Ben Gilbert: prediction

Transcript context

…Analysis, let's do it. Because we haven't been analyzing this business yet. Yes. The first segment that we're going to do in our analysis here is power, which is adapted from Hamilton Helmer's Seven Powers book, which is an amazing framework for business strategy. The question here is, what is it that enables the business to achieve persistent differential returns? Or put it 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's one here that is so painfully obvious that has been observed over and over again over the years. The original credit goes to an investor, Nick Sleep. The power is scale economies. It's Hamilton Helmer's notion that Costco has the ability to leverage their scale to compete for items that their competitors can't get, or perhaps get a better price from suppliers than any of their competitors. Nick Sleep has this phrase that I think is possibly the best way to describe Costco. Scale economies shared with customers. The flywheel looks like this. Costco has enormous volume. 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? Costco makes sure of that, they do their research, they come to a price, and they say, great. 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 at facilities? What is literally the leanest we could possibly run and still breakeven or generate a small profit? That's how they come up with this 11% target gross margin number. What they do then is 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. To be honest, this scale economies that they then share with customers, I don't know how anyone could ever catch them in this moat that they've built from that. Because as we were talking about, for most, if not all of their suppliers, they are by far the biggest buyer of their goods, even bigger than Walmart because they have so many fewer SKUs in the store. This is so fun. I feel like there's such a resonance between Costco and Nike, even though on the surface they're so different. Maybe this is like a Pacific Northwest thing. But I really think Nike 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. Costco does the exact same thing here. Costco could definitely make a higher margin than they do now and still charge lower prices than Walmart, but they choose not to. Instead, they share that benefit back with customers.…

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