Costco

There’s an interesting article on msnmoney.com about Costco.  For those of you not in their market area, Costco is a warehouse club, similar to Sam’s Club, but with a more up-scale image.  Their merchandise tends to be a little more high-end than Sam’s. 

Costco (and Sam’s) are able to work on low margins because of their low expenses and because they generate substantial revenue from membership fees, $1.2 BILLION for Costco in their most recent fiscal year. The article is generally favorable toward Costco.  Compared to many of their big box competitors, some of the kudos are well-deserved.  For instance, they are much more generous to their employees with both pay and benefits than Sam’s Clubs.

One thing the article doesn’t point out is that many of the expenses that Costco and other big boxes "save" are actually passed along to their manufacturers.  Selling them can be an expensive proposition.  For example, the writer praises Costco for their no-questions-asked return policy.  Guess what?  The costs of that liberal return program are born by the manufacturers, not by Costco.  Other expenses associated with their streamlined distribution process also fall on the manufacturer.

The warehouse clubs are able to keep their inventory low by forcing their suppliers to hold the merchandise in their warehouse.  That’s why, in spite of their wafer thin profit margins, the prices in warehouse clubs aren’t necessarily the lowest in town.  Manufacturers, at least the smart ones, load these additional expenses into their wholesale price.  So, even though the warehouse club sells at a maximum of 15% gross margin, they’re often adding that margin to a higher wholesale price.

It’s easy for a manufacturer to get excited by the potential business generated by Costco or any big box store.  But the costs are high, both the expense of supporting their bare-bones operation and the expense of the loss of loyal dealers.

Demand lines with names like Black and Decker, Panasonic, or Sony may develop a long-term relationship with a warehouse club, but for the most part, products are in and out of the clubs very quickly.  As the video that accompanies the article points out, every product is carefully scrutinized and the ones that don’t perform are quickly replaced.  (While the article is favorable to Costco, the video looks like a Costco infomercial.

The club model is unique but the high-volume/low-service style of business isn’t that different from any of the big box stores. 

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