Why Costco is so loved

Keeping customers, employees and investors happy is no mean feat writes The Economist

image: getty images

Feb 15th 2024 

In the nearly 40 years that The Economist has served up its Big Mac index, the price of the McDonald’s burger in America has more than tripled. In that same period the cost of another meaty treat—a hot-dog-and-drink combo at Costco—has remained steady at $1.50. Last year customers of the American big-box retailer devoured 200m of them. Richard Galanti, Costco’s longtime finance boss, once promised to keep the price frozen “for ever”.

Customers are not the only fans of Costco, as the outpouring of affection from Wall Street analysts after Mr Galanti announced his retirement on February 6th made clear. The firm’s share price is 430 times what it was when he took the job nearly four decades ago, compared with 25 times for the s&p 500 index of large companies. It has continued to outperform the market in recent years. What lies behind its enduring success?

Costco is the world’s third-biggest retailer, behind Walmart and Amazon. Though its sales are less than half of Walmart’s, its return on capital, at nearly 20%, is more than twice as high. Charlie Munger, a famed investor who served on Costco’s board from 1997 until his death last year, called it a “perfect damn company”. Mr Galanti, who describes Costco’s business model as “arrogantly simple”, says the company is guided by a simple idea—hook shoppers by offering high-quality products at the lowest prices. It does this by keeping markups low while charging a fixed membership fee and stocking fewer distinct products, all while treating its employees generously.

Start with margins. Most retailers boost profits by marking up prices. Not Costco. Its gross margins hover around 12%, compared with Walmart’s 24%. The company makes up the shortfall through its membership fees: customers pay $60 or more a year to shop at its stores. In 2023 fees from its 129m members netted $4.6bn, more than half of Costco’s operating profits.

Joe Feldman, an analyst at Telsey Advisory Group, a research firm, argues that the membership model creates a virtuous circle. The more members the company has, the greater its buying power, leading to better deals with suppliers, most of which are then passed on to its members. The fee also encourages customers to focus their spending at Costco, rather than shopping around. That seems to work; membership-renewal rates are upwards of 90%.

Next, consider the way the company manages its product lineup. Costco stores stock a limited selection of about 3,800 distinct items. Sam’s Club, Walmart’s Costco-like competitor, carries about 7,000. A Walmart superstore has around 120,000. Buying more from fewer suppliers gives the company even greater bargaining heft, lowering prices further. By limiting its range, Costco can better focus on maintaining quality. Less variety in stores helps it use space more efficiently: its sales per square foot are three times that of Walmart. And with fewer products, Costco turns over its wares almost twice as fast as usual for retailers, meaning less capital gets tied up in inventory. It has also expanded its own brand, Kirkland Signature, which now accounts for over a quarter of its sales, well above average for a retailer. Its margins on its own-brand products are about six percentage points higher than for brands such as Hershey or Kellogg’s.

Last, Costco stands out among retailers for how it treats its employees. Some 60% of retail employees leave their jobs each year. Staff turnover at Costco is just 8%; over a third of workers have been there for more than ten years. One reason for low attrition is pay. Its wages are higher than the industry average and it offers generous medical and retirement benefits. Another is career prospects. The company prefers to promote leaders from within. Although Mr Galanti’s successor has come from outside, the rest of Costco’s executive team has been with the company for more than 20 years. The late Mr Munger was confident that Costco had “a marvellous future”. Its customers could be enjoying $1.50 hot dogs for many years to come. 

Bitcoin: It’s always difficult to get people to understand something if their wealth depends on their not understanding it.

The rising price of electricity and the plunging value of the cryptocurrency could burst the speculative bubble for today’s prospectors writes John Naughton in The Guardian

Bitcoin mining has previously produced lucrative gross margins as high as 90%. Photograph: Jack Guez/AFP/Getty Images 
In the bad old days, prospecting for gold was a grisly business involving hysterical crowds, pickaxes, digging, the wearing of appalling hats, standing in rivers panning for nuggets, “staking” claims and so on. The California gold rush of 1848-55, for example, brought 300,000 hopefuls to the Sierra Nevada and northern California and involved the massacre of thousands of Indigenous people.

In our day, the new gold is bitcoin, a cryptocurrency, and prospecting for it has become a genteel armchair activity, although it is called “mining”, for old times’ sake. What it actually involves is using computers to perform unfathomably complicated calculations to create cryptographic “hashes” – codes that are, in practical terms, uncrackable.

Sounds intimidating, doesn’t it? But in reality anyone can play the game. You just have to have the right kit – a special bitcoin-mining computer called an Asic (application-specific integrated circuit). These gizmos are readily available online. I’m looking at one as I write: the Bitmain Antminer S19, which costs $6,999 (£5,600) and can do 95 terahashes – 95tn calculations – every second.

Mining is a misleading term for the computational work that’s needed to validate transactions on the blockchain – the cryptographically protected distributed ledger that underpins bitcoin. For every “block” that a miner is able to validate, they are rewarded with a number (currently 6.3) of new bitcoins. The value of the reward is tied to the prevailing price of the currency at the time. Not so long ago, for example, when each bitcoin stood at $68,000, that reward was worth nearly $430,000.

So you can understand why bitcoin mining looks a bit like a contemporary version of what happened in California in the 1840s. While most of the hopeful arrivals then were Americans, there were also thousands from Latin America, Europe, Australia and China. The Judge Business School in Cambridge, which has been tracking bitcoin mining for years, now finds that the US, with 37.84% of global hashrates, remains the biggest location, followed by China (21.11%), Kazakhstan (13.22%), Canada (6.48%) and Russia (4.66%).

So bitcoin mining has become a global phenomenon. And while here and there there are small outfits diversifying into it, such as the Californian pancake-batter maker that bought an Asic after pancake sales plunged during the pandemic, most miners are now industrial-scale operations with large sheds of Asics in serried racks, looking for all the world like small-scale data centres of the kind run by Google and co.

And, like data centres, they are power-hungry. That Bitmain Antminer machine, for example, has a power rating of 3,250 watts. It was recently estimated that bitcoin consumes about 110 terawatt hours per year, which is 0.55% of global electricity production, or roughly equivalent to the annual energy draw of countries such Malaysia or Sweden. 

For many operators, bitcoin mining has up to now been an astonishingly lucrative activity, with gross margins sometimes as high as 90%. But suddenly things have changed. First, bitcoin’s price has plunged – from its peak of $68,000 to $30,587 as I write this. And second, electricity prices have soared – by up to 70% in parts of the world, leading some industry experts to calculate that mining a single bitcoin can now cost up to $25,000. So the industry finds itself squeezed at both ends. Just like any ordinary business, in other words.

There’s an agreeable sense of schadenfreude in all this. Bitcoin has been a fascinating phenomenon from the very beginning, but one that morphed under the pressure of greed. Originally conceived as a currency – that is, as a means of payment – it rapidly became perceived as an asset class and, in a time of low interest rates, was the subject of an hysterical speculative bubble that now seems to have deflated, even if it hasn’t definitively burst.

Although it was predictable from the outset that, as the currency evolved, maintenance of its underpinning cryptographic blockchain would become ever-more onerous, it took a long time for the environmental consequences of that fact to be realised. But perhaps that’s a hallmark of every speculative bubble. It’s always difficult to get people to understand something if their wealth – real or anticipated – depends on their not understanding it. Meanwhile, the rest of us are left with the realisation that even the coolest idea can fry the planet.

'If you don't have the right culture, it's hard to be a high-performance team'

Former South Africa rugby captain Francois Pienaar talks about his role on Cricket South Africa's review panel. INTERVIEW BY FIRDOSE MOONDA in Cricinfo



"I have been really privileged to get involved in high-performance teams that have won" © Getty Images



Despite consistently boasting some of the best players in the world, South Africa remain the only top-eight team that has never reached a World Cup final or World T20 final. After a year in which both the men's and women's teams crashed out of a major tournament in the first round, while the Under-19 team failed to defend their title, Cricket South Africa are determined to discover why and have appointed a four-person panel to investigate.

The highest-profile person on that panel is Francois Pienaar, the Springbok (rugby) World Cup-winning captain in 1995. He and coach Kitch Christie hold an enviable 100% winning record, while Pienaar also enjoyed great success at domestic level. It is hoped some of his knowledge will rub off on the cricketers.

Pienaar spoke at the launch of the Cape Town Marathon, for which he is an ambassador, about his involvement with Cricket South Africa's review panel, what it means to be a high-performance team, and how to create a winning culture.

Why did you agree to be involved in the CSA review? 

Passion. I love this country and I have been involved in cricket - I've played cricket at school, I played Nuffield Cricket, I was involved in the IPL marketing when it came here in 2009. As a panel, we all know things about high-performance and closing out games. I have been involved in a number of initiatives where we've put structures in place and they have borne fruit. This is just a privilege, to be honest.

How will you and your fellow panelists approach the review?

What we will try and learn is what the trends over the last ten years are. We will look at trends, selection, stats and come up with recommendations.

What do you, specifically, hope to bring to the review? 

A different thinking from not being in the sport, coming from outside the sport. I have been really privileged to get involved in high-performance teams that have won.

Can you talk about some of the teams you were involved with and how they achieved what you call high-performance status? In 1993, the Lions won 100% of their games. 

In 1994, we won 90%. As captain and coach of the Springbok rugby team, Kitch Christie and myself, we never lost. There was a certain culture of that side and a way of doing things. Our management team fulfilled high-performing roles in getting us to get a shot at the title. Even then, there are no guarantees. When you get to the final, it's a 50-50 call and it's the smart guys who work out the margins. It's all about the margins.

Then I went over to England and rugby was really amateur. I was a player-coach at Saracens, I needed to put those processes in place and, luckily, took the team to win their first ever cup. Those sort of things I am really proud of.




A brand to admire: the All Blacks have won the last two World Cups © Getty Images


Have you seen anything similar to that in cricket?

I had a magnificent session with the Aussies before the Ashes in the early 2000s. They asked me to do a session on margins and big games and how to close out games. I was sort of embarrassed. The best cricket team in the world by a long shot was asking me, but I found it so interesting. My payment there was that I got an insight into how they run their team. Steve Waugh as a captain and a leader - wow! I got so much from that.

What makes a high-performance team?

Culture trumps strategy for breakfast. If you don't have the right culture in any organisation, it's very hard to be a high-performance team. The brand must be stronger than anything else. CEOs and coaches and captains come and go but you have to understand the culture and the core of why teams are high-performance teams, and you can't tinker with that. As soon as you start tinkering with that, then you stand the risk of not remaining a high-performance team.

Look at the All Blacks brand [New Zealand rugby], and how they nurture and love and embrace that brand. One of the nicest things for me was at the last World Cup when Graham Henry, who coached them when they won the World Cup in 2011, was coaching Argentina and New Zealand were playing against Argentina in the opening match at Wembley. I was there. My question would be what would happen in South Africa if a team of ours - cricket, rugby, soccer - if the coach who had won the World Cup in the previous outing is now coaching the opposition in the opening match. Would we invite him to lunch with the team the day before the game? I think not. They did that. The All Blacks invited Henry because he loves the guys, he is part of that brand, part of that passion, so why should they not invite him? They knew, if we are not smarter than him, if we don't train hard, then we don't deserve to win. It's about the culture.

Then afterwards, Sonny Bill Williams gave away his medal. Was it him or part of the culture? I would think it's part of the culture. Same with Richie McCaw. Why did he not retire in the World Cup? Because if he did, it would have been about him and not about the team, and he knew it needed to be about the team. That's my take.

How do you create a winning culture? 

Let's go back to rugby. Every World Cup that has been won since 1987, the core of that winning national team came from the club side that dominated. So that side knew how to win. Like in 1995, the core of our team was from the Lions. If you infuse that culture with incredible players, they will enhance the way you do things.




"We will look at trends, selection, stats and come up with recommendations" © IDI/Getty Images


Are there other elements that go into creating a winning team?

Form is very important and so are combinations - they have to work very well - and then there is leadership. How do the leaders close a game down, how do they make decisions, and how do you work with other leaders in the team to do that?

Rugby is a fairly simple game: it's about how easy you release pressure, your exit strategy, and how you stay unpredictable on attack. For that to happen, there are certain elements that need to fall into place. But the overarching thing is, do you have the right culture, have the right guys in form, have the right combinations and the leaders? Can they execute? And by leaders it's not only the captain, it's the coaches, the management staff. If you can do that right, you will be competitive a lot of the time, and if you can bottle that so that when the next guy comes, you pass the baton - you can't change that. Bottle it, understand it, love it. You'll be on the right track.

Is one of South Africa's problems that they have not found a way of gaining or transferring that knowledge? 

The transfer of knowledge is something I am quite interested in discussing. Do we do that, and what are the reasons for us not doing it? In rugby, we've never had that culture. We don't have ex-coaches, for example, involved. We have got universities, schools - how can we bottle that, how can we work together? The transfer of knowledge and the sharing of ideas, we need to rekindle that.

Will transformation form part of the review? 

Everything is open for discussion and it should be. If you want to do a proper job, you should have the opportunity to ask questions about all elements that enhance high-performance.