Costco Wal-mart

 

Ellen Ruppel Shell, Cheap : the high cost of discount culture, 2009 

pp.228-229

    Costco works on anemic profit margins (1.75 percent versus Wal-Mart's 3.34 percent), and makes most of its money on membership fees.

  But it also keeps cost down the old-fashioned way by retaining its employees and by keeping executive compensation in check.

    (Shell, Ellen Ruppel, HF5429.215.U6S54 2009, 381'.1490973——dc22, copyright © 2009) (Cheap : the high cost of discount culture / Ellen Ruppel Shell, 1. discount houses (retail trade)——united states, 2. consumer behavior——united states, pp.228-229 )

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Brad Stone, The everything store

    Sinegal explained the Costco model to Bezos: it was all about customer loyalty.  There are some four thousand products in the average Costco warehouse, including limited-quantity seasonal or trendy products called treasure-hunt items that are spread out around the building.  Though the selection of products in individual categories is limited, there are copious quantities of everything there——and it is all dirt cheap.  Costco buys in bulk and marks up everything at a standard, across-the-board 14 percent, even when it could charge more.  It doesn't advertise at all, and earns most of its gross profit from the annual membership fees.

    "The membership fee is a one time pain, but it's reinforced every time customers walk in and see 47 inch televisions that are 200 dollars less than anyplace else," Sinegal said.  "It reinforces the value of the concept.  Customers know they will find really cheap stuff at Costco."

    Costco's low prices generated heavy sales volume, and the company then used its significant size to demand the best possible deals from suppliers and raise its per-unit gross profit dollars.  Its vendors hadn't been happy about being squeezed but they eventually came around.  "You can fill Safeco field with the people that don't want to sell to us," Sinegal said.  "But over a period of time, we generate enough business and prove we are a good customer and pay our bills and keep our promise.  They they say, 'Why the hell am I not doing business with these guys.  I gotta to be stupid.  They are a great form of distribution.'

    "My approach had always been that value trumps everything," Sinegal continued.  "The reason people are prepared to come to our strange place to shop is that we have value.  We deliver on that value constantly.  There are no annuities in this business."

    A decade later and finally preparing to retire, Sinegal remembers that conversation well.  "I think Jeff looked at it and thought that was something that would apply to his business as well," he says.  Sinegal doesn't regret educating an entrepreneur who would evolve into a ferocious competitor.  "I've always had the opinion that we have shamelessly stolen any good ideas," he says.

   (Brad Stone, The everything store: Jeff Bezos and the age of Amazon, )

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