Xiaomi CEO Lei Jun once said that among the three companies that have profoundly influenced Xiaomi, Costco is one; Pinduoduo CEO Huang Zheng also stated that Pinduoduo will become a combination of Costco and Disney in the future. Ye Guofu, founder of Miniso, has repeatedly praised Costco, and after the Shanghai store opened in 2019, he posted late at night saying that Costco understands the essence of human nature and has grasped the essence of retail. The late investment guru Charlie Munger once said: "This is an example of having the right management system, the right personnel selection, the right moral standards, the right diligence, and so on. This is quite rare. If you have been associated with such a business once or twice in your life, then you are a very lucky person." Costco's CFO, Galanti, described Costco's business model as "so simple it's almost contemptible," with a clear and concise business philosophy: attract customers by offering the best quality products at the most favorable prices. To achieve this, Costco maintains low product prices while charging a fixed membership fee, reduces product variety, and treats all employees well. Costco is the largest membership warehouse club chain in the United States, founded in San Diego, California, in 1976. In the 2023 Fortune Global 500 list, Costco ranked 26th, with total revenue of $242.29 billion (approximately 1.7516 trillion RMB) in fiscal year 2023, and net profit of $6.292 billion for the fiscal year. Since opening its first store in Shanghai, China, in 2019, after nearly five years of development, it currently has 6 stores in China, located in Shanghai Minhang, Shanghai Pudong, Suzhou, Ningbo, Hangzhou, and Shenzhen, with another store in Nanjing in preparation and scheduled to open in the second quarter of this year. Although Costco's sales are less than half of Walmart's, its return on capital is nearly 20%, more than twice that of Walmart. Over the years, Costco has been a model for many companies to learn from and imitate, but the results still echo the saying, "Always imitated, never surpassed." So, what exactly is Costco's "secret weapon" that allows it to remain a benchmark and evergreen in the global retail industry? Value Proposition: Standing with Customers Image source: Photo by "Retail Circle" Unlike most merchants who engage in a battle of wits with customers, Costco essentially stands with its customers. Costco essentially acts as an agent for its members, helping them select products, negotiating the best prices with suppliers, and seeking various exclusive benefits. Because of this, after decades of cultivation, Costco has gained a group of loyal customers. There is a popular anecdote: If you want to buy something but Costco doesn't sell it, it means you don't really need it. This shows that Costco not only curates products but also eliminates unnecessary pseudo-needs and pseudo-products, helping customers streamline their lives and focus on the essence of a good life. Clearly, this is a super trust, not only in the quality and price of products but also in its curated categories, and in Costco's ability to provide completeness of life with a minimal SKU count. There is also an unwritten rule at Costco: if the gross margin of a product exceeds 14%, it must be approved by the CEO and the board of directors. Looking at financial reports, Costco's product gross margins are basically around 10%. It is known that since Costco introduced its $1.50 hot dog and soda combo in 1985, the price has never increased. Image source: Photo by "Retail Circle" Of course, besides the most obvious low prices, Costco also offers exclusive benefits for customers, including car tire repair, car fuel, water delivery, physical exams, eye exams, and hearing tests. Moreover, compared to the typical 7-day return policy at most supermarkets or specialty stores, Costco accepts returns without asking questions and without time limits. As long as you are not satisfied, you can return or exchange at any time, even for eaten food, worn clothes, or used appliances. Additionally, unlike most stores, Costco stores do not have aisle signs or store maps to facilitate quick shopping. Instead, Costco's aisles are simply marked with numbers, and the store regularly changes product placements and introduces new products. According to Costco, this is to use "treasure hunt retail psychology" to surprise consumers and make shopping enjoyable. In 2018, Thad Kleszcz, the general manager of Costco's Culver City, California store, explained Costco's store layout strategy: the store layout is designed as a maze to encourage customers to walk around more. Kleszcz also revealed that employees work hard before store opening to change product positions. This way, consumers have a different experience each time they visit Costco, which encourages them to buy and even look forward to their next visit to see what has changed. Employees never deliberately hide products to deceive customers; adjusting product positions is just to make shopping fun. It can be said that for customers, Costco is a strict housekeeper, not only helping customers purchase everything but also covering almost all aspects of the quality life customers pursue with the fewest product categories. This also practices what Costco's executive vice president James Murphy said: "The essence of retail is service." It is precisely for this reason that Costco has established a loyal relationship of mutual trust with its customers, which is something many companies can easily learn but fail to grasp the essence of. Unique Business Model Image source: Photo by "Retail Circle" In fact, Costco's business logic is very clear: its operations only consider acquiring customers, not making money, and through high-quality, low-priced products combined with high-value-added services, it ultimately wins the lifelong loyalty of members. The author learned that as of February 2024, Costco's cardholding members have reached 130 million. Moreover, Costco currently has a membership renewal rate of over 91%, and these long-term customers have become its loyal supporters. Of course, relying on membership fees for profit is only the surface. In fact, Costco's core competitiveness lies in attracting consumers with high cost-performance products and profiting by providing additional value-added services. It can be said that Costco's success is not only the success of the membership model but also the success of modern management. Costco's membership model is actually a manifestation of user thinking: everything for the user, thinking from the user's perspective. The foundation of the Costco model is products; only high-quality products will attract users, and membership is just a means to accelerate product purchases. Another is competitive thinking. Facing competition and pressure from many large supermarket chains globally, Costco breaks away from the "product profit" mindset and uses "membership fees" as its source of profit, thereby avoiding competitors and forming its own moat. As Ye Guofu, founder of Miniso, said, Costco understands the essence of human nature and grasps the essence of retail. Consumers, regardless of nationality, skin color, or class, all have the psychology of "spending less and buying better," which is universal across time and cultures. Costco keenly captures this and spares no effort to guide and satisfy it; this is its insight into human nature. Conversely, this is also the best interpretation of the consumer as "God": if you give way to consumers, they will choose you. Image source: Photo by "Retail Circle" It can be said that Costco's moat lies in the stickiness of its members. Once you have this shopping experience, you can't do without it. Every purchase by each member and their accompanying relatives is widening its moat. The more members, the more products consumed; the more products consumed, the larger the volume; the larger the volume, the stronger its bargaining power, and the lower the prices. This is a positive feedback loop. The effect is that the moat becomes wider and deeper. From Costco's financial data, membership service fees, although not a high proportion of Costco's revenue, account for a relatively high proportion of net profit. Data shows that Costco's total revenue in fiscal year 2022 was $226.954 billion; net profit for the fiscal year was $5.844 billion, of which membership fees were $4.224 billion, accounting for more than 70% of Costco's net profit. Currently, Costco's membership fees in the United States mainly come in two types: a regular membership with an annual fee of $60 and an executive membership with an annual fee of $120. In China, there are two categories: Gold Star users and Business users, with membership fees of 299 yuan for both, though sometimes discounted to 199 yuan. Among them, Gold Star users are for individuals, while Business users are for legal representatives of enterprises and institutions. Regardless of the type, each user can apply for one free household card, and business users can apply for up to 6 additional cards. In January this year, on the opening day of Costco's first store in South China, the Shenzhen store, the number of memberships opened exceeded 140,000, ranking first globally, demonstrating its popularity and influence. Unreplicable Supply Chain After decades of development, Costco has established over 800 warehouses in multiple countries around the world, demonstrating strong market coverage. Financial data shows that in fiscal year 2023, Costco's revenue reached $245.65 billion, a year-on-year increase of 6.33%, with the U.S. market accounting for 73%, Canada 14%, and other international markets 13% combined. Costco's supply chain management philosophy is key to its ability to continuously provide high-quality products at competitive prices. It deeply understands the art of supply chain simplification, achieving operational efficiency and cost optimization by removing unnecessary complex links. This simplification not only allows Costco to continuously deliver value to its members but also enables it to convert saved costs into tangible benefits for consumers, ensuring that customers can always get their desired products at prices better than traditional retail. The author learned that Costco adopts a direct sourcing model with suppliers, agreeing to deliver purchased goods directly to warehouse stores (about 30%) or Costco's logistics distribution centers (about 70%), reducing the multi-level sorting process in freight. In addition, the company's stores and distribution centers are closely located, with distribution centers as the axis and stores spreading outward, shortening delivery routes and maximizing loading and sorting efficiency, thereby reducing unit distribution costs. According to Costco's financial report, the delivery time from distribution centers to stores does not exceed 24 hours, laying the foundation for its high-turnover business model. In seasonal product management, unlike many retailers, Costco does not maintain seasonal inventory for long periods. Instead, it chooses not to replenish seasonal products after they sell out, thereby reducing the complexity of inventory management. Clearly, this approach not only aligns with Costco's overall strategy of pursuing maximum efficiency and cost-effectiveness in supply chain operations but also helps maintain its inventory flexibility and responsiveness. In terms of SKUs, unlike traditional retailers with tens of thousands of products, for example, Walmart has about 120,000 SKUs, and its similar membership warehouse club Sam's Club has about 7,000, Costco has about 3,800 SKUs. This strategy reflects its profound insight into supply chain operational efficiency, cost control, and simplicity. Because the fewer suppliers, the larger the purchase volume, the higher its bargaining power, allowing it to further lower prices. And by limiting product variety, it can better ensure product quality. Fewer product types in the store also help improve space utilization efficiency: Costco's sales per square foot are three times that of Walmart. Due to fewer product types, Costco's product turnover rate is nearly twice as fast as that of typical retail stores, meaning less capital is tied up in inventory. At the same time, Costco has vigorously developed its private label brand, Kirkland Signature, which currently accounts for more than a quarter of total sales, far higher than the retailer average. Kirkland's profit margin is about six percentage points higher than brands like Hershey or Kellogg's. As an "evergreen" in the retail industry, Costco's success is not only due to the above three points but also to the corporate culture deeply embedded in every employee's mind. Costco's corporate culture is: "If we continue to serve our customers and make them satisfied, they will keep coming back." Therefore, all of Costco's business activities revolve around creating value for users. For Costco, inspiring passion, integrity, and a sense of ownership among employees, motivating users, and ensuring that users believe they get the best experience when shopping at Costco are the core of its corporate culture and the key to its success. Currently, Costco has opened 6 stores in China and has not shown obvious signs of being ill-adapted to the local environment. In 2019, when Costco opened its first store in Shanghai, China, it registered over 200,000 members, higher than the average of 68,000, setting a record in Costco's 36-year history. In 2021, when Costco opened its second store in Suzhou, China, on the opening day, long queues formed outside the store, stretching over two kilometers, with waiting times of up to one hour. In January this year, when Costco's 6th store opened in Shenzhen, it was also exceptionally popular, with over 140,000 memberships opened on the opening day, ranking first globally. Recommended Reading