Author: alearningaday

Costco on Acquired – a few reflections

After rave reviews from good friends, I finally got to the Costco episode of the Acquired podcast. It justified the rave reviews – thank you Acquired team. Here were my reflections –

  1. The first part of the Costco story is the story of Sol Price – probably one of retail’s most prolific inventors. He invented modern retail as we know it with the creation of Fedmart (that inspired “Walmart” and “K mart” ) and then Price club which led to Costco.
  2. Sol Price was an inventor who was very aware of the fact that he wasn’t as good at running his inventions. However, I loved the anecdotes of just how principled he was. Sam Walton – the founder of Walmart – famously said he stole the most ideas from Sol Price. Sam Walton’s tape recorder was once confiscated at a Price Club. When Sol heard of this, he immediately mailed it back.
  3. Jim Sinegal, Costco’s co-founder, famously corrected someone who said he learnt a lot from Sol to emphasize “I learnt everything from Sol.” Costco’s origin and biggest ideas – memberships, the warehouse concept, unique approach to inventory, etc., can be traced in a straight line to Sol Price’s innovations.
  4. One of the magical parts of Costco’s strategy is the warehouse concept. As they’re a warehouse, suppliers deliver directly and items are immediately available to sell. They turn items over roughly 1 in 26 days – i.e., before supplier bills come due in 30 days. It is wild how beautifully their cash flow system works.
  5. Costco has a mandate of a maximum of 14% margin with an average at 11%. So, for every dollar they save, 89 cents of value goes right back to the customer.
  6. Costco doesn’t do loss leaders – goods sold at breakeven or at a negative profit – to bring customers into stores as it means fleecing the customer elsewhere. The only place where they barely break even is $1.50 hot dog – a tradition that has lasted four decades.
  7. Costco have been reducing their SKUs over time – they’re currently in the range of 3000-4000 (other retailers store 50,000+). It is a mark of how much their customers trust them to pick the right thing. This also means each buyer REALLY understands the cost of every ingredient and monitors it carefully. And while they have tremendous power over suppliers given they go big on few SKUs, they are known to be tough but fair. Their objective is passing value to the customer.
  8. Kirkland Signature is the largest consumer packaged goods brand in the US – $52B in sales out of ~$230B in 2023. Again, a symbol of how much customers trust Kirkland.
  9. Costco rarely vertically integrates. One of the few exceptions is with chicken where they’d otherwise have to deal with a small group of firms (who then have pricing power). They produce 200 million chickens in-house a year.
  10. They pride themselves to be learning machines. Stores in year 1 today are doing better than stores in year 5 from 2014. This shows up in their $ per squarefoot. They live in rarefied air – it is closer to Tiffany’s (who sell diamonds!) and are orders of magnitude above other retailers.
  11. Their memberships are a profit center which contributes to 70% of their operating income. Their memberships also ensures record low shrinkage/stolen goods. Another reason for that record is staff who are paid $26/hour vs. $19/hour in other places with fantastic benefits. This means 4x lower turnover and high loyalty.

    Finally, Costco’s executive membership costs twice the normal membership. And if you don’t get enough value to make up for the extra cost, they give the money back to you. Only at Costco.
  12. It is amazing how much Costco has inspired amazon. When Amazon was going through a difficult time after the dot com bust, Jim Sinegal and Jeff Bezos met for coffee and Sinegal explained to Bezos that there are two kinds of companies. The first focus on extracting value to customers and the second focuses on always giving customers value. Costco was firmly the second kind.

    That day, Bezos went back and sent an email to his team that Amazon would be the kind of company that was always focused on giving value back to customers. Prime memberships, of course, have strong parallels to Costco’s memberships.
  13. Most of Costco’s senior executive team started 30-40 years prior. Their current CEO started as a forklift driver.
  14. This, then, was the part I found most inspiring. The Costco exec team is such a phenomenal example of a quiet group that isn’t showy. Instead, they’re quietly focused on improving the retail experience for their customers. They’ve grown 10% every year, an incredible feat over a period of 30 years with no end in sight.

    I loved this because it is a beautiful counter example to job-hopping every 2 years. Complex fields take time to master. And I’m both inspired and grateful for the Costco executive team’s mastery over the business.

Between poses

Arnold Schwarzenegger shared a neat story about going to a famous ballet teacher when he was training as a bodybuilder. Bodybuilding competitions involve striking various poses. The goal is for each of these to be photo moments that impress the judges.

He expected this ballet teacher to help him strike graceful poses. Instead, she spent a disproportionate time giving him feedback on how he was getting to the pose. When he asked her why, she explained that while he was focused on getting to that photo moment, the judges were watching his form as he transitioned poses. He spent more time in transitions vs. striking poses during his routine and she wanted him to get that right.

The insight has wonderful parallels in our lives too. We often spend a disproportionate amount of our bandwidth thinking about big moments – big decisions, big meetings, and so on.

But most of what matters happen between those events.

Bottled water is a great way to eat plastic

Let’s start with this – I abhor the concept of selling bottled water. I understand the business rationale – as people understand the negative effects of sweetened sodas, beverage companies need revenue streams that help them recapture spend. Ergo bottled water.

The sad truth is that the countries that are the biggest buyers of bottled water are the countries that need them the least because of the quality of their tap water. Bottled water makes for a good story – but it is a head fake. If you really are worried about water quality, just buy a filter and you’re still likely going to get better quality water anyway.

All this said, this was an argument that a good story – and the picture of a nice sounding “spring” somewhere – was winning.

Until now.

A new study found that a one-liter bottle of water has over 240,000 fragments of plastic – 90% of which are previously undetected “nanoplastics.” This builds on previous studies that showed more microplastics existed in bottled water than otherwise. The scale of these nanoplastics, however, is an order of magnitude higher than we’d have thought.

I thought the response from the International Bottled Water Association was particularly good – “There is no scientific consensus on the potential health impacts of nano- and microplastic particles.”

Amazing.

I’m looking forward to more studies that build momentum around these findings and, of course, I’m eagerly looking forward to the IBWA’s responses to them.

4 topics I wish we’d cover in school

There are 4 topics we don’t cover in school that I wish we did –

(1) Managing ourselves – from our mindset to our productivity

(2) Health and personal wellness

(3) Personal finance / managing our money

(4) Building better relationships

There are a slew of other useful topics that I’d have loved to learn at school. But I haven’t found any others that are more central to living a good life than these.

And while I used to loosely check in on these from time to time, I’ve started incorporating check-ins on each of these as part of my weekly check in.

Raising a plant

We used to be really bad at raising indoor plants. We kept doing what we thought worked, blissfully ignored the signs, and then realized it was too late. The plant was dying (or dead) and there was no coming back.

Thanks to my wife’s diligence, we’ve gotten a lot better at raising indoor plants over the years. That happens because she consistently invests time and energy, ensures they get what they need, and gets ahead of problems.

One of my graduate school Professors used to tell stories about former students who used to come to him for help. They shared how they were always traveling for work and then dealing with fractured family relationships. What surprised him was that they nearly always expressed surprise.

To which he’d say – “I’m surprised you’re surprised”

It turns out relationships are a lot like raising plants. As with raising plants, there often are points of no return. We need to keep investing time, energy, and care – in ways that work for the others in the relationship. We need to read the signs and get ahead of problems. And, hopefully, we don’t get in our own way and cause problems that wreck a functioning relationship.

Of course, not all relationships need to be maintained. Sometimes, the most important thing we do is replace a plant that wasn’t working in our space with a new one.

But it matters that we are proactive and intentional in how we approach all this.

Being proactive and intentional doesn’t guarantee good outcomes. We’re dealing with humans after all. But, like all good processes, we put ourselves in situations where we’re most likely to have good outcomes in the long run.

In the final analysis, that’s all that matters.