COST - Costco

[rb]

Is anyone else surprised by how much square footage Costco sets aside for clothing?  Of all their efficiencies, I have always wondered why.  Not referring to underwear, socks and gloves as much as shorts, shirts, pants, etc.

I have been surprised by that, especially since they have no dressing room. But then I also see people buying the clothes.

 

The Costco guy aren't dumb. So I doubt this is a mistake. What I've noticed is that they have different things that appeal to different groups. There are things at Costco that are an absolute deal for me and I buy those consistently. Then there are other things that I couldn't care less about and wonder why people buy them. I suspect those people may wonder the same thing when they see what I purchase.

[Guest longinvestor]

rb, they play in different pools, because Aldi and LIDL sell mostly food and have small stores!?

 

I can think of some similarities:

- They sell from the palette.

- First Aldi sold a lot of private labels. They didn't sell Coca-Cola. A few years back they changed that.

- Aldi and LIDL have a very limited number of products, but very good ones.

- Aldi and LIDL are super efficient.

- A few years back there was no marketing for Aldi and LIDL. They changed that.

 

Some years ago Wal Mart entered the german market, lost some money and left the market, probably because of too strong competition.

There are some legendary stories about the Aldi brothers in relation to thrift. It´s a culture of thrift and avoidance of envy (like Berkshire).

 

It´s also interesting from the standpoint that brands could get more powerful again (e. g. Kraft Heinz) if the retail landscape changes....

ALDI carries between 1100 to 1400 SKU’s at the store. Yes,?they have extensive testing and vetting of those items.  They also have the fastest checkout. PERIOD. Take a look at the barcode markings on the carton. Huge. Their checkout conveyor belt is also big. They apparently can checkout over 40 items per minute. No bagging means that checkout process is super fast. Usually have just 2 or 3 employees. Like others have posted Sam’s Club or Costco sell big packages and is often not good for 1 or 2 person households.

[mrholty]

rb, they play in different pools, because Aldi and LIDL sell mostly food and have small stores!?

 

I can think of some similarities:

- They sell from the palette.

- First Aldi sold a lot of private labels. They didn't sell Coca-Cola. A few years back they changed that.

- Aldi and LIDL have a very limited number of products, but very good ones.

- Aldi and LIDL are super efficient.

- A few years back there was no marketing for Aldi and LIDL. They changed that.

 

Some years ago Wal Mart entered the german market, lost some money and left the market, probably because of too strong competition.

There are some legendary stories about the Aldi brothers in relation to thrift. It´s a culture of thrift and avoidance of envy (like Berkshire).

 

It´s also interesting from the standpoint that brands could get more powerful again (e. g. Kraft Heinz) if the retail landscape changes....

ALDI carries between 1100 to 1400 SKU’s at the store. Yes,?they have extensive testing and vetting of those items.  They also have the fastest checkout. PERIOD. Take a look at the barcode markings on the carton. Huge. Their checkout conveyor belt is also big. They apparently can checkout over 40 items per minute. No bagging means that checkout process is super fast. Usually have just 2 or 3 employees. Like others have posted Sam’s Club or Costco sell big packages and is often not good for 1 or 2 person households.

 

As an Aldi shopper I wonder if the checkout no bagging is actually faster.  Since they don't have bags and the ones near me don't have boxes I do carry a bag.  Its a hurdle which limits how much I spend and a large psychological barrier for my wife that took several trips to convince her.  Our habits are this:  We shop at ALDI weekly, we also shop at our local Hyvee/Kroger, etc and then go to Costco 1x a month. 

 

In the US - Aldi and Trader Joes are owned by two different companies.  Aldi was owned by 2 brothers and they fought and split the company into Aldi North and Aldi South (IIRC it was a disagreement over to carry tobacco in the 70s). After the split the 2 brothers never spoke until their death.  Aldi also pays their regional mgrs well at $80k/year + Car and they hire them fresh out of college.  Good pay/high expectations.

 

 

[SlowAppreciation]

Aldi (also the owner of Traders Joe) and Lidl, probably the most successful companies in Germany, are entering the US market. Buffett also mentioned it recently. Tesco got killed by them.... So it´s not easy to say, which company will survive.

If I had to bet I would be on Costco´s side because of Munger and the great business model, but not at a PE of nearly 30.

 

Not so fast.... https://www.fooddive.com/news/grocery--report-lidl-is-dramatically-scaling-back-its-growth-this-year/515139/

 

Just seven months after Lidl opened its first stores on the East Coast, Gehrig seems to have run out of patience with company’s American foray.

 

Signs of Lidl’s poor U.S. performance have been building for months, from store traffic declines to canceled developments, and strategy shifts ranging from increased fresh promotions to a focus on smaller stores. Last fall, Lidl fired its German head of U.S. operations, Daniel Marasch, replacing him with the head of Lidl Spain, Michael Aranda, a 17-year veteran of the company. Since then, the company has canceled projects in markets up and down the East Coast, including Staunton, Virginia, where a real estate developer reported the company saying they were no longer focusing on small markets, according to a local report. Lidl has denied this is the case.

 

Analysts have pointed to a few key problems, most notably Lidl's overemphasis on nonfood products, questionable real estate decisions, and stores that are too big and too costly to operate. Lidl had actually planned to open smaller stores in the U.S., but went back to the drawing board after its research found Americans preferred a larger box. At 36,000 square feet, its U.S. stores are roughly 35% larger than its European stores.

[SlowAppreciation]

rb, they play in different pools, because Aldi and LIDL sell mostly food and have small stores!?

 

I can think of some similarities:

- They sell from the palette.

- First Aldi sold a lot of private labels. They didn't sell Coca-Cola. A few years back they changed that.

- Aldi and LIDL have a very limited number of products, but very good ones.

- Aldi and LIDL are super efficient.

- A few years back there was no marketing for Aldi and LIDL. They changed that.

 

Some years ago Wal Mart entered the german market, lost some money and left the market, probably because of too strong competition.

There are some legendary stories about the Aldi brothers in relation to thrift. It´s a culture of thrift and avoidance of envy (like Berkshire).

 

It´s also interesting from the standpoint that brands could get more powerful again (e. g. Kraft Heinz) if the retail landscape changes....

ALDI carries between 1100 to 1400 SKU’s at the store. Yes,?they have extensive testing and vetting of those items.  They also have the fastest checkout. PERIOD. Take a look at the barcode markings on the carton. Huge. Their checkout conveyor belt is also big. They apparently can checkout over 40 items per minute. No bagging means that checkout process is super fast. Usually have just 2 or 3 employees. Like others have posted Sam’s Club or Costco sell big packages and is often not good for 1 or 2 person households.

 

As an Aldi shopper I wonder if the checkout no bagging is actually faster.  Since they don't have bags and the ones near me don't have boxes I do carry a bag.  Its a hurdle which limits how much I spend and a large psychological barrier for my wife that took several trips to convince her.  Our habits are this:  We shop at ALDI weekly, we also shop at our local Hyvee/Kroger, etc and then go to Costco 1x a month. 

 

In the US - Aldi and Trader Joes are owned by two different companies.  Aldi was owned by 2 brothers and they fought and split the company into Aldi North and Aldi South (IIRC it was a disagreement over to carry tobacco in the 70s). After the split the 2 brothers never spoke until their death.  Aldi also pays their regional mgrs well at $80k/year + Car and they hire them fresh out of college.  Good pay/high expectations.

 

Both brothers were also fairly reclusive from what I recall. I'd love to read a book about the history of the company but haven't found any.

[maybe4less]

Aldi (also the owner of Traders Joe) and Lidl, probably the most successful companies in Germany, are entering the US market. Buffett also mentioned it recently. Tesco got killed by them.... So it´s not easy to say, which company will survive.

If I had to bet I would be on Costco´s side because of Munger and the great business model, but not at a PE of nearly 30.

 

Not so fast.... https://www.fooddive.com/news/grocery--report-lidl-is-dramatically-scaling-back-its-growth-this-year/515139/

 

Just seven months after Lidl opened its first stores on the East Coast, Gehrig seems to have run out of patience with company’s American foray.

 

Signs of Lidl’s poor U.S. performance have been building for months, from store traffic declines to canceled developments, and strategy shifts ranging from increased fresh promotions to a focus on smaller stores. Last fall, Lidl fired its German head of U.S. operations, Daniel Marasch, replacing him with the head of Lidl Spain, Michael Aranda, a 17-year veteran of the company. Since then, the company has canceled projects in markets up and down the East Coast, including Staunton, Virginia, where a real estate developer reported the company saying they were no longer focusing on small markets, according to a local report. Lidl has denied this is the case.

 

Analysts have pointed to a few key problems, most notably Lidl's overemphasis on nonfood products, questionable real estate decisions, and stores that are too big and too costly to operate. Lidl had actually planned to open smaller stores in the U.S., but went back to the drawing board after its research found Americans preferred a larger box. At 36,000 square feet, its U.S. stores are roughly 35% larger than its European stores.

 

Another European grocer finds the US market too hard to crack?

[bizaro86]

The thread from the time of the Amazon/Whole Foods sell-off is here: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/costco-selloff/

 

I had thought I contributed, but upon re-read apparently all I did was buy the stock and think nice thoughts about it. Sorry about that.

 

LOL, that exactly what one should do. It takes less time to push the buy button than to make 20 posts and then do nothing.

 

Apparently I'm vain enough that I think my thoughts at the time would have been of value to others. I should probably spend more time thinking about that prior to posting... :-X

[bookie71]

Costco has a tremendous wholesale business. When we visited my son in Sitka, we found Kirkland brand products at both the larger stores and many of their snack items in other stores around town.  In case you are dismissing this because Sitka is small, keep in mind that Safeway's largest volume store is in Kodiak. (Supplying the fishing fleet) no national stores in Sitka, but a large fishing fleet.

According to a friend who works at Costco, the stores pay the same as you and I.

P.S. You can buy Kirkland products on Amazon.

https://www.amazon.com/Kirkland-Signature-Bath-Tissue-2-Ply/dp/B007Z8ZQQS/ref=sr_1_4_s_it?s=hpc&ie=UTF8&qid=1529727865&sr=1-4&keywords=kirkland+toilet+paper

[stahleyp]

I go to Costco and Aldi pretty often. Aldi has a nice selection of organic food now. It's very clean and the lines are super fast.

 

The Kirkland products on Amazon are from 3rd party suppliers. I think the that toilet paper at Costco is around $15-$17.  Not a bad profit margin for them.

[Jurgis]

I think that my post won't contribute much, but what the heck...  8)

 

I like Costco as a business. I've watched the documentary, I've read the thread, I understand the model.

That said, I've never shopped there and very likely never will. Pretty much everything about the model does not work for me: huge sizes (small household), one product selection (idiosyncratic taste), lines (hate lines), membership fee (won't shop there enough to justify), etc. Yes, I'd probably buy toilet paper there if that was painless, so maybe I should look into what they have online and think whether online-only membership is worth it. Likely not.

 

Investment wise, I've held it in the past. I don't have strong opinion about its attractiveness now or in the future. I am a bit afraid it's no longer "hold forever" which means that buy valuation matters even more. So likely I won't buy it and so won't spend much time delving into it.

 

Have fun.  8)

[crastogi]

I am in the same Boat as you Jurgis.  But, I have a Costco membership for the following reasons

 

- savings on Gasoline

- Travel/ rental car savings

- Insurance. 

Plus the credit card is a good deal too

 

It is amazing how much value a 60/yr membership can give

[Cigarbutt]

It is amazing how much value a 60/yr membership can give.

 

I think Costco is still a great business although it may no longer be one of the "inevitables".

 

Every time I look at their numbers, always come to the conclusion, among others, that they are experts at extracting profits out of their target affluent customers, ie in extracting consumer surplus.

In my environment, most people have Costco membership cards and ALL think that their membership fee is valuable.

 

I guess that's what they mean by moat.

 

 

[Jurgis]

I am in the same Boat as you Jurgis.  But, I have a Costco membership for the following reasons

 

- savings on Gasoline

- Travel/ rental car savings

- Insurance. 

Plus the credit card is a good deal too

 

It is amazing how much value a 60/yr membership can give

 

- Gasoline: 9 miles drive one way to Costco. Not worth it. Plus we get gas-discounts at local grocery shop that also has gas.

- Travel/rental car: don't travel/rent much, likely not worth it.

- Insurance: ... maybe. This is a tough one. I'd have to look and compare. Hate doing insurance compares anyway. So probably not.

- Credit card: https://citicards.citi.com/usc/Costco/Dual/2018/Jan/PS/default.htm?m=XSMS111111W&cmp=KNC~01~110901~CRDACQXX~MSN&BT_TX=1&ProspectID=B4CD0934741349FABD7C9DDECF8AE103 Does not look like a great deal. 4% off gas at any place is somewhat attractive. The rest is meh IMO. I'm not sure I'd get it even if I had membership. I get 2% off any purchase, ~3% off gas with my current credit cards. Edit: I guess if you travel much, then 3% off travel vs 2% that I get would accumulate. Need $6K of travel to cover membership.

- Someone else mentioned buying new car through Costco program. This might be worth $60. If I don't have to drive to Costco to do it...  8)  ;D

[bizaro86]

The number one reason I hear for not having a Costco membership matches Jurgis - too far away to be convenient.

 

That suggests to me that they could add more members by continuing to open new stores, so not a saturated market. Given they operate with negative working capital, new store capex is basically just land, a big box, and fixturing. If they really do buy and flip out parcels they could probably cover capex that way.

[rb]

Up where I live I have 2 Costcos in 4 mile radius. Both have huge lines.

 

Gas is an insane deal at Costco. 18 cents per below market. That's about 70 cents a gallon for our American friends. We basically recover the cost of the membership out of gas savings alone in 2 weeks. The main complaint I hear from other Costco customers is that their Costco doesn't have a gas station.

[bizaro86]

Up where I live I have 2 Costcos in 4 mile radius. Both have huge lines.

 

Gas is an insane deal at Costco. 18 cents per below market. That's about 70 cents a gallon for our American friends. We basically recover the cost of the membership out of gas savings alone in 2 weeks. The main complaint I hear from other Costco customers is that their Costco doesn't have a gas station.

 

We have a costco very close to us, and the gas is way cheaper than elsewhere. We almost never buy it, because it is generally a 20-30 minute wait...

[bizaro86]

Up where I live I have 2 Costcos in 4 mile radius. Both have huge lines.

 

Gas is an insane deal at Costco. 18 cents per below market. That's about 70 cents a gallon for our American friends. We basically recover the cost of the membership out of gas savings alone in 2 weeks. The main complaint I hear from other Costco customers is that their Costco doesn't have a gas station.

 

We have a costco very close to us, and the gas is way cheaper than elsewhere. We almost never buy it, because it is generally a 20-30 minute wait...

 

I've often thought they could add a significant number of members if they built a few standalone gas station locations. The volume of sales they must do is huge, and even if they earned no net income from the gas itself I think that would significantly expand their pool of members.

[rb]

Yea thats' pretty bad. I think the longest I've stayed in line was 15 minutes I think. I just bring something to read. The second Costco they've built has 6 pumps per row. It moves pretty fast.

 

FYI. The best time to go is between 5 and 6 PM. Don't know why. But if i go then I'll probably be done in 5 minutes.

[Jurgis]

Up where I live I have 2 Costcos in 4 mile radius. Both have huge lines.

 

Gas is an insane deal at Costco. 18 cents per below market. That's about 70 cents a gallon for our American friends. We basically recover the cost of the membership out of gas savings alone in 2 weeks. The main complaint I hear from other Costco customers is that their Costco doesn't have a gas station.

 

Your conversion or units are wrong.  ;) US MA gas prices are aroundish $2.50-2.80 per gallon. Which is $2.50-2.80 / 3.78 ~= $.60-.80 per liter.

 

Our grocery store gives out gas points. Sometimes we get gas $.50-.70 per galon under market (i.e. $2 or even lower). Of course, unlike Costco that depends on things we buy, how much we buy, etc. But that's also less than a mile away...

[stahleyp]

I wonder why Costco doesn't put multiple bar codes on products like Aldi? That seems like a huge time saver.

[Guest longinvestor]

Back to Sam's Club. I went back and checked their revenues and it was $57 B in 2017. So, about half of Costco's. For non-brand conscious people, Sam's is the place. Being colocated with Walmart surely is a big advantage. Now they are adding gas stations as well.

Also, the single biggest deterrent of standing in the checkout line is gone for me with the Scan&Go application. It is crazy to watch people still standing in line; it's not as if they don't have a phone, they are all looking at the phone while waiting. It may well the demography that shops at Sam's, cash buyers, weak tech skills etc.

 

More than Amazon, Sam's Club will keep Costco honest for the foreseeable future. And with the decades long squeeze on disposable income, the demography that shops WMT is not about to shrink. If anything, E-Commerce (Click-to-mortar, scan-and-go etc.) stands to bring in incremental revenue! Virtually everyone on this board fit the Costco shopper profile and not Sam's. The savings are insane. For me, Costco is 30 minutes away but I choose Sam's because I am cheap. Nobody beats WMT in price.

[bookie71]

I wonder why Costco doesn't put multiple bar codes on products like Aldi? That seems like a huge time saver.

When we had Sam's club in Alaska, often the prices were higher there than at Walmart.

[Cigarbutt]

The number one reason I hear for not having a Costco membership matches Jurgis - too far away to be convenient.

 

That suggests to me that they could add more members by continuing to open new stores, so not a saturated market. Given they operate with negative working capital, new store capex is basically just land, a big box, and fixturing. If they really do buy and flip out parcels they could probably cover capex that way.

 

Interesting because, once you obtain a membership card, renewal is an enduring 90%+.

 

Market saturation and sales cannibalization has been in the air for a long time and has shown up in numbers in the last few years. I would say we are getting there. In Canada, Costco's market penetration is way higher than in the US, in large part because Sam's Club failure to establish a significant presence and, given the long term nature of retail, it is hard to see how Costco could gain a lot of market share going forward.

 

For the real estate (like other selected areas where Costco has been contrarian and successful in the retail space), traditionally (although this has changed to some extent) they have chosen areas in cheap locations and often the Costco store area became a new retail destination.

 

Reference that is dated but it is interesting to look back sometimes when there has been a consistent operating history and when trying to see how this may impact the future (relevant pages for the real estate: pages 95, 97 and 98).

 

http://www.coriolisresearch.com/pdfs/coriolis_understanding_Costco.pdf

 

When the report was published in 2004, share price was about 41$ and there were questions about saturation and potential growth. Most of the market cap has gone up since 2009 but multiple expansion has been part of the story.

 

“There’s no annuity in this business.  You don’t have any guarantees.  You’re only as good as your latest act.”

Jim Sinegal, CEO, Costco, July 1997

 

 

[Gregmal]

Up where I live I have 2 Costcos in 4 mile radius. Both have huge lines.

 

Gas is an insane deal at Costco. 18 cents per below market. That's about 70 cents a gallon for our American friends. We basically recover the cost of the membership out of gas savings alone in 2 weeks. The main complaint I hear from other Costco customers is that their Costco doesn't have a gas station.

 

Gas stations and liquor stores. Many Costco's don't have either, and IMO these are huge markets that won't be penetrated by others anytime soon and present a huge growth option. Particularly IMO the liquor stores. I was floored to find out from a friend that Costco bottles the same stuff used by Grey Goose or Macallan and then sells it at half the price under their Kirkland brand. Selling 18 year Scotch for $39. Gas prices can't be beat either. Both will continue to get people to their stores.

[Spekulatius]

We pickyback on my wife’s family Costco card. It’s worth it for some things, but not for other. The service discounts are so so. We once had a carpet layed down, which ended to be crappy work. I also had an AC unit install quoted, but found cheaper quotes (much cheaper quotes even ) elsewhere. Their prices for tires can be good. For cars, I could negotiate a better price elsewhere, without trying hard. do for me, most services from Costco affiliates are not worth it.

 

We do use Costco for meats, craft beers, some cloth and several other food items they I can’t recall. We also found them to be very good for OTC meds. They also have good deals on consumer electronics especially considering the return policy.