a lifetime no questions ask full value return policy wow！

so theres some fun Seattle history around this do you know where the inspiration nords drum for this policy came from thats funny i didnt know！

but its just northfrom is such a famous local story around there favorable return policy yeah！

so jem and Jeff browmen before he tragically too young passed away a few years ago they would talk about this especially， jeffin the browmentsbeingseeatl retailers they were hugely influenced by nordstrom and nordstram famously has the same return policy do you know？

the potentially a pocrfulstory about the famous return adordstrum no， it may not be real but at some point， somebody brought tires back to nordstrumen， so id like to return these and instead of saying we dont sell tires the person thought about it for a while and said well， could you just tell me a little bit more information and they said well， i bought these here and they named a year and it turns out that before that real estate was a northdrum it was actually a tires center and northram gave a guy muddy in took the tires amazing OK？

what while were on Costco Trivia enteres theres a famous sale price story i think this was the price club days when they were opening one of the Earlynot Sandiego locations the first new expansion sites he showed up and he saw tires their tires was one of the things that they sold price club and the tires were all like neatlystacked on the warehouseshelsnewalxefinestarts throwing them off the shells on to the floor place like sol what are you doing？

have you gone crazy？

what happens it is like youfingidiot howerthecustomers gonna be able to pick up the tires when theyre up high on the shelves they got to be down on the floor uh wow！

i do know by the way northdrum has sent adjusted its return policy to actually be capped not infinit and so now cosco has a better return policy than nordstrom amazing wild alright morestatsjustforfun theysold 2POINT 2 million pumpkinpies in the threedays leading up to Thanksgiving last year they saw one third of the Jumbo cache in the entire world！

哈哈哈 they of course sell eye glasses and this is one of the areas where they felt they should vertically integrate i actually dont know why， but i suspect its because prices are artificially high in the entire glasses supply chain oh， yeah， the eye glassindustry is notoriously brute all this so cosgo now owns and operates three optical grinding labs to make prescription iglasses so good its a craziest thing and then lastly， theres the illustration of their culture i think they definitely believe that you must work long smart and hard if youre going to be a leader there and none are optional you just have to do it and datastrate this all of their market managers and country managers come to headquarters for two days every single month so no matter what market you manage you fly to isequa thats a hundred and sixty people to all sit in a room for two days and just talk about whats working， whats not what youre seeing and how the whole company can get better and share learnings oh！

man Jim talks about this a lot in the talks i watched on YouTube that when he was ceo and i think Craig does the same thing to the state he visited every store！

every year yes！

he did and there are hundreds of stores around the world there are way more cosco stores out there than there are days in the year the dedications incredible crazy alright！

carvouts carvouts alright i have two and ive got to do them both because theyfastand small the first one theres a brand called to foc tifosi that makes sunglasses for running and you can wear them for other stuff to but i love them because they are sunglasses that dont slip off my face when youre running or doing something and you get swedy they have these little grippy pads that sit on the nose and i feel like ive solved this like thing that was mildly annoying in my life for a very long time， which is continually pushing up my sunglasses， while running so highly recommend to foc theyre also pretty cheap i bought like three pair of and are goofy in different colors and theyre fun amazing you are becoming Phil night during his ocleface yes， exactly the second is a match up that i found last night what i was looking for cool stuff to listen to while finishing the research and editing the script thank you to Jason kotkeyauthor of kotkeydot org for posting this there is a New York city dj named dwells who released a mash up about four months ago of everything in its right place by Radiohead and Kendrick Lamars N95 and it is so sick that sounds awesome its probably because im like a huge i dont listen radio had that much anymore but like in college i oh you used to be really undoing seven hoursa day or something yeah like whenever i was programming， it was just Radiohead all the time but it like instantly took me back to that place in my life and is honestly one of the best mashops ive ever heard i didnknow match ups were still a thing thats awesome i used to love mashops in some like dj subculture i mean it is crazy how mainstream like girl talk get yeah what was the other one？

the white panda were for a while massips i love it yeah radio hadncandraclamare willing to end the shownotes all right inspire by you since you did to carve out im also gonna do to carve out the first is a great episode of investlike the best friend of the show Patrick over there with Jeremy and chifon so good also friend of the show this was going to be my third also yeah， it was so good one of the best packest episodes this period all year i think， but especially cause we know Jeremy pretty well from tiny and we know Patrick very well like even hanging out with them a lot learning！

a ton still listening to their conversation and this conversation ill tell you is exactly like hanging out with Jeremy， but in higher density， his personality is exactly how he comes across on the podcast but its definitely a best of you know whenever i hang out Jeremy， i get like six or seven kind of mindglowing one liners these like insights that just come to amount of nowhere and the podcast has thirty in an hour and a half is just awesome yeah its just awesome go listen to it well well。

well， worth your time yeah my second carveout this is a fun local one Jenny and i did a day night last week highlyrecommandfor any parents out there we have a standing babysitor who we love Friday night weekly day night unless something changes oh good for you highly recommend that but we went out in dog patch in safety Cisco which Ive been to in a longtime its becomes such a cool neighborhood went to this awesome winebar there we walk around we got a screen at home free slocum afterwords dog patch is right on the water and the bay its gonna interesting history it was the headquarters i think of health angels for a long time during like the fifties and sixties you werked there right didnt you when you were an intern dongpatch labs on peer itrinner remember the actual number but yeah there was a coworking space when i worked at code we actually they condemned the peer and took it down cause it was like we were the last year that it was still i dont we probably should have at an office in it but yeah i worked at code we and above us was the coworking space where the Instagram guys launched Instagram thats right but yeah you probably remember back that i mean dog patches kind of like a random outskirts a surface guy yeah， sleep is little neighborhood its become awesome hmm walked by a um gameshop where they had ladies DnD nightgoing on like is this super cool gonna hang out there more often so become a San Francisco Dont hangoutdowntown downtown is not a good place yeah！

the rest of the city is awesome go to dog patch its a very different experience thank you for saving me from i was gonna stay at a hotel on market street you were like do not do that dear god， do not do that i may never see you again but thatll a hotels are its a big problem i know Airbnb is the thing Airbnb alright with that are thankyou to blinkist and go one with some awesome awesome links that you can check out in the shownotes to see David in my personal bookshelf and also get the blink of the sale pricebook at blinkas dot com slash cosgo thanks also to stat sig you can supercharged your ability to launch features measure them see the impact and collaborate better with your team around being data driven in your decisions and cruise o if youdoing anything in ai， check out there cloud click the link in the show notes and get just better ai data centers that are better for the world sign up for notifications of new episodes we just flip this thing live acquireddatafm slash email we are going to be including a little tiddbits after we release episodes including listener， corrections and little fun stories that we didnt have any time for recording will also be teasing future episode so if you want playable trivia game with us to try and guess what next episode is going to be that is when we are going to be dropping those hints you can become a lp acquire data fm slash lp become closer to the show do zoom calls with us every other month or so and at least once a season helppick the next episode quire data FM slash lp LPS chose Nike aremost recent episode before this one they did oh one thing we should say in case you dont follow us on social media and see the tweets about it friend of the show David Lidski did an awesome truly awesome peace in fast company about acquired and were super grateful that he took the time and dove deep and spent many hours with both of us it was super cool lots and lots of time basically tracking us as we were preparing the Nike episode antencies been listening since 201718 he knew a lot of the history of the show and so wrote this really cool peace if you are one of the people who has emailed us over the years and said itbe great if you guys did something talking about how your research， procesferacquiredworks， David chronicallthat and much better than David， or i ever could of so thank you David lets keep really appreciated we will link to the fast company peace in the shownotes to look for ack two if you want to learn more about ai in any podcast player and check out the slack coming discuss it with us acquire data fm slash slack listeners will see next time im gonna go get a hot dog in the soda ill see there and get a checkback how much are the chicken becse uh more than about fifty， but you know its more substantial than a hot dog slike three thousand calories its like nine hundred calories well？

but yeah youre not hedoing a lot of other eating that day i love it all right listeners Wes next time well？

see next time who got the truth is you isnt you isnt you who got the truth now 哼。