Tomorrow the Costco Wholesale Corporation will celebrate its 40th birthday, marking a milestone for the company that widely introduced selling bulk items to consumers via giant box stores.
Wholesale shopping – consumers buying items at a similar price to what retailers pay their suppliers – is an effective way for people to save money. The downside is that for the business model to work, the wholesale chain must sell items in volume, requiring higher costs upfront than what shoppers would incur at traditional retail stores.
This dynamic is why shopping at Costco appeals to wealthier demographics. Those who can spend money now to save money later will often do so; meanwhile, those who live paycheck to paycheck may be compelled to make purchases at the last minute. Nevertheless, the company’s growth trajectory and customer retention indicate it has a lot to offer anyone.
In recent years, Costco experienced significant success, with its stock massively outperforming the S&P 500 from the beginning of 2020 to the end of 2021 at a rate of 2.61x. At the same time, it kept its customers happy, boasting a membership renewal rate of 90% worldwide in 2022. The sustained appeal should be enough to make retail shoppers wonder what they’re missing.
A Look Back at Costco’s History
The Costco origin story begins in 1976 with the founding of the Price Club in a converted airplane hangar in San Diego. Founder Sol Price began his wholesale club purely as a business-to-business venture, but he soon realized he could achieve more significant purchasing clout by selling to select individuals. The then-unfamiliar business model, which relied on paid membership cards, quickly gained traction.
In 1983, former Price employee Jim Sinegal and attorney Jeff Brotman opened the first Costco Wholesale in Seattle. The company expanded over the following decade, becoming the first to reach $3 billion in sales in under six years. When Costco merged with Price Club in 1993 under the name PriceCostco, the operation had a combined 206 stores and $16 billion in yearly sales. It renamed itself Costco in 1997.
After the merger, the business underwent further strategic expansion in the U.S. and abroad. By the mid-2000s, the company had planted its flag in Canada, Mexico, the U.K., Japan, Taiwan, and South Korea, among other markets. This global outreach was accompanied by a keen sense of local adaptation, with regional delicacies featured alongside commonplace items.
How The Costco Membership Model Works
By charging an annual membership fee, stores like Costco offer customers access to a slate of products at lower prices than traditional retail. This fee becomes a steady revenue stream, allowing these businesses to operate on tighter profit margins per item, which translates to more competitive prices.
The wholesale chain offers two membership tiers – Gold Star at $60 and Executive at $120, with the latter giving 2% rewards on purchases. Costco had nearly 119 million members by the end of 2022, with 54 million on the Gold Star tier. Rivals Sam’s Club and B.J.’s Wholesale Club run on similar tiered membership models.
Costco maintains a lean operation to keep costs down. The company carries less than 4,000 stock-keeping units (SKUs) at each store, far lower than Walmart’s 140,000. It also eschews marketing and public relations departments, instead relying on customer loyalty to spur word-of-mouth advertising.
The Costco model is heavily dependent on an upper-middle-class customer base. The typical customer is a married, college-educated Asian American woman living in the Pacific Northwest and earning over $125,000 annually. And the stores tend to be located in prosperous suburbs. These facts set Costco apart from Sam’s Club, which caters to a lower-income clientele.
Recent trends indicate that some of Costco’s affluent customers may peel off to competitors like Walmart for grocery shopping in more difficult economic times. The latter has been picking up grocery market share in recent months. However, even as the average daily transactions have declined at Costco by 4.2% this year amid inflation woes, in-store traffic has risen 4.8% globally. This may indicate that loyal members will be ready to shell out once again when the time is right.
How Bulk Shopping Can Save People Money
While it’s easier to shop in bulk when one has a more extensive financial backstop, anybody who can manage it will benefit in various ways.
Lower Unit Prices: The core of warehouse shopping is reduced prices achieved through minimal overhead. Over a year, saving a considerable sum is possible, especially on essentials. Costco’s average markup is 11%. Compare this to Walmart’s roughly 24% and the 30% at supermarkets, and it’s easy to see how the savings can add up.
Fewer Trips: Going to the store less means spending less on gas, public transportation, or other travel costs. It also reduces the temptation to make unplanned purchases, which can add up over time.
Inflation Protection: An easy-to-overlook benefit of bulk shopping is that as prices rise due to inflation, people who buy in bulk can shield themselves from price hikes in the short term. Inversely, a constant rate of purchasing ensures maximum exposure to the increases.
Discounts and Promotions: Wholesale stores tend to offer additional deals on bulk items, leading to even more savings. Costco often encourages shopping with “treasure hunt” promotions that involve limited-time offers and surprise items at discounts.
State Tax Benefits: In a handful of states, bulk purchases of certain items may be exempt from sales tax, giving consumers a small break. This exemption will vary by state and product, but it’s a decent benefit when available.
The Environment: Despite the risk of excessive purchasing, bulk shopping cuts down on packaging waste per unit, making it more eco-friendly than other options – particularly a continuous stream of deliveries from Amazon.
This article was produced and syndicated by Wealth of Geeks.
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