Costco is a fascinating business.
You know all those groceries you buy?
Yeah, they basically sell those at breakeven and then make all of their profit from the $60 annual membership fees.
Quick [THREAD]
You know all those groceries you buy?
Yeah, they basically sell those at breakeven and then make all of their profit from the $60 annual membership fees.
Quick [THREAD]
1/ This is the key. The company keeps gross margins as low as possible.
We'll cover the second part of the highlighted section a little bit later.
We'll cover the second part of the highlighted section a little bit later.
2/ In turn, this gives it pricing authority. In other words, you don't even look at the price because you know it's going to be the best.
3/ Off of merchandise, Costco's gross margins are only 11%.
So when you buy 5 lbs. of peanut butter for $10, it costs the company $9 typically.
So when you buy 5 lbs. of peanut butter for $10, it costs the company $9 typically.
4/ Compare this to Target.
Gross margins are almost 30%.
Gross margins are almost 30%.
5/ Or against Walmart.
About 25%
About 25%
6/ Now for the second part.
The company sells its inventory typically before it needs to pay suppliers.
In other words, suppliers do what Costco tells them to do.
The company sells its inventory typically before it needs to pay suppliers.
In other words, suppliers do what Costco tells them to do.
7/ Costco has essentially aggregated demand which it can then leverage against its suppliers in the form of payment terms.
See, the DSI and DPO are basically the same.
On top of this, Costco collects cash in about 4 days, so that's the extent of the cash conversion cycle.
See, the DSI and DPO are basically the same.
On top of this, Costco collects cash in about 4 days, so that's the extent of the cash conversion cycle.
8/ Now for real kicker.
Look at the percentage of net income that comes from membership fees.
Look similar?
Look at the percentage of net income that comes from membership fees.
Look similar?
9/ Membership fees only make up about 2% of sales but normally a little bit more than 100% of profit.
10/ The company has more than 53 million paid members (as of 2019) of which 37% are executive members.
This means Costco will haul in about $4.3 billion in membership fees, about 110% of its net income for 2019.
This means Costco will haul in about $4.3 billion in membership fees, about 110% of its net income for 2019.
End/
So Costco's business model is to sell products for as low a margin as possible to aggregate demand which they can leverage against suppliers and collect cash from membership fees.
And I haven't even gone into all the little details like this does:
issuu.com/slowappreciati…
So Costco's business model is to sell products for as low a margin as possible to aggregate demand which they can leverage against suppliers and collect cash from membership fees.
And I haven't even gone into all the little details like this does:
issuu.com/slowappreciati…
Which business model should I break down next?
Might as well capitalize on this lol. Subscribe to my free newsletter for more of this stuff: eepurl.com/dzGUS1
