FREE NEWSLETTER
Despite my protestation, we went to a big box store today, COSTCO to be specific.
I am not a fan of these stores. They don’t save people money, they encourage spending and for some people waste as well. It’s all hard to resist, but I try, yet sometimes fail. Today I bought a three foot bag of popcorn and a bag of dried apricots-I never bought those in my life).
These stores encourage people to buy what they don’t need and in volume that may not be able to use. Just stand by the door sometime and look at the contents of carts. There is a pretty high percentage of what we typically call junk food.
You cannot talk about Costco’s business model without mentioning the $1.50 hot dog combo and the $4.99 rotisserie chicken.
Costco deliberately loses money (or breaks even) on these items to drive foot traffic. Because the rotisserie chickens are always placed at the very back of the warehouse, you are forced to walk past thousands of dollars of high-margin items—electronics, clothing, snacks, seasonal goods—just to grab dinner. By the time you get to the register, that $5 chicken has turned into a $200 purchase.
Costco’s profit margin on sales is only 1-2% so it must create volume. 50-60% of profits come from membership fees, 83 million of them (generating about $5 billion in revenue, virtual 100% profit. It’s a good business model as is their employee compensation structure to retain workers, but you need to be a disciplined shopper or that bag of popcorn will turn into two huge pies, a few cases of soda, and a gallon jug of mayo.
totally agree, Mr. Quinn. I like to joke with family and friends that “Costco should be call half-paycheck.”
Just read an article this morning how valuable free samples are to COSTCO and how they lure people into buying, including at the bakery. So gotta love it. They must have a psychologist on staff 😏
I understand the skepticism, but there are reasons Costco works for some. Like any subscription arrangement, you have to balance the cost against savings every year for Costco (as you need to do for Amazon Prime and similar things). I have a small numbers of things I particularly like at Costco, and buy over and over for the savings – like Advil, certain breakfast cereals, Keurig pods and gas for my car. There are a handful of others. I first went there for eyeglasses – great service and much lower prices. Periodically, I buy individual things for better prices, like lawn fertilizer, printer ink, canned olives, dried mango and in the spring, plants. I don’t buy much else. The eyeglasses alone saved me much more than the annual fee. Cheaper gas is always about 15-20 cents a gallon better than local stations. My gut calculations tell me I am better off each year, since I don’t load up on things unnecessarily. But the Costco advantage is not a giant advantage.
One thing I do notice is that Costco is also a destination for many non-profits that serve the poor. I often see people with three and four loaded carts at a time, all with essentials and no impulse item. I think that when those people load up their carts with food essentials, they should be applauded for using their contributions wisely.
A prudent, disciplined shopper may well save money and the membership be worth it.
However, if that were the case in the majority of situations, the model would fail. They need to maintain very high volume of sales to buy in bulk for low prices. That applies to all the non-necessities that tempt most shoppers filling those large carts.