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Slate Money: Food: Costco

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Before we get into this episode we have a big favor to ask. One of our advertisers is conducting a survey and we would be very grateful for your help with answering. If you're if that questions it will take less than ten minutes of your time and your participation helps her show so go to sleep study dot com to complete the short survey. Now thank you Jose. Welcome to sleep money food. A whole mini season devoted to the economics of food and the food industry and everything associated with food and boy. Do we have the perfect episode to kick off this series? It IS COSTCO. Obviously in the news right now because everyone is storming into stock up on whatever they need in the home bunkers. There was one man who understands costco better than anyone else around here. That man is Zack Crockett. Hey how're you doing Felix Zach? Told me about yourself. Who are you and how did you find out all about COSTCO? Yes so I'm a reporter at the hustle a business tech newsletter. Costco is just this weird fascinating place. That in many ways breaks all the rules of retail. you can buy a twenty seven pound bucket of Mac and cheese a casket a dollar fifty hot dog and a life insurance policy items sitting these wooden pallets in these dark unmarked aisles. The brand selection Super Limited. And you pay sixty dollars just to get in the door so I was just wondering how this all makes sense. We will find out coming up on slate money food. So Zach what proportion of Costco members do you think have been just late rushing to COSCO stuck up on everything as they stop. Panicking about corona virus. This is something you know if you spend a lot of time on twitter online you're gonNA see people jousting over the toilet. Paper rolls the panic buying the anti shells all the pictures. After say though I think that is a relatively small proportion of of the Costco customers at large most. Tosto customers our families who buy these big bulk orders or just people in the suburbs stocking up on stuff you see. These retail arbitrage guys going in and buying big bulk packages of stuff and reselling it on Amazon for a prophet. And you also see You know the doomsday community. Going full scale on on their Costco binges lately buying out the toilet paper aisle and so forth. But I think that's actually a a relatively small portion. What's going on right now because this is one of the things which I find super fascinating about Costco which you are an expert in and which is one of the most amazing businesses in America is that people don't go there very often. The whole business model is basically that you have some monster suburban SUV tank type vehicle and you drive it into the parking lot of Costco. And then you go and you do. Some massive shopping by pallets live goods. And then you load them into your in the SUV. Oyo Pickup truck or whatever and you drive them into your four car garage and you just let them sit there and you can basically live off your garage for the next three months until you have to rinse and repeat If I got that right because I mean I live in Manhattan. I don't really understand this. So that's pretty much it. I mean the first thing you have to understand is most of these stores are in suburban areas. The average Costco Shopper is a pretty well off like we're talking like hundred K. so for discount store. That's that's pretty high and you know you have to have the space to store this stuff like you said but very much by design the average Costco Shopper. Probably only goes in once a month. Compared to the average supermarket shopper goes in once a week so That is very much by design That also comes with an economic benefit to Costco. You know the less a customer has to go shop. That's less resources for the store. Less restocking resources less cashier resources less people taking up space in the parking lots to some more efficient operation which is very court their model. It is super efficient right in typical supermarket. They you know a pallet of goods will come in and they will spend a huge amount of effort unpacking everything and so everyone can buy these bottles of shampoo individually or something and then at Costco People. I'll just buy a dozen bottles of shampoo at a time and then I'd know who thinks that it makes sense to buy a dozen bottles temperature time but people do that right. Yeah I mean look like you walk into one of these stores and it's it's really the the anti store in every way it's like the ugliest place in the world you have these bare concrete floors. There's no sign edge us. There's these giant pallets. There's forklift operators by you as you're buying your rotisserie chicken you know. And actually shockingly. It's actually expensive for Costco. Design their stores that way. It costs about eighty million dollars per store just because they're so large but all of this minimal operation. It's both by design it. Ultimately bitstream is the operations makes things a little bit cheaper for consumers. But it's also kind of just experiential in this weird way but I was wondering about that like how much of that is theater. How much of that is is is like putting on a show of being cheap as opposed to actually being efficient. Some of it is absolutely a show. Costco is is some weird form of capitalistic theater. In in some ways it's Jim Senegal the founder and CEO Of Costco who stepped down. Twenty twelve has admitted as much but to be fair. Some of it is practical and operational avid say. Actually most of it is bringing things. In on the Palate by forklift reduces the the backlog of stuff they have in in storerooms? It reduces touch costs which essentially. There's this idea in retail that anytime an employee has to touch a good adds to the cost and cost very low touch costs. It's coming straight off the truck in basically going right into the store. There's no fancy displays that you might see in whole foods. There's no stocking little cans on shelves. You see what you get and they have a bunch of like super high end steaks. Lobsters thousand dollars bottles of wine and that kind of stuff as well right they trying to be all things will people. Yeah I mean you can walk into a Costco and you can buy an eighteen karat white gold diamond necklace for five hundred thousand dollars. You can buy a seventy two pound wheel of Parmesan cheese by what until really late. Who the hell by seventy two pound wheeled apartments. I mean. It's that restaurateurs. Are they getting? Are THEY SHOPPING COSTCO? You know it's funny. You ask that because the the original premise of costco was supposed to be kind of this B. Two B. Model that sold to other restaurant tours and Food operators a goes all the way back to the fifties with SOA price who started this store called Fed Mart which eventually became the price club. One of his employees was Jim Senegal. He broke off and started costco but over time they realize this business to business model selling restaurant. Tours wasn't working. The business only really worked when they opened it up to individual people who kind of had this sudden novelty of going in and seeing these crates for themselves. It's a great question. Who The hell buys the seventy two pounds of cheese right? I don't actually know I've never seen any I`Ma Costco customer myself. I go in there. God knows he buys that but someone does out there and They have incentive to sell anything on their shelf because they're incredibly selective about what they do sell so this is a bit like trader. Joe's right they have a very low number of skews that actual items that they say. Oh yes so average supermarket. You're looking at forty or fifty thousand SKEWS WALMART. You're looking at one. Hundred thousand. Costco has thirty seven hundred skews. They're incredibly selective very small number of items relatively you know in any given category. You're going to have one or two selections rather than like fifteen or twenty. It's very low skew. Very high volume. So you know you're not gonNA buy one jar of tomato sauce. You're going to buy a six pack. You're going to buy a four pack of toilet paper you're going to buy you know seven pound. Tub of new Tele. That's the kind of all we're talking about here but it does raise the question. No if they only have three and a half thousand skews and each one is very carefully. Paik town because you know they've managed to negotiate some great deal with the manufacturer and they know that hits the sweet spot how on Earth they managed wind up with seventy two pound wheel of Parmesan. Like it's like is that really in the top three and a half thousand things that anyone wants. That's a great question. I mean someone out. There is buying these seven pound type of Miss Hellas in. A lot of a lot of big families will stock up. I I think one interesting thing you just raised. Is You know right? Now if corona virus all of all this panic buying. We're seeing the costco to some small level. I don't WANNA say they're contributing to that but the by design they are stockpiling store in some small way right like a family is going to go in there. Maybe once a and by enough rations to last a month you know the the prepping community for instance loves COSTCO COSTCO. Once at one time sold a six thousand dollar Doomsday Kit That gave you rations. That would last four years dehydrated meats and such so if you go on these doomsday communities like these bunker communities Very active right now online. You'll see a lot of discussion about COSCO sleigh. 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Get money is a podcast for the people in your life. Who Don't know much about money but are ready to start learning from investing to credit loans. Get money tackles it all in a way. That is both fun and easy to understand. So if you know someone who needs a little nudge? Why don't recommend get money? Listen wherever you get your podcasts. I mean in terms of this stocking up mindset. It seems to me that this is really. It's not just a prep her and doomsday thing. I mean although that's happening right now it's actually deeply embedded in the entire costco business model. Have this mental model of you know we used to live in villages and there would be the fish monger in the green grocer in the butcher. Ruin the pharmacist. In the you know all the rest of it and you would go from one to the next with your shopping bags. And you'd like by each one then you then you do the same thing the next day and that would be like a daily thing and you could. You could do it all with a couple of tote bags of every job and then when things became much more suburban that model changed to to exactly what you're talking about because the weekly shop at the supermarket and in order to do a weekly show up at the supermarket. Unitive fridge but you also knew the quite the big fridge week's worth of food and then you also needed a bunch of other storage for the nonperishable foods and whatnot and the the service that a bunch of those old village doors were doing was we will stalk all of these things in stock for you and then when you need them you can come and buy them and then with the rise of the supermarket that balanced change. Well we will just tell you a bunch of stuff once a week and then you'll stuck it in your own home and then when you need it you will go and find it on the third shelf in the in the garage and then that just got turbo judge by Costco a bit. The amount of just she is square footage in freezer space. That you need in order to be a costco member seems to be a deeply American thing. This is the ultimate mutation of what you just talked about. It's I I mean. Costco has one hundred and fourteen million square feet of retail space. It's almost unfathomable but this is almost all the way down. They've taken the model all the way down the chain where they've almost eliminated a part of that supply chain process where they're you know they'll even skip the distribution process sometimes Crates straight for manufacturers to stores so it's giving consumers a taste of that back end process of retail and in the process. It actually does make things a little bit cheaper in some ways or I mean it kind of is somewhere almost back towards like the wholesale end of the of the chain rather than the retail end of the chain and is done on this subscription basis. You have to buy a membership and so the weird way like what you're doing when you're buying that membership is your paying rent on this million square foot warehouse way you can just walk in and buy whatever you need in bulk. I didn't know what the best way to think about this. Membership membership like lockin thing whereas one last paying the membership than you feel that you need to go back. Yeah it's it's a sunk cost fallacy. You know you you pay the this up front cost of sixty dollars just to get access to the store. You're already in the hole before you've even started shopping so you know there's this frantic mindset like I have to recoup that sixty dollars People often walk into Costco with the idea that they're gonNA do fifty sixty dollars shopping trip and they'll walk out with like seven hundred dollars worth of stuff but the membership fees interesting The subscription model grocery store if you look at Costco's annual reports in their numbers they have about one hundred fifty billion dollars in sales every year their cost of goods on that one hundred thirty two million so the profit margin their margin on their sales is only about eleven percents. They're really make the bulk of their profits on those membership fees which amounts to about three billion dollars a year that eleven percent margin they make on on that stuff they actually sell these seventy two pound things cheese. That eleven percent margin goes to cover their operation costs so you know their stores put it keeping the lights on their employees and really the bulk of their profit comes from those membership fees that they charge which they charge on a variety of levels but most people get what's called the gold membership which is sixty bucks gets you access into store Kind of gives you a free pass to to buy whatever the hell you want in there. They also had a very lucrative deal with American Express for a long time right. I know that my Amex was like there was a big headlines when Amex lost that deal and At least according to the Wall Street Journal went into full on panic mode all of this small businesses back when they lost the Costco Card because they were like that's like a backbone of because the small businesses who had that cut they would spend you know seven figures often aggregate on those. Yeah I I don't know too much about the numbers behind that but Yeah that is a royalty model. They'll get a kind of a percentage royalty from from the sales. And Yeah you do have the the executive tier cardholders going in and spending Figure some six figure sums for a time at least and possibly still at it. That is a big part of of their models. Well so what are the basic individual terrorists the sixty bucks a year right and then and then it goes you get like cheaper prices. Will you get if you spend more than you get? You know the hundred twenty executive tier I think is You get a percentage back you get two percent back or something so it really only make sense be spend a lot but you know they have fifty three million paying cardholders in the bulk of them. Are Those Standards Sixty Dr? You know everyday suburban families going in there. And who else does this? I will not has like a version of this right. Wal Mart Has Sam's Club which Sam Walton founder of while heart started Sam's Club as a way to compete with the price club which was Costco's predecessor. Costco actually merged with the price club in the nineties to compete with Sam's Club because there was such a big threat and for for a while there price costco and then they kinda just rebranded into Costco over time. But yeah there you know. There's other players in the space who operate on a very similar model. I think the thing that distinguishes costco from some of the other players is they've always had a mentality of a putting their employees and their customers over profits. I don't want to sound like a proselytizer of a costco. But they they've proven it time and time again. They pay their employees well. Their shareholders often get angry that they don't increase their margin caps on their on the goods that they sell and They have a good track record of treating their customers employees. While passing down the any savings they get to people who actually go and shop in their store and the employees a a well paid and they have much less turnover than the Wilmot's of this world. Yeah there's there's an economic benefit for Costco for treating employees well to the average turnover rate in retail at largest sixty five percents The average pays like ten bucks an hour. It costs go. They have a much higher retention rate of employs. Over time they pay them about twenty one dollars an hour on average and you know they give them things like health sponsored benefits. They have union with sixteen thousand members. They have a good track record of of treating employees. Well so the other big question I had about Costco is if you're only going there once a month. How do you deal with perishable? Food is perishable food not really a big part of what Costco Sales? They do sell quite a bit of perishable food. I think what you're tapping into is. It's a huge debate whether or not you save money shopping at Costco. That's a question everyone asks like you actually save money. Shopping at Costco by analysts bulk stuff. And if you if you look at the per unit costs you for sure you save money think things are cheaper. They do a lot to drive down those costs for you but if you look at food waste. That's a big problem with buying in bulk. If if you factor in the amount of food that customers are probably wasting when they're doing these big bowl purchases. The value out of shopping at Costco does decrease food. Waste is is a big problem. I mean Costco's bulk principles extend to produce and you know he by twenty four pack of apples or whatever. I would hope that the majority of people who are buying those things are have really big families or just. Eat a lot of apples but so you come. You can't go in there and buy like free apples. I don't think so. No you're looking at like eighteen to twenty four. If you want a Muffin you gotta by twelve you know. The exception is like their food courts. You can go go while than by a single hot dog for a dollar fifty at the food court but author shelves. You gotta go big if you're going into a costco and that sometimes probably means more food waste If you're not a responsible consumer or just known foods sort of I can easily imagine that if you buy. It doesn't bottles of Shampoo that a lot of people will know actually wind up using all dozen bowls shampoo for whatever reason your although. I'm sure that the people who stocked up on you know like ten packs a hand sanitizer pretty happy about it now. So let me ask you the the big question of the moment right now which is toilet paper of all the things ex ante. If you told me that was going to be a pandemic raciest and people are gonNA wind up stocking up on the central's but as one item in particular is going to wind up getting sold out of every single market and every single superstar. And I'd be like well obviously. That's GONNA be tylenol right. That's going to be gatorade. Or that's going to be whatever they need when they get sick or I would have thought clearly soap since seems to be the number one weapon in this in this war and like maybe people will be looking no none of that toilet paper. Is there any? Do you understand this weird thing that. How is it toilet paper that everyone suddenly got hung up on? It really is an. It's an unlikely Golden Asaid of our times really. It's I don't know how the focus became on toilet paper. I I will tell you. There is a a history. This this whole thing actually. Kinda reminds me of Back in one thousand nine hundred seventy three some. Your listeners might remember the oil embargo. The market dip and there was a toilet paper. Panic in nineteen seventy three and the means of transmission back then that stoke. The panic was not the Internet. It was I think Johnny Carson made a joke on a TV show about there being a shortage of toilet paper based on some governmental report that hinted that there might be slightly less paper and Americans have collectively lost their minds. Flooded the toilet paper market. Every store was sold out for a few weeks. I think that's kind of what we're seeing. Now it's Everything you're hearing from from manufacturers is telling us that there actually isn't a shortage there's nothing to worry about yesterday the New York Times. There was an article to the effective. There's plenty of food in America people. Don't worry the supply chains are functioning. Perfectly fine I even saw video on twitter Yesterday of this toilet paper employees in a big manufacturing facility driving around on a forklift laughing maniacally at these at these mountains of toilet paper and he was just saying see everyone. There's there's plenty of toilet paper. Calm down calm down. The problem I think is customers are lining up for as long as two hours before Costco opens storming in there and jousting over these forty packs. And but you know it's interesting. Costco COSTCO'S UNIQUE ROLE IN HIS TOILET. Paper Situation Toilet papers. Actually one of if not their best selling products in the entire store sell a billion rolls year. They actually employ fulltime toilet. Paper Engineers To test things like tensile strength cross direction the lofton thickness. They even use a spectrophotometer to measure the whiteness of the toilet paper. So they put a lot of effort into the Kirkland brand toilet paper and the own brand is cut land right there. Their private label brand that accounts for about thirty percent of their sales. But yeah it it is interesting that toilet paper has become the focus of our of our panic. Buying I do think it's self fulfilling and a lot of ways that it could have been and the thing but then once for for whatever reason like a couple of as you say tweets went viral. Jimmy went on the television or whatever and everyone started thinking toilet paper. Everyone started buying toilet paper just because everyone was buying toilet paper. And there's no actual other reasons for that and then into exactly but it's happening even with even at Costco people might people are going to cost. Maybe me twice a month now as I have seen the videos of people lining up outside Costco with empty shopping carts before he even opens to get in there like some kind of weird black Friday situation. Yeah yeah I mean the lines? Are there the lines? Are there a went to a Costco yesterday? And there's plenty of food there. I mean you know the shelter while stock but for sure they're out of a few things you go you go a few hours into the day and they're going to be out of teepee. It's not necessarily because shortage it's more just that You know people are lining up their storming in there. They're putting as much as they can fit in their car. I think Costco I'm not one hundred percent certain but I think they are starting to institute some some caps of a rationing toilet. Paper rationing exactly one hundred rolls of toilet baby. Yeah Yeah I think I think the last ration I heard was that you could only buy two packs. But that's still eighty roles atif teeth. I'd say it's GonNa last you allow if you're lucky what are what have I missed? What's the what's the big crazy thing about costco? That me being Ebonite. I don't even comprehend understand what one interesting thing we could mention is. Costco is extremely selective about who it works with. Anyone who works with COSTCO IS GONNA be in for for a hard time. They're going to get pushed to bring down the cost of their products. Costal even work directly with people who make things to help bring these costs down. There is one story. I heard once about You know this Teddy Bear Company wanted to sell their bears and Costco and the retail price was like a hundred bucks and they were willing to sell them to Cosco for fifty dollars each at this bulk price But Costco really was intent about selling his bears for twenty nine bucks in their store so they worked for like months with this Teddy Bear Company to reduce the costs way down like forty percent so they could sell these things for twenty nine bucks and they would have made the same profit margin if they'd sold them for sixty dollars all that time and effort to drive down the price optimistically. I think it was mostly for the consumer's benefit of their stores. They know that people come in there to to find good deals and they want to stay true to that but it did remind me hearing that story of a perfect counter that I once heard from someone else. I once interviewed at Robert Crandall. Who is the president of the EX PRESIDENT OF AMERICAN AIRLINES? And he told me a story about how back in the eighties. He took one all of of every person salad on the airplane back when they serve food on planes and that saved the company forty thousand dollars a year just taken out one olive off the salad and in that case an executive made a move that saved the company money. The consumers expense. Costco often will do the opposite though. Make a move to reduce costs. But they'll pass the saving generally down the chain instead of hoarding it at the top level. The name that has been going through my head. This whole conversation is a key like it seems to be like. It's exactly the same model right. He just have massive warehouses. Super Low prices. A Costco does seem to have a lot more consumer loyalty than I kid. People late lake is a pleasant place like whereas does nothing worse in the world zinc. I get people are obsessed with Costco. I mean they're they're like forums. I mean it's it's out of control. Part of the whole membership model isn't just a source of revenue it's creating this cult of frugality people like to share their stories about how much money they save Costco and like. I said before the average COSTCO CUSTOMERS PRETTY WELL OFF. But they're also incredibly frugal. They're almost like a silicon valley engineer. Who makes two hundred thousand a year? Who insists on only owning four t shirts? It's like that's kind of the typical COSCO Gossamer but we're which they blow to Costco coach. They probably bought a costco. Or Sam's Club. Yeah but yeah there. There's a total culture frugality to to the membership model that works in their benefit as well. Zack Crockett thank you for bringing us up to speed on Costco. And we will link in the show notes as well for your amazing on Chick-fil-a which we didn't have time to get to but that is a whole other insanely amazing and kind of unique business model. Thank you very much for being with us. On sleep money food I was fine thanks Felix.

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