pay for the privilege of shopping there, and its members decide the

privilege is worth the cost year after year after year.

The now global chain of warehouse stores counts more than 55 million

members around the world, and around 90% of them renew their

memberships each year.

If you want a 25-pound bag of beans, a bucket of soy sauce or a crate

full of bananas, Costco is the place to go.

While you are there, you can buy a flatscreen TV, a pair of

eyeglasses, some gourmet cheese and a few pairs of sweat socks.

You might be astonished at how little each item costs, and yet you

might end up spending much more than you planned to.

Costco developed a retail recipe that might have sounded crazy when

the company was founded, charging people a fee to allow them to spend

money in the store.

But it works, in part because Costco is a company that is run very

much for the pleasure of its members, and its members are fiercely

loyal. But the question is,

how long can it hold onto that?

Younger generations of consumers have grown up shopping online and

companies such as Amazon have taken some of Costco's secrets and

applied them to e-commerce, all while making shopping online a matter

of clicking a single button.

Add that to the downstream effects of the coronavirus.

Sales fell in April for the first time in a decade, largely due to

lockdowns and safety measures.

They bounced back in May, June and July.

But the company, meanwhile, had to spend $283 million in

Covid-related safety and sanitation costs during the third quarter of

2020, which ended in May.

Furthermore, Costco wants or even arguably needs shoppers to

physically visit its stores.

That is a big part of the experience.

Long lockdown periods around the country and general anxiety about

contracting the coronavirus led many shoppers to stay home and buy

more of what they needed online.

The company is highly dependent on membership fees for its profits,

meaning it needs to keep giving customers reasons to pay a minimum of

$60 per year to shop at the store.

Costco also raises membership fees every few years.

Subscriptions and memberships are often some of the household

expenses first to go when budgets tighten and consumers, faced with a

wide array of subscription services for gyms, streaming services,

meal delivery and other things, may be deciding what they ought to

cut if the economy goes into a downturn.

Costco's membership numbers held steady and even increased during the

recession that began around 2008.

But it remains to be seen just how resilient its business is this

time around. Costco declined to participate in this story.

What is today called Costco actually grew out of a merger of two

retailers with similar business models.

The first was called Price Club, and it was started in 1976 in a

converted airplane hangar in San Diego, California.

The store took its name from founder Sol Price, a Bronx-born attorney

who, in many ways, pioneered the club warehouse retail model more

than two decades before starting Price Club.

Price had learned a great deal about the world of business through

his legal work, helping clients with bankruptcies, real estate deals

and partnerships. But he had never run a store before.

He entered the retail business as a way to find a use for a

warehouse he helped his mother-in-law acquire as an investment in

1953. While searching around for a purpose for this property, Price

heard about a company called FedCo, a large warehouse store in Los

Angeles that sold a variety of goods at very low prices.

It was open only to members, run in a manner similar to a

co-operative and had been primarily created to serve U.S.

Postal Service workers and their families.

After trying unsuccessfully to partner with FedCo in his San Diego

warehouse, Price opened FedMart.

At FedMart, Price developed the idea of selling goods at very low

margins while charging a membership fee.

The company became tremendously successful and inspired other large,

low-priced retailers.

Sam Walton said many of his ideas for Walmart came from Price's

store. FedMart went public in 1959 on the American Stock Exchange.

The company was bought by a German retailer in 1975, but the new

owners failed to maintain Price's success, and FedMart closed its

doors by 1983.

Price then founded the Price Company in 1975 and opened Price Club in

1976.

The chain of stores had much the same model as Price's previous

venture. A few years later, two men named Jeff Brotman and Jim

Sinegal founded Costco in the Seattle, Washington area in 1983.

Like Price, Brotman was a lawyer with commercial ambitions, who

ventured into the club warehouse business at the urging of his

father, who had noticed Price's success.

The other Costco founder, Jim Sinegal, had spent years working

closely with Price at both FedMart and Price Club.

Costco grew rapidly from nothing to $3 billion in sales in under

six years.

Price Club and Costco merged in 1993 and were initially named

PriceCostco. The company became just Costco in 1997.

Since that merger, Costco has attained explosive growth.

In 1993, the company reported $15.5 billion in sales.

In 2019, its sales totaled $152.7 billion.

The company went public on December 5th, 1985.

Since then, shares have risen more than 19,000% from an IPO price

before stock splits of $10 per share to $344 per share

on August 26th, 2020.

A basic Costco membership costs $60 per year.

There is also a gold star executive membership that costs twice that.

That comes with some special perks, such as 2% cash back rewards up to

$1000 per year, savings on trips booked through Costco Travel, and on

a variety of other services Costco provides, such as identity

protection, auto and home insurance and bottled water delivery.

The value of these services would vary per customer, but someone who

opted out of them and only collected the 2% cash back reward would

have to spend $6000 per year to recoup the $120 executive membership

fee. The thing is that Costco doesn't make most of its money from the

actual sale of goods.

Its margins on the products on its shelves are extremely thin, much

thinner than those of grocery stores, for example.

Instead, Costco's profits come from its memberships.

"You know, most of their net income comes from membership fee revenue.

So last year, 92% of their total net income came in the

form of membership fee revenue.

So that membership fee revenue essentially drops straight down to the

bottom line because there's basically no cost associated with it."

It could be said that the store actually exists for the purpose of

getting its members to renew their memberships year after year after

year. And so, Costco is extremely focused on keeping its members

happy. In fact, the company has been known to refuse to raise prices

on goods in order to improve margins on sales, just to keep its

customers coming in the door.

It is also known for treating its workers well.

Costco store employees make better wages than those at many other

retailers. The company justifies the better pay and benefits for

workers on the grounds that happier employees will be more helpful to

members and improve the shopping experience

"In this world of, you know, what is what is stakeholder capitalism

versus shareholder capitalism, I think Costco's already have the

right approach to it, look it, you care about your associates, and

you care about your customers because if your associates aren't happy

and working hard and excited to be where they are, then your

customers are going to see that, your members and service levels they

get. And so the virtuous circle and the best thing for shareholders

is ultimately to have happy customers, and the way you get happy

customers is to have generally happy employees.

So to me, they've sort of gotten it the right way.

You know, at the end of the day, it is shareholder capitalism.

But the best way to benefit shareholders longer term is to take care

of your customers. And a key way to do that is take care of your

associates." Costco also offers some perks to all members that are

designed to make the experience of shopping more pleasant and easy.

The store is famous for having various stations set up throughout,

handing out free samples of different products, often food.

Costco had to briefly shut down this practice during the coronavirus

pandemic, no doubt disappointing many members.

In addition to free samples, there are also frequently in-store demos

of other products, such as electronics.

Costco also offers a concierge service for members, essentially a

technical support line where people can call for help with products

purchased in the store.

While some members might be relieved to discover they are able to get

help with products once they have bought them, part of what Costco

offers is extremely careful attention to what it even chooses to

stock in its stores in the first place.

Many customers might not notice as they stroll past the pallets of

sodas, stacks of egg crates and towers of paper towels that despite

the appearance of a vast warehouse stuffed with goods, inventory is

tightly controlled.

Items are packaged in large quantities, but there is a relatively

small number of products, often called stock keeping units or SKU's,

for the unique barcode attached to any unique item.

A single Costco carries only about 4,000 SKU's, whereas a Walmart

Supercenter can carry nearly 150,000.

But those products are very carefully chosen.

In many ways, Costco was a pioneer in the now common practice of

collecting and analyzing customer data.

When a member makes a purchase at Costco, the first thing they do is

swipe their Costco card.

Evercore ISI estimates that Costco has a team of more than 100 buyers.

Those buyers can access shopping data when determining what sorts of

products they ought to fill a store's shelves with.

"Those buyers are able to use that information to really seek out

items that their members might really appreciate, that wouldn't

wouldn't be obvious.

But that could be anything from leather coats, unique jewelry items,

a newly packaged way or innovative way to put together a camera and

the lenses that maybe isn't sold anywhere else.

So really finding what it is that their members might like.

And that's what creates a treasure hunt."

The company uses its massive number of members as leverage when

negotiating with suppliers.

Though Costco's prices are typically low, getting the absolute lowest

price in a category is not always the point.

The point, say analysts who follow the company, is delivering good

value. Products also rotate in and out of the store's inventory.

There's a pretty good chance that many of the items a shopper sees on

Costco shelves might not be there in a month or two.

The rotating stock encourages impulse buying.

Each visit to the store can yield the surprise for a member, maybe a

blender or a pair of running shoes.

Seeing something unexpected and knowing it might not be there in the

future can lead shoppers to jump at the opportunity to make an

unplanned purchase.

The store has also found other ways beyond the shelves to keep people

coming back, including cheap gasoline, optical services and low-cost

medical devices such as hearing aids.

There's a travel service, a credit card and a car buying service.

"The big picture is once you have, in the U.S., we think they have

well over 30 million households that are signed up as Costco members,

you're trying to find a way to add value to those members outside of

the club, outside of those four enclosed walls.

And I think ancillary businesses are a way to take the power of the

membership outside the club.

So, for example, travel, they can get package discounts, everything

from hotels to cruises.

But that's been one area of value add.

One another one's car buying.

So sort of cutting out the middleman and saying, 'Hey, we will bring

our group of members to a pre-negotiated price so that none of us

have to go through the hassle of the whole haggle with the dealer.'

Credit card's another one where there's a cashback program where you

can get 4% back on gasoline, 3% on restaurant spend, on travel spend,

even takeout or curbside pick-up restaurant spend, I've noticed

during this year of Covid.

So that's a pretty good value to the member on top of the normal

extra 2% or 1% you might get elsewhere at a Costco."

And there is, of course, the food court that sells $1.5 hot dogs and