Costco's CEO Has a Simple Recipe for Making Money

By Daniel B. Kline Retail

While Amazon (NASDAQ: AMZN) has laid waste to many traditional retailers and disrupted many others, the online leader has not managed to impact Costco (NASDAQ: COST).

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The warehouse club has managed to keep its sales moving in the right direction, posting comparable-store sales for fiscal 2016 that were 3% higher in the United States and 4% globally (when factoring out lower prices for gasoline). Costco has also added members, closing fiscal 2016 at 86.7 million people carrying its membership cards compared to 85.5 million a year earlier.

It has been a good run that shows no signs of slowing down even as other retailers feel the heat from Amazon. Costco CEO Craig Jelinek is not surprised by his chain's success. He has been with the company for over 30 years and in that time has seen a simple recipe that has served the chain through all sorts of retail trends.

Costco has followed the same philosophy for a long time. Image source: author.


What is Costco's formula?

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Jelinek explained in a recent television interview with consumer advocate Clark Howard that the warehouse club chain has carved out its own place in global retail by sticking to one strategy. Costco, he said, keeps its overhead low, which lets the company not have to mark up products as much as other stores in order to cover expenses (and make a profit).

"All you see is merchandise," Jelinek told Howard. "That's what we do; we buy and sell merchandise. The floors, it's not what they're made out of, it's whether they're clean. You know there's cost to marble, there's cost to mannequins, there's all sorts of costs of parts of the business."

The warehouse club also has rules for how much it marks up any item on its bare-bones, warehouse-style shelves. The company has a 15% ceiling for markups, but the CEO said he preferred to keep it to 14%. In order to do that the chain has to keep its sales volume high.

"You buy quality merchandise at a very low price, keep your costs down," the CEO said, "but not on the backs of your employees." The chain, which pays above-average retail salaries, has a philosophy that keeping workers for longer makes them more efficient.




Costco also keeps pricing down by having relatively few staff people on the floor. That's made possible partly by the ones it does have being experienced and partly by using a store setup that limits the need to help customers.


This is a sustainable model


While other retailers have to change what they do to battle Amazon, Costco can more or less stay the course. That does not mean it won't have to make some course corrections, but it's not likely the retailer will have to dramatically change in order to continue to compete.

"Our view is to figure out how we can sell it for less, and sell more," Jelinek said. "We don't want to know how much more we can make; we want to know how little we can make and sell more and pay the bills and make a little profit."

That's an absurdly simple model that has worked for decades. The competition may have changed, but Costco hasn't because what the warehouse club is at its core still resonates with shoppers.

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Daniel Kline has no position in any stocks mentioned. He likes to go for it on fourth down. The Motley Fool owns shares of and recommends and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.