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Costco

How a 14% margin cap, a $1.50 hot dog, and 3,800 SKUs built the most loyal customer base in retail.

▶165K views on YouTubePreview, 1 of 7 tactics free

With Ben Gilbert & David Rosenthal

"If you raise the hot dog price, I will fucking kill you. Figure it out." — Jim Sinegal to Craig Jelinek
Ben Gilbert & David Rosenthal, on the episode

Acquired spent four hours unpacking Costco for a reason. By every Wall Street metric, this should be a worse business than Walmart: capped gross margins, a third higher wages, no advertising, a fee just to walk in the door. Instead, Costco has a 93% US renewal rate, a Kirkland private label generating $52 billion a year on its own (closer to $77B with gas), and a 50-year track record of compounding through every recession the U.S. has thrown at it. Ben and David's argument across the episode is that none of this is luck. Costco's playbook is a coherent system, and most of it is copy-able by operators in any category that touches consumers.

Tactic 01

Ben Gilbert & David Rosenthal, Acquired

Cap your take so the customer always feels the win

The play

Pick a margin ceiling you refuse to cross and pass supplier savings straight to customers.

Ben Gilbert & David Rosenthal says

Costco enforces a strict cap on margin, marking up a maximum of 14 percent above supplier cost. The only exception is Kirkland's signature, where they cheat a little and let themselves go up to 15, quite indulgent. You could raise the price of a bottle of ketchup to a dollar and three cents instead of one dollar and no one would know. Raising prices just three percent would add fifty percent to pre-tax income. Even Walmart marks up 25, which is almost twice as much as Costco's margin. For every dollar Costco gets a supplier to reduce the price on something, tough but fair, the customer actually sees most, about 89 percent, of the benefit.

Try this

Pick one margin or fee number in your business and write down the ceiling you will not cross this quarter.

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Tactic 02

Treat membership as the real product

Ben Gilbert & David Rosenthal says

Membership fees represent about 70 of the company's operating income, with the other 30 of the profit margins…

Episode quotes and Try this

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Tactic 03

Build private label that beats the brand, not undercuts it

Tactic 04

Anchor trust with prices you refuse to raise

Tactic 05

Constrain SKUs to force velocity

Tactic 06

Pay your operators more than the industry pays

Tactic 07

Skip the marketing budget; let the experience do the work

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ACQUIRED, extracted by Podex