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. 

Freemasons launch recruitment drive for young women

Charlotte Philby in The Independent

Nikki Roberts is someone a teacher might call a good “all-rounder”: smart, pretty, lots of friends. Aged 31, she is also a far cry from your typical Freemason. But that, if the Federation of the International Order of Co-Freemasonry has its way, is about to change.

Forget secretive circles of white-haired men locking fingers in strange handshakes, they say. A British branch is in the throes of a thoroughly modern recruitment drive. It is using Facebook and Twitter to sign up new members, particularly young women, to its society.

“A lot of people have misconceptions about what Masonry is,” Ms Roberts says. Not surprising, given that for centuries members of this traditionally male club have refused to divulge what goes on behind closed doors in meetings and ceremonies. “I can say that it [the Freemasons] is an association, a fellowship if you like, dictated by a system of morals, with lot of symbols and philosophy...” Roberts explains. She compares it to an “occult”: “You need to believe in a divine intelligence or supreme being.”

Since joining the Freemasons five years ago, Roberts says her life has been transformed. “I gave up a lucrative job in the City and now I work in health and social care, something more rewarding,” she says. While cohorts at her lodge (one of the only mixed gender orders in the world, the British Federation) range from party-planners to nurses – many of them female – there are other common elements among members, she says. “The kind of people it draws are interested in being good people; we have respect for laws, we like giving to charity... we live by certain morals.” It is a “life-long commitment”, she adds.

The biggest misconception, Roberts says, is that women are not suited to joining the club. “People choose the Masons in order to become more aware and to awaken areas of their mind to their true nature; women, being naturally nurturing and intuitive, are particularly responsive to that.” That, however, is a matter of opinion. Ask Ken Kirk, 86, a former policeman and a member of the strictly-male United Grand Lodge of England and the answer is clear: “Mixed gender orders? Absurd.”

At first glance, Hexagon House, the British Federation’s Masonic headquarters in Surrey, does little to shift the fusty image. Inside this Surbiton base-camp, the 21st century seems a world away. The hallway is stuffed full of archaic artefacts, such as one might expect from a fraternal system dating back 500 years (the first clubs were recorded in Scotland in the late 16th century): ceremonial firing glasses, brass etchings and silk wall-hangings adorned with obscure symbols.

Follow the carved wooden staircase to the second floor, however, and there are small signs that that this particular order is trying to embrace the modern world.

On the shelves, alongside The Book of Mirdad and The House of the Temple (and a dark cloak hanging on the back of the door) is an A4 folder labelled “Website statistics” and a novelty mug with the logo “old masons never die / you’ll have to join to find out why”.

Worldwide, there are 6 million active Freemasons, with 2 million in the US and around 400,000 in Britain. At the moment the Federation of the International Order of Co-Freemasonry, founded by ideological polymath Annie Besant in 1902, has around 300 members (the majority of them women), and is one of the most progressive – and smaller – orders; many orders won’t let a young women through the door.

Conspiracy theories about what being a Freemason entails are rife. With famous alumni including Winston Churchill and Robbie Burns, the most common perception is that this is an elite club populated by powerful men. That is the dated image the Federation is seeking to change, explains Suzanne Jozefowicz, its secretary. “Masonic membership worldwide is dropping,” she says, and an image refresh is in order. “Freemasonry isn’t about the past, it is about the future, we need to reflect the world around us.”

Jozefowicz, who joined the British federation in 1984, is a suitably modern figurehead for the British Federation. Raised as a Catholic (“But I asked questions like ‘why isn’t God a woman?’ and never got an answer”), she worked as a school-teacher and then a rock musician before joining this, one of the few mixed-sex fellowships, in her twenties. “When confronted with challenges in life people invariably look for an explanation... [we] frequently turn to religion but more and more people are finding that doesn’t necessarily answer the sort of nagging ache within them to understand the purpose of life and what happens or not afterwards.”

So what does Freemasonry offer that is so different? “The natural processes of life come into play,” she says. “Masonry is experiential, it’s not something you can learn like you would for an exam... because Masonry is about your own personal search for truth.” Jozefowicz will confirm that there are various levels of membership, although not the existence of a supreme 33rd degree, which is one popular conspiracy.

“The most basic level is the apprentice, as found in the old building trades,” she says. “He would join with an expert craftsman and spend his time learning the basics; it was a very passive learning process...” Jozefowicz explains by way of analogy: “The apprentice then becomes a journeyman or, as we phrase it, a fellow of the craft, who is able to do work under the direction of the expert craftsman but isn’t yet able to go out of his own....”

At that point, he (or she) is given “some kind of broken token, half of which he would take, and the other half of which his mentor would keep; so the journeyman could go to different places but ultimately he was still bound to his teacher. “In the third and final degree, the secretary says, “the journeyman reaches his maturity and is able to go out as a recognised craftsman in his own right.” By which, she says, she also means “journeywoman”. “We have people of every background in our order,” she adds. “Now the majority are professionals, but we want to expand that out. We will open our door to anyone who knocks.”

Heading back downstairs to the library, past the loo (“It says Gentleman on the door but actually it is for women, too!”), Jozefowicz employs yet another analogy to explain what Freemasonry can bring to the contemporary citizen: “It is about gaining self-knowledge by way of practical instruments: there is the trowel, the gavel, the chisel, the ruler, the square... these are metaphorical instruments of measurement and calculation.”

Keeping their secrets secret is a Masonic priority. In order to ensure a low drop-out rate, candidates are thoroughly vetted; only once that has been done does the initiation begin.

At Hexagon House the magic happens in The Grand Temple room, replete with astrological symbols painted on the ceiling, there are wooden thrones surrounded by carved wooden objects and an organ. But what really goes on once the music starts and the incense has been lit?

“There is a handshake, yes,” Jozefowicz confirms. “But they are part of the things that are secret in each ceremony so [what they consist of] is one thing that I can’t disclose to you.” Even if she did, she says, the knowledge would be useless out of context: “It’s purely a means of recognition and generally speaking it’s only used within the lodge.”

What about the noose, which according to hearsay is placed around the inductee’s neck? “Let’s not call it a noose, let’s call it a cable-tow,” Jozefowicz says. “The significance is quite complex... [a similar rope] is used to moor a ship to its mooring, so it is a way of associating the person with the lodge, and also a symbol of something referred to as the silver cord... It is also is a reminder of the mortality of the individual because obviously if you get hung, you die.”

The rolled-up trouser leg? “For anything you go through in life there is always a specific preparation, and Masonry there is the same,” the secretary explains. “The practice varies, according to which obedience or which working or which lodge you go to... but always some of that is physical and some is mental. You will find in other orders that the rolled up trouser leg is part of that preparation. We tend not to get too distracted by things like that...”

“We open our arms to anybody, of any background, religion or gender,” Josefowicz concludes. “Other Masonic organisations have historically taken a lot more controlled approach to what they release in public. We have always advertised our presence, we’ve had numerous open days, people have been invited even to attend open ceremonies... We hide our answers in plain sight.”