In February, the Dynamic Incentive Program has more than tripled the growth of McDonald's burgers in the United States over the past 40 years. Over the same period, another meat treat, Costco's Hot Dog Plus Drink, has been stable at 1$5.
Last year, customers at the major American retailer ate 200 million hot dogs. Richard Gallanti, Costco's long-time chief financial manager, has promised to keep it "forever."
Customers aren't the only fans of Costco, with Gallanti announcing his retirement on Feb. 6 and Wall Street analysts showing their love for Costco, with the company's share price at 430 times what it was when he took office nearly 40 years ago, and the S&P 500 index trading just 25 times higher.
What is behind the company's consistent outperformance in recent years?
Costco is the third-largest retailer in the world, behind Walmart and Amazon. While sales are less than half of Walmart's, the return on capital is nearly 20%, more than double Walmart's. Charlie Munger (Buffett's partner) was a well-known investor who served on Costco's board of directors from 1997 until his death last year, and he called it a "perfect damn company."
Describing Costco's business model as "arrogantly simple," Gallanti said the company's guiding philosophy is simple, with the lowest ** offering high-quality products as a way to attract shoppers. To this end, Costco charges a fixed membership fee while keeping the list price low, reducing the inventory of different products, and giving employees better treatment than their peers.
Start with profits. Most retailers raise their profits by raising the mark. That's not the case with Costco, where gross margins hover around 12%, compared to 24% for Walmart. The company compensates for this with membership fees: customers pay $60 or more per year to shop at their stores.
In 2023, 1Net membership fee income from 2.9 billion members reached $4.6 billion, more than half of Costco's operating profit.
Joe Feldman, an analyst at research firm Telsey Advisory Group, believes that the membership model creates a virtuous circle. The more members a company has, the more purchasing power it has, resulting in better deals with merchants, and most of the deals are passed on to members. Membership fees also encourage customers to focus on costco instead of shopping around.
This seems to be working, with membership renewal rates of up to 90%.
Second, consider how your company manages its product lineup. Costco stores have a limited assortment of about 3,800 items. Walmart's Costco-like rival, Sam's Club, has about 7,000 items. Walmart has about 120,000 items.
Buying more from fewer traders gives Costco more bargaining power, which further reduces costs. By limiting the variety of products, Costco can better focus on maintaining quality. The reduction in the variety of items in the store has helped to make more efficient use of space, and sales per square foot are three times that of Walmart.
Due to the reduced number of products, Costco's merchandise turnover rate is almost twice as fast as that of the retail industry, which means that inventory takes up less money. In addition, Costco has expanded its own brand, Kirkland Signature, which now accounts for more than a quarter of sales, well above the retailer average.
The profit margins of private label products are about 6 percentage points higher than those of brands such as Hershey or Kellogg.
Finally, Costco is also the best among retailers when it comes to treating employees. About 60% of retail employees leave each year. Costco's employee turnover rate is only 8%; More than one-third of employees have been with Costco for more than ten years.
One reason for the low employee turnover rate is wages, which are higher than the industry average and offer generous medical and retirement benefits. Another reason is career prospects. Companies tend to promote leaders from within. While Gallanti's successor is from the outside, the rest of Costco's executive team has been with the company for more than 20 years.
The late Munger was confident in Costco's "bright future." For many years to come, Costco's customers will be able to enjoy 1$50 hot dogs.