guiding principle: offer extreme value for high quality products at the lowest possible prices

Saul (way back) basically invents “discount store,” (“marts”), then goes on to invent the Costco model

• based off of a non-profit in LA (FedCo) where federal employees bought items together — had to technically be member-based to get around laws against selling products below retail price

unlike many others, they do NOT use “loss leaders” (mark down some items below retail price to get customers, and mark up other items to make up the money— basically treating customers like they’re stupid)

pay workers way more: today, $26/hour versus $19/hour at Walmart, and great healthcare benefits, 401k

• causes VERY low employee turnover, even for hourly workers: 7% versus >20% for typical retail workers
• promote from within — again, unique!

hypermarkets: grocery + hard goods (modern day Walmart!), actually first invented in France

warehouse operations side has great upsides (selling to small businesses)

• Saul made a deal with French hypermarket guy, actually just got bought out then kicked out, and Jim Senegal (warehouse guy) promoted; he goes on to start Price Club
• logistics are easy bc manufacturers deliver right to you, and you don’t have to make things look nice
• don’t have to worry about small quantity issues
• takes advantage of the real estate that FedMart had built up
• decided to only sell 3000 items most wanted by other businesses- huge difference from other “marts,” which had 50k+ SKUs
• not an immediate success, but then they make a deal with San Diego Credit Union to give their members access, which starts big word-of-mouth chain (including to many small business owners!)
• unexpectedly at the time, consumers were pretty okay with shopping directly at a warehouse
• new model is very cash flow positive! manufacturer drops off product, invoices (usually due on 30 days), and since it can be sold immediately without any internal supply chain → usually sold before invoice needs to be paid! even today, they turn over inventory much faster than most everywhere else = negative cash conversion cycle
• also helped by low SKU count
• 3 years after founding, become a public company just because they passed 500 shareholders without actually listing on any exchange! (only do this in 1982)

Sam Walton chats with Saul, then goes to found Sam’s Club (Saul doesn’t care at all, they stay friends ❤️)

• same things happens with Bernie Marcus and Home Depot
• then Jeff from Seattle asks to start a Price Club franchise, they say no, so they go ahead and just start their own company by cloning the business plan… but they connect him with Jim Senegal (sp.), they go on to start Costco :)
• eventually Price Club and Costco (which was expanding much more rapidly) pseudo-merge due to pressure fRom Sam’s Club

membership model

• actually selects for wealthy customers— both bc need to afford membership cost up front, ability to buy in bulk (even though cheaper per unit), have space to store bulk purchases

employee retention, membership, and large size of items all reduce shrinkage (theft)

internal principle to not mark up items more than 14% from price they buy it at (except for Kirkland Signature… up to 15%)

• compared to others: most retailers can mark up by 100%, even Walmart marks up 25%
• builds trust with members, and with suppliers

Costco Code of Ethics

1. obey the law
2. take care of our members — not trying to improve margins, but to increase value to members
3. take care of our employees
4. respect our suppliers — Costco buyers have deep understanding of commodities; “tough but fair;” usually a customer’s largest customer (bc low SKU count, high relative revenue per product)

• notice ABSENCE of shareholders (sum of above four achieve value for shareholders)

Kirkland Signature → another way for them to provide value, offer product for better price than on the market

• currently biggest packaged goods brand in the US

low selection works bc they offer the best products possible - comes back to trust

• accepting “intelligent loss of sales”

historical split: about 70% memberships, 30% retail

very efficient revenue per foot, per employee

“treasure hunt items” make up ~25% of items to make shopping experience fun — one time only