Costco
03:01:09 Share

I don't think I have ever been more in love with a company in a business model.

What are you? Tirely munger?

It's just the deeper you dig, the more good things you find. And usually at the exact opposite of that think the opposite of being in the early .

stage of venture capitalist who. Get true. Easy you with you, with you sit me down, say.

welcome to season thirteen episode quiet the pocket about great technology companies and the stories and playbooks behind them i'm then gilbert David rosenthal, and we are your hosts. What if I told you that there was one place where you could get all these things under one roof, a two and a half pound container of cashes, prescription eyeglasses, a tank of gas, new tires for your car, ninety six rolls of toilet paper, a new refrigeration, an outdoor shed, a ten carrot diamond ring, some fresh prepared sushi, fine wine at a great Price, and you could even grab a hot dog with a soda and a free rifle on your way out for just a buck fifty?

I don't believe you.

Hey, IT has been the same Price for forty years now.

forty seven years.

Yes, most of you are very familiar with this disneyland of consumer value that i'm referring to. IT is costco. This company seems very simple on the face of IT.

If you sell in book, you have the opportunity to offer great deals to your customers. But what really makes IT work are the fifty clever innovations that they're refined over the years that all work together like an orchestra that's been rehearsing for decades. Nothing about costco is an accident, from the extra wide parking spaces to the whole protester chickens.

And if your goal is to offer extremely great value to your customers on the high quality products at the lowest possible Prices, there are a lot of ways that you could go about doing that. And today, we will walk through the very specific path of decisions and trade us that costco has chosen to accomplish just this. So listeners remember that extreme value, high quality products, lowest possible Prices. And David, my god, does this method work? Well, there is a reason charly monger IT loves .

this business. Oh, does he have, you know, the great warn buffer joke about cost cared? Oh, no.

okay. So here is warn and charity are flying on a plane that gets hijack. It's kind of macro. The highjackers each grant, one of them, one last wish. And they asked charlie first.

And charlie says, I would like to give my speech on the virtues of costco one more time before I die. And then the highjackers is turned to warn, and he says, shoot me first. It's so great.

This actually happened at a burger in your meeting. It's uw. youtube.

We will link to IT at the show dots. And that is awesome. I truly manger, of course, on the board of cocos o and long time fain of the bottle, as you should be, too.

So here are some insane e stats. Costco has grown revenue, right, about ten percent for over thirty years in a row. Their revenue per square foot of their warehouses belongs more in a conversation with Tiffany than walmart.

They seem to have incredible running room had of them to expand internationally. And here in north america, and David, here's one that is just for you. Their store brand, current lin signature does more revenue alone, not including anything else in the store. Then all of nike.

I bet it's so great. I think I found the current lin signature as a unified brand, I think might be the largest brand in the world by revenue is the largest package brand in the world. Yes, which is a business number because like they sell everything, you know, most other brands only sell like shoes.

but they're fifty two billion a year that they sell, which inches by nike, by just about a billion dollars, does IT even include the curcumin signature gas, right? Listeners, if you want to know, every single time a new episode drops, you can sign up for email updates, acquired data m slash email and two brand new things.

We will be including little hints at what the next episode will be to the email list now, and two will be including follow ups from episodes when listeners share things with us after release, be a little corrections or just additional insights. So sign up acquired data m slash email, come talk about the episode with us at acquired data m slash slack and learn from other listeners who may be closer to these topics than even David A I R. If you want more from David night, check out our second show, A C Q two available in any podcast player, just search A C Q two.

And our next few episodes are about AI with CEO, who are leading the way as the world very rapidly changes in front of us. So without further radio, this show is not investment advice. Steven and I may have investments in the companies we discuss in this show is for informational and entertainment purposes. Old David rose, all, what are the history in facts?

So costco was founded, as many people know, in seattle, lovely city of seattle, in nineteen eighty three, by retail veterans jim, cy, nag, al and Geoffrey brought man. Now jeff came from a long line of seattle retailers. His dad was a retailer.

His brother is a retailer. Jeff was one of the first investors and board members of starbucks. Super cool. yeah. And jim, well, we'll talk about him as we go here. But if you were around in kind of of shopping age, shall we say in nineteen eighty three, you know that the true history of costco did way further back than that to someone that we talked a lot about on our walmart episode.

The legendary soul Price and his two companies, fmr and Price club, and although cost, go quote and quote, was founded in one thousand and eighty three, the organization that we know in love today is actually the result of a merger between costco and its predecessor company, Price club. And Price club is really, of course, the actual result of sales. Previous company for mark, which fed mart itself really came out of fed co. In the one thousand forties.

In some ways we sort of have to tell a whole industry history here, but another ways this kind of are all the same company because they're all stacked learnings from sol Price and his various brain children over the years to create the costco that IT is today.

Totally, we start history facts in january nineteen six in new york city, in the bronx, where one Solomon saw Price is born. Now says parents were jewish immigrants from bellerus. They arrived just a couple years before Alexis's.

As teenagers, they had absolutely nothing. They spoke no english. They had no money, nothing.

So salt parents, like many jewish immigrants around them in new york, ended up getting jobs in the garment factories in the Lorry side. And the conditions in these factories were like, terrible, just absolutely terrible. If you went to school here in the U.

S, you might remember learning in american history class about the triangle shirt waste factory, five in one nine member. This is like the start of the american labor movement and the communist party. And the socialist party emerged as a reaction to this in amErica because it's a terrible disaster.

Literally, the factor owners have locked the door to keep the workers in the building so they wouldn't steal. And then a fire breaks out. A one hundred and forty six people are killed, mostly women and Young girls like this is terrible.

So sales parents didn't work at triangle, but they worked to other factories just like this crazy. And you can make this up. So maybe the most influential american retail capitalist in history comes out of the tankle shirt ways factory movement, and communism and socialism and everything that's happening in new york, in the do ish community at this time.

wow. And you say one of the most influential, I do think, is top two. Top three with sam walton. Of course.

sam walton actually wrote in, made in amErica that he stole more ideas from sel than anyone else in his business career.

All right, very credible argument that he is the most important .

american retail capitalist. Jim tells the story that a reporter once asked him if he learned a lot from salt. And jim replied, no, that's an accurate.

I didn't learn a lot. I learned everything, absolutely everything I know. I learned from self. So we found this awesome biography of solve that's like really rare is out of print. IT was written by a sun robber.

Y and if you are a fan of costco or want to learn about retAiling, or just like all these business practices, you absolutely try to get your hands on this thing self publish to eh. I don't think there's anywhere else in the world that lays out in detail exactly how costco works and its predecessor companies. It's amazing also super fun. Blankest sponsor, the show made a summary for us.

Yes, I was texting David before this listeners, and I was like, I don't think a lot of people, a like book and blankest agreed to order a copy and enter IT into a blank so you can get the black of summary will link to the show notes on how to do that. But David, the other crazy thing is, I think Robert may have signed every copy of this book because he signed yours and he signed the one that I got.

H amazing. That's how rare this thing is. So back to cells growing up here, he says in the book, this is quote from him, in the new york jew's community at the time, there was no such thing as republicans. The socialists were the conservatives, and the communists were the radicals.

So IT really illustrates where souls political ideology .

comes from. absolutely. So as a Young child, he develops an I defect that causes his left eye to drop. He's really so of contest about this, as you can imagine. But as a result, he channels all of this insecurity into being like a massive over achiever in school.

So he skips two grades in school, growing up, and then in the middle of his high school years, his parents moved the family from new york city to 3d ago， california. Now, sand ago is a town of like one hundred and fifty thousand people. This is not the same in the ago.

We know today there's no qual com, there's no illumina. There's only like just the beginnings of the U. S. Nav and the defendant industry there.

But it's a small town when saw gets out there to center ago in a parallel moment to sam wolton s early life, soul meets his future wife while is in high school. And IT turns out that saw s future wife's first name is Helen. Just like sams wife name is also holier than sams wife would be very influential on him, long with her family.

Same thing with salt. So just like Helen walton, Helen moscow, soon to be comes from one of the wealthiest families in santiago. This is literally .

just like sand ago. Walmart, literally.

That's what about to happen here, just like ten years before C. M. And walmart. wow. So HEllens family owns and Operates a scrap metal business.

A scrap metal business in the nineteen thirties in Sandy ago is about as well position as you can possibly be because Sandy ago is about to go through a huge transformation during world war two. It's gonna come the principle port of the U. S.

Navy, pacific fleet, which is going to the main naval Operations of for a war 2。 The city is gona. Absolutely proven. It's gonna be shipbuilding.

It's gonna be navy. It's gonna be metal. David and I were just down and send ago doing episode ir, and I went stop by the middle museum has done our lucky pisos.

You can feel the history dripping off that thing on all the old airplanes and everything. Santiago has been obviously a huge navy culture for seventy five years now. Totally during .

and after the war, all these sailors and G. S. Come through the city then when the war over, and they come back home wherever they lived in the country, before they say, why am I living in kansas? I should be living in sand .

ago and ago is pretty great.

It's really nice there. So from one hundred and fifty thousand people, when sam moves there after the war, sandia goes on the path to becoming today is the eighth largest city in america, is larger than seattle.

It's ger than seco, I wouldn't guess.

So this is going to become quite the feral market, shall we say, for a new retail enterprise in postwar america. But before then saw goes to U. S.

A and gets his law degree. They come back to see a year ago, and he starts practicing as a lawyer. Now cells timing is just I you could not scrip this any Better.

He becomes a lawyer right before this boom. When you're a lawyer in a small town, I mean, my parents were lawyers in a small town growing up. You're a lawyer for your clients, but you're kind also consider ary you're advising on business real ee state negotiations, divorces, trust states you're like super deep with your clients. So after the war, soul starts councell all these entrepreneurs with these new retail concept startups s that are emerging in cna ago.

One of these startups is called the seven seas locker club, which extensively, the premise for this business is literally a club of lockers where navy sailors can store their uniforms when they're on leave and wearing their civilian clothes, that when they go out to sea, they can store their like personal clothes and effects while there away on the ships. you. But actually, that's just a trojan horse to get all of these consumers into the door of its full traffic and then they offer all kinds of goods and services to them within the locker club.

So there's laundry, there's drag cleaning, there's clothing, there's jewelry, there's food, there's haircuts. This might start to sound a little familiar here. Another client is a jewelry store called four star jewellers.

Now in addition to Operating their own jewelry store, these guys also sell jewelry wholesale to other retailers. And IT turns out that there's one account in particular that accounts for like the vast majority of their outside wholesale business. And is this I retail concept Operating out of los Angeles called feed co, like fed code? What is a fed code? What is happening here? But also like.

okay, how are they doing so much volume? Go check IT out and see what's going on.

Yeah exactly. Well, federico IT, turns out, was a nonprofit membership club. IT was a customer collective, and IT was called fed co. Because I was only open to federal employees, primarily postal workers.

After the war, about eight hundred postal workers in the los Angeles area decided somehow that they wanted to pull their buying power together and their federal employees. And so they start this clubs so that they can pull the buying power and get Better Prices on goods that they can all participate and together. What turns out, there are a lot of federal employees out there, especially in santiago, they charged a membership fee.

They charge dues to join. But unlike costco today, that they didn't really make any money on the memberships. Remember, there are non profit. So the cost was five dollars one time for a lifetime that go membership.

Yeah hard to see that working, but actually it's not so different inflation adJusting from our eyes membership today, very clearly our I is not interested in making money off the membership program. I pay what is at eighty five dollars or something once, just to grant me sort of a higher affinity to the store and the monkees. Not really relevant.

That is the perfect analogy. That's exactly what ftca is. yeah.

So as you can imagine, fed co becomes quite popular amongst the government employees in the L A area. And then not just the L. A area. People start driving from all over southern california, including Sandy ago, sometimes up to like hundreds of miles round trip, to do the majority of their shopping at veg.

co. IT was time to expand, but fed cosin on profit. They're not looking to like expand and build .

this huge emp ire. exactly. So on the jewelry guys, they see what's happening with all of the wholesale business that there sending to red co. Up in L. A.

They like, man, we gotto find a way to open a fed COO here in Sandy ago, and sounds like actually I might have just the location. IT turns out that HEllens family owned a twenty one thousand square foot warehouse in cnd IT goes industrial district that's currently setting empty. So the three, however they check, ked IT out like, oh yeah, we could totally, we create fed co in this building right here in Sandy eagle.

So if saw were sam walton, that would be the end of the story right there. He just feel like, great. I'm in a clone.

Fed cow. No, this is how soul is different than sam and I think proud y. Harkins back to his upbringing in new york.

And you know, everything that was happening. He calls up the fed cobol of directors in L. A.

And he says, hey, we want a partner with you guys. We think that a fed co. Would do great. And see in the ago, can we create a joint venture together? We've got the building will Operate the store.

Let's go into business together and be partners fed code like he said there non profit, they're not interested in expansion, so they turn them down. And sologub blessed b, he called him back and he's like, no, no, no, guys, we really want to do this. How about this? You can own the whole business will just be a franchise down in Sandy ago.

You get all the upside. You get all the enterprise value. Like we don't care, we just want to bring this to sand ago and they say no again because I like a non profit porter directors .

yeah on the one hand, you might think saw Price, not a very savy business person, just take the gift and go with IT. On the other hand, ridiculous ly principled guy.

there is a really funny so q from later in his life, he's asked about how he feels about essentially being the father of modern american retAiling. And he thinks about IT and he still loves. He says, you know, maybe I should have to warn a condom.

Oh, h so but .

it's not that he's a rub. He's a really good business man. He's just also incredibly principled. Yep, and this is going to flow through directly in the costco o as well. Seek okay, back to feed code.

So after the second rejection, soul and the guys are like, I guess we now can go do IT ourselves. So in november one thousand hundred and fifty four, they open the store in this warehouse location, and they had to think about what to call IT. And they are like more. Basically, this is a clone of fed co, but we can't use that in name, and it's kind of a bad name anyway. What if we draft off the same brand recognition though, and call IT fed mart .

an equally bad name.

an equally bad name that would have historic impact. So why do you think walmart is called walmart? Why do you think k mar .

was called k mar?

Oh, IT was the first mart. It's because of this is I M talking about and made in america. By the time walmer was starting, people knew what red Marks were.

They were expanding across the country. And he was like, oh, great, we're gona draft off the red mark brand. There was the same thing with k.

Mark fed. Mark becomes the first scaled quasi national discounter. And people like water discounters, discounters are walmart.

k. mart. targets. That is the industry that saw births here.

And so very specifically, we are not talking about what costco is today as a whole. Sailor red mart is not big pilots with enormous quantities of things. IT is much more like a walmer. You want to go grab a canadians off the shelf, you grab a canadians off the shelf. And importantly, IT is both packaged food and sundry are general merchandise under one roof.

Yes, correct. And on the one hand, red mart is obviously a clone of fed COO. On the other hand, the huge single key difference that makes all the difference, it's a for profit company, it's not a nonprofit. And so just like all a capitalist for profit companies saw in the jewelry guys and fmr have the impetus to expand.

that makes sense. And so just to put some other fine points around what IT isn't, what IT isn't, IT is still only for federal employees, right?

Yes, at this time, okay.

And it's not a membership club. Well.

so IT is still a membership club. You do still have to be a federal employee. You do still have to buy a membership.

I think they maybe took the lifetime membership Prices down to two dollars. So I undercut fed cover. So they like that.

But obviously, it's not about the membership. The reason they did this and the reason that no other discounters had really scaled before this is crazy. There were actually laws on the books in the U.

S. At the time that manufacturer of goods could set a minimum selling Price for retail. And IT was actually illegal for retailers to offer products below that Price to the general public. wow. So the term discounters discounting meant selling below the manufacturer minimum. Press, how did you get around this well saw kind of stumbles into figuring out the, if you are a membership club, you're not open to the general public so you can skirt these laws and cell below the manufacturer s minimum Price.

interesting.

huh? So this is crazy. And this is why I think there's a strong argument that saw really is the goat among american capital retailers. We haven't even gotten a Price club and whole ceiling and costco yet. He also invented that later.

First he invents the discounter, which then sam walton ki with K, R, dating with target copy, and becomes the dominant retail form of america. Two totally sever things. He invents both of them crazy.

So when salon the guys open the first fed marin one hundred fifty four and ago, IT is a huge and immediate success. Their sort of wild dest dreams expectations are that they do a million dollars in sales in the first year. The store is three million dollars in sales in thousand and fifty four in one year.

wow. And why do you get the sense that IT worked?

IT worked because I was already working. This was a no risk bet. Clearly, fed co.

Had proved the model in L. A. They just did the same thing as a four profit company.

Makes sense. So a year after santiago, they opened the second fed mr. In photo x right off the bed, going multiday. They want to go big.

Here is another banger, literally, when they open IT, there are a lines half a mile long to go get into the parking lot of the story, like going out in every direction from the store. They take IT to texas, they go to scene tonio, they go to houston, they go to dallas. All of these stores are huge successes.

So at this point, two things happen that are gona prove very fateful, both for fed mark and for one saw fully stabbed practicing law and goes full time with red mark. He becomes the president of fed mark two. He hires a Young college student from sand ago city college as a part time beggar in the sand ago store one jim cinna and jim would end up working for the next twenty two years at the mark directly for soul.

Eventually, jim ends up running fed march entire distribution and central warehousing Operations, warehouses. You can see the costco picture are coming together here. Put a bit in that. So fed mark goes public in one thousand fifty nine. They raised two million dollars.

They played that money into both expanding the number of stories across the country, but also remember back to seventies locker clubs, the sweet of goods and services that they're offering under the roof, or in some cases, not under the roof. This is when they add gasoline to feed mark. So the costco gasoline ines like this, started with fdc k.

They would intentionally Price a few cents lower than whatever the other gas stations were charging in the area. And a few cents at that time was a lot because gas was like twenty five cents. And unlike gas stations, red mart is making money on consumer shopping in the store as well, so they can Price at cost on the, get all the traffic coming to the store and then monetize to the store.

They add a pharmacy to feed mark, costco pharmacy. Today, people are religious about IT. So there is a crazy story. The guy who sets up the pharmacy division for feed mark starts getting death threats from people in the industry.

He has a rock thrown through his window, literal mafia stuff, because they're undercutting the fat margins in these pharmacy counters so much that guys protege a who then takes over the pharmacy division for fed mark when he retires, that guy goes on to start costa as pharmacy division. amazing. Most importantly for the costa story here, after they go public, fin barr uses part of the capital to develop their own house brand. For some of the popular products that they're selling on the shelves.

It's like the FM brand.

Is that right? The F M brand. Yp, we ever see FM branded old photos and stuff of like these paper ticals referring to FM, cola, F M, whatever.

That's what is a red mark. And then one more piece of fed mark, uh, playbook, shall we say, that clearly makes its way over. As saw is running the company during the first few years, he starts to qualify some retail management philosophies.

And he a famously sort of canonised these as fed Marks for priority order principles. And he teaches every new employee throughout the whole company about this. Number one first priority, provide the best possible value to customers.

Number two second priority, pay good wages to employees and provide good benefits, including health insurance. Then is in the fifties like this is progressive stuff. Number three, maintain honest business practices. And then number four, the last one, make money for investors. So if you're a cosco nerd out there and there are probably many costco o investor nerds listening right now, those are probably sound very familiar to costa s priority order values.

right? Not the same, but kind. Rimes put a pin in IT when IT comes to costco will bring those up and going to each of them in depth.

So and you might be listening and saying like, yeah, yeah, yeah that sounds good, but i'm thinking about, you know, I don't know, maybe I go to wall mart today or I walking to target and I see some similar things written on the walls.

There isn't this kind of all the same if you really mean them? No, there is some very, very clear tradeoff fs that saw is gonna make with fed marr that costco makes today that are very different from what their competitors do. Like one, do you sell loss leaders in the store, loss leaders being when you mark down items below your cost in order to attract people all into the store with sales if you're those other retailers? Yeah, of course this is like a time modern tactic. And retAiling.

of course you're brag about IT in made amErica about we could get this incredible number of member, the thing was, but build a periodical in the parking lot and blow him out to get people to come and participate the spectacle, right?

If you're soul and costco today, you're absolutely not gonna this stuff. No.

they won't sell something unless they can make money on IT.

Because the flip side of doing loss leaders is that you gotta a make up for IT somewhere. You gotta mark up other goods in the store to fat margins to make IT worth doing. The loss leader for you basically IT means you're treating your customers like their stupid totally.

That's exactly I read on this two. I feel like David acquired number one tenant, treat the audience like they are smart if you're going to ever do loss leaders are sort of violation that tenant and saying, like if we're onna, get one over on our customers.

This is a native murder soul. He passes that down the gym. cynical.

It's a natheless ura gym. Okay, so that's one trade off. Here's another really big one.

What do you pay your employees? So in two thousand, six harper business review published a really great peace called the high cost of low wages. Will they very directly compare costco and warmer employee salaries and benefits.

which for a listener's, if you want those numbers today, costa s average hours wage is twenty six dollars and walmart is nine nine fifty. So huge, huge difference if you are going to go into equivalent job at one or the other. On top of that, at costco today, you also are eligible for a four one k with a match. And very, very good health care, shockingly good health care, even for hourly workers. So if you're going to go work at one of the other today, you'd be very lucky to go work in costco.

So obviously, the tradeoff of this is for fed mark at the time and straight through the costco today, this creates meaningful ly higher per employee labor costs for the company.

Yeah totally. But what are the benefits? And this is where we get this beautifully interlink to set of trade off the played together.

So what do you get? Will you get low employee turn over? And when I say low, I mean very low. After the first year, costco today has only a seven percent attraction rate among their workforce.

This is wow, this is for hourly labour.

Yes, typical retail is twenty percent. So IT is a meaningfully lower cost to on board and train new employees like you Normally have to spend a lot of your money ramping people to get them up to speed. Costco Price club fed mart does not have to do any of that because they're really rewarding their employees.

Employee loyalty also reinforces the idea that people shouldn't steal. They feel grateful for this job. They're excited to be in IT. The shrinkage or the uh, unaccounted for merchandise at costco today is astonishingly low. IT is zero point one five percent of sales.

That's crazy. So .

merchandise does not walk out the door. Their strong bias also is to promote internally. So if you look at costco today, thirty six percent of U. S. Employees have over ten years of service.

And this is truly unique, I think, about costco among major american, at least corporations, and was true at Price club in fed mark before IT, the senior, senior management. This is the same story. I mean, jim started as a grocery beggar in the fifties. At the mark, craig eleni started his career as an hourly employee at red mart. This is how long the ten years of these people and how linked these stories are.

If you look at their executive team at costco today, basically all of them have been there for over twenty five years. The only vice presidents at the company who have not are the digital e commerce people that they had to bring in to address the issues decades ago.

It's crazy. So what happens? Fed mart truly was the first discounter that scale nationally. All of these innovations, even though solo came up with them as these other companies are scaling and I think particularly came up, they don't really have the large scale Operational expertise nor the access to capital to really fend off the competition.

Came out, if you remember back to our walmart episode, came out of the cristi department store chain, which was huge. So they had so much more access to capital, certainly then fed mart and even then, say, walton and walmart, sam, to fight bitterly last mile by last mile, building out a distribution network to be came up soul and red mart. They don't really have a fire power to compete.

So they need capital or they need to sell the business one of the other. And IT seems like what they kind of did was accidentally .

both yeah in the biography saw comments to a sun robbert who had also joined the company, joined far at this time. He says, quote, we're good at creating businesses or not as good at running businesses yeah okay.

Listeners now is a great time to tell you about long time friend of the show service now.

yes, as you know, service now is the A I platform for business transformation, and they have some new news to share. Service now is introducing A I agents. So only the service now platform puts A I agents to work across every corner .

of your business. yep. And as you know from listening to us all year, service now is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this.

So what are A I agents? A I agents can think, learn, solve problems and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control.

Yep, with service now, AI agents proactively solve chAllenges from I, T, H, R, customer service software development. You name IT. These agents collaborate, they learn from each other, and they continuously improve handling the busy work across your business so that your teams can actually focus on what truly matters ultimately.

service. Now, an agenda I is the way to deploy A I across every corner of your enterprise. They boost productivity for employees and rich customer experiences and make work Better for everyone.

Yeah, so learn how you can put A I agents to work for your people by clicking the link in the shower notes or going to service. Now document slash A I dash agents. All right, David. So what happens with fed mark?

So like you say, by the time we get to the end of the sixties, early seventies, souls burned out. He and rover, they don't want to be running this business at scale. First, he brings in corte professional management and moves up to chairman of the board.

Second, he starts looking around for a capital partner to help the business compete on a more level playing field with the other discounters. They end up going to europe. And this is super important, both for the drama that happens, but also leading into Price.

Colin, costco, at the time in the seventies, this new retail concept in europe was getting going actually pioneer by the french company Carol, which is still a huge global retailer today. That concept is the hypermarket. So what are hypermarkets? Hypermarkets are smashing together everything we are just talking about with the discounters, the general goods retAiling with a full scale grocery store supermarket.

So fresh food, everything. This is what almost every wellman is today, the supercenters. It's grocery and hard goods in one huge, enormous warehouse, you might say, which is funny. You would have assumed .

that the americans would pie an ear, that it's areas that the french did.

IT was the french of all people. So this concept didn't exist yet. And IT wasn't until the late eighties that walmart would really embrace IT and rolled out across america.

So as sol and robbert are looking for partners to take fed mark to the next level and going across europe, they're meeting with all these hypermarket Operators. So they end up getting into bed with one of the german clone run by a retail entrepreneurial hugo man. The idea was that man was gonna a help soul and fed mart. Take this hypermarket concept and more of the existing fed mart stores into hypermarkets, which walmart would do, to great success. But like fifteen years later, had this happened, we would be telling a very different story today.

and we might be shopping for totally in practice. What I did up happening is this weird thing where sol Price was and innovator and a great merchant, but not a deal guy. And so IT seems like there's two cardinal sins that is committed.

One not really asking hugo man, why do you want to do this deal? And what is interesting about this to you? And what do you want to do with the combined company? And then two, selling the majority of IT and treating them like a minority investor.

The saw is looking for a growth investor.

and he ends up getting a buy out. Yeah, one with my interests.

So within a few months of when the deal actually closes, perhaps predictably, saw and hugo get in a huge fight at the very first .

board meeting.

the very first board meeting, they are yelling at each other. This is not go. And, well, my hand fires.

So literally fires saw, I think, and Robert to, and changes the locks on their office doors. Literally boots saw out of his own company. It's super ugly.

And then the person at fed mark of the remaining executives, who they task with, you think you like doing in all here. And so the woman of inform the rest of the company what's just happened, you know who that was? no.

Jim sica, no way. Wow, isn't that alaric? Oh, my gosh.

Oh, that is crazy. And I think what was going on here is hugo man and just realized that fed demary was sitting on a gold mind of real estate and just wanted the real state portfolio. And what sol Robert wanted was Operating capital from the parent company, from hugo man to invest more and aggressively opening more fed mart .

stores and pioneering hypermarkets in amErica yeah.

which of course, sugar man had no interest in.

yeah. So had this not gone down like this, I think i'll probably would have just retired as new management took over at fed mart in all would have been emiko. He wasn't really interested in continuing his career, but but because of how this went down with him getting black out of his office, he is past, he is now sixty years old at this point, and he is a man on a mission.

Great time to be a founder.

Totally amazing. I love that he's like the modest chain of american retail. Yes, change, of course, being the van cy of T, M, C, who is A.

X 0。

They will go to start T, S, M. C. So saw and Robert together they get at least on an office literally the next day after they are boot IT out.

And they're we're doing IT again, we're back in the sample, let's go. But they know they are not going to compete directly with red mart because fed mart is fAiling at that. They're na get steam rolled by one mark, mark.

everybody else. By the way, fed mart within five years was like completely dead after the totally ran into the ground and hug a man did make a fortune on the real state. But yeah, that mars dead.

So salon Robert are sitting around in their new office brainstorming what's their angle of attack here? And they keep coming back to one part of the fed mark business they felt was underappreciated and they didn't really exploit enough while they were at fed bar. And that is the division, the gym cna ran the centralized warehousing Operations.

So the two of them I like, you know, if we zoom out there really is kind of a different in northern al way to think about the fed mark business. You really could say that jim ran are warehouse Operations kindly like its own business. They were supplying the individual fed mart stores, which were sort of smaller businesses. And when you look at IT that way, almost all of the margin that we made at the company was at the warehouse level. The stores themselves were not particularly profitable and pretty hard to compete with the competition out there.

I didn't realize that they thought to sort of slice the margin up into those two almost like places in .

the value chain. yeah. So they're well, is there a way that we could take jims Operation recreated and make that the core business instead? And so the business plan that they come up with is literally that create warehouses for other individual small businesses, other retailers. And they're envisioning like gas stations, restaurants, small variety stores in the like independent chains that they can come and shop to stock their own shelves at this centralized warehouse that we're going to Operate.

So just business owners can be members.

just business owners and like, man, if we did that, I think that would be providing a huge service to these small businesses because one of their big problems that we know from Operating the red mart stores is actually how you manage your inventory, like physically where you put IT, you know you need a centralized warehouse to hold your inventory. If you're a small gas station, you don't have your own warehouse, we can be your warehouse.

great. And to put a final point on IT, the reason why is awesome to just run warehouse Operations is because the logistics are simple. You are taking pilots of stuff and you are moving IT to a location in a warehouse.

And then the customer comes and takes a huge amount of IT off your hands. You don't really have to turn and make sure the labels are facing out and you don't have to deal with a little one off. We've only sold sixteen units, but there's actually one hundred and twenty seven units on the things that you everything is nice, easy, big quantities, doesn't require a lot of attention from your staff. Being in the wholesale business is good if you can get IT, but their inclination at this time is well, the only people who would be willing to shop and buy in that way our business, others, this would never work as a consumer concept.

Yep, all that totally true and amazing parts of the costco bottle. There's one piece in particular that really, really makes this a crown dual, and it's the reason why they were so enamored of what jim was doing. If you're Operating a wholesale warehouse, you don't have to Operate any logistics. The manufacturer deliver the product right into your warehouse. You don't need to run trucks, you don't need to Operate other warehouses, you don't need to move stuff around the country.

right? And the business owners just come to you and pick IT up right from the warehouse or IT was delivered right from the manufacturer total.

And because of all this, because this new business, this cosco brace club going to be race club, is providing such a valuable service to the small businesses that are shopping there in managing all these logistics for them. Or I shouldn't say managing because Price club doesn't manage IT, either the manufacturer do they like we can actually go back to that original feed co membership idea.

And instead of having IT just be like a way to skirt around the law, we can charge real money for this membership because we're providing real value. Added this to the businesses yeah. So once they hit on this business plan, soul and robber put a few people from fed mart and elsewhere, including they hire this super brey Young guy from harvard business school, nam, gilles bateman, as their cfm.

And then they go get started. Gals would later go on to become chairman of, do you know this span? No, cop U. S.

A really big part of my childhood and part of the enormous diaspora of retailers that come out of not only fed mark, but Price club jim senigar. After, I think he was probably locked up at the mart under new management for a while. After that, he would come over and briefly work at Price club a couple years later. solid. The best of the best are coming through this place.

So they decide .

as they're getting started, that in order to keep the Operations really tight and realized the maximum benefit benefit thing you are describing of how these has this Operate, they're only gonna stock, about three thousand of the highest volume items that they think most other retailers are going to sell to their customers. So at the time, wall marts and k marts had on the order about fifty thousand skies, and even fed mart had probably close to that many at the time, going all the way down to three thousand. This is a non consensus move totally.

But if you're only selling to businesses and they have small stores is not like we need to stock basically everything under the sun. IT just needs to kind of be sufficient.

right? Super important. Remember, they're not thinking about consumers just yet. However, when they launch the first store, when they open the first Price club in san ago, unlike fed mart, it's not an initial gangbuster success. Turns out it's a lot harder to sell in recruit businesses to come to your customers, then IT is just. Out a single and attracting consumers.

And there is not like a viral word of mouth necessarily among these business. And they are not just encountering each other everywhere all the time. exactly.

So they worried after a couple months that this thing might not work if they might need to shut IT down, and then they have the greatest stroke of luck. So they're going around Sandy ago, trying the cell memberships to businesses. And they get a meeting with the Sandy ago city credit union.

And the credit union managed vanek. We're a credit union, were not a retailer. We don't really buy much stuff or not interested in this. But you know what are members if we could find a way to get them access to what you're doing here, that might be a really good benefit that we could offer of like, oh, you can get wholesale Prices on goods.

So, gals, the wonder in Young CFO, he goes over to the credit union, hammers out a deal whereby any credit union member can qualify for a new quote, quote, group membership plan at Price club and be allowed to shop there, just slipping higher Prices than the business members. IT turns out that this is two things. One is unlocks the gusher of consumers into Price club.

which allows for not only volume, but word of mouth. This is the seeds that are shown of costco today doesn't really advertise. And this is the first moment that they realized, oh my gosh, consumers are going to tell each other about this thing exactly.

And it's even Better than that because not only do consumers tell other consumers, IT turns out that a lot of small business owners are also consumers. So IT also drives small business owner membership. And because the business members get slightly Better pricing on things, all of a sudden these consumers are running around. Be like, oh, hey, I think my ant owner nail salon on or something like that, like let me get her to go sign up and get a membership and then I can use her card and get Better .

places yeah and David, do you know what I did this week?

Uh, I suspect that you love to a costco.

And do you know what now has a business membership to costco?

Oh, hello, where's my card? Actually.

I think you need to go and have your picture taken. I was on a personal one before, but all I was there as, like you know, would be appropriate this week. So we now have a business membership.

Hey, we are a small business, right? I another fun story as this unlocks the viral consumer word of mouth channel. Of course, traffic at this first C N, D, eagle Price club store starts growing and growing and growing. Sol rubber start getting calls from local hot dog vendors that want to set up carts at the stores exit.

If you got .

traffic at first, they ignore them. Eventually, though, they start getting enough calls, they are like, huh? Maybe we should do something about this.

And maybe rather than letting these guys come set up their cards, what if we do at ourselves? So sell calls up he national hot dogs and ask them if they can supply them with hot dogs to sell at the stores and he bro says, not only will we sell you hot dogs to sell, will supply the car too and thus the costco dollar fifty hot dog. And so a deal is born, and still to this day is a about fifty, forty seven years later.

There is a decent chance this is the one and all the loss leader that .

costco cells today. There are no constr. I do know that they've gone through many, many iterations in housing, all the Operations to track, keep the cost down.

Oh, they actually make the hot dogs. Now they also sell one hundred and thirty million of them per year.

Wow.

that's not all in america. But if I were, that's like a third of amErica go to costco and getting a hot dog every year. yeah. So there is this interesting question that has now been answered, which is there is this kind of horrible way of shopping where I need to go buy in bulk directly from the warehouse. No good retail experience.

Are consumers actually going to do that? You know this whole thing was intended for business owners, and there's all these benefits that come from selling to business owners. Again, you don't need a separate retail area and wholesale area.

The logistics are all much easier. You know you don't have to ever have your own logistics to move stuff from the warehouse to a different store to sell IT. But our consumers going to do this and they learn immediately. Yes, it's sort of this shocking thing where it's like, wow, consumers are willing to just go to a warehouse and buy stuff right off the pilot. That's a pretty unexpected thing that happened.

IT. Turns out that there is really one pretty sure thing, at least in america, probably the whole world, that if you sell something at lower Prices than anywhere else, you get to sell a lot of IT, no matter what hopes people have to jump to.

Yeah, one other fun thing. Do you know what the building that this warehouse was in was previously?

I do. That is super cool.

IT is listeners, the airplane hanger of the Howard. Huge aircraft CoOperation.

One of the many i'm served that Harry hues head but yes, we only cover Harry hues at some point on .

acquired finites.

So on the back of this wild success in Cindy ago once again saw in Price club quickly expand, just like with bad mark first to arizona and then beyond this time though, it's way different than fed mark, visible competition and capital dynamics. So wherever mark was capital constrained relative to the competitors because of the genius aspects of this Price club model, they are cash flow guiza these stores. So the suppliers handle the logistics delivered directly into the warehouses.

So let's just follow the cache cycle. They delivered the warehouse the moment they drop off. That pilot is when they invoice Price club and invoices tend to be about net thirty. So that means the pallets dropped off and you have thirty days to pay the supplier.

But the minute that the palace gets dropped off in the warehouse.

those goods are for sale, right? No more internal supply chain, no more unpacking, no more shelving. It's just a available at to buy now.

So in many, if not close to all cases, with praise club and them with costco today, those goods are sold before her Price club has to pay the invoice to the supplier is amazing.

Are I, David? I got a bunch of great stuff for you on this one. So we're going to flash ford a little bit to today, but i've a huge thank you for the costco.

G financial officer Richard gani spent an entire afternoon with me walking through a lot of these characteristics that really make costco work. So I got a bunch of great to bits while I was hanging out in their campus outside seattle that where was my invite I invited. You could have gone on a plane.

All right. So here's how IT all works today. So costco actually turns their inventory twelve point four times per year.

And just for comparison, walmart turns their inventory eight times per year. Home depos more like five times per year. So at this number north of twelve times year, David, exactly what you're saying. That means costco can sell through its inventory faster and more often than every thirty days. To be specific, they're on about a twenty six.

twenty seven day sale.

This is amazing. So with typical payment terms, being net thirty IT means they literally have zero dollars tied in inventory. And in fact, they are able, to your point, to make a few bucks on the float.

So this is, of course, an average. There are some things that will sell in a week or two. Other big ticket items might sit for a month or two. Sometimes costco can even turn things two or three times before they have to pay a supplier for IT. So this is called a negative cash conversion cycle where vendors effectively finance costa s inventory for them.

You know, i'm in I officially i'm with charlie on this one. He can come in here and give the speech ten times in a row about how great costco is. I will listen to all of that. I with this company.

So there's a couple interesting components here. There are companies that can achieve a negative cash conversion cycle. But the way they do IT is by having predatory terms where they go to their suppliers and say, i'm not going to pay for like three or six months and that is one way to do IT costco using standard payment terms here, right? Thirty days.

And so there's two things that enable them to do IT. One is this warehouse model where things are instantly available for sale. Customers come right to the place where they were dropped off, not quite anymore and will get to that later.

But at Price club, that's definitely and grab stuff right off the pellet. The other thing that makes IT all work is to this day, costco has kept their skill count very low. Ski S, K, U being a unique item that a store has for sale. I think, David, you mentioned before about three thousand a Price club is what they had available for sale. If you look at a walmart today, they have something like a hundred thousand, two, one hundred and fifty thousand different skills that they sell.

super centres. Indeed.

costco in the last ten years was around forty five hundred. And then they sort of looked and said, can we bring IT down and went to four thousand. And today they're sitting at thirty eight hundred. So this number is still going down, not up.

And if you do the math and you started thinking, well, this, if you're not selling a lot of skills, but you have a lot of customers coming through your stores, what does that mean? IT means that any given item is gona turn faster IT sort of this metrical unlock in addition to the instantly available for sale in the warehouse thing. IT is the low skill count that directly gives you the ability to turn your inventory over quickly.

It's just so awesome. I mean, like if you look at a Price club then and certainly a costco today, capital light quote, quote would be the far this thing from your mind you like these are massive structures that must be so much money that goes into this. Well, yes, that's true.

But it's a capital late business model. It's wild. It's all being financed for you by your suppliers because of these dynamics.

And of course, today, as costco opens new warehouses, they can very tightly predict how they'll perform because they know how all the other one's perform. And so sure, there's a lot of upfront money in opening a new store. But once that happens, you sort of know exactly what it's gna mature to and exactly how you are. I positive on all your fixed cost to invest in that new location and you have this negative cash conversions like all with all of your inventory being effectively free, if not profitable for you. Well, IT sits there.

Amazing, all right listeners, our next sponsor is a new friend of the show. Huntress countries is one of the fastest growing and most loved cyber security companies today. Its purpose built for small ammie sized businesses and provides enterprise grade security with the technology, services and expertise needed to protect you.

They offer a revolutionary approach to manage cyber security that isn't only about tech, it's about real people providing real defense around the clock.

So how does IT work? Well, you probably already know this, but IT has become pretty trivial for an entry level hacker to buy access and data about compromised businesses. This means cybercriminal activity towards smaller medium businesses is at an all time high.

So hunters created a full managed security platform for their customers to guard from these threats. This includes end point detection and response, identity threat detection, response security awareness training, and a revolutionary security information and event management product that actually just got launched.

Essentially, IT is the full sweet of great software that you need to secure your business, plus twenty four, seven monitoring by elite team of human threat hunters in a security Operation center to stop attacks that really software only solutions could sometimes miss. Countries is democratizing security, particularly cyber security, by taking security techniques that were historically only available to large enterprises and bringing them to businesses with as few as ten, a hundred or one thousand employees at Price points. That makes sense for them.

In fact, it's pretty wild. There are over a hundred and twenty five thousand businesses now using countries, and they rave about IT from the hill tops. They were voted by customers in the g two rankings as the industry leader in end point detection and response for the eight consecutive, and the industry leader in manage detection and response again this summer. Yep.

so if you want cutting edge cyber security solutions, backed by a twenty four seventeen of experts who motor or investigate and respond to threats with matched precision, head on over to hunt us dot com slash acquired or click the link in the show notes are huge thanks to huntress. Okay, David. So take us from the first Price club through the costco.

So on the back of these eighth wonder of the world, like cash flow dynamics that these Price club warehouses have, Price club goes public in one thousand seventy nine, three years after funding, and I say, go public, not in a IPO, not in a direct listing. They don't list anywhere. They don't raise any money because they don't need any capital.

So what happens is there is so much buying and selling activity among the original shareholders, because this thing has become so valuable that this is the first time i've actually ever heard this happening. Price club crosses the five hundred shareholder mark that at the time, the S. C, C, Mandate, ed, if you had more than five hundred separate shareholders of a company, you had to start filing as a public company. So Price close, just like, okay, i'll file, we'll be a public company. They don't on an they just need money.

That's crazy. So they're registered with E, C, C, but they're not listed on a yes.

traded over the or they're not on the new york stock exchange or on the national dean like that.

wow. So for those first three years, I need to know a Price club shareholder in order to buy the shares.

Yeah, there probably are some market making systems. I think this is what the over the counter market cannot does. But yeah, you can just go traded on an exchange.

Wow, hilarious. So one thousand nine hundred eighty two. They do ultimately list on nasdaq probably just to get more liquidity in the trading.

Also, in one thousand nine hundred eighty two, saw gets a call from his old same welton. He wants to come out. He wants to see. Saw wants to have dinner with the two. Helen get the families together.

He wanted to shop his computer like he always.

and like, so great with Price clubs. Your second act, I want to come see you in action. And so is like, char, come on out. I think he knows what save is up to, but he doesn't really care .

what gonna stop him from going into a store.

you know, totally. So sam and Helen come out. They all have a nice dinner in lahore's.

Soul tells them all about Price club, how the model works, the cash flow dynamics. Everything, say, of course, goes back to bton fill. And within twelve months, guess word pops up, seems close.

Oh, this, and this is really the major different here between salon. Sam saw, doesn't care. He's like, sure, you know, again, what am I gonna do to stop you? They stay friends.

There's this amazing story that sam tells in, made in america, where a few years later, sam is going around again to Price club, shopping his competitors with his tape recorder, making notes about how they are doing pricing and a matta and stuff and the security at the store confiscates see him stay record sol ends up just male and IT right back to is like keeping out stuck. Ah it's so fully right around the same time. Another person comes out to cnd ago to visit soul and Price clubs, a guy named bernie Marcus.

And for some listeners, that is gna ring or a lot of bells. Bernie has a story very much like souls. He was the president running the handy down hardware store chain, and he had gotten kicked out by the board and was pretty salty about IT and was looking for a second act.

So saw has him about the C. D. ago. He shows him the Price club warehouse.

He gives them the playbook and he says, like berny, you've got all this hardware expertise. Take the Price club playbook. Go kick their button, open the Price club of hardware stores. Bernie markets, of course, then goes home, turns around and starts home. Debo.

which we have heard from listeners ten times, that we need to do the home deep story. At some point, I actually did not know burn Marks his name or that he was the founder of home depos. So I think now we have to do.

Now we have to. So this now brings us finally to one mark call that i'll gets also in one thousand and eighty two. There are these like years in retAiling one thousand nine hundred and sixty two in while Martin k.

Martin target star, one thousand and eighty two when all this is happening, another berny, this time a seattle retailer named bernie brotton and his son jeff called up soul and they say, saw this Price club thing is fantastic. Where retailers up in the northwest, up in seattle, we'd love to open a franchise up here. A Price glob franchise in seattle is just like the fed cow fed mars and saw the Price club management team think about IT, and they make the very poor decision to say no.

And in a same echo of what happened gsh thirty years early, bernie and jeff say, okay, we understand we're going to do IT anyway. We're gona close the Price code model and start the same thing up in seattle. And again, I think sol is totally fine with .

this because I was Price club growing aggressively.

They were, but they weren't planning to go to the northwest. They were following the old sort of trade routes of the fed mark playbook of arizona, texas, florida, go out across the south in the midwest. So what happens next is pretty hilarious.

Jeff rotman cold calls Price clubs head of merchandising and says, hey, my family and else were starting up a Price club clown up in seattle. We actually think the northwest is a great market for this. Would you be willing to leave Price club and come up and be Michael founder? And they had a merchandizing is like, well, no, not because I don't think it's a good idea, but you see saw Prices.

My uncle IT is like, but let me give you the number of somebody else who you really should call. I think this guy is the the right guy for you. We've worked with him for a long time here at fed mart and Price club.

He's now left. He's doing some retail consulting, so he'll probably be willing to talk to you. His name is jim sina banana.

And this is how IT all comes together. Jeff calls jim convinced to them to come up to seattle. He's ready. He's ready to run his own show as they say. So jim moves up to seattle, they start costa and the business plan is really pretty much exactly just clone Price club.

And jim really is souls protegee. It's like clone Price club, but with a guy at the home who is built for scale and absolute focus on the details.

And not only was he sells protege, not only is he a tremendous generational talent executor, he also is the guy who ran the division that inspired the whole thing. He really is the perfect guy. And so listeners.

you might be realizing now when we were saying at the top of the epo de, this really is kind of all one company story IT really is there is a straight line through from red code, a fed mark or let's even just started at fed Marks and to told the same people through to costco today.

So jim moves up to seattle. He in the Brown, raise seven and a half million dollars to get going.

Yep, they sell fifty percent of the company to do that. They recruit eight people immediately, mostly from fed Marks, some from Price club. And there are all sort of ties.

And fifties, this is like a gang of ten, twelve people who have all work together before. Industry veterans have short hand, and they are just like, we've got the money. Okay, go. We know exactly what to do.

literally. It's like the T S, M C story.

or like the zoom story. It's like a huon finding forty people who know exactly how to build zoom and then just doing IT.

Yep, so great. So within a couple months, they open the first costco warehouse in seattle. Then a few months later, they open the second important. Of course, both of them take off immediately. Then they go to u to to northern california to british columbia.

And this is where you can see that what soul said about being really great creatively in business at the Prices in Price club, but not greater execution. Why was praise club not in northern california, given that they started in southern california? These the kind of mistakes that they made. So this new costco under gym hits a billion dollars in revenue in less than three years after getting started. This is the eighties.

and three billion in less than six years, which is the first company ever. They had that milestone too.

It's a wild. They go public. And what, two plus years after .

founding yeo, go crazy once .

this plays out. And of course, sams club is also becoming a jugg. A note at this pointing time.

Price club is doing fine. Again, capital is not the competitive vector here, but they're not being as aggressive. They're not expanding as fast as costco and sams club.

What happens with Price club is in some ways sort of the same as what happened with fmr. You know, as all readily admits. He in robbed our greatest ative ideas in retail.

They're not so greater scale execution now it's different in the capital is not a competitive vector here. Back in the red mark days, fed mark was constrained. You know, the whole reason they went looking for a capital partner was they needed more capital in order to be able to grow stores and compete with walmart and kmart.

These Price club warehouses were paying back their capital investment quite quickly, especially relative to feed mark because of the cash ful of dynamics that we were talking about. So Price club was certainly doing fine. IT wasn't declining, but jim and jeff costco and certainly sam at walmart n sams club, they are pedal to the middle, aggressively expanding. And that's not really solin robbert demo.

no. And IT does. If you kind of read between the lines and some of the stuff that does kind of seem like costco wasn't poaching people from Price club, but a lot of really good people sort of found their way and wait, got job, costco. So costco definitely had, at this point, the base of the sort of most aggressive, talented whole sellers of the west coast.

Yep, totally. And so at this point in his life, he sort of proved himself again. He's made his point after his terrible exit out of feed mark, he steps back from the day to day of the business.

He hands that over the robber. He gets really end of real estate. He's not as aggressive as he once was. So in june one thousand nine hundred ninety three, costco and Price club merge together to form the united Price costco. And as we ve talked about, this really is a reuniting of them.

And at the end of the day, Price club was either going to a land with willmar or with costco. And sol Price didn't wanted to be walmart and very, very much wanted to join forces with jim and ago. And so they sort of made that happen. This was the natural successor for this combined business in ago. Now interestingly.

the transaction really is about as close to a merger of equals as I think we've ever seeing on the show with the cavy ot. The gym is clearly gonna. The CEO that's gonna run the combined company at the transaction, fifty two percent of the equity and the combined company goes to costco shareholders, forty eight percent to Price club shareholders. There are about the same size, about hundred stories each at the time of the transaction, but costco is growing way faster. So had they just waited a couple years, the baLance of favor would have been so far in the costco side of things.

Yeah and you sort of to get the sense that the costco folks were being very respectful of the Price club folks because I believe IT was something like a thirty plus percent premium paid for Price clubs stock. And so I think IT was everyone sort of looking at each other and costco sort of knowing that they could really buy Price club for a much smaller relative percentage in the future. But why don't we just do this today? I know it's a good deal for Price club folks and let's just say pu da merger of equals let's call IT and let's be one .

team from now on yeah and there was a forcing function today. IT wasn't just that jm had a soft spot for his mentor, sallon for Price club. Sams club in walmart was aggressively expanding at this point in time.

And so if they had waited too much longer, sams club would have just gotten huge and potentially run away with the market. So after the merger happens, even the newly combined Price cost go is still only a hair bigger than sams club in terms of number of stories and revenue. So they kind of needed to do IT pretty quickly or sams. So was GTA run away with that fascinating.

which is so funny because it's a much less disciplined business. Every bit of DNA in costco and Price club is just so unbelievably disciplined and an admirable weight run a business and same club strikes me as a bunch of cowboys who are changing strategies all the time.

Well, you know, it's a second business line under walmer, of which the main walmart supercenter business line is one of, if not the greatest retail business of all time. It's certainly the biggest still to this day. Saw cat amazingly, lives to be ninety three years old.

He passes away in two thousand nine. After the merger, he really devote the rest of his life, the next fifteen plus years to philanthropy politics. So he does a ton of international development in santiago.

He gives back to U. S C. U S C S. Public policy school is the Price school of public policy, because he also becomes super involved in democratic politics. And actually, when obama is running for president in his first campaign in two thousand, he comes to santiago and meets with sol Prices and ninety two year old sol Price. That's how influential he is, how much money he's giving to the democratic party in this kind of last chapter of his life.

Do you know who speaks at the twenty twelve dnc when obama is getting elected?

I do, jim.

So they really are, when I say, ideologically similar, or the natural successor, or most like another son of sol Price gym and gen. Sol Price really are of one mind in many ways.

except tim is a way Better execute. All right.

So let's talk about the execution of this business a little bit. And there are some concepts that I think we've talked about at a high level, but we haven't ly drilled into why they work so well. And honestly, I have like ten or twelve of these, David.

So we're going to talk about two important ones now. And then we'll get in a more as we sort of make our way to modern day a little bit. Yeah, let's do IT.

So one that we haven't talked about is the economics of membership. And there is the obvious ones that everyone sort of realizes today. The base level membership is sixty dollars. And as a consumer, I assume i'm getting some kind of good deal by paying sixty dollars and that even before learning too much about costco, i'm aware that, that sixty dollars is something i'm paying up front to get the benefit of some low Prices later. But let's analyze some of the second order effects of membership, which I think are potentially even more interesting than the obvious ones.

There's a lot of psychology happening here. yes.

The first one is that IT actually selects for .

wealthy customers. Yes, this is amazing.

as does buying and book. So the items that you're buying are literally cheaper per unit. You're saving money, but you need to buy a lot of IT up front, just like you need to pay a membership fee up front, which means that they tend to get members who are not sensitive to cash flow and they also tend to get members who have space to store stuff at home.

And so I looked at as some of the data on this to try and put some numbers to IT. There was an independent research firm that found that the typical costco consumer makes about one hundred and twenty five thousand dollars a year in household income and has a four year degree. Walmart, by comparison, has a immediate income of about eighty thousand dollars.

And keep in mind, the medium U. S. Income is seventy one thousand dollars.

So costco shoppers have a seventy percent higher income than the U. S. medium.

Yeah, this is one of the most surprising things about costco. They have the lowest places, but they have the wealth est consumers of any major retailer.

Yes, it's totally fascinating and very smart consumers, people who can kind of look at the deal and go actually, I know i'm coming out ahead on this. Another interesting psychology around this is when you pay sixty dollars up front, IT encourages you to come and use the membership. You are more likely to shop because you've prepaid some of your margin dollars.

I think this is called the endowment in effect. If I remember back to my psychology classes.

yes, you just sort of assume that you're getting some kind of good deal by prepaying for a membership of front. You want to go maximize the margin dollars that you are able to get on their discounts, which is totally fascinating. Another one is that membership further decreases shrinkage.

We already talked about the fact employee retention is great for making sure people don't steal things. So this membership makes some members don't want to lose their membership. You sort of a feel like you're part of some sort of club on top of that.

These items are huge. They're hard to steal. How do you steal A T V? How do you steal a two and half pound thing of nuts? And so there's like all these factors, membership is one of them that really contribute to low shrinkage.

yes. Now you mention getting a good deal. We talked earlier back in the feed mark days about how lost leaders and sales was kind of an anathema to solve phrase. How does that play into this?

Yes, this is super interesting. So costco basically wants to provide insane value to consumers. They want you to get a Better deal as a member that you could possibly get by shopping anywhere else.

And so how do they go about doing this? They have enforced a strict cap on the margin that they are willing to make on any product. So they have decided internally that they are not allowed to mark up anything more than fourteen percent above what these suppliers sell IT to them for.

And i'll tell you, they are tough but fair with their suppliers and making sure that they get a great Price for their members. And so costco decides we will only mark up anything a maximum of 4 percent。 They actually do mark other things up less than that because things like a electronics, they actually can only mark up six, seven, eight percent.

So maximum fourteen percent. The only exception to this is current in signature, where they cheat a little bit and let themselves go up to a fifteen percent. Quite indulgent.

So how does this compare? I think that's the interesting thing here. A common practice at department stores is literally one hundred percent markup. Someone gets a good for fifty box. They sell up for one hundred box.

I mean, even at walmart, a discounter quote on quote Marks up twenty five percent, which is almost twice as much as costco s margin. And so jim senegal l has a great quote on this. He was asked about IT, and his response was, you could raise the Price of a bottle, a catch up to a dollar and three cents instead of one dollar.

And no one would know raising Prices just three percent would add fifty percent to our pretext income. Why not do IT? It's like heroin. You do IT a little bit, and you want a little more. Raising Prices is the easy way when I .

think also back to the membership IT all comes back to member trust. The members have to trust that they are gonna get the absolute best Price on everything. And that costco isn't gonna be playing these games, otherwise they would just go off at amazon a wallman ter, whatever.

You're exactly right. The value proposition forty years ago was you are going to get the very best deal possible on the goods that you're buying here. Extreme value proposition is what they they like to say.

And the fact they've just made that true every year for forty years is something that really does stick in people psyche. And I totally get the heroes en line. I think it's so easy to decide to cheat one year. And in all the future years, you're going to cheat because you've broken expectations with customers, with shareholders. There is something kind of magical even in the relationship between costco and a supplier, where a supplier knows that when costa s being really tough on them to give the lowest Price, costco is not onna turn around and then market up fifty percent, make a bunch of money. Costco s is going to make the same margin that they've always made.

On that totally, it's worth double clicking on the supplier relationship for a sec. Costa s relationship with their suppliers is words apart from wall Marks relationship with their suppliers. You go to vent vill as a supplier and you are getting, but through the god let, IT is designed to squeak you as much as possible.

That is not how the supplier relationships work with costco. They'll work with their suppliers, they'll understand and your business, they'll come see you. Yeah, okay.

I was going to save this for later, but we ve got to do IT. Now the costco code of ethics as IT exists today, largely inspired by the fed mark values from forty, fifty years before r in order, obey the law. Number one, first and foremost, obey the law, and we will save that for a moment.

I've got a fun story of how that came to be. Number two, take care of our members and listeners. When you're listings through this, the order is important, the subject of each statement is important, and the phrasing of each statement is important.

So one, obey the law to take care of our members. Three, take care of our employees for respect our suppliers. And I find IT fascinating that they use the word respect because they have a posture of tough, but fair.

And so there's this great anecdote, and I mean, I heard one, but there's fifty examples of this that you can find in various tiguas calls or talking with people who suppliers to the company, where costco buyers always ask why, when a supplier tries to increase the Price and that parts not that novel, I imagine a walmer buyer also tries to ask why the buyers are very deep, so they actually know the commodity Prices of ingredients from suppliers. So let's take like a chocolate company, for example, that sells a chocolate product. If the chocolate company said, hey, the chocolate costs more and now the costco buyer would say, well, I know the Price of coco i've been watching the commodities is market. I understand milk sugar.

Why is IT more expensive? Just give me feedback on that. And a lot of the times IT is like a commodity Price has gone up or they use labor in a certain area that's gone up or maybe they have a long dated contract with a supplier of their own that you know has an artificially high Price for some reason until the contract expires.

And so the costco buyers will write all of this down, will keep track of IT. And because they manage so few accounts, they actually can keep track of IT, like each buyer is only really adding three, five, ten, maybe fifteen new skills the year, but you've manage a very tight set of relationships. So they'll just call the supplier back and say, hey, last time we talked to, you'd mention that coco Prices were high.

I've noticed they've gone down. Are you lowering the Prices so that we can lower IT for our members? It's like this really amazing side. Benefit of having the low school count is that they can be tough but fair with suppliers and really stick to IT.

So awesome.

And because of costco s gross margins always being targeted at eleven percent, capped at fourteen percent. This means that for every dollar that costco gets a supplier to reduce the Price on something, again, tough but fair, the customer actually sees most, you know, eighty nine percent of the benefit. And so costco really does just get to pass whenever they get a benefit.

Eighty nine percent of that benefit goes to the member. So the way I look at this is some companies always look for a ways to make more margin. Costco specifically does the opposite. They look for a ways to provide more value to members and retain them for members as longer and get them to get their friends to be members. And they try hard across the board to get lower overhead costs through cleverness and efficiency, not through squazing or underpaying or anything like that.

So there's a really fun acquired cannon, acquired cinematic universe story related to this, which is the famous as chronicled by brad stone in the everything store coffee date between jim sana goal and jeff BIOS in two thousand, one which occurs at the starbucks inside of the bell view, barns and noble .

of all plays.

That's right. So perfect. And at the time, this is two thousand. One amazon stocks was in the dumps. They were under pressure from wall street.

Jeff and the organization were embarking on a camp gn for raising Prices on the amazon 点 com to get profitable。 And they just started this rolling out of a super important jeff has this coffee with jim, and jim explains this philosophy to jeff. Jeff comes back to amazon H Q.

The next day and is like i'm reversing the policy and says exactly what you just said. There are two types companies in this world, companies that work hard to charge their customers more and companies that work hard to charge their customers less. Hence, fourth, as of today, amazon is a company that works hard to charge its customers less. And that is directly from jim sinegal.

Wow, that's awesome. So on this point, number four of suppliers, here's some quick math that illustrates why they do have to be so careful and why they do wield such an enormously large stick. So walmart revenue today is about three times costco in the U.

S. But since costco cells so few items, very massive customer for any given supplier. They always have this super opposites relationship. The average revenue per product because of this skill count at costco is about ten times walmart. wow. So any time they're in a negotiation, I mean, like almost every time the person sitting across the table is looking at costco, like you are my largest customer.

you are like fifty percent of my business.

I think they try not to have that be the case, but it's very easy for you to become that. So IT is really important that they have IT as one of their sort of four main intents respect our suppliers. Now, notoriously missing from these four is the notion of a shareholder. And jim senegal articulates, if we do these four things throughout our organization, and again, those four things are, obey the law, take care of our members, take care of our employees, respect our suppliers in that order, then we will achieve our ultimate goal, which is to reward our shareholders.

It's so funny going back to our previous episode, and rob stress ten principles at nike. And like on the one hand, the nike principles and the costco of the principles are about as far part as you could imagine. On the other hand, rob stress nike principal number ten is, if we do the right things will make money. Dam near automatic, right? And that really is the same thing, a gozo hundred percent so .

fun story of how these code of ethic capable to be. So in the mid eighties, the washington state liquor control board was putting costco through the ringer when costco was applying to sell alcohol. And I think at the time, I was just beer and wine.

And basically the liquor control board was looking for any possible reason to deny them. And I think there might have been some corruption going on. The state had a vested interest in preventing very large retailers from becoming the volume of selling the wine and costa, because they were started with these ethos, came through squeaky clean and actually got the permit.

There was literally nothing that you could sort of drug up on them to deny them. And so the company was fortunate to realize, and very early days, how much IT would pay off to be truly above approach, no matter how tempting anything was. They had to build a culture that was completely obsessed with this code of ethics.

And you just see IT everywhere. I mean the wages, the way they treat suppliers, the fierce fix cap on Marcus, the discipline not to raise memberships constantly. I think it's been like six years between the last two times they raise the membership even five dollars. It's a ludicrous, squeaky clean and long term oriented mindset.

So back to the story. At the time of the merger, the combined company was about sixteen billion in revenue that was up from costa co. Alone was three billion in one thousand and eighty nine. So by the merger and ninety three costco and Price club, each about eight billion in revenue and then sixteen together. So fast growing, impressive scale already .

and stores more concentrated on the west coast but around amErica by this point.

Yeah IT combine two hundred stores. So pretty large. They're in canada. They're in mexico. They've already started international expansion, which that is going to become huge throughout the two thousand says will see for costco.

But right around the time emerge, costco takes a pretty important step that unlocks a huge part of the next chapter for the company, and that is the creation of the famous carker and signature housebroken. And there is a fun story around this, when they were talking about creating their house brand, the company's corporate headquarters was in carker, in washington. Read your bell view across the lake from seattle.

And so that's where the cuculin signature name came from. I think by the time they actually launched IT, they had relocated to isaka a little further south. And they are like, we can't call this is .

access signature. No percent signature is a good.

But IT was tied in with international expansion because they needed a brand name and a trademark that they could clear across all the countries that they are Operating in and planning to Operate in. And so cuculin signature like that works in japan, that works in korea.

that works in taiwan. IT sounds so generic, like I had even put IT together when I first moved to seattle twelve years ago, that the current lin over there was of current lin signature, because current lin kind of just meant nothing to be at ant. You know, what's the whole foods version? The three sixty five, interestingly, over time, krick in signature has come to mean something, and that is a certain level of quality.

Nobody is a testing that this current in signature switched is a lulu lemon switcher that has fancy materials and the most cut in edge technology in IT. But IT is of a certain bar of quality that is sufficient for costco members. And that is sort of the ethos that costco has around current lin's signature that we're only going to put something out there if we feel that we can create value for you, that it's gonna a lower Price than what you could get otherwise. Or the flip side of that, that we can make a Better product than you could get from many of these branded products that we were either previously stocking .

or evaluating stocking and a maybe the most obviously, and perhaps most famously, where this comes to bear is in wine and liquor sales. The Carolyn signature wine. You know, you'll get people who are a wine stoves that i'll drink carrolton signature. Why they're yeah yeah yes you know costco but like this is actually good stuff to clear and vada the same thing.

Oh, and especially for these things that are very clearly difficult to make and therefore it's made by one of a few people, like made by a real wild maker or like the batteries definitely made by a company that makes other batteries. It's not like their low quality batteries. So I do think much like their eleven percent target gross margin on everything, costco o looks at their house brand as an opportunity to provide value to members, not an opportunity to capture more margin for themselves.

But now they also have a pretty unique opportunity. They realized with their houses brand because of the very small number of skills that they're putting in the warehouse, there is much less competition on the shelves for any given product category for the house brand. So like yeah you mentioned you whole foods has the three sixty five house brand.

Walmart has their house and all these big retail do. Safeway hardly does. But in a standard retail environment, the house brand is going to be one of like five, six or ten different brands of a given product category on the shelves. At costco, it's one of two, three or one of one.

I mean, if you go by the mixed nuts, the mixed nuts are curr consignor mix nuts. The jumbo cashes are current secutor jumbo cashes. And in part because the buyers were evaluating the whole landscape and they determined we can do something Better for less.

I think the costco fancy mixed nuts is the best mixed nut blend. But I think that that was an enterprising buyer who was being creative and working with suppliers and thought, like I actually think we can provide a Better product for a lower Price than what exists on the market. And I don't know.

I think there's a lot of scenarios where they have certainly consumers agree fifty two billion dollars of current signature sales were down last year. That does not include the current in signature gas. So out of costa s two hundred and thirty billion top line, a little under a quarter of IT was curlin signature sales and closer to a third if you include the gas.

Wow, that's incredible.

It's america's largest consumer package brand.

So at the same time, too, is there spinning up Caroline signature and the kind of mid to late nineties, they also start expanding internationally. So first they go to the U. K, then they go to korea, to taiwan, to japan, ultimately china, which is now a big initiative for them.

What's interesting is, I think at the time, I suspect there were very few other western style global or globally aspiring retailers that were entering asian markets because it's not exactly obvious that a huge warehouse with bulk packaging would work in cultures like a japan where people live in tightly packed, dense urban environments, much smaller houses and apartments than in america. This is not the lay and S, U. V and suburbs, right? But IT works. Good, great. yeah. I mean.

at the end of the day, people really like value. High quality products at a great value is a super compelling value proposition for anyone in the entire world, totally. We want to think our long time friend of the show, vanna, the leading trust management platform. Venta, of course, automate your security reviews and compliance efforts. So frameworks like soc two, I saw twenty seven o one gdpr and hyper complaints in motoring vento takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple.

Yeah, vana is the perfect example of the quote that we talk about all the time here and acquired jeff bases his idea that the company should only focus on what actually makes your beer taste Better. I E spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that does IT. Every company needs compliance and trust with their vendors and customers. IT plays a major role enabling revenue because customers and partners demand IT, but yet IT add zero flavor to your actual product that IT takes care.

evolve IT for you, no where spread sheet, no fragment to tools, no media reviews to cobble together your security and compliance requirements. IT is one single software pain of glass that connects to all of your services via and eliminate countless hours of work for your organization. There are now A I capabilities to make this even more powerful. And they even integrate with over three hundred external tools, plus they let customers build private and integrations with their internal systems.

And perhaps most importantly, your security reviews are now real time instead of static, so you can monitor and share with your customers and partners to give them added confidence.

So whether you are start up or a large enterprise and your company is ready to automate complaints and streamline security use, like vantage, seven thousand customers around the globe, i'd go back to making your beer tase Better head on over to vantage 到 comes required and just tell them that then。 And David sent you.

And thanks to friend of the show, Christina anta CEO, all acquired listeners get a thousand dollars of free credit vantage com slash acquired. I want to go back to something that we've been waiting into in the discussion of current in signature, which is why is IT okay that at costco, they can only have thirty eight hundred skills like why are people OK with this deal or I don't need selection when I shop here. And I think there's a few illustrative examples of the story from here that get into that.

So David, let's talk about low selection and how would that? okay. So walmart and other retailers Operate under the assumption that shoppers require selection. IT seems like a reasonable assumption and less you started your life as A B to b whole seller that then fell backwards into consumer and then realized IT was fine for consumers too.

So obviously, if you have selection, IT makes the life of a retailer very difficult in a lot of ways, but he was just assumed that you had to. But costco makes the opposite bet. They bet that you don't need selection as long as you ensure that everything you can buy as high quality.

And that is the crazy thing that has worked. Costco essentially has its entire buying teams ethos, sort of shopping for you. They're free selecting the best one or two items in every category.

And consumers, because they do all that work ahead of time, are basically just OK sacrificing selection entirely and saying, yeah, as long as you give us good value and great stuff, we're totally okay with that. That's an important unlock. You can't just have low selection and be like, well, it's all cheap stuff. IT has to be like high quality and its category and the best deal on the market in order for people to be OK with low selection, which drives low skill count, which drives all the amazing .

things we talked about so far. Yep, IT comes back to trust. And part of this too, also hurt s back to sell in the fed mark days. Sell developed this kind of principal back in fmr that he called the intelligent loss of sales.

Yes, I was waiting for to bring this up.

yes. So this isn't necessarily the number of brands in terms of the selection out there. This is about product sizes. So today costco o was taken this to the extreme of like you can only by the two and a half pound jar of nuts. There's no like a dance jar of nuts.

You could buy a whole bunch of little packs of afternoon packs of nuts.

Either way, you're walking out with a lot of nuts, yes. But other retailers and everybody back in the fed mart days had all sorts of different sizes of products in. The idea was that by having different sizes, you would maximize the surface area of customers in market that you could reach.

Like sole uses the example in the book of household liberating ating oil, like kind of W T4 type stuff。 He's like we only Carried the eight ounce can even though there was like a three ounce can out there. We'd lost some sales from customers that only needed one or two ounces and that would only buy a three out can and they just didn't buy the dots can. But IT was worth IT to us to forgo that because by only having the a downs can, we could reduce the number of excuses that we hadn't get all these benefits that you're talking about then.

I mean, yes, you and I have been trying to do this without having a name for IT for years, people, sponsor required seasons. There are lots of other podcast that that you do all kinds of crazy stuff. And we're just like, look, we have a cue.

It's called the season. We would love to work with you on that. And IT makes our lives so much Better. And we can run our business in a completely different way by having a low used count totally.

If we didn't do IT this way, we would need to have an agile team or work with theo at outsource network or something like that, that would that way more overhead our business that we don't want.

right? This stuff is all about the tradeoffs you are willing to make and just daily training them together such that the benefit of each tradeoff plays into the benefit of another trade off that you are making in a that's a line.

I knew we were going to love costco.

Honestly, it's like maybe my favorite business that we've studied. Let's tell the end to talk about that. But there's a few more things along the way that happened in the nineties and two thousands before we get to today that I think you're important to touch on.

We've mentioned logistics a few times and that the low skew out means that they can meaningful simplify their logistics. And to put a point on that, they only have so many suppliers who are bringing goods to costco. The fact that they sell in book means that they can bring a whole pilot into a warehouse and consumers just sort of come and pluck off the pilot.

It's wholesale, is a wholesale club. But there is something we haven't talked about, which is costco s distribution centers. So they use something called a cross dock system for their distribution centers.

Now member, I mentioned back in the Price club days, it's a little bit more complicated today. Not all the suppliers just show up to the one store, the one warehouse with all the goods. They actually do need some system to receive things from suppliers .

and bring stores yeah bec, in the Price club days, there were no distribution centers.

Exactly here is how the distribution centers work. Trucks pull up on one side and unload pallets. And that's where the suppliers trucks are on the other side of the warehouse, their costco trucks.

And so what happens is, since they move stuff entirely by the pilot, no partial pallets know these few things, go to this, these few things go to that store. The supplier trucks unload the pilots. They just get scouted across the dock to go directly to a costco warehouse.

And then within minutes to hours, that truck leaves and there's no unwrapping of individual boxes. There's nothing sitting overnight in the facility. This is so much simpler er and IT really plays into that cash flow dynamic where things can be available for sale so fast. And just to underscore how differently tied this system is, ninety two percent of costco merchandise is cross dock only ten percent of walmart has crossed doc merchandise on a pilot system like this.

And it's not like walmart has an invested many tens of billions in their distribution and logistics systems totally.

It's just that costco o has made a trade off that makes IT so that they just have a much simple or Operation. And they've got all the downsides to come with the trade off, no selection, but they get all the upside that comes from IT. And so this also plays into this labor thing.

You can totally pay your employees more when you need less people to generate the same amount of sales. You don't have wasted manpower. Unwrapping items from poets, no one turning the labels out to look pretty.

The customers do all of this. So IT legitimate means they just need less people. And this is why they generate over seven hundred and thirty thousand dollars of revenue per employee. They're just efficient at aligning their tradeoffs.

I love IT. This is the bricks and murder retail version of the sas business fallacy, which we fall cate you all the time on the show, which is if you invest in in our build around sas companies and SaaS company margins, you can fall into the trap of thinking, well, why would I ever want to to be involved in a business that doesn't have ninety percent margins? But actually, what you should really care about, especially as an investor, is not your margin percentage, but your absolute margin dollars. And so yes, costco has much lower margins than their competitors, but the volume that they drive in the actual dollars end up being worth IT.

Yeah even though costco is only at eleven percent growth margin business and only ever will be at eleven percent gross margin business, it's still a pretty amazing business to own.

Yeah mean, it's what did you say two hundred and thirty plus billion dollars of revenue .

and uh seven and a half billion dollars of Operating income off that. So again, tiny little sliver margins, seven and a half billion dollars of Operating income falling out the bottom .

is pretty awesome, especially seven and a half billion dollars of highly defensible Operating income yeah.

seriously. And as you've been talking about, because of the way that there are inventory is financed, a reasonably capital light business, all things considered, they're building these warehouses on huge pieces of real estate, you know, with gigantic shelving and all this headcount. And it's an amazingly capital efficient business.

It's weird. yeah. okay. I think it's time to talk about investing nerds favorite aspect of the costco story, which is that there really are two different businesses here under one roof.

There is the retailer and then there is the membership business. It's almost like way back salon, Robert sitting in the office after fed mart thinking, you know what, we actually had two different businesses of red mart. Costco is also two different businesses. There is the Operations of the retailer and then there is the membership business.

right? And psychologically, they're one thing. It's one experience for the customer, but financially, it's two entirely different things. yeah. So a lot of people like to make a lot of hey about the idea that costco generates all their profit on memberships and that retail is just a break even business. And this has been popular to say because they run the retail business at such thin margins and memberships are nearly a one hundred percent margin business. I mean, really, what does IT take to runner .

membership business? Yes, with like a ninety percent renewal rate, something crazy like that. Talk about a fast company.

but it's not quite true. IT is accurate to say that membership fees represent about seventy percent of the companies is Operating income with the other thirty percent of the profit margins coming for retail. It's been a little bit more than thirty percent in recent years, but that sort of the historical split think about is a seven thirty thing.

IT really is staggering that a business that does two hundred and thirty billion dollars top line, seventy percent of the profits can come from the four billion dollars of revenue they generate from memberships. That tells you how razor than the margins are on the retail business almost to the point we are like why do they care about growing sales at all? All they should care about is increasing retention of members. The split is just significant enough for the retail business. You're like, okay, yeah, we should care about growing sales in the retail business but if IT wasn't seventy thirty of IT was ninety ten or ninety five five, you be like, well, i'm actually not sure why we care about making a single another sale of toilet paper because unless IT is increasing the likely hod someone retaining, I don't care about IT and they're not quite there.

but they're almost there. Well, except though the way that you grow memberships is you grow retail sales, right?

But for the last several years, they have totally been growing retail sales per member. And if I was like a ninety five five split, you sort could make the argument of like why did they care about growing the retail sales? Remember black at this sort of more seventy, thirty eight split, there's just enough profit dollars coming from the retail side of the house where you care about that too.

I love IT. It's like amazon and A W S. For this amazon retail. Yes.

in the last twenty five years, membership has grown from nearly nothing. If you look at what the numbers were in the early nineties compared to today, four and and a half billion dollars yeah.

I mean, when we are talking about the fed mart days, like I was two dollars .

for a lifetime membership, crazy. And again, David, this membership business takes almost no investment.

They don't do any advertising.

right? To quote our friend and reMarks, I basically think that costco has decided to only be a decent return on invested capital retailer, which allows them to have an insane return on invested capital membership club business. Yeah, it's so true again to court Andrew. Insanely stable growth on a huge capital late fee stream.

I mean, that sounds like a venture .

capital management company. It's pretty wild .

are at speaking of membership. Let's talk about the last big innovation piece of the puzzle before we get to the business today. And that is the two tear costco membership system and the executive memberships which they launch in nineteen ninety eight seven yes.

one thousand nine hundred ninety eight, the executive membership. So what is the executive membership and why are we bothering to spend time on IT? Isn't IT just a second higher Price membership? IT is super illustrative of management thinking.

So I love this as a microcosm for all of costco. So you can spend an extra sixty dollars, so total one hundred and twenty instead of sixty. And what you get for that is two percent cash back on your transactions. Now that two percent cash back is limited, but it's limited at something crazy like you can only get a thousand dollars back.

A 6 lars， incremental investment. Thousand dollars back is pretty right.

And if you actually hit that thousand dollars, that would mean you're spending fifty thousand dollars at costco a year wow.

i'm sure they're people this. So the .

break even point of this sixty dollars is three thousand dollars, which is not that hard to hit. In fact, it's right around and I suspect this is why managing Price at that way, it's right around the average household spend at costco. So they want to make IT basically breaking even for basically everyone.

which is also also been also different than other retailers. I mean, now there's also it's a fani logy systems to do this. But costco has always been able to track customer spend at the individual level because they're all members. They have accounts for all of them a .

hundred percent. And other people might invent something like this to say, well, if we're going to bet that they won't use IT, they won't shop here enough and we will get to make some money on the people who are infrequent shoppers. And we're excited about that and will basically get the breakage on people who pay for the Operated membership.

But do you know shop enough? That's not at all what costco is doing here. And to illustrate that, here's the insane part of IT.

If you do not use that, they will refund IT. So good. Is there anything more costco than that? IT is an amazing value for members.

IT is such a good value that fifty five percent of U. S. Members now do IT. But much like everything else we talk about with costco, IT is also amazing for costco because they get your money at the beginning of the year further advantage ing their cash float position. And IT gets even Better because that makes you more likely to go shop there.

Now since you get even Better deals with the cash back, you effectively instead of getting the fourteen percent growth margin cos, cos now only making a twelve percent margin on you when you shop there are so as long as you're spending three thousand dollars or more IT basically just makes costa s margin even lower for everything you purchase. Interestingly, forty five percent of paid members worldwide are executive members, but those members represent seventy three percent of sales. So whether by causation or correlation, executive members just spend more.

And estimates are that regular members by less than one third of what executive members do. So it's this fascinate and customer segmentation thing where costco just gets to no and reward the most frequent shoppers who do the highest volume. Purchasing executive members, as you would guess, also renew at a higher rate. And so IT helps with retention on top of that, which they call the triple play membership.

These guys are so foxy. I love IT.

If you get the costco issued city VISA card, you renew at an even higher rate. So they have these layers of letting you opt into loyalty. And all of this, David, as you mentioned earlier, is on top of a high renewal rate. Anyway, ninety three percent of members in the us. Renewed every single year.

amazing. And you can really see the fingerprints of this DNA in amazon prime. Obviously, the whole thing is inspired by the costco membership rate large, but the same dynamics definitely play out for prime members of the amazon of order more frequently, much more likely to renew access the whole sweeter services.

IT keeps you in the amazon ecosystem, and IT makes sure that you're buying more stuff. Yep, amazon makes money on the stuff. Costco makes money on the membership.

But at the end of the day, he is nice to retain a loyal customer to contextualize the ninety three percent member attention. Again, that's just all members. That's not even the executive members or the credit card owners.

Subscriptions to streaming services renew like half of their customers every year. So consumer subscriptions retaining at ninety three plus percent is nuts. That's the monthly retention of most streaming services. It's crazy on top of all of this. I'm pretty sure that this has never been disclosed, and I haven't asked anyone about IT. But if you sort of read trade publications, people seem pretty convinced that costco is making money, which of course, they are on the deal that they cut with city and VISA in order to have the costco card be the city VISA card. I mean, most of the time when you are processing payments, you oh two to three percent of each transaction to the issue of the card, I think the dynamics are actually the opposite way with costco, where costco gets to hold an auction and say we have an enormous amount of payment volume with enormously good customers with good credit. Would you like to do business with us and who would like to pay us for the privilege of being the costco card rails?

Yeah, I imagine there's not a lot of default in the costco customer segment base. There's also some fun history to all this too. So that deal or humane of them used to be with american express and then they essentially can't held an action, as you say.

I think the origins of this, though, start all the way back with the original press club business plan, not to offer credit, but specifically not to offer credit. Another one of the big benefits of moving to this business wholesale model was they could get out of the credit card game that they had to play a fed mark when they were only selling to businesses. When that was the plane, I was like, hey, cash or check that's IT no credit or exchange fees that we're going to have to bear.

And then when they open the consumers in the group model, they kept that. So for a long, long, long time, you couldn't use credit cards at all. Price club gosa s .

and that's the importance of doing the hard thing. First, by proving that they could exist and set customer expectations around were only cash and check IT meant that they never had some scary moment where if credit card companies were put the screws to, they had a bunch of fear around what customers not shop here. They were just from the very beginning, getting one hundred percent of the dollars rolling in.

And so they knew the counterfactual. They knew customers are going to shop with us no matter what credit or company is. If you want to work with us, you're welcome to. But we do not need to pay for the privilege because we do know that our customers are not going to leave us for a fact.

Yep, you'll be happy to have our business, not the other way around.

It's crazy, of course, with costco s margin structure, they literally couldn't I mean that speaking of traders, they literally couldn't ever accept credit. How within eleven percent gross margin are you going to go give three percentage points of that eleven percent to a VISA, like I actually would flip the business subside down.

We talked about a minute ago, they make seven and a half billion dollars of Operating income on two hundred and thirty billion dollars of sales. The credit card companies eat all your profitability if you let them in the door. And so it's a prety incredible position toughing IT out and doing the hard thing first and then being able to sort of flip to the other side of the table.

Yeah, anyway, I love that point on the payment processing. I think it's an amazing playbook that costs ran over the years and unnecessary one every single time. Costco does something amazing, they needed to because of the trade offs that they chose up.

So I think that's the last big peace. Let's take IT to the business today.

definitely. So tavernier boy, we talked about very few things between, to be honest, like the late eighties and today. And it's because the model was basically cain stone. I mean, they added things like gas, they added ancillary services, and you can go get glasses and you can go by diamond rings. And maybe some of that was done earlier.

I think a lot of that was .

from the first part, is that but the story is intentionally boring. It's what if you grow at ten percent for decades, doing exactly the same thing, having a well understood set of tradeoffs in a strong culture.

where does IT go? yep. And you Operate in arguably the second or maybe third biggest market in the world, right, which is global retail, right?

And you're the third biggest player in the largest market amErica behind name on a and volunt. So this acquired episodes different because so much of IT is just nursing out over the awesome new wands of costco s business bottle and actually less of and then this crazy thing happened because he was a bunch of like, stand up guys making a intelligent set of tradeoffs, really thinking hard, and then a whole bunch people working hard for a long time.

That's the story once saw, got things figured out, the second generation with Price club really straight line to today. So let's paint the picture today. And then I think what's interesting to talk about next is OK.

Everybody knows how this soul works. How is IT defensible? Why is only costco do costco? But first, tell us about costco today.

So I don't think people realize maybe by this point of the epsom, they do, but certainly not before how big costco is. It's sort of a sleepy stories since it's tuck away in a seattle suburb. They don't do a lot of chest pounding.

They just are quiet and they do two hundred and thirty billion in revenue there. The third largest retailer er in the us. They have one hundred and twenty four million members worldwide.

One third of U S. Shoppers are costco customers. They have a little over three hundred thousand employees at eight hundred and sixty stores. We talked about this. They do seven hundred and fifty eight thousand dollars of revenue per employee yeah that's well.

if I remember from our walmart episode, walmart I think is over two million employees and I believe amazon has well over a million yeah.

So costco s is doing similar between a third and a half the total revenue of walmart, but they're doing IT with what almost an order of magnitude fewer people. Yes, it's crazy. They have the highest revenue dollars per square foot of any wholesaler or discount store targets, about four hundred and fifty dollars per square foot of revenue. Walmart, about six hundred dollars. Costco is eighteen hundred dollars per square foot of revenue.

W said. A, costco were an apple store.

and they have a lot of square feet. yeah. And this is up from, let me look at this graph.

In one thousand hundred and ninety eight, they had six hundred dollars of foot, and now there are at eighteen hundred dollars of foot, meaningfully grown IT. It's important to point out you've made the comment about apple. Costco s margins are a lot lower than apple. So they're generating a huge amount of revenue dollars, not so much on the margin dollars. But as we've been talking about.

that's the point of the individual warehouses these days. You may have these stats exactly, but I think an average costco warehouse generates over two hundred million dollars in revenue, and the top ones generate three, four hundred million dollars of revenue for a single store. Single costa s could be scale public companies on their own.

yet two hundred and sixty nine million dollars sales per store on average per year. Wall nut. So just for fun, let's go north of thousand eight hundred just to see who else se's out there. Tiffany is three thousand, so kind of within spitting distance like it's only two x earth, less than two x and they sell diamonds.

Well.

so does casco. That's true. Apple, of course, is the goat at fifty five hundred dollars a square foot with high margins.

I mean, the apples just did not business, but it's worth putting out lululemon is approaching costco level two there, around sixteen hundred dollars of foot, but of course, much smaller stores than costco. Costco is just unbelievable efficient. We talked earlier about how that's illustrated in the head count fiction ency.

But now we see IT in the real estate efficiency, too. Yep, this point on growing revenue profit is interesting. You know, I mentioned that went from six hundred and eighteen hundred over the last twenty five years because IT reminds us to look at an important similar metric in retail, which is same store sales.

So costco grew this by fourteen percent last year. wow. Same store sales, fourteen percent, which is how you get to that two hundred and sixty nine million dollars of revenue per store.

They are so good at this that they actually publish their stores by cohort ear and the annual report, which almost no other company and certainly no other retailer does. And they clearly illustrate that not only does the average store increase meaningfully over the previous year in most years, but new stores also inherent a lot of the learnings. So the first year of a new store is dramatically Better than what first years of stores were years ago. And to illustrate, this year, one of a store opened last year was Better than year five of a store opened in twenty fourteen.

Wow, it's crazy. It's also a wild that these stores are still growing at those rates year over year given that many costco stores have been open for like thirty plus years at this point.

right? It's crazy. I mean, part of IT is the addition of gas and the other big and salary items they are selling, but part of IT also is just being really good merchants and finding these little things that members love and find value in and doing little optimizations everywhere .

yeah and exactly to that point. You know, one of the sort of famous aspects today of the costco shopping experience is the treasure hunt nature of IT. And this is something that they've learned over time.

You know, the original support press club business plan was just the three thousand core skills for businesses. And then opening that up to consumers along the way, they kind of realize that, hey, if an addition to the course staples we have, which pretty much don't change, we could change the brands. We could change. The exact details of what they are. But we're always gna have nuts, you know, we're always gonna have chicken stuff like that. If we have a small number of additional U N R wow one time items such that every time as a member you come into the store, there's something new and different for you to find and buy at a really low Price that would drive repeat traffic and make cutting the costco more of a novelty, more of an entertainment event. And so today I think about twenty five percent of their skills are these treasured hunt items.

huh? I did not realize that. I mean, I know they've sort of learned a bunch of things over the years, like when they brought in fresh food for the first time, they didn't optimize the place in the store where they put that, but they still saw a huge Spike because they drove repeat.

When you have fresh food, people come in, they wanted buy that they had some other stuff, but they've been very clever and figuring out where to put in the store to make sure that you have to walk by a bunch of other stuff to get having the fresh food is in the back, right? So like you're coming in for fresh food, congratulations. You get to see all these other cool things that are buyers have managed to find out in the world for you. And of course.

you get some of those two. yep. And I think for the items, again, the non staples, the treasure hunt type items, they intentionally want to run out so that they're not gonna be there next .

time you come. Yes, that's a good point. okay. Analysis, time analysis. Let's do IT because we haven't been in lighting this business yet. yes. So the first segment that we're going to do in our analysis here is power, which is adapted from hamilton helmers seven powers book, which is an amazing framework for business strategy.

The question here is what is that, that enables the business to achieve persistent differential return? Or put another way, how can a business be way more profitable than their closest competitor and do so sustainably? The seven options are, counter positioning scale economies, switching costs, network economies, process power, branding and cornered resource.

There is one here that is so painfully obvious that IT has been observed over and over again over the years. And the original credit goes to investor nick sleep. And the power is scale economies is hamilton helmer's notion that costco has the ability to leverage their scale to compete for items that their competitors can get, or perhaps get a Better Price from suppliers than any of their competitors.

Next leap has this frees that I think is possibly the best way to describe costco, scale economies shared with customers. And the fly wheel looks like this. Costco has enormous volume, and what they do with that volume is they go to the supplier and they say, what is your absolute lowest Price where you're still making an honest margin on this, but you're willing to sell IT to us.

And then costco make sure of that. And they do their research and they come to a Price and they say, great. And then costco looks at their own business and they say, how can we have the lowest possible overhead?

What is the smallest amount of dollars we can spend at our head office, turning the lights on our facilities? What is literally the lenders we could possibly run and still break even or generate a small profit? That's how they come up with this eleven percent target gross margin number. And so what they do then, as they mark up the goods, literally the smallest amount that they can in order to share the most value with their shoppers, with their members, and then the cycle repeats, they get more members, they get Better deals from suppliers. And to be honest, this scale economies that they then share with customers, I don't know how anyone could ever catch them in this mode that theyve built from that.

Well, because as we are talking about most, if not all, of their suppliers, they are by far the biggest buyer of their goods, even bigger than warmer, because they have so many fewer rescues in the store. This is so fun. I feel like there is such a resonance between costco and nike, even though on the surface there so different.

Maybe this is like a pacific northwest thing, but I really think nake has incredible brand power. But they choose not to use IT to increase their margins. They choose to use IT to keep Prices low and accessible for customers.

And costco is the exact same thing here. Costco o could definitely make a higher margin than they do now and still charge lower Prices than walmart. But they choose not to, and instead, they share that benefit back with customers.

And that is an investment in their enterprise value. Costco is choosing to invest those dollars in making the franchise more durable by getting more customer love.

Yep, IT really is a choice and durability.

I think yes. In fact, it's what jeff bazas meant when he said your margin is my opportunity. But costco just runs the playbook so consistently.

And when you look at their overhead, the fact that costco runs at ten, eleven percent overhead and amazon runs closer to like thirty percent overhead, costco has chosen a business model where they actually can just have lower margins on stuff because they don't need to do things like ships, goods to your home. They need way fewer people. They need way fewer investments in technology to do crazy.

Robotics, sorting and warehouse is picking and packing. The costco business model is one where they've just gotten rid of all of that. They say we're i'm going to play that game. Our goal is to lower our overheads so we can pass along the most savings to customers.

lower our overhead and lower the Prices that were paying suppliers so we can pass that onto customer tube. This is amazing. So this might be the first example, I think, that we've found in the history of the show.

I think costco has incredible counter positioning power today as a large in combine in a way that they did not have when they got started. Um this is rare. They probably ly had some positioning in other ways.

But today I think they have huge counter positioning versus amazon and e commerce. And we should talk as we go here about costco S E commerce Operations. But they are famously Sparking, shall we say to me, the whole point of costco is you go to the costco and .

the costco believes that too.

Yes, IT is completely counter positioned to amazon's whole reason for being, which is convenient. Certainly, if Prices is no objected is way more convenient to just click clack click in the shopping carden amazon and have a show up at your door.

Yes, different set of tradeoffs for sure. But IT is rare that as a incoming, you have the counter positioning power is usually a thing that started up to do against. But costco is a two hundred and thirty billion dollar our company that none of the other big companies can copy. I mean, walmart is trying and still is not succeeding at IT.

So as we've been researching this episode now evening in the past, I always thought I yeah, costco is great, but they really don't get the internet.

which I think that also was kind of true like fifteen years ago. I think they thought the internet was going to be a fat, which is why they missed IT at first and now they're sort of intentionally missing IT. But I will get into up they are doing in their own way, but I actually do think they unarrested at at first.

yep. But I think where theyve ended up is actually in a pretty good place and in a Better place, I think, than walmer. And that place being that, nura, the whole point is we are not an e commerce company, ty, and the whole point is you come to the warehouse and because you come physically to the warehouse and you take the stuff off the shelves, you're going to be able to get absolutely the best Price veris anywhere else. And amazon today has really become something else from what jeff wanted IT to be after his coffee with jim. cynical.

It's not always the lowest Price. Often you are paying .

for convenience far, far from IT. You are very much paying for the convenience of something. I think every product .

or the brand, very often I will buy something that's a little bit more expensive on amazon because I like, well, I can be easy to return or well, I trust this company. That's a very different premise than the original idea yeah.

So yeah, I really think that costco, amazingly, as this huge company has developed a lot of counter position power.

Yeah, that's a good point. Switching costs. I guess there's some i'm not going to go join B J S. Wholesale club, sams club. And I already have a membership, so to some extent, but I don't think that's the reason that they win network economies. Not really no.

I think get scale .

economies yeah process power definitely. I mean, there's a culture at costco that others have failed to replicate or haven't tried hard enough to replicate.

Yep, I don't think there's a corner research, but branding is an interesting one.

Let's talk about that, right? So recently a bunch of folks from costco got told go ring the bell at the aztec and they're all wearing their current in signature sweatshirts and the joke is made about the idea of, uh, 科 klin katou and it's worth footnoting。 This is not the main point here, but this is weird how current lend sort of has a passionate following in a way or it's turning into a real brand when that was not the intention.

The brand identity is that it's the anti brand.

right? There's a lot about our current consumerism climate that I think feels that also quick IDE. Costco has never tweet the account has a lot of followers and zero tweet. They are not really a participant and social media, but they have a massive tail wind from all the costco tiktok ers. There's people constantly sharing videos about here's this amazing thing I found or here's how i've structured my day or .

costco in or here's my hall. Yes.

they've benefit enormously from influencers.

What this has always been part of the strategy, even going back to the fed, Martin Price club days, soul. And then now costco doesn't advertise either at all or like very, very minimally. But they very intentionally, back in the day, tried to get local six o'clock news stories, very like all the lines at cosco.

Crazy treasures, hunt of micco's co. And IT always worked whenever there is a store opening, news crews would go nuts. And it's kind of like the nike athletes wearing the shoes on the cover of sports illustrated sort of thing that's worth a lot more and earned media than anything you could ever buy.

Our David, well, we're here. We have to tell the hot dog story. So this comes up literally every time there is any sort of writing or podcasting work or anything about costco. Very famously, as David I talked about, the hot dog and drink combo has been a dollar fifty for many, many years.

And when jim and a gal hit over the rains to crack janek, crack went to him and said, you know, hey, we're close on margin here, uh, or maybe we're upside down. Nobody really knows on the hot dogs, we might need to raise the Price. And of course, James and I got looks at him and goes, if you raise the Price of the hot dog and drink combo, I will often kill you. So that is why he is still praised the way IT is today. And this story has gotten so much airtime .

and its classic cost school like i'm sure this didn't actually happen. They just kind like made of this story IT might have actually happened. I craig has been work in the seventies. He would never raise the Price of the hot dog.

right? He would have known anyway. Back to branding. They know earn media branding. There's this kind of interesting thing where it's almost like nike, where I think they have a latent branding power. And i'm not talking about current lin here.

I'm talking about the buyers like trusting the buyers members trust the preselected inventory from costco. And I don't know where that shows up IT. Definitioned doesn't show up in Price.

Costco will never generate access margin because of their brand, but their brand turns them. Something mean people become members and trust them. And that leads to something, I assume that leads to volume. IT leads to willingness to buy, which leads to volume or IT leads to retention. So this is the second episode where it's not branding power under hamilton's definition, its latent branding power.

Yep, just like the big one with scale economies here. Yep.

in A A lot of ways, I think what costco is sort of doing is they realize that they have latent branding power and latent scale economies, and they sort of choose not to recognize short term profits from those. And I think it's all of this super long term game where this is why the market is willing to pay a much higher multiple for costco than any of their competitors.

There are a lot of ways that if costco wanted to, they could make more money today than they currently do, but they've decided not to. And so you know, it's the same result whether you look at IT as let's assume that they did take a little bit more margin or let's assume that they did raise Prices on members or let's assume that they lead into their branding power in some way and actually charged the Prices that theyve earned. Would the multiple then be reasonable? Yes, absolutely. Or the other way to look at IT is, is this business just going to be around predictably for a longer period of time that I have their competitors because they're doing all these things. You get to the same answer, which is IT is worth paying a higher multiple of the dollars that are recognizing today for a company that has made these choices totally.

I mean, let's to say I don't think we've talked market cap yet. Costco is what? Two hundred and forty billion in revenue today?

yep. And walmart does six hundred and twenty billion.

They go. Costco obviously trades at a muttiah multiple. The warmer you are.

Exactly right. I think it's because of it's because of the durability. It's because of the membership model. It's like, you know that, that revenue is not going anywhere .

and there are profits that they could take today and they choose not to.

yes. Costco, I think, is pretty uniquely positioned in that they're gonna do well, I think in any economic climate because in a recessionary environment, they're gona do well because they are the lowest Prices retailer of goods out there in a boom environment. I think they're also gonna a do well because of the nature of their customer base. As more people become affluent, they're gonna be more likely to shop at costco. I think that's .

exactly right. And you can see IT in the numbers. They do very well in every economic environment.

Where's walmart is kind of getting freezed on both directions. I think in recessionary times, they probably do well, but not as well as costco because they don't evel, absolute lowest Prices. And then in boom times, I think people migrate out of walmart into shopping on the amazon, shopping a costco.

Well, should we move in the playbook themes? Let's do IT awesome. Well, to start, I want to say a huge thank you to alex Morris who raise the investment substate the science of heating.

He has two pieces that were just excEllently written, analyzing costco s financials. And he was also very kind, David, I spent a lot of his sunday last sunday emAiling him and asking clarifying questions. And he shared a bunch of data with me.

He was super helpful. So thank you. Alex will put a link to the science of hitting in the shown notes to open this section.

I want to say a gym and a gok quote. This isn't a tRicky business. We just try to sell high quality merchandise at a lower cost than everybody else.

And I think it's hilariously farcical. He's both right and so cheesy. This is a extremely tRicky business.

I have heard him say that many times to in my research, and I occasionally hear him say the second part of the quote that he selectively leaves off. The second part is anybody can sell goods for cheap. The trick is to make money. While so we talk .

about a bunch on this episode, the fifty little things that they do, that all sort of synchronize with each other, that makes IT work you don't do. One of those IT falls apart. Oh, I want ten thousand cups.

Oh, I want to be a leader in e. commerce. Oh, I don't want a membership fee.

Oh, I want to blow out a bunch merchandise and do a sale. Any of these trade, ffs, you break on, the whole thing breaks. Yep, there are so many fun little paradoxes of things about this company.

They sell goods at the lowest possible Price, but that means that they have a wealthy customer base. IT always breaks my brain when I keep coming back to this point. And I think IT broke the brain of a lot of name brand companies too, who refused to sell at costco.

I mean, until like ten years ago, a lot of brands, they just had this idea that low Prices had too much of A A negative signal about their brand. And IT took decades for costco to approve that. They really did care about quality that was part of their value proposition. And also IT took decades to prove that they could facilitate a huge amount of volume. And you know they would ve won over everyone from apple to don Perry on.

yeah I think this is critical playbook theme for them. They've managed to create this sort of all the garden inside a costco. And I used that in not the typical wilderness term of being like consumer unfriendly.

You're keeping them in the world garden. It's exactly the opposite within the garden walls of a costco warehouse. Whatever Price products are doesn't in consumers mind equate to like their value or what their Price should be. Outside of the walls of the garden.

a hundred percent you can go and buy right now five hundred dollars on southwest airlines for four hundred and fifty dollars at costco. You can literally buy dollars for smaller dollars. And with a enormous company that a huge swath of the U.

S. Uses is not so obscure restaurant or baby or something. It's like here's a thing that you're likely going to spend money on anyway and this company has decided to put IT in here for a lower Price and that works somehow.

Yeah and another big piece of this is that for the majority of suppliers, costco Mandates that the item you sell them is a unique skill that the shopper can't buy anywhere else. So there's not even any comparison shopping. If you're buying a blender, the costco version will come with some extra cups or maybe a two pack of sad crs comes with a bunch of extra toothbrush heads.

You know, it's these things that are custom, uniquely made for costco shoppers. IT is such a world garden. David checked this out. Nike Normally refuses to sell at costco because, of course they do. They're nike.

They won't even sell on amazon, except right now, as we talked about on our last episode, they have a lot of inventory and they need to discount to move IT through the channel. Nike can't really discount anywhere. I guess they have their like nike outlets.

But for the next couple years, they're going to be moving a lot of merchandise through costco because, you know, it's costco, it's all it's different old people pay to get in. There is a whole different thing. This isn't just like whatever the psychology is, nike is actually willing to sell through costa until they work through these inventory chAllenges. And then i'm sure they want to do business with costa again for a while. But even nike, the most brand conscious company in the world, plays ball sometimes.

You you mentioned apple apple cells through costco.

by ipad there, by computers there. okay. So there is a thing that we haven't to addressed yet, and that is the conflict between Operationally light, you know, low overhead and a tremendous amount of vertical integration.

And when you're selling fifty billion dollars of current lend, you have some vertical integration. You do some things yourselves. The fine est illustration of this is chickens. Yes, I knew you were are going .

to get to the chickens. I was just waiting the whole times. Like when is been gona talk chickens?

I wanted do a whole episode on costco chickens.

We need to have Richard costco S C F O on the show to talk chickens.

I know, right? We should ask him, okay? So when do they are vertically integrate? They will do IT when they can provide enough value to members to make IT worth, increasing their overhead. And so here's the chickens example. They sell five hundred million chickens a year, not pounds chickens.

That's like A U S. And canada population worth of chickens a year.

That is exactly right. And don't think about IT too much. That's also the thing with the chickens, one hundred and thirty million of which are rotary y chickens.

So even just a rotary chicken business alone, that's a third of the U. S. Is a test r chicken every year.

The rest, of course, are chicken breast, chicken eyes and legs and everything the chickens used in the food court for the chicken bake. Because of course, when they make stuff, they actually make IT themselves. When you go by muffins, those are backed at costco and their Bakery.

There are really only four, five chicken processing companies in america. And when you have supplier concentration like that, Prices can get a artificially inflated. You know, you could be on the wrong end of the stick as the buyer when there's so few suppliers.

So costco decided we're gonna be doing this for a long time. We think our members might be in a deal. So what should we do? We can provide more value to members by doing the insane work of processing this ourselves.

So first, they sort of figured out we can rent a hundred percent of the capacity of a plant in alabama to kind of learn the ropes of, like, you know, war warehouse merchants. Now we're becoming chicken processors. How does this work? They learned.

And then they proceeded to build their own fully owned facility in fremont, nebraska, outside of omaha, and build relationships with one hundred and fifty local farmers in the surrounding area. I mean, this is nuts. That facility processes two million chickens a week.

Now, IT worked. Wow, to take that even further, there's two other dedicated facilities that they don't fully own, but that just are for costco. They can now process two hundred million chickens a year. So while they're still working with the other big chicken processors, at least costco can keep monist on pricing now by taking on this huge amount of vertical integration themselves.

Wow, we are gna convert a lot of people to vegans in this part .

of the episode ah and we don't even talk about the hot dogs yeah who?

Okay, let's move on.

Let's move on. So a much nice, for example, is like the fancy mix nuts that I was talking about earlier, I saw an opportunity to make a Better product, worked directly with farmers and suppliers and kind of clean up that whole supply chain. They do the same thing in coffee, bring down the Price, increase the amount of fair trade stuff going into little current pods is just like fascinating to watch when they are willing to leverage their scale to take on additional complexity, like when they feel that in the interest of members versus when they say, you know what, I think we're going to be emergent .

on this one go.

So that's the chickens. One thing is, whenever you talk to any of these current or former costco employees or you watch any of the youtube videos of the talks or you read anything, they talk in sense. It's the crazier thing.

You hear most executives talk and they talk in dollars, especially like, you know, jenson and n video. And you listen to him talk. He has C, E, O. Speak a game, exactly what he said, a CEO language, something like that. But it's all in these like plus or minus ten percent swag.

Few billion here, few billion there. You whatever we're talking, seventy percent of margin .

business for via exactly I love the concept previous de s the high level concepts, right? And the rest will follow. You talk to someone to costco and that what they tell you is that, that cost three dollars in eighty nine cents, and it's not just three other things.

Theyll tell you that, that cost a hundred eighty dollars and eighty nine cents. It's ingrained in the culture that every cent matters. And I kind of love that because it's just so different that other companies, well.

what is so fitting to the nature of the business and their margins when you have eleven percent of margins, you're like, guy.

care about every penny you bet. The thing that kept echoing my head is that these people, and you know, this isn't quite heroes journey the way that some of our episodes are, it's not the same person all the way through because it's so praise. Is jim senior at all the executives who are currently on the team today because most of them have been there for thirty plus years?

The way that all these people think and act are sort of a different type of heroes journey, because there are a different type of hero. Me, a lot of the times in our society, the people we've built up with these crazy sociopaths, ot the moon tight people. And this is just a group of people who spent their life's work all working at the same combined company, just trying to improve the model in little ways.

There is so little personal ambition. I mean, none of these people have linked in profiles. They do but like, they have one job on at no picture and no description or like, you know, the costco twitter account made no tweet ever.

There is a crazy consistency to the culture. I walked into the headquarters and the coffee was current lent pods from a curig. Like when you sit down in the lobby and you know someone who says, or would you like a water and like you bet the water that they hand you is a current signature water. I mean, the executives you walk by the executives there in cubicles, it's exactly as you would imagine that it's perfectly .

consistent with costco. Yes, it's so great. A few more things to say on this of one.

I literally just looked up as you are talking great. Glick liked in profile. IT still says he's an E, V.

P. At costco. The dude has been C E. O from like a decade. amazing.

Yeah, the reason I looked up his link in profile is that the backgrounds of these people are so different to then what you would typically think of is, like the management team of an american fortune fifty company, jim went to cnd ego city college, right? Craig went to cnd, a state university. They started as beggars at fed Better when they were teenagers.

And theyve just worked through the business all the way through. Yeah, occasionally there's somebody like jael's payment who comes in, who went to her business school. But like that is the exception.

not the and it's a hundreds of billion dollar market cap company. Now yep, amazing. I will say to that there is this famous quote about amazon being a charity that's run for the benefit of customers. Do you remember that?

I do it's actually costco.

It's actually costco right on two and three billion of sales that keeps seven and a half billion an Operating income. I've just never seen a company give more consumer surplus than costco. They just leave so much on the table for the ecosystem around them.

Yeah while we're talking about the people here, I think I related but separate playbook theme, it's truly the promoting from within culture. There is always been the case going all the way back to fmr and really Carries through to the state. And it's just astonishing to me that a two hundred and fifty billion dollar market cap company, this is so ingrained in the culture.

Other companies talk about this, but then you'll see like, oh, they go to A C E O. Surge and they bring in somebody from machines. I, or something like that. Nobody walks the walk on this, except costco.

And there are very noble company and all the decisions they make a very noble. And you get the sense that there having a lot of fun being noble, but you only earn the right to be noble if your machine works and their machine really works. And I think that kind of the point is they've earned the right acting this.

Nobody partially got them to where they are, but where they are earned them the right to continue to be noble. The company has never done way off. If they needed to, they would have one a layoff. But they've run the business in such a way and figured out the way that they've never needed to do that. Even after they did emerge, they merged to nearly identical companies and they did not lay anybody off.

right?

That's wild. It's crazy. So amazing management. Alright, my last big player item is an old quote.

There was a doctor bank analyst that said IT is Better to be an employee or a customer than a shareholder, which costco management would say, yeah, that's literally like we've printed IT. It's in A P, D, F. On our website.

that's called our court ethic annual report.

So in the short term, maybe that is a totally reasonable thing to say and know what would argue with IT. But in the long term, IT has been fantasti C2Be a s ha reholder.

I did the math, if you bought ten thousand dollars of shares in their IPO in one thousand and eighty five, you would have three point three million dollars today a three hundred and thirty x and this does not include the dividends you would have earned along the way, which they've actually done a lot of dividends, including fresh special dividends to. They were huge. I don't know.

It's funny how if you want to a dip in and out of the stock in a year or two, it's not going to be great for you. It'll be predictable that it'll be high Price ed when you come in. But you know it's not going to a be world changing, but there's a chance that over thirty years, that is world changing for you.

You know there are no hard and fast rules and investing, obviously. And if you think there are, that's a great way to lose your shirt. But it's funny to note that every time we've used a version of that phrase are required when studying a company that wall street analysts think X, Y, Z company is a charity being run for the benefit of x, turns out that there's a pretty great stocks to own.

a great for the long term. Yep, those are the ones that are the most enduring ing. As our friends said, N, C, S, capital would remind us. Yeah, all right. David bear ball.

Yes, let's do IT. You will start with bare case.

Yes.

starting with bare case, how you ever GTA find a bare case about this comment, I can we bring tirely in here, and like you on this.

well, for Better, for worse, they have been very slow to e commerce.

Maybe for Better, as we talked about.

but maybe for worse. And we talked about most of IT, but there's a thing that we haven't really discuss yet, which is amazon's overhead is like thirty percent targeted. Walmart is something like twenty percent. The fact that costco needs to run at eleven percent for IT to work really did blind them to e commerce. I don't think this was a conscious choice.

This was a miss that they got really lucky on and happen to work out well for them, where they could continue to run their same playbook and kindly skip e commerce for a long time. I mean, there fifteen years late to e commerce. And structurally, costco can provide things that a far lower cost than amazon.

But at the end of the day, like there really is no way that costco can do e commerce like these other companies. I mean, even walmart to figured out out walmart is as good for most use cases as amazon, but they're paying the Price that is a huge amount of overhead to set up the infrastructure to do home delivery. So one of the things were going to talk about here and bear ball, and I think we should transition, is what costco is doing, that is costco flavored e commerce instead of amazon flavoured e commerce.

But I will save that for my bulky a second staircase. IT was popular the past to say that costco would have an issue with Young people. But I mean, I guess this is really a bad case. This is false for a couple reasons.

There is nothing more gensec than costco. I know costco .

has been blowing up on tiktok. We've talked about, but also from all available data, Young people are getting memberships at the same rate they always have, like, of course, the bulk of members will be people in their forties and fifties with a family in a house. But that hasn't really changed over time.

If you liked the costco business in the last decade of an investor, all signs are it's going to be pretty similar in the next decade to in terms of know the ramp of when people become members. There's another one that's like i'll put IT in bare case. But again, i'm not really sure it's a bare case.

IT is worth pointing out. IT is either true that this business cannot grow at more than ten percent per year on average. They they ve had little years where they Spiked, but sort of on average or management just doesn't want IT to, which also would be fine because there are lots of benefits to slow, steady, durable, but the company has a lot of cash on the baLance sheet and regularly does dividends and buybacks.

There is a crazy step from the science of hitting that. The company has returned eighty percent of net income to shareholders in the last decade rather than reinvesting in in growth. And the key reason for this is that it's just really, really hard to expand.

They need to hire the people like the right people, train them well, promote internally. And the work to scale is so physical. The new construction, expanding suppliers, shipping large pilots in a new geography, I think cash is not the constraint stopping them from expanding.

There is a physical limit to the speed at which this company can grow. So i'm calling that a bare case because it's more like, you know, you should be aware that this thing can't scale like zoom scale during the pandemic. That's like the polar opposite of the spectrum.

Zoom or slices has like basically no bottle next to infinite instant growth or instagram launching threats instantly has hundred million members. Costco o is the literal opposite. The bottle makes everywhere to scaling and no amount of cash is gonna lay that problem got any bar cases.

I think i'm going to quote charly on this one and say I have nothing more to add.

I thought you might go there. Alright, bull case. I mean, the biggest one is the fly wheel is spinning and i'm not really sure who can catch them.

So here's again from the science of hitting sub stack quote. The average sams club only generates about half the revenues of a costco and that gap has widened over time given the unit economics of the business. That's a tough hurdle le to overcome, which explains why sams club has a smaller unit base today.

Then I did a decade ago, crazy right over the same period, costco increased its U. S. Warehouse count by one third. Anyone who could have chAllenged them is just done.

Yeah maybe part of that is because wAlbert has just been placing their resources elsewhere, particularly in the e commerce fighting against them like I think walmart has basically decided like we're not going to kill the sams club business. But this is not where where focusing our competitive energy right now.

And to be more fair, this is no longer a market chair fight for the warehouse retail business. This is global retail. And then the question is, how much of global retail can costa s model address? It's not costco o versus a specific competitor. It's costco versus human behavior.

yeah. How big is this market exactly? And that, I think, is actually a bull case for costco because you could argue maybe they are maybe they aren't saturated in like north america.

but they are not.

They are, yes, I think they are not. And they are definitely not saturated in asia, in the rest of the world, in europe, in africa, in australia. They have a lot of global room to run.

So this is my second bull case, which you touch on. The domestic thing just doesn't aside. Every five years on earnings calls and an annual letters, costco ageing reveals that they're surprised by how unsaturated they are in the U.

S. market. They'll open a store in a city where they already have three or four stores and they're like, and this one did just as well. And of course, IT doesn't have as many members because you do actually separate the population of a city.

But the convenience of having the store closer means that, you know IT hits the payback targets that you'd wanted to hit just as fast as a store that was in a brand new market for them. And at some point, we'll stop being surprised or at some point, they actually will crate the north american market. But it's amazing that they keep thinking as soon and it's never soon up.

My third one is international expansion. Exactly as you're saying, in particular, china, there is incredible pent up demand. So here's a illustration from the science of heating, which is just so good.

The average U. S. Store has sixty eight thousand members.

The first store in china opened in twenty fifty, which popped to four hundred thousand members within two years. The U. S. At maturity is at sixty thousand members.

China, right? I was doing our china tech episodes because I feel like every ten minutes in those episode, des, we just be like china, like things are of a different scale there .

if you can Operate there. I mean, that's the big thing is like for U. S. Companies that is very complicated, Operate there. So there is going to be be six stories in china within the next year.

And all indicators are that this concept performs just as well, if not Better, then IT does in the U. S. They have a lot of running room, so much running room, and they've been very deliberate about the chinese strategy.

They got a permit to open their first store twenty years before they actually did. The chinese government issued them a permit. What is more costco than waiting twenty years after you're allowed to do something to do IT when you feel you're in .

a good place to do IT? Well, either play in the long game, be the executives at the time probably were reasonably assured they were still going to be the executives twenty years from them.

So like why not oh, it's awesome. Here's my forth bull case and it's actually e commerce. Bear with me for minute on this.

They're a approaching e commerce in a very cost. Go away. And they have bunch of different approaches.

But there's two specific ones I want a highlight. One where they have differentiation, which is on big and bulky items. That's where they're putting a lot of their energy.

They spent a billion dollars to buy a company that became costco logistics. And they do things like deliver shed to your house. And this is a pretty difficult thing to do from a traditional e commerce company or an .

e commerce native company. This is shed, is refrigerators. This is washing machines. Haters, right?

Didn't you almost just order a fridge this morning on costco?

O exactly. I am saying this because I almost had to replace my refrigerator. Turns out I was able to get IT repared, thankfully. But I was briefly in the market for a refrigerator and IT was super interesting dynamics. Costco had the lowest Prices on the model that I was looking at but only by like twenty dollars versus best buy in home debo. It's like fifteen .

hundred dollars something .

yeah like five hundred dollar refrigerator, which i'm glad I enough to buy. But all the other players, clearly the manufacturer, the samsung refrigerator, was running a promotion. So the M.

S. R. P. Was two thousand dollars and all those other retailers were saying, oh, this week only is on sale for fifty one hundred and Cosmos had a very like ourn seventy. Next week aska will still have IT for fourteen, seventy and it'll .

be two thousand at best. bye. Yeah, exactly right.

And so I do think this is an interesting area for costco and e commerce. The second one is costco next dot com. Do you know what this is.

David? No, I didn't find this.

IT allows you to shop directly on other websites and put in your costco number and get a discount.

Ao, costco cuts a deal .

with those companies to say we're going to send you as long as the traffic we send you, once you verify that you give those people a discount.

We so this is literally like ebay a for costco.

yes. So costco looks at IT like, oh, great. We get to give yet another value to our members without having to take on the e commerce logistics that they hate, that complicates their business, that changes people's impression of what costco is.

fascinating.

It's like the obvious way for them to play this market, for anyone who's win to partner with them.

which again, to the supplier dynamics. It's the same thing here, like on the surface, if you're X Y Z E commerce player, that would be crazy. But then you think about IT, you like what we could get a lot of very high value traffic. Maybe we should do this.

It's like selling through costco without having to cell through costco without having to physically drop off at their warehouse. And it's the internet way to sell .

through costco.

amazing. So in my last bull case really is costco culture IT just outlives any given quarter year economic cycle or even any CEO. Normally when company is get bigger, things get worse, standard as of excEllence fall and execution gets sloppy. Had cosa s just been exactly the opposite of that?

I mean, costco was sort of technically founded in one nine hundred and seventy six with Price club. You can really say I was started with fed mark before that. Let's just say IT was ninety, seventy six.

Here we are in twenty twenty three. There have been three CEO in the history of costco. So press James and go crazy, all of whom worked at fed back.

Yes, crazy. okay. I have a bunch of costco trivia before we get to carve.

Ts, yes, let's do IT.

Costco is the largest seller in the world of fine wines. Fine wines are defined as twenty to three hundred dollar bottles, like what costco is, but they're just the largest seller. R of things.

Well, that is the most amazing in capsule tion of their demographic. Yes.

it's well, thy people who like value deal exactly. Do you know their refund policy?

No questions asked.

IT, no questions asked. How long do you think that less infinite, infinite. There is an exception on things like electronics.

Those are ninety days, but that's seventy five more days than anywhere else up. Apple is two weeks. If I buy a acbar pro at costco, it's a ninety day return policy. If I buy at apple, it's a fourteen day return policy. Yep, in fact, i'm sitting here.

I really wanna buy a thirteen inch macbook air, but i'm afraid that the thirteen inch macbook air about to become the m3 later this year， I should just go buy at a costco. Now that is not really the behavior that they want to encourage. And I do know that if you sort of take advantage of IT over over and over again, do sort of take you aside and say, hey, IT seems like we're not providing in our value to you. Let us refund the membership or so sorry, we can do a great job.

What a great way to phrase kicking you out.

But I will tell you, the infinite return policy includes things like diamond rings.

wow. If you get divorced, you can return the engagement ring.

Last year they saw a ten carrot diamond ring. And that diamond ring, to my knowledge, has a lifetime, no questions ask. Full value return .

policy wow, so there's some fun seattle history around this. Do you know where the inspiration north .

stream .

yeah for this policy came from?

That's finally I didn't know, but it's just north from as such a famous local story around their favorite able return policy.

yes. So jm and jeff, man, before he tragical too Young, passed away few years ago. They would talk about this, especially jeff, in the brothers being seattle retailers, they were hugely influenced norge term. Norge to famously has the same return policy.

Do you know the potentially apocryphally about the famous return at nordstrom? No, IT may not be real. But at some point somebody brought tires back to ndd rim. And so i'd like to return these. And instead of saying what we don't sell tires, the person thought about IT for a while and said, well, could you just tell me a little bit more information and they said, well, I bought these here and they named the year and IT turns out that before that real estate was a nordstrom, IT was actually a tire center. And north stream gave the guy monty and took .

the tires amazing OK. While we're on costco trivia entries, there is a famous sell Price story. I think this was in the Price club days when they were opening one of the early not send ago locations.

The first new expansion sites, he showed up and he saw tires. Their tires was one of the things that they sold a Price club. And the tires were all like neatly to act on the warehouse shelves and walks.

And he starts throwing them off the shelves onto the floor, please. Like, so what are you doing? Have you gone crazy? What's happened? IT is like you, I think, idiots. How are the customers gonna be able to pick up the tires when they're up high on the can't be down on the fall?

Wow, I do know, by the way, north rim has sent adJusting its return policy to actually be kept not infinite. And so now costco has a Better return policy than north room.

amazing. wild. Alright.

more stats just for fun. They saw two point two million pumpkin pies in the three days leading up to thanksgiving last year. They sell one third of the jumbo cashes in the entire world. They, of course, sell eyeglasses, and this is one of the areas where they felt they should vertically integrate. I actually don't know why, but I suspect it's because Prices are artificially high in the entire glasses supply chain.

Oh yeah, the other glass industry is notoriously brutal.

So costco now owns and Operates three optical grinding labs to make prescription eyeglasses a crazy thing. And then lastly, there's a illustration of their culture. I think they definitely believe that you must work long, smart and hard if you're going to be a leader there.

And none are optional. You just have to do IT. And to illustrate this, all of their market managers and country managers come to headquarters for two days every single month. So no matter what market you manage, you fly to isaka. That's one hundred and sixty people to all sit in a room for two days and just talk about what's working, what's not what you're seeing and how the whole company can get Better and share learnings.

Jim talks about this a lot in the talks. I watched on youtube that when he was CEO, and I think craig g. Does the same thing to the day he visited every store every year.

Yes.

he did. And there are hundreds of stores are around to the world. There are way more costco stores out there than there are days in the year.

The dedications, incredible, crazy, all right, carve outs. Car vets are right. I have to, and i'm going to do them both because they are fast and small.

The first one, there's a brand called to foci T I F O S I that makes sunglasses for running, and you can wear for other stuff too. But I love them because they are sung glasses that don't slip off my face when you are running or doing something. And you get sweet.

They have these little grippy pads that sit on the nose. And I feel like I ve solved this like thing that was mildly annoying in my life for a very long time, which is continually pushing up. My sunglasses is well running, so highly recommend to foe. They also pretty p bought like three pair of, and their goofy in different colors and their fun.

amazing. You are becoming filled night during his oakly phase.

Yeah, exactly. The second is a mash up that I found last night when I was looking for cool stuff to listen to while finishing the research and editing the script. Thank you to Jason, cocky, author of cockney dougga, for posting this. There is a new york city D J named dwells, who released a match up about four months ago of everything in its right place by radiohead and kenrick, mars and ninety five and IT is so sick that also it's probably because i'm like a huge I don't even hours a day or yeah like whenever .

I was programing .

IT was just radio head all the time but I like instantly took me back to that place in my life and is honestly one of the best mashup PS i've ever heard.

I didn't know mashov we're still a thing that's awesome.

I used to love mash helps in some like D J subculture I mean, this is crazy how mainstream like girl talk, White panda .

while mass love IT yeah .

radio hadn't kr Clair willink to end the showed tes I .

inspired by you since you did to carve out I am also gonna to car outs the first is a great episode of invest like the best friend of the show, Patrick, over there with Jimmy good friend, the show .

that was .

so good, one of the best packers episodes. This a period all year, I think, but especially because we know jeremy pretty well from tiny and we know patric very well, like even hanging out with them a lot, learned a ton, still listening to their conversation.

And this conversation, i'll tell you, is exactly like hanging out with jeremy, but in higher density, his personality is exactly how he comes across on the podcast. But it's definitely the best of, you know, whatever I can go through me, I get like six or seven kind of mind blowing one liners, these like insights that just come to him out of nowhere. And the podcast has thirty in an hour a half is just awesome.

Yeah, it's just awesome. Go listen to IT. Well, well, well, where here to? Yep, my second card that this is a fun local one, jennie, I did day night last week.

Highly recommend for any parents out there. We have a standing babysitter who we love friday in a weekly date night, unless something changes. Highly recommend that.

But we went out in dog patch in secret cisco, which I am been to in a long time. It's become such a cool neighborhood. Went to this awesome wine bar there.

We walked around. We ve got his cream at Harry slocomb afterwards. Dog patch is right on the water in the bay.

It's got an interesting history. IT was the headquarters, I think, of health Angels for a long time during like the fifties and 10。 You worked there, right, didn't you? When you are an in turn.

don't patch labs on peered and try remember the actual number. But yeah, there was a coworking space when I worked a code tweet. Actually, they condemned the peer and took IT down because I was like we're the last year that IT was still I know we I shouldn't have had an office in IT, but yeah, I worked at co to e and above us was a coworking space where the instagram guys launched instagram.

That's right. But yeah, you probably remember back then I am dog patch was kind of like a random outskirts to go. Yes, sleepy, the little igher hood, it's become awesome.

Walked by a game shop where they had ladies. D N D, like as this is super cal gona hang out there more often. So if you come to conferences, o don't hang out dowton downtown is not a good place.

Yeah, the rest of the city is awesome. Go to dog patch. It's a very different experience.

Thank you for saving me from my sonna. Stay a hotel on market street. You will like.

do not do that, dear god, do not do that. I may never see you again.

but that was all the hotels are is a big problem.

L B B is a thing.

L B I N B are right. With that, sign up for notifications of new episodes. We just flipped the thing live acquired data FM slash email. We are going to be including little tidbits after we release episodes, including listener corrections and little fund stories that we didn't have in time for recording, will also be teasing future episode.

So if you want play little trivia a game with us to try and guess what next episode is gonna be, that is where we are going to a be drop in those hints. You can become an L, P, acquire data, m, slash, lp. Become closer to the show. Do zoom calls with us every other month or so and at least once a season. Help pick the next episode, acquire df m sash.

LPL L P, choose nike are most recent ent episode. Before this one, they did. Oh.

one thing we should say, in case you don't follow us on social media, didn't see the tweet about IT friend of the show, David lidsky didn't awesome. Truly awesome peace in fast company about acquired. And we're super grateful that he took the time and dove deep and .

spent many hours with both per core lots and .

lots of time basically tracking us as we were preparing the nike episode. And since he's been listing ing since twenty seventeen and eighteen, he knew a lot of the history, the show. And so I wrote this really cool peace if you are one of the people who has emailed all over the years and said, it'd be great if you guys did something talking about how your research process for acquired works.

David chronicled that, and much Better than David I ever could have. So thank you, David. Lets keep really appreciate IT. We will link to the fast company piece in the show notes too. Look for A Q two if you want to learn more about A I in any podcast player and check out the slack, come discussion with us, acquire data FM slash slack listeners .

will see next time I go.

I want to see there and going .

to take a bike.

I want to the chicken bake a more than a about fifty, but you know it's more substantial .

than I like three .

thousand calories. It's like nine hundred calories. Yeah you're not he doing a lot of .

other eating that day. I want IT. We'll see you next time. Will next easy you with a you with a you who got the true.