CostCo

Costco's story begins in a converted airplane hangar in San Diego. It's 1976, and Sol Price has just been ousted from FedMart, the discount store he founded. Angry and determined, he decides to start a new venture. Price Club is born.

The concept is simple: sell a limited selection of products in bulk at rock-bottom prices. Members pay an annual fee for the privilege of shopping there. It's a radical idea at the time.

"We're not trying to be all things to all people," Price said. "We're trying to be a lot of things to some people."

Early days are tough. Suppliers are skeptical. Customers are confused. Why pay to shop? But slowly, word spreads. Small business owners discover they can save big by buying in bulk. Families realize the value of stocking up.

By 1983, Price Club has 24 locations. Enter Jim Sinegal and Jeffrey Brotman. They see the potential in Price's model and decide to start their own warehouse club. Costco opens its first store in Seattle.

Sinegal, who worked for Price earlier in his career, brings a laser focus on keeping costs - and prices - low. "We're allergic to the word 'profit'," he once quipped.

The company grows fast. Too fast, maybe. By 1985, they're public. Expansion is rapid. Mistakes are made. But they learn.

"If you don't make mistakes, you're not trying hard enough," Sinegal said.

1993 is pivotal. Costco merges with Price Club. The combined company, PriceCostco, becomes a force to be reckoned with. But cultural clashes emerge. In 1994, most Price Club executives leave.

Sinegal takes the reins. He renames the company Costco Wholesale Corporation and doubles down on the core philosophy: treat employees well, keep prices low, surprise customers with great deals.

"We're in the business of constantly lowering prices," he said. "That's our mission in life."

It works. Costco becomes known for its "treasure hunt" atmosphere. Members never know what unexpected deals they might find. Maybe it's a $1.50 hot dog and soda combo (a price that hasn't changed since 1985). Or a $4.99 rotisserie chicken. Or a designer handbag at an unbeatable price.

But it's not all smooth sailing. Wall Street analysts often criticize Costco for being too generous with employee wages and benefits. Sinegal doesn't budge.

"Good wages and good benefits are good business," he insisted.

The 2008 financial crisis hits hard. Consumers cut back. But Costco's low prices and loyal customer base help it weather the storm better than many retailers.

Today, Costco is a retail giant. As of 2024, it has 879 warehouses worldwide and over 130 million cardholders. Annual revenue tops $250 billion.

‍

Yet the company remains true to its roots. The average markup on products is still just 11% - far below industry norms. Employee turnover is remarkably low for retail. The $1.50 hot dog combo lives on.

"We're not going to raise the price of the hot dog," current CEO Craig Jelinek said. "End of story."

From a single warehouse to a global powerhouse, Costco's rise is a testament to the power of a simple idea, executed relentlessly. Keep costs low. Treat people well. Give customers unbeatable value.

It's not flashy. It's not tech. But it works.

Lessons

Lesson 1: Embrace the power of constraints. Costco's success isn't about offering everything. It's about offering less. They stock only about 4,000 SKUs compared to 30,000 at a typical supermarket. This constraint forces them to be selective, negotiating better deals with suppliers and simplifying operations. It also creates a treasure hunt atmosphere for customers. As Jim Sinegal, Costco's co-founder, put it: "We try to create an attitude that, if you see it, you better buy it because chances are it won't be there next time."

Lesson 2: Understand the psychology of your customers. Costco's bulk-buying model taps into the psychology of value perception. Customers feel they're saving money by buying in bulk, even if they end up spending more overall. This insight drives their entire business model. Jelinek explained it this way: "Our members understand that buying in bulk saves them money in the long run. It's not just about the price today, it's about the value over time."

Lesson 3: Don't be afraid to leave money on the table. Costco famously caps its markup at 14% for branded products and 15% for Kirkland Signature items. This might seem like leaving money on the table. But it's not. It's building trust. Customers know they're getting a good deal, which keeps them coming back. As Sinegal put it, "We're in the business of constantly lowering prices. That's our mission in life."

Lesson 4: Sometimes, the best marketing is no marketing. Costco spends almost nothing on advertising. Instead, they let their prices and products speak for themselves. This approach saves money and creates a sense of exclusivity. Members feel like they're part of a club. As Sinegal once quipped, "We're allergic to the word 'advertising'."

Lesson 5: Simplicity scales. Costco's business model is remarkably simple. Limited SKUs, no frills, bulk purchases. This simplicity allows for efficient operations and easy replication across markets. It's a model that works as well in Taiwan as it does in Texas. Sinegal summed it up: "We're not trying to be all things to all people."

Book Recommendations

• Sol Price: Retail Revolutionary and Social Innovator by Robert E. Price
• Membership: The Key To Low Prices: A Strategic Analysis on Costco Wholesale Corporation by Jennifer Lynaugh, Andrea Peterson, Angela David

Further Readings

• Costco Business Model
• How Costco's Unique Business Model Resulted In Global Success
• How Costco's obsession with culture drove success
• Costco's Organizational Culture & Its Traits
• Sol Price Summary of Key Ideas and Review