David Rosenthal: belief

Transcript context

…This is super interesting. Costco basically wants to provide insane value to consumers. They want you to get a better deal as a member than you could possibly get by shopping anywhere else. 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. They have decided internally that they are not allowed to markup anything more than 14% above what the suppliers sell it to them for. I'll tell you, they are tough but fair with their suppliers and making sure that they get a great price for their members. Costco decides, we will only markup anything a maximum of 14%. They actually do mark other things up less than that because things like electronics, they actually can only mark up 6%, 7%, 8%. Maximum is 14%. The only exception to this is Kirkland Signature, where they cheat a little bit and let themselves go up to 15%. Quite indulgent. How does this compare? I think that's the interesting thing here. A common practice at department stores is literally 100% markup. Someone gets a good for $50, they sell it for $100. Even at Walmart, a "discount" marks up 25%, which is almost twice as much as Costco's margin. Jim Sinegal has a great quote on this. He was asked about it, and his response was, "You could raise the price of a bottle of ketchup to $1.03 instead of $1, and no one would know. Raising prices just 3% would add 50% to our pre tax 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." What I think also, back to the membership, it all comes back to member trust. The members have to trust that they are going to get the absolute best price on everything and that Costco isn't going to be playing these games. Otherwise, they would just go shop at Amazon, Walmart, or wherever. You're exactly right. The value proposition 40 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 like to say. The fact that they've just made that true every year for 40 years is something that really does stick in people's psyche. I totally get the heroin line. I think it's so easy to decide to cheat one year, and then in all the future years, you're going to cheat because you've broken expectations with customers, with shareholders. There's something magical, even in the relationship between Costco and a supplier, where a supplier knows that when Costco is being really tough on them to give the lowest price, Costco is not going to turn around, then mark it up 50%, and make a bunch of money. Costco is going to make the same margin that they've always made on that good.…

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