Costco（音频）

I don't think I have ever been more in love with a company and a business model.

What are you, Charlie Munger?

It’s just the deeper you dig, the more good things you find. Usually, it’s the exact opposite of that. It’s like the opposite of being an early-stage venture capitalist.

Welcome to season 13, episode 2 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal, and we are your hosts.

What if I told you that there was one place where you could get all these things under one roof: a 2.5-pound container of cashews, prescription eyeglasses, a tank of gas, new tires for your car, 96 rolls of toilet paper, a new refrigerator, an outdoor shed, a 10-carat diamond ring, some fresh-prepared sushi, fine wine at a great price—and you could even grab a hot dog with a soda and a free refill on your way out for just $1.50?

Ben, I don’t believe you.

Hey, it has been the same price for 40 years now.

47 years.

Yes. Most of you are very familiar with this Disneyland of consumer value that I’m referring to. It is Costco.

This company seems very simple on the face of it. If you sell in bulk, you have the opportunity to offer great deals to your customers. But what really makes it work are the 50 clever innovations that they’ve refined over the years, all working together like an orchestra that’s been rehearsing for decades.

Nothing about Costco is an accident, from the extra-wide parking spaces to the whole rotisserie chickens. If your goal is to offer extremely high value to your customers on high-quality products at the lowest possible prices, there are a lot of ways you could go about doing that. Today, we will walk through the very specific path of decisions and trade-offs that Costco has chosen to accomplish just this.

So, listeners, remember: extreme value, high-quality products, lowest possible prices.

David, my God, does this method work.

Well, there is a reason Charlie Munger loves this business.

Oh, does he ever. You know the great Warren Buffett joke about Costco, right?

Oh, no.

Okay, so here goes. Warren and Charlie are flying on a plane that gets hijacked. It’s kind of macabre. The hijackers grant each of them one last wish, and they ask Charlie first. Charlie says, “I would like to give my speech on the virtues of Costco one more time before I die.”

Then the hijackers turn to Warren, and he says, “Shoot me first.”

It’s so great. This actually happened at a Berkshire annual meeting. It’s on YouTube; we’ll link to it in the show notes.

Oh, that is awesome. I mean, Charlie Munger was, of course, on the board of Costco and a longtime fan of the model, as you should be too.

1. Costco’s Unbelievable Scale

Here are some insane stats. Costco has grown revenue at about 10% for more than 30 years in a row. Their revenue per square foot in their warehouses belongs more in a conversation with Tiffany than Walmart. They seem to have incredible running room ahead of them to expand internationally and here in North America.

David, here’s one that is just for you: their store brand, Kirkland Signature, does more revenue alone—not including anything else in the store—than all of Nike.

I know. It’s okay. I think Kirkland Signature, as a unified brand, might be the largest brand in the world by revenue.

It’s the largest consumer packaged-goods brand in the world.

Yes, which is a misnomer because they sell everything. Most other brands only sell one category, like shoes. Kirkland sells $52 billion a year, which edges out Nike by about $1 billion. That doesn’t even include Kirkland Signature gas.

All right, listeners, if you want to know every single time a new episode drops, you can sign up for email updates at acquire.fm/email. And two brand-new things: we'll be including little hints at what the next episode will be to the email list now, and we'll be including follow-ups from episodes when listeners share things with us after release, be it little corrections or just additional insights. So sign up at acquire.fm/email. Come talk about this episode with us at acquired.fm/slack and learn from other listeners who may be closer to these topics than even David and I are. If you want more from David and me, check out our second show, Acquired 2, available in any podcast player—just search Acq2. And our next few episodes are about AI with CEOs who are leading the way as the world very rapidly changes in front of us. So without further ado, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

David, what are the history and facts?

2. The Costco Retail Lineage

Costco was founded, as many people know, in Seattle—lovely city of Seattle—in 1983 by retail veterans Jim Sinegal and Jeffrey Brotman.

Jeff came from a long line of Seattle retailers. His dad was a retailer, and his brother is a retailer. Jeff was one of the first investors and board members of Starbucks.

Super cool.

Yes. Jim—we’ll talk about Jim as we go here.

But if you were around and of shopping age, shall we say, in 1983, you know that the true history of Costco dates much farther back than that, to someone we talked a lot about on our Walmart episode: the legendary Sol Price and his 2 companies, FedMart and Price Club.

Although Costco, quote-unquote, was founded in 1983, the organization that we know and love today is actually the result of a merger between Costco and its predecessor company, Price Club. Price Club, of course, was the actual result of Sol’s previous company, FedMart. FedMart itself really came out of Fedco in the 1940s.

In some ways, we have to tell a whole industry history here. In other ways, these are all the same company because they’re all stacked learnings from Sol Price and his various brainchildren over the years to create the Costco that it is today.

3. Sol Price Shapes Retail

Totally. We start history and facts in January 1916, in New York City, in the Bronx, where one Solomon “Sol” Price is born.

Sol’s parents were Jewish immigrants from Belarus. They’d arrived just a couple of years before at Ellis Island as teenagers. They had absolutely nothing. They spoke no English, and they had no money.

Sol’s parents, like many Jewish immigrants around that time in New York, ended up getting jobs in garment factories on the Lower East Side. The conditions in these factories were terrible—just absolutely terrible.

If you went to school here in the U.S., you might remember learning in American history class about the Triangle Shirtwaist Factory fire.

Yes, in 1911.

You remember that this is the start of the American labor movement, and the Communist Party and the Socialist Party emerge as a reaction to this in America because it’s a terrible disaster. The factory owners had literally locked the doors to keep the workers in the building so they wouldn’t steal. Then a fire broke out, and 146 people were killed, mostly women and young girls.

It was terrible.

Sol’s parents didn’t work at Triangle, but they worked at other factories just like it.

Crazy. You can’t make this up. Sol—perhaps the most influential American retail capitalist in history—comes out of the Triangle Shirtwaist Factory movement, communism, socialism, and everything that’s happening in New York and the Jewish community at this time.

Wow. And when you say one of the most influential, I do think he’s top 2 or top 3, with Sam Walton, of course.

Sam Walton actually wrote in Made in America that he stole more ideas from Sol than anyone else in his business career.

All right, that’s a very credible argument that he is the most important American retail capitalist.

Jim Sinegal, of course, the co-founder and CEO of Costco, tells the story that a reporter once asked him if he learned a lot from Sol. Jim replied, “No, that’s inaccurate. I didn’t learn a lot. I learned everything. Absolutely everything I know, I learned from Sol.”

We found this awesome biography of Sol that’s really rare and out of print. It was written by his son, Robert. If you’re a fan of Costco, want to learn about retailing, or just like all these business practices, you absolutely should try to get your hands on this thing.

It’s self-published too.

It’s self-published. I don’t think there’s anywhere else in the world that lays out in detail exactly how Costco works, as well as its predecessor companies. It’s amazing.

The other crazy thing is that I think Robert may have signed every copy of this book, because he signed yours and he signed the one that I got.

Oh, amazing. That’s how rare this thing is.

So, back to Sol’s growing up. In the book, there’s a quote from him: “In the New York Jewish community at the time, there was no such thing as Republicans. The Socialists were the conservatives, and the Communists were the radicals.”

It really illustrates where Sol’s political ideology comes from.

Absolutely. As a young child, he develops an eye defect that causes his left eye to droop. He’s really self-conscious about this, as you can imagine, but as a result, he channels all of this insecurity into being a massive overachiever in school.

He skips 2 grades growing up. Then, in the middle of his high school years, his parents move the family from New York City to San Diego, California.

Now, San Diego is a town of about 150,000 people. This is not the San Diego we know today. There’s no Qualcomm, there’s no Illumina—there are only the beginnings of the U.S. Navy and the defense industry. It’s a small town.

When Sol gets out to San Diego, in a parallel moment to Sam Walton’s early life, he meets his future wife while he’s in high school. It turns out that Sol’s future wife’s first name is Helen, just like Sam Walton’s wife’s name was also Helen. Sam’s wife would be very influential on him, along with her family. The same thing happens with Sol.

Just like Helen Walton, Helen Moskowitz, soon to be Price, comes from one of the wealthiest families in San Diego.

This is literally just like Sam Walton. That’s what’s about to happen here.

Just like 10 years before Sam Walton.

Helen’s family owns and operates a scrap-metal business. A scrap-metal business in San Diego in the 1930s is about as well positioned as you can possibly be, because San Diego is about to go through a huge transformation during World War II.

It’s going to become the principal port of the U.S. Navy’s Pacific Fleet, which is going to be the main naval operation of World War II. The city is going to absolutely boom. It’s going to be shipbuilding, the Navy, and metal.

Ben, you and I were just down in San Diego doing our episode with Doug DeMuro, and I went and stopped by the Midway Museum because we had just done our Lockheed Martin episode. You can feel the history dripping off that thing—all the old airplanes and everything.

San Diego has obviously been a huge Navy culture for 75 years now.

Totally. During and after the war, all these sailors and GIs come through the city. Then, when the war is over and they come back home, wherever they lived in the country before, they’re like, “Wait, why am I living in Kansas? I should be living in San Diego.”

San Diego is pretty great. It’s really nice there.

From 150,000 people when Sol moves there after the war, San Diego is on a path to becoming what it is today: the 8th-largest city in America. It’s larger than Seattle. It’s larger than San Francisco.

Oh, I wouldn’t have guessed that.

Yep. This is going to become quite the fertile market, shall we say, for a new retail enterprise in postwar America.

Before then, Sol goes to USC and gets his law degree. He comes back to San Diego and starts practicing as a lawyer.

Sol’s timing is something you could not script any better. When you’re a lawyer in a small town—I mean, my parents were lawyers in a small town growing up—you’re a lawyer for your clients, but you’re also kind of a consigliere. You’re advising on business, real estate, negotiations, divorces, trusts, and estates. You’re super deep with your clients.

After the war, Sol starts counseling all these entrepreneurs with these new retail-concept startups that are emerging in San Diego.

One of these startups is called the Seven Seas Locker Club. Ostensibly, the premise for this business is literally a club of lockers where Navy sailors can store their uniforms when they’re on leave and wearing their civilian clothes. When they go out to sea, they can store their personal clothes and effects while they’re away on the ships.

Yep, but actually that’s just a Trojan horse to get all of these consumers in the door.

It’s foot traffic, and then they offer all kinds of goods and services to them within the locker club. There’s laundry, dry cleaning, clothing, jewelry, food, and haircuts.

This might start to sound a little familiar.

Another client is a jewelry store called Four Star Jewelers. In addition to operating their own jewelry store, these guys also sell jewelry wholesale to other retailers. It turns out that there’s one account in particular that accounts for the vast majority of their outside wholesale business, and it’s this odd retail concept operating out of Los Angeles called Fedco.

You’re like, “Fedco? What is a Fedco? What is happening here?”

It’s also like, “How are they doing so much volume? We should go check it out and see what’s going on.”

Fedco, it turns out, was a nonprofit membership club. It was a customer collective, and it was called Fedco because it was only open to federal employees, primarily postal workers.

After the war, about 800 postal workers in the Los Angeles area somehow decided that they wanted to pool their buying power together. They were federal employees, so they started this club so they could pool their buying power and get better prices on goods that they could all participate in together.

It turns out there are a lot of federal employees out there, especially in San Diego. Fedco charged a membership fee—dues to join—but unlike Costco today, they didn’t really make any money on the memberships. Remember, they’re a nonprofit. The cost was $5, one time, for a lifetime Fedco membership.

Hard to see that working, but it’s actually not so different, inflation-adjusted, from REI’s membership today. Very clearly, REI is not interested in making money off the membership program. I pay, what is it, $85 or something, once, just to grant me a sort of higher affinity to the store, and the money is not really relevant.

That is the perfect analogy. That’s exactly what Fedco is.

Yep. As you can imagine, Fedco becomes quite popular among government employees in the L.A. area—and then not just the L.A. area. People start driving from all over Southern California, including San Diego, sometimes up to hundreds of miles round trip, to do the majority of their shopping at Fedco.

It was time to expand.

Yes, but Fedco is a nonprofit. They’re not looking to expand and build this huge empire.

Sol and the jewelry guys see what’s happening with all of the wholesale business they’re sending to Fedco up in L.A., and they’re like, “We’ve got to find a way to open a Fedco here in San Diego.”

Sol says, “Actually, I might have just the location.”

It turns out that Helen’s family owns a 21,000-square-foot warehouse in San Diego’s industrial district that’s currently sitting empty. The 3 of them go over, check it out, and say, “Oh, yeah, we could totally recreate Fedco in this building right here in San Diego.”

If Sol were Sam Walton, that would be the end of the story right there. He’d just be like, “Great, I’m going to clone Fedco.”

No. This is how Sol is different from Sam, and I think it probably harkens back to his upbringing in New York and everything that was happening there.

He calls up the Fedco board of directors in L.A. and says, “Hey, we want to partner with you guys. We think a Fedco would do great in San Diego. Can we create a joint venture together? We’ve got the building, we’ll operate the store. Let’s go into business together and be partners.”

Fedco, though, like you said, is a nonprofit. They’re not interested in expansion, so they turn him down.

Sol calls them back and says, “No, no, guys, we really want to do this. How about this? You can own the whole business. We’ll just be a franchise down in San Diego. You get all the upside, you get all the enterprise value. We don’t care—we just want to bring this to San Diego.”

They say no again because, you know, it’s a nonprofit board of directors.

On the one hand, you might think, “Sol Price—not a very savvy businessperson. Just take the gift and go with it.” On the other hand, he’s a ridiculously principled guy.

There’s a really funny Sol quote from later in his life. He’s asked about how he feels about essentially being the father of modern American retailing. He thinks about it, sort of laughs, and says, “Maybe I should have worn a condom.”

Oh, Sol.

But it’s not that he’s a rube. He’s a really good businessman; he’s just also incredibly principled. That’s going to flow directly into Costco, as we’ll see.

Back to Fedco. After this second rejection, Sol and the guys are like, “I guess we can now go do it ourselves.”

So, in November 1954, they open the store in this warehouse location. They have to think about what to call it, and they’re like, “Well, basically, this is a clone of Fedco, but we can’t use that name—and it’s kind of a bad name anyway. What if we draft off the same brand recognition, though, and call it FedMart?”

An equally bad name.

An equally bad name that would have historic impact.

Why do you think Walmart is called Walmart? Why do you think Kmart was called Kmart?

Oh, it was the first mart?

It’s because of this. Literally. I mean, Sam Walton talks about this in Made in America. By the time Walmart was starting, people knew what FedMarts were. They were expanding across the country, and he was like, “Oh, great, we’re going to draft off the FedMart brand.”

It was the same thing with Kmart. FedMart becomes the first scaled, quasi-national discounter, and people are like, “What are discounters?” Discounters are Walmart, Kmart, and Target. That is the industry Sol births here.

Very specifically, we are not talking about what Costco is today as a wholesaler. FedMart is not big pallets with enormous quantities of things. It is much more like a Walmart. You want to go grab a can of beans off the shelf if you grab a can of beans off the shelf. Importantly, it is both packaged food and sundries, or general merchandise, under one roof.

Yes, correct. On the one hand, FedMart is obviously a clone of Fedco. On the other hand, the huge, single key difference that makes all the difference is that it’s a for-profit company. It’s not a nonprofit.

Just like all capitalist, for-profit companies, Sol, the jewelry guys, and FedMart have the impetus to expand.

That makes sense. Just to put some other fine points around what it is and what it isn’t: it is still only for federal employees, right?

Yes, at this time.

Okay, and it’s not a membership club?

Well, it is still a membership club. You do still have to be a federal employee, and you do still have to buy a membership. I think they maybe took the lifetime membership price down to $2, so they undercut Fedco or something like that. But obviously, it’s not about the membership.

The reason they did this—and the reason that no other discounters had really scaled before this—is crazy. There were actually laws on the books in the U.S. at the time that allowed manufacturers of goods to set a minimum selling price for retail. It was actually illegal for retailers to offer products below that price to the general public.

Whoa. So the term “discounters”—discounting—meant selling below the manufacturer’s minimum price. How did you get around this?

Sol kind of stumbles into figuring out that if you’re a membership club, you’re not open to the general public. So you can skirt these laws and sell below the manufacturer’s minimum price.

Interesting.

This is crazy, and this is why I think there’s a strong argument that Sol really is the GOAT among American capitalist retailers. We haven’t even gotten to Price Club and wholesaling in Costco yet; he also invents that later.

First, he invents the discounter, which Sam Walton, Kresge with Kmart, and Dayton with Target copy. It becomes the dominant retail form of America. Two totally separate things—he invents both of them. Crazy.

When Sol and the guys open the first FedMart in 1954 in San Diego, it is a huge and immediate success. Their wildest-dream expectation is that they do $1 million in sales in the first year. The store does $3 million in sales in 1954, in 1 year.

Wow. Why do you get the sense that it worked?

It worked because it was already working. This was a no-risk bet. Clearly, Fedco had proved the model in L.A. They just did the same thing as a for-profit company.

Makes sense. A year after San Diego, they opened the second FedMart in Phoenix, Arizona. Right off the bat, they’re going multistate. They want to go big here.

It’s another absolute banger. Literally, when they open it, there are lines half a mile long to get into the parking lot of the store, going out in every direction.

They take it to Texas. They go to San Antonio, Houston, and Dallas. All of these stores are huge successes.

At this point, 2 things happen that are going to prove very fateful, both for FedMart and for Costco.

First, Sol fully stops practicing law and goes full-time with FedMart. He becomes the president of FedMart.

Second, he hires a young college student from San Diego City College as a part-time bagger in the San Diego store: Jim Sinegal.

Jim would end up working for the next 22 years at FedMart, directly for Sol. Eventually, Jim ends up running FedMart’s entire distribution and centralized warehousing operations.

You can see the Costco picture coming together here. Put a pin in that.

FedMart goes public in 1959. They raise $2 million and plow that money into both expanding the number of stores across the country and, remember Seven Seas Liquor Club, the suite of goods and services they’re offering under the roof—or in some cases, not under the roof.

This is when they add gasoline to FedMart. The Costco gas lines started with FedMart. They would intentionally price a few cents lower than whatever the other gas stations were charging in the area.

A few cents at that time was a lot, because gas was about $0.25. Unlike gas stations, FedMart is making money on consumers shopping in the store as well, so they can price gasoline at cost, get all the traffic coming to the store, and then monetize through the store.

They add a pharmacy to FedMart. Costco pharmacy customers today are religious about it.

There’s a crazy story: the guy who sets up the pharmacy division for FedMart starts getting death threats from people in the industry. He has a rock thrown through his window. It’s literal Mafia stuff because they’re undercutting the fat margins in pharmacy counters so much.

That guy’s protégé, who takes over the pharmacy division for FedMart when he retires, goes on to start Costco’s pharmacy division and run it.

Amazing.

Most importantly for the Costco story here, after they go public, FedMart uses part of this capital to develop their own house brand for some of the popular products they’re selling on the shelves.

It was the FM brand, is that right?

The FM brand, yep. If you ever see FM-branded old photos or newspaper articles referring to FM Cola or FM whatever, that’s what it is. It’s FedMart.

One more piece of the FedMart playbook: as Sol is running the company during these first few years, he starts to codify some retail management philosophies. He famously canonizes these as FedMart’s 4 priority-order principles and teaches every new employee throughout the whole company about them.

Number 1, the first priority: provide the best possible value to customers.

Number 2, the second priority: pay good wages to employees and provide good benefits, including health insurance. This is in the 1950s. This is progressive stuff.

Number 3: maintain honest business practices.

Number 4, the last one: make money for investors.

So if you’re a Costco nerd out there—and there are probably many Costco investor nerds listening right now—those all probably sound very familiar to Costco’s priority-order values, right?

Not the same, but they kind of rhyme. Put a pin in it. When it comes to Costco, we’ll bring those up and go into each of them in depth.

You might be listening and saying, “Yeah, yeah, that sounds good,” but I’m thinking about maybe going to Walmart today, or walking into Target, and seeing some similar things written on the walls. Isn’t this all kind of the same?

No. There are some very, very clear trade-offs that Sol is going to make with FedMart, and that Costco makes today, that are very different from what their competitors do.

First, do you sell loss leaders in the store? Loss leaders are items marked below your cost to attract people into the store with sales.

If you’re those other retailers, yeah, of course. This is a time-honored tactic in retailing. You’re going to use this. Sam Walton bragged about it in Made in America: they could get some incredible number of an item, build a pyramid of them in the parking lot, and blow them out to get people to come and participate in the spectacle.

If you’re Sol and Costco today, you’re absolutely not going to do this stuff.

No. They won’t sell something unless they can make money on it, because the flip side of doing loss leaders is that you have to make up for it somewhere. You have to mark up other goods in the store to fat margins to make it worth doing the loss leader for you.

Basically, it means you’re treating your customers like they’re stupid.

Totally. That’s exactly my read on this too. I feel like the Acquired number 1 tenet is: treat the audience like they’re smart. If you’re ever doing loss leaders, you’re sort of violating that tenet and saying, “We’re going to get one over on our customers.”

Totally. This is anathema to Sol. He passes that down to Jim Sinegal. It’s anathema to Jim.

That’s one trade-off. Here’s another really big one: what do you pay your employees?

In 2006, Harvard Business Review published a really great piece called “The High Cost of Low Wages,” where they very directly compare Costco and Walmart employee salaries and benefits.

For listeners who want those numbers today, Costco’s average hourly wage is $26, and Walmart’s is $19.50—a huge difference. If you’re going to get an equivalent job at one or the other, you’d be very lucky to go work at Costco.

On top of that, at Costco today, you’re also eligible for a 401(k) with a match and very, very good health care—shockingly good health care, even for hourly workers.

Obviously, the trade-off of this is that, for FedMart at the time and straight through to Costco today, this creates meaningfully higher per-employee labor costs for the company.

Yep, totally. But what are the benefits? This is where we get this beautifully interlinked set of trade-offs that play well together.

You get low employee turnover. When I say low, I mean very low. After the first year, Costco today has only a 7% attrition rate among its workforce.

Wow. This is for hourly labor?

Yes. Typical retail is 20%, so it is a meaningfully lower cost to onboard and train new employees. Normally, you have to spend a lot of your money ramping people up to get them to speed. Costco, Price Club, and FedMart don’t have to do any of that because they really reward their employees.

Employee loyalty also reinforces the idea that people shouldn’t steal. They feel grateful for this job; they’re excited to be in it. The shrinkage, or the unaccounted-for merchandise, at Costco today is astonishingly low. It’s 0.15% of sales.

That’s crazy.

Their strong bias is also to promote internally. If you look at Costco today, 36% of U.S. employees have more than 10 years of service. This is truly unique, I think, among major American corporations—and it was true at Price Club and FedMart before it.

The senior management is the same story. Jim started as a grocery bagger in the 1950s at FedMart. Craig Jelinek started his career as an hourly employee at FedMart. This is how long the tenure is of these people and how linked these stories are.

If you look at their executive team at Costco today, basically all of them have been there for more than 25 years. The only vice presidents at the company who have not are the digital and e-commerce people they had to bring in to address some issues decades ago.

It’s crazy. So what happens? FedMart truly was the first discounter that scaled nationally. All of these innovations, even though Sol came up with them, as these other companies are scaling—particularly Kmart—they don’t really have the large-scale operational expertise or the access to capital to fend off the competition.

Kmart, if you remember back to our Walmart episode, came out of the Kresge department-store chain, which was huge. So they had much more access to capital than FedMart. Even Sam Walton and Walmart—Sam had to fight bitterly, last mile by last mile, building out his distribution network to beat Kmart.

Sol and FedMart don’t really have the firepower to compete, so they need capital or they need to sell the business—one or the other.

It seems like what they did was accidentally both.

Yes. In the biography, Sol comments to his son Robert, who had also joined the company at this time, “We’re good at creating businesses. We’re not as good at running businesses.”

So what we’re about to get to is where they’re looking for a capital partner, and I think they accidentally find themselves selling the business.

Before we tell that story, it’s time to thank one of our favorite companies, Statsig. One common thread from all the retail companies that we’ve talked about—Walmart, Amazon, and now Costco—is their obsession with making decisions based on data. Even decades ago, this was not cheap. Remember Amazon’s early Oracle database, or that Sam Walton built out a private satellite network to get real-time sales data? But their approach made it possible to take huge bets, reinvest in the things that worked, and shut down the projects that failed. These practices are now table stakes for great retailers.

Fortunately, it’s a lot easier to build a data-driven culture now than it used to be, thanks to Statsig. Thousands of companies, from startups to large enterprises, use Statsig to do experiments in their products, automate the analysis, launch new features, and analyze product performance. If you’re building software products, Statsig is the one-stop platform you need for product experimentation, feature flags, and analytics, instead of expensive, clunky, and disjointed point solutions or building internal tools that are always under-resourced for this kind of stuff. Statsig just works, and they help teams move fast with data they can trust.

One of the world’s largest retailers, Flipkart, part of the Walmart empire, actually uses Statsig today to run experiments and ship features to hundreds of millions of users. When they started working with Statsig, Flipkart already had a strong data-driven culture, but they needed better experimentation tools. Today, they have hundreds of engineers, data scientists, and PMs who use Statsig, and it’s helped them dramatically increase their pace of launching new things and measuring them.

The Statsig team has a crazy amount of expertise in this area. We did a whole Acquired 2 episode in February with Vijay Raji, their CEO, and the rest of the team is also made up of people who built things like Facebook Ads, Office 365, and Facebook Marketplace. If you’re a startup, they have a super-generous free tier and a special program for venture-backed companies. If you’re a large enterprise, they have clear, transparent pricing with no seat-based fees. Small-features Acquired community members can take advantage of a special offer, including 5 million free events a month and white-glove onboarding support. Just go visit statsig.com/acquired—that’s S-T-A-T-S-I-G dot com slash acquired—to get started on your data-driven journey.

All right, David, so what happens with FedMart?

By the time we get to the end of the 1960s and early 1970s, Sol’s burned out. He and Robert don’t want to be running this business at scale.

First, he brings in “professional management” and moves up to chairman of the board.

Second, he starts looking around for a capital partner to help the business compete on a more level playing field with the other discounters.

They end up going to Europe, and this is super important both for the drama that happens and for what leads into Price Club and Costco.

At the time, in the 1970s, this new retail concept in Europe was getting started, pioneered by the French company Carrefour, which is still a huge global retailer today. That concept is the hypermarket.

What are hypermarkets? Hypermarkets are the smashing together of everything we were just talking about with the discounters—the general-goods retailing—with a full-scale grocery-store supermarket. Fresh food, everything.

This is what almost every Walmart is today: the supercenters. It’s grocery and hard goods in one huge, enormous warehouse, you might say.

It’s funny. You would have assumed that the Americans would pioneer that.

It’s hilarious that the French did it. It was the French, of all people.

This concept didn’t exist yet, and it wasn’t until the late 1980s that Walmart would really embrace it and roll it out across America.

As Sol and Robert are looking for partners to take FedMart to the next level and going across Europe, they’re meeting with all these hypermarket operators. They end up getting into bed with one of the German clones, run by a retail entrepreneur named Hugo Mann.

The idea was that Mann was going to help Sol and FedMart take this hypermarket concept and morph the existing FedMart stores into hypermarkets—something Walmart would do successfully, but about 15 years later.

Had this happened, we would be telling a very different story today, and we might all be shopping at FedMarts.

Totally. In practice, what ended up happening is this weird thing where Sol Price was an innovator and a great merchant, but not a deal guy.

It seems like there are 2 cardinal sins that get committed. One: not really asking Hugo Mann, “Why do you want to do this deal? What is interesting about this to you? What do you want to do with the combined company?”

And two: selling the majority of it and treating him like a minority investor.

Sol is looking for a growth investor, and he ends up getting a buyout.

Yes, one with misaligned interests.

Within a few months of when the deal actually closes, perhaps predictably, Sol and Hugo get into a huge fight at the very first board meeting. They’re yelling at each other. This is not going well.

Mann fires Sol—literally fires Sol, I think—and Robert too, and changes the locks on their office doors.

He literally boots Sol out of his own company. It’s super ugly.

And then the person at FedMart among the remaining executives who they task with informing the rest of the company about what’s just happened—do you know who that was?

Jim Sinegal?

No way.

Wow.

Isn’t that hilarious?

Oh my gosh. That is crazy.

I think what was going on here is that Hugo Mann just realized FedMart was sitting on a gold mine of real estate and wanted the real estate portfolio. What Sol and Robert wanted was operating capital from the parent company—from Hugo Mann—to invest more aggressively in opening FedMart stores and pioneering hypermarkets in America.

Yeah, which, of course, Hugo Mann had no interest in.

Yep. So had this not gone down like this, I think Sol probably would have just retired as new management took over at FedMart, and everything would have been amicable. He wasn’t really interested in continuing his career.

But because of how this went down, with him getting locked out of his office, he is pissed. He is now 60 years old, and he’s a man on a mission.

Great time to be a founder.

Totally amazing. I love that he’s the Morris Chang of American retail.

Morris Chang, of course, being the founder and CEO of TSMC, who was booted out of Texas Instruments at age 56, I think. Then he went on to start TSMC.

Sol and Robert get a lease on an office literally the next day after they’re booted out. They’re like, “We’re doing it again. We’re back in the saddle. Let’s go.”

But they know they’re not going to compete directly with FedMart, because FedMart is failing at that. They’re going to get steamrolled by Walmart, Kmart, Target, and everybody else.

By the way, within 5 years, FedMart was completely dead after this acquisition. It was run into the ground, and Hugo Mann did make a fortune on the real estate.

But FedMart was dead.

4. Price Club Reinvents Wholesale

Yep.

Sol and Robert are sitting around in their new office, brainstorming what their angle of attack is. They keep coming back to 1 part of the FedMart business that they felt was underappreciated and that they hadn’t exploited enough while they were at FedMart: the division that Jim Sinegal ran, the centralized warehousing operations.

The 2 of them are like, “If we zoom out, there really is a different and orthogonal way to think about the FedMart business. You could say that Jim ran our warehouse operations kind of like its own business. They were supplying the individual FedMart stores, which were sort of smaller businesses.”

When you look at it that way, almost all of the margin that we made at the company was at the warehouse level. The stores themselves were not particularly profitable and were pretty hard to compete with against the competition out there.

I didn’t realize they thought to slice the margin up into those 2 places in the value chain.

They’re like, “Is there a way that we could take Jim’s operation, recreate it, and make that the core business instead?”

The business plan they come up with is literally to create warehouses for other individual small businesses—other retailers. They’re envisioning gas stations, restaurants, small variety stores, and independent chains that can come and shop to stock their own shelves at this centralized warehouse we’re going to operate.

Business owners can be members. They’re like, “If we did that, I think we’d be providing a huge service to these small businesses.”

One of their big problems, which we know from operating the FedMart stores, is how you manage your inventory—physically, where you put it. You need a centralized warehouse to hold your inventory if you’re a small gas station. You don’t have your own warehouse. We can be your warehouse.

To put a finer point on it, the reason it’s awesome to just run warehouse operations is because the logistics are simple. You’re taking pallets of stuff, moving them to a location in a warehouse, and then the customer comes and takes a huge amount of it off your hands.

You don’t have to turn around and make sure the labels are facing out. You don’t have to deal with, “Oh, we’ve only sold 16 units, but there are actually 127 units on this thing.”

Everything is nice, easy, big quantities. It doesn’t require a lot of attention from your staff.

Being in the wholesale business is good if you can get it, but their inclination at this time is, “The only people who would be willing to shop and buy in that way are business owners. This would never work as a consumer concept.”

Yep, all of that is totally true. There are amazing parts of the Costco model, and 1 piece in particular really makes this a crown jewel. It’s the reason why they were so enamored of what Jim was doing.

If you’re operating a wholesale warehouse, you don’t have to operate any logistics. The manufacturers deliver the product right into your warehouse. You don’t need to run trucks, operate other warehouses, or move stuff around the country.

The business owners just come to you and pick it up right from the warehouse where it was delivered—right from the manufacturer.

Totally. And because of all this—because this new business, which is going to be called Price Club, is providing such a valuable service to the small businesses shopping there in managing all these logistics for them—or I shouldn’t say managing, because Price Club doesn’t manage it either; the manufacturers do—they’re like, “We can actually go back to that original FedMart membership idea.”

Instead of having it just be a way to skirt around the law, we can charge real money for this membership because we’re providing real value to these businesses.

Yep. Once they hit on this business plan, Sol and Robert poach a few people from FedMart and elsewhere. They hire this super-bright young guy from Harvard Business School named Giles Bateman as their CFO, and then they get started.

Giles would later go on to become chairman of Co-op USA—a really big part of my childhood and part of the enormous diaspora of retailers who came out of not only FedMart but Price Club.

Jim Sinegal, after being locked up at FedMart under new management for a while, would come over and briefly work at Price Club a couple of years later. The best of the best are coming through this place.

They decide, as they’re getting started, that in order to keep the operations really tight and realize the maximum benefit of everything you were describing about how these warehouses operate, they’re only going to stock about 3,000 of the highest-volume items that they think most other retailers are going to sell to their customers.

At the time, Walmarts and Kmarts had on the order of about 50,000 SKUs, and even FedMart had probably close to that many. Going all the way down to 3,000 is a nonconsensus move.

Totally. But if you’re only selling to businesses and they have small stores, it’s not like you need to stock basically everything under the sun. It just needs to be sufficient.

It’s super important to remember that they are not thinking about consumers just yet.

However, when they launch the first store—when they open the first Price Club in San Diego—unlike FedMart, it’s not an initial gangbuster success.

It turns out it’s a lot harder to sell and recruit businesses to become your customers than it is to put out a shingle and attract consumers. There’s not necessarily a viral word of mouth among these business owners. They’re not just encountering each other everywhere all the time.

Exactly. So they’re worried after a couple of months that this thing might not work. They might need to shut it down.

Then they have the greatest stroke of luck.

5. Consumers Unlock The Flywheel

They’re going around San Diego trying to sell memberships to businesses, and they get a meeting with the San Diego City Employees Credit Union. The credit union management says, “We’re a credit union, not a retailer. We don’t really buy much stuff. We’re not interested in this. But you know what? Our members—if we could find a way to get them access to what you’re doing here, that might be a really good benefit we could offer, like wholesale prices on goods.”

So Giles, the wunderkind young CFO, goes over to the credit union and hammers out a deal whereby any credit-union member can qualify for a new, quote-unquote, group membership plan at Price Club and be allowed to shop there at slightly higher prices than the business members.

It turns out that this does 2 things.

One, it unlocks a gusher of consumers into Price Club, which allows for not only volume but word of mouth. This is the seed that’s sown for Costco today. Costco doesn’t really advertise, and this is the first moment they realize, “Oh my gosh, consumers are going to tell each other about this thing.”

Exactly. It’s even better than that, because not only do consumers tell other consumers, it turns out that a lot of small-business owners are also consumers. So it also drives small-business-owner membership.

Because the business members get slightly better pricing on things, all of a sudden all these consumers are running around saying, “Oh, hey, I think my aunt owns a nail salon or something like that. Let me get her to go sign up, and then I can use her card and get better prices.”

Yep. And do you know what I did this week?

I suspect that you drove to a Costco. And do you know what now has a business membership to Costco?

Hell yeah. Where’s my card?

Actually, I think you need to go in and have your picture taken.

I was on a personal one before, but while I was there I was like, “You know, it would be appropriate this week.” So we now have a business membership.

Hey, we are a small business.

That’s right.

I love another fun story. As this unlocks the viral consumer word-of-mouth channel, traffic at this first San Diego Price Club store starts growing and growing and growing.

Sol and Robert start getting calls from local hot-dog vendors who want to set up carts at the store’s exit.

If you’ve got traffic, you may as well. You’re going to attract hot-dog vendors.

That’s right. At first, they ignore them. Eventually, though, they start getting enough calls that they’re like, “Maybe we should do something about this. Rather than letting these guys come set up their carts, what if we do it ourselves?”

So Sol calls up Hebrew National and asks if they can supply them with hot dogs to sell at the stores.

And Hebrew National says, “Not only will we sell you hot dogs to sell, we’ll supply the cart too.”

And thus, the Costco $1.50 hot-dog-and-soda deal is born. It’s still $1.50 to this day, 47 years later.

There’s a decent chance this is the one and only loss leader that Costco sells today.

They’re a little cagey about what the actual costs are, but I do know that they’ve gone through many, many iterations in-housing all the operations to try to keep their costs down.

Oh, they actually make the hot dogs now.

Yep. They also sell 130 million of them per year.

Wow. That’s not all in America, but if it were, that’s like a third of America going to Costco and getting a hot dog every year.

So there’s this interesting question that has now been answered: there’s this horrible way of shopping where I need to buy in bulk directly from the warehouse, with no good retail experience. Are consumers actually going to do that?

This whole thing was intended for business owners, and there are all these benefits that come from selling to business owners. Again, you don’t need a separate retail area and wholesale area. The logistics are all much easier. You don’t have to operate your own logistics to move stuff from your warehouse to a different store to sell it.

Are consumers going to do this?

They learn immediately that, yes, it’s a pretty shocking thing. It’s like, “Whoa, consumers are willing to just go to a warehouse and buy stuff right off the pallet?”

That’s a pretty unexpected thing that happened.

It turns out there is really 1 pretty sure thing, at least in America—probably the whole world: if you sell something at lower prices than anywhere else, you’re going to sell a lot of it, no matter what hoops people have to jump through.

Yep. One other fun thing: do you know what the building that this warehouse was in was previously?

I do, and it’s super cool. It was the airplane hangar of the Hughes Aircraft Corporation—one of the many, I’m sure, that Howard Hughes had.

Yes. We’ve got to cover Howard Hughes at some point on Acquired.

Definitely.

On the back of this wild success in San Diego, Sol and Price Club quickly expand, just like with FedMart, first to Arizona and then beyond.

This time, though, it’s way different than FedMart with respect to competition and capital dynamics. Whereas FedMart was capital-constrained relative to its competitors, because of the genius aspects of this Price Club model, these stores are cash-flow geysers.

The suppliers handle the logistics, delivering directly into the warehouses. Let’s just follow the cash-flow cycle. They deliver to the warehouse, and the moment they drop off that pallet is when they invoice Price Club. Those invoices tend to be about net 30.

So that means the pallet gets dropped off, and you have 30 days to pay the supplier. But the minute that the pallet gets dropped off in the warehouse, those goods are for sale, right? No more internal supply chain, no more unpacking, no more shelving. It’s just available to buy now.

In many, if not close to all, cases with Price Club—and then with Costco today—those goods are sold before Price Club has to pay the invoice to the supplier. It’s amazing.

All right, David, I got a bunch of great stuff for you on this one. We’re going to flash forward a little bit to today, but I have a huge thank-you to Costco Chief Financial Officer Richard Galanti, who spent an entire afternoon with me walking through a lot of these characteristics that really make Costco work. I got a bunch of great tidbits while I was hanging out at their campus outside Seattle.

Where was my invite?

I invited you. You could have gone on a plane.

All right, so here’s how it all works today. Costco actually turns its inventory 12.4 times per year. Just for comparison, Walmart turns its inventory 8 times per year, and Home Depot is more like 5 times per year. At this number, north of 12 times a year, David, exactly what you’re saying, it means Costco can sell through its inventory faster and more often than every 30 days.

To be specific, they’re on about a 26- to 27-day sale. This is amazing. With typical payment terms being net 30, it means they literally have $0 tied up in inventory. In fact, they’re able, to your point, to make a few bucks on the float.

This is, of course, an average. There are some things that will sell in a week or 2; other big-ticket items might sit for a month or 2. Sometimes Costco can even turn things 2 or 3 times before they have to pay a supplier for it. So this is called a negative cash-conversion cycle, where vendors effectively finance Costco’s inventory for them.

You know what? I’m in—capital-I. I’m with Charlie on this one. He can come in here and give the speech 10 times in a row about how great Costco is, and I will listen to all of it. I am in love with this company.

So there are a couple of interesting components here. There are companies that can achieve a negative cash-conversion cycle, but the way they do it is by having predatory terms, where they go to their suppliers and say, “I’m not going to pay you for 3 or 6 months.” And that is one way to do it. Costco’s using standard payment terms here, right? 30 days.

There are 2 unique things that enable them to do it. One is this warehouse model, where things are instantly available for sale. Customers come right to the place where they were dropped off—not quite anymore, and we’ll get to that later—but at Price Club, that’s definitely what it was—and grab stuff right off the pallet.

The other thing that makes it all work is that to this day, Costco has kept its SKU count very low. SKU—S-K-U—being a unique item that a store has for sale. I think, David, you mentioned before about 3,000 at Price Club is what they had available for sale.

If you look at a Walmart today, they have something like 100,000 to 150,000 different SKUs that they sell. Supercenters, indeed. Costco in the last 10 years was around 4,500, and then they sort of looked and said, “Can we bring it down?” They went to 4,000, and today they’re sitting at 3,800. So this number is still going down, not up.

If you do the math and start thinking, well, geez, if you’re not selling a lot of SKUs but you have a lot of customers coming through your stores, what does that mean? It means that any given item is going to turn faster. It’s sort of this magical unlock. In addition to the instantly available-for-sale-in-the-warehouse thing, it is the low SKU count that directly gives you the ability to turn your inventory over quickly.

It’s just so awesome. If you look at a Price Club then, and certainly a Costco today, “capital-light,” quote-unquote, would be the farthest thing from your mind. You’re like, “These are massive structures. There must be so much money that goes into this.” Well, yes, that’s true, but it’s a capital-light business model. It’s wild. It’s all being financed for you by your suppliers because of these dynamics.

And, of course, today, as Costco opens new warehouses, they can very tightly predict how they’ll perform because they know how all the other ones perform. Sure, there’s a lot of upfront money in opening a new store, but once it happens, you sort of know exactly what it’s going to mature to and exactly how you’re ROI-positive on all your fixed costs to invest in that new location.

You have this negative cash-conversion cycle, with all of your inventory being effectively free, if not profitable for you while it sits there. Amazing.

Okay, David, so take us from the first Price Club through to Costco.

On the back of these eighth-wonder-of-the-world-like cash-flow dynamics that these Price Club warehouses have, Price Club goes public in 1979, 3 years after founding. And I say “go public” not in an IPO, not in a direct listing. They don’t list anywhere. They don’t raise any money because they don’t need any capital.

What happens is there’s so much buying and selling activity among the original shareholders because this thing has become so valuable that this is the first time I’ve ever heard of this happening: Price Club crosses the 500-shareholder mark. At the time, the SEC mandated that if you had more than 500 separate shareholders of a company, you had to start filing as a public company.

So Price Club’s just like, “Okay, we’ll file. We’ll be a public company.” They don’t list on an exchange. They’re just like, “Really? Sure. We don’t need the money.”

So they’re registered with the SEC, but they’re not listed on an exchange?

Yeah, it’s traded over the counter. They’re not on the New York Stock Exchange or on the Nasdaq or anything like that.

Wow. So for those first 3 years, I need to know a Price Club shareholder in order to buy the shares?

Yeah, there probably are some market-making systems. I think this is what the over-the-counter market kind of does, but yeah, you can’t just go trade it on an exchange.

Wow, hilarious. So in 1982, they do ultimately list on Nasdaq, probably just to get more liquidity in the trading.

Also in 1982, Sol gets a call from his old buddy Sam Walton. He wants to come out. He wants to see Sol. He wants to have dinner with the 2 Helens, get the families together. He wants to shop his competitor, like he always does.

He’s like, “You’re doing so great with these Price Clubs. I love your second act. I want to come see it in action.” And Sol is like, “Sure, come on out.” I think he knows what Sam is up to, but he doesn’t really care. What’s he going to do, stop him from going into a store?

Totally.

So Sam and Helen come out to San Diego. They all have a nice dinner in La Jolla. Sol tells them all about Price Club, how the model works, the cash-flow dynamics, everything. Sam, of course, goes back to Bentonville, and within 12 months, guess what pops up? Sam’s Club.

Amazing.

And this is really the major difference here between Sol and Sam: Sol doesn’t care. He’s like, “Sure. Again, what am I going to do, stop you?” They stay friends.

There’s this amazing story that Sam tells in Made in America, where a few years later, Sam is going around again to Price Club, shopping his competitors with his tape recorder, making notes about how they’re doing pricing and inventory and stuff. The security at the store confiscates Sam’s tape recorder. Sol ends up just mailing it right back to Sam, and he’s like, “Keep your notes. It’s all good.”

Around the same time, another person comes out to San Diego to visit Sol and Price Club: a guy named Bernie Marcus. For some listeners, that’s going to ring a lot of bells. Bernie has a story very much like Sol’s. He was the president running the Handy Dan hardware-store chain, and he had gotten kicked out by the board and was pretty salty about it. He was looking for a second act.

So Sol has him out to San Diego. He shows him the Price Club warehouse, gives him the playbook, and says, “Look, Bernie, you’ve got all this hardware expertise. Take the Price Club playbook, go kick their butt, and open the Price Club of hardware stores.”

Bernie Marcus, of course, then goes home, turns around, and starts Home Depot, which we have heard from listeners 10 times that we need to do the Home Depot story at some point.

I actually did not know Bernie Marcus’s name or that he was the founder of Home Depot, so I think now we have to. Now we have to.

So this now brings us finally to one more call that Sol gets, also in 1982.

There are these years in retailing: 1962, when Walmart, Kmart, and Target started, and 1982, when all this is happening. Another Bernie, this time a Seattle retailer named Bernie Brotman, and his son Jeff call up Sol. They say, “Sol, this Price Club thing is fantastic. We’re retailers up in the Northwest, up in Seattle, and we’d love to open a franchise up here—a Price Club franchise in Seattle.” This is just like the Fedco and FedMart days.

Sol and the Price Club management team think about it, and they make the very poor decision to say no. In the same echo of what happened 30 years earlier, Bernie and Jeff say, “Okay, we understand. We’re going to do it anyway. We’re going to clone the Price Club model and start the same thing up in Seattle.” Again, I think Sol is totally fine with this because Price Club was growing aggressively. They were not planning to go to the Northwest; they were following the old trade routes of the FedMart playbook—Arizona, Texas, and Florida, going out across the South and the Midwest.

So what happens next is pretty hilarious. Jeff Brotman cold-calls Price Club’s head of merchandising and says, “Hey, my family and I are starting up a Price Club clone in Seattle. We actually think the Northwest is a great market for this. Would you be willing to leave Price Club and come up and be my co-founder and the head of merchandising?”

The head of merchandising is like, “Well, no—not because I don’t think it’s a good idea, but you see, Sol Price is my uncle.” Then he says, “But let me give you the number of somebody else who you really should call. I think this guy is the right guy for you. We’ve worked with him for a long time here at FedMart and Price Club. He’s now left and is doing some retail consulting, so he’ll probably be willing to talk to you. His name is Jim Sinegal.”

6. Costco Clones Price Club

And this is how it all comes together. Jeff calls Jim and convinces him to come up to Seattle. He’s ready to run his own show, as they say. So Jim moves up to Seattle, they start Costco, and the business plan is really pretty much exactly this: clone Price Club.

And Jim really is Sol’s protégé. It’s like cloning Price Club, but with a guy at the helm who is built for scale and has an absolute focus on the details.

Yep. Not only is he Sol’s protégé, and not only is he a tremendous generational-talent executor, he’s also the guy who ran the division that inspired the whole thing. He really is the perfect guy.

Listeners, you might be realizing now that when we were saying at the top of the episode that this really is kind of all one company story, it really is. There is a straight line from Fedco to FedMart—or let’s even just start it at FedMart, since it’s all the same people—through to Costco today.

So Jim moves up to Seattle. He and the Brotmans raise $7.5 million to get going.

Yep. They sell 50% of the company to do that. They recruit 8 people immediately, mostly from FedMart and some from Price Club, and they’re all sort of in their 40s and 50s. This is a gang of 10 or 12 people who have all worked together before—industry veterans who have shorthand—and they’re just like, “We’ve got the money. Okay, go. We know exactly what to do.”

I mean, literally, it’s like the TSMC story or the Zoom story. It’s like Eric Yuan finding 40 people who knew exactly how to build Zoom and then just doing it.

Yeah, so great. Within a couple of months, they opened the first Costco warehouse in Seattle. A few months later, they opened the second one in Portland. Of course, both of them take off immediately. Then they go to Utah, Northern California, and British Columbia.

This is where you can see that what Sol said about being really great creatively in business and at pricing at Price Club, but not great at execution, is true. Why was Price Club not in Northern California, given that they started in Southern California? These are the kinds of mistakes that they made.

This new Costco under Jim hits $1 billion in revenue in less than 3 years after getting started. This is in the ’80s, and it reaches $3 billion in less than 6 years, making it the first company ever to hit that milestone, too. It’s wild.

They go public—what, 2-plus years after founding?

Yeah, 1985. They go public. Crazy.

Once this plays out, and of course Sam’s Club is also becoming a juggernaut at this point in time, Price Club is doing fine. Again, capital is not the competitive vector here, but they’re not being as aggressive. They’re not expanding as fast as Costco and Sam’s Club.

What happens with Price Club is, in some ways, sort of the same as what happened with FedMart. Sol readily admits that he and Robert are great at creative ideas in retail, but they’re not so great at scale execution. Now, it’s different in that capital is not a competitive vector here. Back in the FedMart days, FedMart was constrained; the whole reason they went looking for a capital partner was that they needed more capital to grow stores and compete with Walmart and Kmart.

These Price Club warehouses were paying back their capital investment quite quickly, especially relative to FedMart, because of the cash-flow dynamics that we were talking about. So Price Club was certainly doing fine. It wasn’t declining, but Jim and Jeff at Costco—and certainly Sam at Walmart and Sam’s Club—were pedal-to-the-metal, aggressively expanding. That’s not really Saul and Robert’s strength.

No, and if you read between the lines in some of this stuff, it does kind of seem like Costco wasn’t poaching people from Price Club, but a lot of really good people sort of found their way there and went and got jobs at Costco. Costco definitely had, at this point, the base of the most aggressive, talented wholesalers on the West Coast.

Yep, totally. Saul, at this point in his life, had sort of proved himself again. He’d made his point after his terrible exit from FedMart. He steps back from the day-to-day of the business and hands that over to Robert. He gets really into real estate, and he’s not as aggressive as he once was.

So in June 1993, Costco and Price Club merge together to form PriceCostco. As we’ve talked about, this really is a reuniting of them. At the end of the day, Price Club was either going to land with Walmart or with Costco, and Saul Price didn’t want it to be Walmart. He very much wanted to join forces with Jim Sinegal, and so they sort of made that happen. This was the natural successor for this combined business in Jim Sinegal.

Interestingly, the transaction really is about as close to a merger of equals as I think we’ve ever seen on the show, with the caveat that Jim is clearly going to be the CEO who runs the combined company. At the transaction, 52% of the equity in the combined company goes to Costco shareholders and 48% to Price Club shareholders.

They’re about the same size—about 100 stores each—at the time of the transaction, but Costco is growing way faster. Had they just waited a couple of years, the balance of favor would have shifted much further toward Costco.

Yeah, and you sort of get the sense that the Costco folks were being very respectful of the Price Club folks. I believe it was something like a 30%-plus premium paid for Price Club stock. So I think it was everyone sort of looking at each other, with Costco knowing that they could really buy Price Club for a much smaller relative percentage in the future, but thinking, “Why don’t we just do this today? I know it’s a good deal for the Price Club folks. Let’s just say pseudo-merger of equals and be one team from now on.”

Yep. There was a forcing function to this. It wasn’t just that Jim had a soft spot for his mentor Saul and for Price Club. Sam’s Club and Walmart were aggressively expanding at this point in time, and if they had waited too much longer, Sam’s Club would have just gotten huge and potentially run away with the market.

After the merger, even the newly combined PriceCostco was still only a hair bigger than Sam’s Club in terms of number of stores and revenue. They kind of needed to do it pretty quickly, or Sam’s was going to run away with it.

Fascinating. It’s so funny because it’s a much less disciplined business. Every bit of DNA in Costco and Price Club is just so unbelievably disciplined and an admirable way to run a business, and Sam’s Club strikes me as a bunch of cowboys who are changing strategies all the time.

Well, you know, it’s a second business line under Walmart, of which the main Walmart Supercenter business line is one of, if not the greatest, retail businesses of all time. It’s certainly the biggest still to this day.

Saul, kind of amazingly, lives to be 93 years old. He passes away in 2009. After the merger, he really devotes the rest of his life—the next 15-plus years—to philanthropy and politics. He does a ton of charitable development in San Diego and gives back to USC. USC’s public policy school is the Price School of Public Policy because he also becomes super involved in Democratic politics.

When Obama is running for president in his first campaign in 2008, he comes through San Diego and meets with Saul Price—92-year-old Saul Price. That’s how influential he is and how much money he’s giving to the Democratic Party in this last chapter of his life.

Do you know who speaks at the 2012 DNC when Obama is getting reelected?

I do. Jim Sinegal.

Yep. So they really are, when I say ideologically similar, the natural successor, or almost like another son of Saul Price. Jim Sinegal and Saul Price really are of one mind in many ways, except Jim is a way better executor.

All right, so let’s talk about the execution of this business a little bit. There are some concepts that I think we’ve talked about at a high level, but we haven’t really drilled into why they work so well. Honestly, I have 10 or 12 of these, David, so we’re going to talk about 2 important ones now, and then we’ll get into more as we make our way to modern day a little bit.

Yeah, let’s do it.

7. Membership Builds The Moat

One that we haven’t talked about is the economics of membership. There are the obvious ones that everyone realizes today. The base-level membership is $60, and as a consumer, I assume I’m getting some kind of good deal by paying $60. Even before learning too much about Costco, I’m aware that the $60 is something I’m paying up front to get the benefit of some low prices later.

But let’s analyze some of the second-order effects of membership, which I think are potentially even more interesting than the obvious ones. There’s a lot of psychology happening here.

Yes. The first one is that it actually selects for wealthy customers.

This is amazing. Buying in bulk does the same thing. The items that you’re buying are literally cheaper per unit, so you’re saving money, but you need to buy a lot of it up front, just like you need to pay a membership fee up front. That means they tend to get members who are not sensitive to cash flow, and they also tend to get members who have space to store stuff at home.

I looked into some of the data on this to try to put some numbers to it. There was an independent research firm that found that the typical Costco consumer makes about $125,000 a year in household income and has a 4-year degree. Walmart, by comparison, has a median income of about $80,000. Keep in mind, the median U.S. income is $71,000, so Costco shoppers have a 70% higher income than the U.S. median.

This is one of the most surprising things about Costco. They have the lowest prices, but they have the wealthiest consumers of any major retailer.

Yes, it’s totally fascinating—and very smart consumers, people who can look at the deal and go, “Actually, I know I’m coming out ahead on this.”

Another interesting psychology around this is that when you pay $60 up front, it encourages you to come and use the membership. You’re more likely to shop because you’ve prepaid some of your margin dollars. I think this is called the endowment effect, if I remember back to my psychology classes.

Yes. You just sort of assume that you’re getting some kind of good deal by prepaying for a membership up front, so you want to maximize the margin dollars that you’re able to get from their discounts. It’s totally fascinating.

Another one is that membership further decreases shrinkage. We already talked about the fact that employee retention is great for making sure people don’t steal things. Membership makes it so members don’t want to lose their membership; you sort of feel like you’re part of some sort of club. On top of that, these items are huge and hard to steal. How do you steal a TV? How do you steal a 2.5-pound thing of nuts?

There are all these factors, and membership is one of them, that really contribute to low shrinkage.

Now, you mentioned getting a good deal. We talked earlier, back in the FedMart days, about how loss leaders and sales were kind of anathema to Saul Price. How does that play into this?

This is super interesting. Costco basically wants to provide insane value to consumers. They want you to get a better deal as a member than you could possibly get by shopping anywhere else. So how do they go about doing this?

They have enforced a strict cap on the margin they’re willing to make on any product. They’ve decided internally that they’re not allowed to mark up anything more than 14% above what these suppliers sell it to them for. I’ll tell you, they are tough but fair with their suppliers in making sure that they get a great price for their members.

Costco decides, “We will only mark up anything a maximum of 14%.” They actually mark other things up less than that. Electronics, for example, they can only mark up 6%, 7%, or 8%. So the maximum is 14%. The only exception to this is Kirkland Signature, where they cheat a little bit and let themselves go up to 15%.

Quite indulgent. How does this compare? I think that’s the interesting thing here. A common practice at department stores is literally a 100% markup. Someone gets a good for $50, and they sell it for $100. Even at Walmart, a discounter, or a so-called discounter, the markup is 25%, which is almost twice as much as Costco’s margin.

Jim Sinegal has a great quote on this. He was asked about it, and his response was, “You could raise the price of a bottle of ketchup to $1.03 instead of $1.00, and no one would know. Raising prices just 3% would add 50% to our pretax income. Why not do it? It’s like heroin. You do it a little, and you want a little more. Raising prices is the easy way.”

I think, also, back to the membership, it all comes back to member trust. The members have to trust that they’re going to get the absolute best price on everything and that Costco isn’t going to be playing these games. Otherwise, they would just go shop at Amazon or Walmart or wherever.

You’re exactly right. The value proposition 40 years ago was, “You are going to get the very best deal possible on the goods that you’re buying here.” Extreme value proposition is what they like to say. The fact that they’ve just made that true every year for 40 years is something that really does stick in people’s psyches.

I totally get the heroin line. It’s so easy to decide to cheat one year, and then in all the future years you’re going to cheat because you’ve broken expectations with customers and shareholders. There’s something kind of magical even in the relationship between Costco and a supplier, where a supplier knows that when Costco is being really tough on them to give the lowest price, Costco is not going to turn around and then mark it up 50% and make a bunch of money. Costco is going to make the same margin that they’ve always made on that good.

Totally. It’s worth double-clicking on the supplier relationship for a second. Costco’s relationship with its suppliers is worlds apart from Walmart’s relationship with its suppliers. You go to Bentonville as a supplier, and you are getting put through the gauntlet. It’s designed to squeeze you as much as possible. That is not how the supplier relationships work with Costco. They’ll work with their suppliers, they’ll understand your business, and they’ll come see you.

Okay, I was going to save this for later, but we’ve got to do it now. The Costco Code of Ethics, as it exists today, is largely inspired by the FedMart values from 40 or 50 years before. It is, in order:

1. Obey the law—number 1, first and foremost, obey the law. We’ll save that for a moment; I’ve got a fun story about how that came to be.

2. Take care of our members.

3. Take care of our employees.

4. Respect our suppliers.

When you’re listening through these, the order is important, the subject of each statement is important, and the phrasing of each statement is important. I find it fascinating that they use the word “respect,” because they have a posture of tough but fair.

There’s this great anecdote—I mean, I heard one, but there are 50 examples of this that you can find in various earnings calls or by talking with people who are suppliers to the company—where Costco buyers always ask why when a supplier tries to increase the price. That part’s not that novel; I imagine a Walmart buyer also tries to ask why.

The buyers are very deep in the details, so they actually know the commodity prices of ingredients from suppliers. Take a chocolate company, for example, that sells a chocolate product. If the chocolate company said, “Hey, the chocolate costs more now,” the Costco buyer would say, “Well, I know the price of cocoa. I’ve been watching the commodities market. I understand milk, sugar, and butter. Why is it more expensive? Just give me feedback on that.”

A lot of the time, it’s because a commodity price has gone up, or they use labor in a certain area that has gone up, or maybe they have a long-dated contract with a supplier of their own that has an artificially high price for some reason, until the contract expires. The Costco buyers will write all of this down and keep track of it.

Because they manage so few accounts, they actually can keep track of it. Each buyer is only really adding 3, 5, 10, maybe 15 new SKUs a year, but they manage a very tight set of relationships. They’ll just call the supplier back and say, “Hey, last time we talked, you’d mentioned that cocoa prices were high. I’ve noticed they’ve gone down. Are you lowering the prices so that we can lower them for our members?”

It’s this really amazing side benefit of having the low SKU count: they can be tough but fair with suppliers and really stick to it.

So awesome. Because Costco’s gross margins are always targeted at 11% and capped at 14%, this means that for every dollar Costco gets a supplier to reduce the price on something—again, tough but fair—the customer actually sees most of the benefit. Eighty-nine percent of the benefit goes to the member.

The way I look at this is that some companies always look for ways to make more margin. Costco specifically does the opposite: they look for ways to provide more value to members, retain them for longer, and get them to get their friends to become members. They try hard across the board to get lower overhead costs through cleverness and efficiency, not through squeezing or underpaying or anything like that.

There’s a really fun Acquired canon, Acquired Cinematic Universe story related to this: the famous, as chronicled by Brad Stone in The Everything Store, coffee date between Jim Sinegal and Jeff Bezos in 2001, which occurs at the Starbucks inside the Bellevue Barnes & Noble, of all places.

That’s right. So perfect. At the time—this is 2001—Amazon’s stock was in the dumps. They were under pressure from Wall Street, and Jeff and the organization were embarking on a campaign of raising prices on Amazon.com to get profitable. They had just started rolling this out; it was super important.

Jeff has this coffee with Jim, and Jim explains this philosophy to Jeff. Jeff comes back to Amazon headquarters the next day and says, “I’m reversing the policy.” He says exactly what you just said: “There are 2 types of companies in this world: companies that work hard to charge their customers more, and companies that work hard to charge their customers less. Henceforth, as of today, Amazon is a company that works hard to charge its customers less.”

And that is directly from Jim Sinegal.

Wow, that’s awesome.

On this point—number 4, respect our suppliers—here’s some quick math that illustrates why they do have to be so careful and why they wield such an enormously large stick. Walmart’s revenue today is about 3 times Costco’s in the U.S., but since Costco sells so few items, it is a massive customer for any given supplier. They always have this very lopsided relationship.

The average revenue per product because of the SKU count at Costco is about 10 times Walmart’s.

Wow. Any time they’re negotiating, almost every time, the person sitting across the table is looking at Costco like, “You are my largest customer. You’re like 50% of my business.” I think they try not to have that be the case, but it’s very easy for it to become that. So it’s really important that they have it as one of their 4 main tenets: respect our suppliers.

Now, notoriously missing from these 4 is the notion of a shareholder. Jim Sinegal articulates it this way: “If we do these 4 things throughout our organization”—and again, those 4 things are obey the law, take care of our members, take care of our employees, and respect our suppliers, in that order—“then we will achieve our ultimate goal, which is to reward our shareholders.”

It’s so funny, going back to our previous episode on Rob Strasser’s 10 principles at Nike. On the one hand, the Nike principles and the Costco principles are about as far apart as you could imagine. On the other hand, Rob Strasser’s Nike principle number 10 is, “If we do the right things, we’ll make money.” Damn near automatic, right? And that really is the same thing at Costco.

100%. So, a fun story of how this Code of Ethics came to be: in the mid-1980s, the Washington State Liquor Control Board was putting Costco through the wringer when Costco was applying to sell alcohol. I think at the time it was just beer and wine.

Basically, the Liquor Control Board was looking for any possible reason to deny them. I think there might have been some corruption going on. The state had a vested interest in preventing very large retailers from becoming the volume sellers of beer and wine.

Costco, because it had started with this ethos, came through squeaky clean and actually got the permit. There was literally nothing that you could dredge up on them to deny them. The company was fortunate to realize very early on how much it would pay off to be truly above reproach. No matter how tempting anything was, they had to build a culture that was completely obsessed with this Code of Ethics.

You just see it everywhere: the wages, the way they treat suppliers, the fierce fixed cap on markups, and the discipline not to raise memberships constantly. I think it had been about 6 years between the last 2 times they raised the membership, even by $5. It’s a ludicrously squeaky-clean and long-term-oriented mindset.

Back to the story: at the time of the merger, the combined company was about $16 billion in revenue. That was up from Costco alone being $3 billion in 1989. By the merger in 1993, Costco and Price Club were each about $8 billion in revenue, and together they were at $16 billion.

They already had impressive scale, with stores concentrated more on the West Coast but spread around the country by this point. They had a combined 200 stores, a pretty large footprint. They were in Canada and Mexico, and they’d already started international expansion, which was going to become huge throughout the 2000s for Costco, as we’ll see.

8. Kirkland Drives The Flywheel

Right around the time of the merger, Costco takes a pretty important step that unlocks a huge part of the next chapter for the company: the creation of the famous Kirkland Signature house brand.

There’s a fun story around this. When they were talking about creating their house brand, the company’s corporate headquarters was in Kirkland, Washington, right near Bellevue, across the lake from Seattle. That’s where the Kirkland Signature name came from.

By the time they actually launched it, they had relocated to Issaquah, a little farther south, and they were like, “We can’t call this Issaquah Signature.” No, Kirkland Signature is good. But it was tied in with international expansion because they needed a brand name and a trademark that they could clear across all the countries where they were operating and planning to operate.

Kirkland Signature works in Japan, Korea, and Taiwan. It sounds so generic. I didn’t even put it together when I first moved to Seattle 12 years ago that the Kirkland over there was Kirkland Signature, because “Kirkland” kind of just meant nothing to me. It meant, you know, what’s the Whole Foods version? The 365.

Interestingly, over time, Kirkland Signature has come to mean something, and that is a certain level of quality. No one is attesting that this Kirkland Signature sweatshirt is a Lululemon sweatshirt with fancy materials and the most cutting-edge technology in it, but it is of a certain bar of quality that is sufficient for Costco members.

That is sort of the ethos that Costco has around Kirkland Signature: we’re only going to put something out there if we feel that we can create value for you. It’s going to be a lower price than what you could get otherwise, or the flip side of that: we can make a better product than you could get from any of these branded products that we were either previously stocking or evaluating stocking.

Perhaps the most obvious, and maybe most famous, place where this comes to bear is in wine and liquor sales. Kirkland Signature wine—you’ll get people who are wine snobs who’ll drink Kirkland Signature wine, and they’re like, “Yeah, yeah, it’s Costco, but this is actually good stuff.” Tequila and vodka are the same thing.

Yep. Now they also have a pretty unique opportunity that they realize with their house brand because of the very small number of SKUs that they’re putting in the warehouse. There’s much less competition on the shelves for any given product category for the house brand.

You mentioned Whole Foods has the 365 house brand, Walmart has their house brand, and these big retailers do too. Safeway certainly does. But in a standard retail environment, the house brand is going to be one of 5, 6, or 10 different brands of a given product category on the shelves.

At Costco, it’s 1 of 2, 3, or 1 of 1. If you go buy the mixed nuts, the mixed nuts are Kirkland Signature mixed nuts. The jumbo cashews are Kirkland Signature jumbo cashews. In part because the buyers were evaluating the whole landscape, they determined, “We can do something better for less.”

I think the Costco Fancy Mixed Nuts are the best mixed-nut blend, but I think that was an enterprising buyer who was being creative and working with suppliers and thought, “I actually think we can provide a better product for a lower price than what exists on the market.”

I think there are a lot of scenarios where consumers agree. $52 billion in Kirkland Signature sales were done last year. That does not include Kirkland Signature gas. Out of Costco’s $230 billion top line, a little under a quarter of it was Kirkland Signature sales, and closer to a third if you include the gas.

Wow, that’s incredible. It’s America’s largest consumer packaged brand. At the same time, as they’re spinning up Kirkland Signature in the mid-to-late 1990s, they also start expanding internationally.

First, they go to the UK, then to Korea, Taiwan, and Japan, and ultimately China, which is now a big initiative for them. What’s interesting is, I suspect there were very few other Western-style, global, or globally aspiring retailers entering Asian markets at the time, because it’s not exactly obvious that a huge warehouse with bulk packaging would work in cultures like Japan, where people live in tightly packed, dense urban environments with much smaller houses and apartments than in America.

This is not the land of SUVs and suburbs, right?

But it works great. At the end of the day, people really like value. High-quality products at a great value are a super-compelling value proposition for anyone in the entire world.

Totally. I want to go back to something that we’ve been wading into in the discussion of Kirkland Signature, which is: why is it okay that at Costco they can only have 3,800 SKUs? Why are people okay with this deal where I don’t need selection when I shop here?

I think there are a few illustrative examples from the story that get into that. So, David, let’s talk about low selection and how that’s okay.

Walmart and other retailers operate under the assumption that shoppers require selection. It seems like a reasonable assumption, unless you started your life as a B2B wholesaler that then fell backward into consumer and realized it was fine for consumers too.

Obviously, if you have selection, it makes the life of a retailer very difficult in a lot of ways, but it was just assumed that you had to. Costco makes the opposite bet. They bet that you don’t need selection as long as you ensure that everything you can buy is high quality, and that is the crazy thing that has worked.

Costco essentially has its entire buying team’s ethos centered around shopping for you. They’re preselecting the best 1 or 2 items in every category, and consumers, because Costco does all that work ahead of time, are basically okay sacrificing selection entirely and saying, “Yeah, as long as you give us good value on great stuff, we’re totally okay with that.”

That’s an important unlock. You can’t just have low selection and be like, “Well, it’s all cheap stuff.” It has to be high quality in its category and the best deal on the market in order for people to be okay with low selection, which drives low SKU count, which drives all the amazing things we’ve talked about so far.

Yep. It comes back to trust, and part of this also harkens back to Sol and the FedMart days. Sol developed this kind of principle back in FedMart that he called the intelligent loss of sales.

Yes, I was waiting for you to bring this up. This isn’t necessarily the number of brands in terms of the selection out there. This is about product sizes.

Today, Costco has taken this to the extreme: you can only buy the 2.5-pound jar of nuts. There’s no 8-ounce jar of nuts.

Well, you could buy a whole bunch of little packs of afternoon snacks of nuts. Either way, you’re walking out with a lot of nuts.

Yes, but other retailers—and everybody back in the FedMart days—had all sorts of different sizes of products. The idea was that by having different sizes, you would maximize the surface area of customers in-market that you could reach.

Sol uses the example in the book of household lubricating oil, kind of WD-40-type stuff. He says, “We only carried the 8-ounce can, even though there was a 3-ounce can out there. We lost some sales from customers who only needed 1 or 2 ounces and thus would only buy a 3-ounce can, and they just didn’t buy the 8-ounce can.”

But it was worth it to us to forgo those sales because, by only having the 8-ounce can, we could reduce the number of SKUs that we had and get all these benefits that you’re talking about.

I mean, yes, you and I have been trying to do this without having a name for it for years. People sponsor entire seasons. There are lots of other podcasts that let you do all kinds of crazy stuff, and we’re just like, look, we have a SKU. It’s called the season. We would love to work with you on that, and it makes our lives so much better. We can run our business in a completely different way by having a low SKU count.

Totally. If we didn’t do it this way, we would need to have an ad sales team or work with an outsourced network or something like that, which would add way more overhead to our business that we don’t want.

Right. This stuff is all about the trade-offs you’re willing to make and just daisy-chaining them together such that the benefit of each trade-off plays into the benefit of another trade-off that you’re making in a way that’s aligned.

Yep, I knew we were going to love Costco. Honestly, it’s maybe my favorite business that we’ve studied. Let’s wait until the end to talk about that, but there are a few more things along the way that happened in the 1990s and 2000s before we get to today that I think are important to touch on.

9. Costco Runs On Simplicity

We’ve mentioned logistics a few times, and the low SKU count means that they can meaningfully simplify their logistics. To put a point on that, they only have so many suppliers who are bringing goods to Costco. The fact that they sell in bulk means that they can bring a whole pallet into a warehouse, and consumers just sort of come and pluck it off the pallet.

It’s wholesale. It’s a wholesale club. But there’s something we haven’t talked about, which is Costco’s distribution centers. They use something called a cross-dock system for their distribution centers.

Now, remember, I mentioned back in the Price Club days that it’s a little bit more complicated today. Not all the suppliers just show up to the one store, the one warehouse, with all the goods. They do need some system to receive things from suppliers and bring them to stores.

Yeah. Back in the Price Club days, there were no distribution centers.

Here’s how the distribution centers work: trucks pull up on one side and unload pallets. That’s where the suppliers’ trucks are. On the other side of the warehouse, there are Costco trucks.

Since they move stuff entirely by the pallet—no partial pallets, no “these few things go to this store” and “these few things go to that store”—the supplier trucks unload the pallets, and they just get scooted across the dock to go directly to a Costco warehouse.

Within minutes to hours, that truck leaves, and there’s no unwrapping of individual boxes. There’s nothing sitting overnight in the facility. This is so much simpler, and it really plays into that cash-flow dynamic where things can be available for sale so fast.

Just to underscore how differentiated the system is, 92% of Costco’s merchandise is cross-docked. Only 10% of Walmart has cross-docked merchandise on a pallet system like this. It’s not like Walmart hasn’t invested many tens of billions in their distribution and logistics systems.

Totally. It’s just that Costco has made a trade-off that makes it so they have a much simpler operation. They’ve got all the downsides that come with the trade-off—no selection—but they get all the upside that comes from it too.

This also plays into the labor thing. You can pay your employees more when you need fewer people to generate the same amount of sales. You don’t have wasted manpower unwrapping items from pallets, and no one is turning the labels out to look pretty. The customers do all of this.

It legitimately means they just need fewer people, and this is why they generate over $730,000 of revenue per employee. They’re just efficient at aligning their trade-offs.

I love it. This is the bricks-and-mortar retail version of the SaaS business fallacy, which we fall prey to all the time on the show. If you invest in or build around SaaS companies and SaaS company margins, you can fall into the trap of thinking, “Why would I ever want to be involved in a business that doesn’t have 90% margins?”

Actually, what you should really care about, especially as an investor, is not your margin percentage but your absolute margin dollars. So, yes, Costco has much lower margins than its competitors, but the volume that it drives and the actual dollars end up being worth it.

Yeah. Even though Costco is only an 11% gross-margin business and only ever will be an 11% gross-margin business, it’s still a pretty amazing business to own.

I mean, it’s what did you say—$230-plus billion of revenue and $7.5 billion of operating income off that? Again, tiny little sliver margins, but $7.5 billion of operating income falling out the bottom is pretty awesome.

Yep, especially $7.5 billion of highly defensible operating income.

Seriously. As you’ve been talking about, because of the way that their inventory is financed, it’s a reasonably capital-light business, all things considered. They’re building these warehouses on huge pieces of real estate with gigantic shelving and all this headcount, and it’s an amazingly capital-efficient business.

It’s weird.

Okay, I think it’s time to talk about investing nerds’ favorite aspect of the Costco story, which is that there really are 2 different businesses here under 1 roof. There is the retailer, and then there is the membership business.

It’s almost like way back when Sol and Robert were sitting in the office after FedMart thinking, “You know what? We actually had 2 different businesses at FedMart.” Costco is also 2 different businesses. There are the operations of the retailer, and then there is the membership business.

Right. Psychologically, they’re 1 thing. It’s 1 experience for the customer, but financially, it’s 2 entirely different things.

A lot of people like to make a lot of hay about the idea that Costco generates all of its profit on memberships and retail is just a break-even business. This has been popular to say because they run the retail business at such thin margins and memberships are nearly a 100% margin business.

I mean, really, what does it take to run a membership business, with a 90% renewal rate or something crazy high like that? Talk about a SaaS company.

But it’s not quite true. It is accurate to say that membership fees represent about 70% of the company’s operating income, with the other 30% of the profit margins coming from retail. It’s been a little bit more than 30% in recent years, but that’s sort of the historical split. Think about it as a 70/30 thing.

It really is staggering that a business that does $230 billion of top line can have 70% of its profits come from the $4 billion of revenue they generate from memberships. That tells you how razor-thin the margins are on their retail business.

It’s almost to the point where you’re like, “Why do they care about growing sales at all? All they should care about is increasing retention of members.” The split is just significant enough for the retail business where you’re like, “Okay, yeah, we should care about growing sales in the retail business.”

But if it wasn’t 70/30—if it was 90/10 or 95/5—you’d kind of be like, “Well, I’m actually not sure why we care about making a single additional sale of toilet paper, because unless it is increasing the likelihood someone retains, I don’t care about it.” They’re not quite there, but they’re almost there.

Well, except the way that you grow memberships is you grow retail sales. For the last several years, they have totally been growing retail sales per member.

If it was a 95/5 split, you could sort of make the argument, “Why do they care about growing the retail sales per member?” But at this more 70/30-ish split, there are just enough profit dollars coming from the retail side of the house where you care about that too.

I love it. It’s like Amazon and AWS versus Amazon retail. In the last 25 years, membership has grown from nearly nothing, if you look at what the numbers were in the early 1990s compared to today.

$4.5 billion.

Yeah. When we were talking about the FedMart days, it was $2 for a lifetime membership. Crazy. And again, David, this membership business takes almost no investment. They don’t do any advertising.

To quote our friend Andrew Marks, I basically think that Costco has decided to only be a decent-return-on-invested-capital retailer, which allows them to have an insane-return-on-invested-capital membership-club business.

Yep, it’s so true. Again, to quote Andrew, insanely stable growth on a huge, capital-light fee stream. I mean, that sounds like a venture capital management company. It’s pretty wild.

Speaking of membership, let’s talk about the last big innovation piece of the puzzle before we get to the business today, and that is the 2-tiered Costco membership system and the executive memberships, which they launched in 1998. Is that right?

Yes, 1998—the executive membership.

So what is the executive membership, and why are we bothering to spend time on it? Isn’t it just a second, higher-priced membership?

It is super illustrative of management’s thinking. I love this as a microcosm for all of Costco. You can spend an extra $60, for a total of $120 instead of $60.

And what you get for that is 2% cash back on your transactions. Now, that 2% cash back is limited, but it's limited at something crazy, like you can only get $1,000 back. A $60 incremental investment for $1,000 back is pretty good, right? And if you actually hit that $1,000, it would mean you're spending $50,000 at Costco a year.

Oh, wow. I'm sure there are people who do it.

So the break-even point of this $60 is $3,000, which is not that hard to hit. In fact, it's right around—and I suspect this is why management priced it that way—the average household spend at Costco. So they want to make it basically break even for basically everyone, which is so awesome and also different from other retailers.

I mean, now there are all sorts of fancy technology systems to do this, but Costco has always been able to track customer spend at the individual level because they're all members. They have accounts for all of them—100% of them. Other people might invent something like this to say, “Well, we're going to bet that they won't use it. They won't shop here enough, and we'll get to make some money on the people who are infrequent shoppers.” We'll basically get the breakage on people who pay for the upgraded membership but don't shop enough.

That's not at all what Costco is doing here. To illustrate that, here's the insane part of it: if you do not use it, they will refund it. So, great. Is there anything more Costco than that?

It is an amazing value for members. It's such a good value that 55% of U.S. members now do it. But much like everything else we've talked about with Costco, it is also amazing for Costco because they get your money at the beginning of the year, further advantaging their cash flow position.

And it gets even better because it makes you more likely to go shop there. Since you get even better deals with the cash back, instead of getting the 14% gross margin, Costco is now only making a 12% margin on you when you shop there. So as long as you're spending $3,000 or more, it basically just makes Costco's margin even lower for everything you purchase.

Interestingly, 45% of paid members worldwide are executive members, but those members represent 73% of sales. So whether by causation or correlation, executive members just spend more. Estimates are that regular members buy less than one-third of what executive members do.

It's this fascinating customer-segmentation thing where Costco gets to know and reward the most frequent shoppers who do the highest-volume purchasing. Executive members, as you would guess, also renew at a higher rate, and so it helps with retention on top of that, which they call the triple-play membership. These guys are so folksy. I love it.

If you get the Costco-issued Citi Visa card, you renew at an even higher rate. So they have these layers of letting you opt into loyalty, and all of this, David, as you mentioned earlier, is on top of a high renewal rate anyway. Ninety-three percent of members in the U.S. renew every single year.

You can really see the fingerprints of this DNA in Amazon Prime. Obviously, the whole thing is inspired by the Costco membership writ large, but these same dynamics definitely play out for Prime members at Amazon: they order more frequently, are much more likely to renew, access a whole suite of services, stay in the Amazon ecosystem, and buy more stuff.

Yep. Amazon makes money on the stuff; Costco makes money on the membership. But at the end of the day, it is nice to retain a loyal customer.

To contextualize the 93% member retention again, that's just all members. That's not even the executive members or the credit card owners. Subscriptions to streaming services renew for maybe half of their customers every year, so consumer subscriptions retaining at 93%-plus is nuts. That's the monthly retention of most streaming services. It's crazy.

On top of all this, I'm pretty sure that this has never been disclosed, and I haven't asked anyone about it, but if you sort of read trade publications, people seem pretty convinced that Costco is making money—which, of course, they are—on the deal that they cut with Citi and Visa in order to have the Costco card be the Citi Visa card.

Most of the time, when you are processing payments, you owe 2% to 3% of each transaction to the issuer of the card. I think the dynamics are actually the opposite way with Costco, where Costco gets to hold an auction and say, “We have an enormous amount of payment volume with enormously good customers with good credit. Would you like to do business with us? Who would like to pay us for the privilege of being the Costco card rails?”

Yeah, I imagine there's not a lot of defaults in the Costco customer segment.

There's also some fun history to all this. That deal, which you may know, Ben, used to be with American Express, and then they essentially held an auction, as you say.

I think the origins of this, though, start all the way back with the original Price Club business plan—not to offer credit, but specifically not to offer credit. Another one of the big benefits of moving to this wholesale model was that they could get out of the credit-card game that they had to play at FedMart when they were only selling to businesses, when that was the plan.

It was like, “Hey, cash your check. That's it. No credit-card interchange fees that we're going to have to bear.” Then, when they opened to consumers in the club model, they kept that. For a long, long time, you couldn't use credit cards at all in Price Club or Costco.

Yep. You'd be happy to have our business, not the other way around. It's crazy. Of course, with Costco's margin structure, they literally couldn't—speaking of trade-offs, they literally couldn't ever accept credit. How, with an 11% gross margin, are you going to give three percentage points of that 11% to Visa? It would actually flip the business upside down.

We talked about it a minute ago: they make $7.5 billion of operating income on $230 billion of sales. The credit-card companies eat all your profitability if you let them in the door. So it's a pretty incredible position, toughing it out and doing the hard thing first, and then being able to flip to the other side of the table.

Yep. Anyway, I love that point on the payment processing. I think it's an amazing playbook that Costco ran over the years, and a necessary one. Every single time Costco does something amazing, they needed to because of the trade-offs that they chose.

So I think that's the last big piece. Let's take it to the business today.

Definitely.

So, David, to your point, we talked about very few things between, to be honest, the late '80s and today, and it's because the model was basically cast in stone. They added things like gas, ancillary services, glasses, and diamond rings. I don't know—maybe some of that was done earlier, and I think a lot of that was from the FedMart days. Big yard goods. I bought a shed there.

But the story is intentionally boring. What if you grow at 10% for decades doing exactly the same thing, having a well-understood, good set of trade-offs and a strong culture? Where does it go?

Once Sol got things figured out in the second iteration with Price Club, it's a straight line to today. So let's paint the picture today, and then I think what's interesting to talk about next is, okay, everybody knows how this all works. How is it defensible? Why does only Costco do Costco?

But first, tell us about Costco today.

I don't think people realize—maybe by this point of the episode they do, but certainly not before—how big Costco is. It's sort of a sleepy story since it's tucked away in a Seattle suburb. They don't do a lot of chest-pounding; they're just quiet and they do $230 billion in revenue.

They're the third-largest retailer in the U.S. They have 124 million members worldwide. One-third of U.S. shoppers are Costco customers. They have a little over 300,000 employees at 860 stores, and they do roughly $750,000 of revenue per employee.

Yeah, that's wild. If I remember from our Walmart episode, Walmart has over 2 million employees. I believe Amazon has well over 1 million. Costco is doing somewhere between one-third and one-half the total revenue of Walmart, but they're doing it with what—almost an order of magnitude fewer people?

Yeah, it's crazy. They have the highest revenue dollars per square foot of any wholesaler or discount store. Target's about $450 per square foot of revenue, Walmart's about $600, and Costco is $1,800 per square foot of revenue.

Wow. Is that a Costco or an Apple store?

And they have a lot of square feet. This is up from—let me look at this graph—in 1998, they had $600 a foot, and now they're at $1,800 a foot, so they've meaningfully grown.

It's important to point out that you made the comment about Apple: Costco's margins are a lot lower than Apple's. They're generating a huge amount of revenue dollars, not so much in margin dollars. But as we've been talking about, that's the point.

The individual warehouses these days—you may have these stats exactly—but I think an average Costco warehouse generates over $200 million in revenue, and the top ones generate $300 million or $400 million of revenue for a single store. Single Costcos could be scaled public companies on their own.

$269 million of sales per store, on average, per year. Wow. Nuts.

So, just for fun, let's go north of $1,800 just to see who else is out there. Tiffany is $3,000, so kind of within spitting distance. It's less than 2 times, and they sell diamonds.

Well, so does Costco.

Yeah, it's true. Apple, of course, is the GOAT at $5,500 a square foot, with high margins. Apple's just a nuts business.

But it's worth pointing out that Lululemon is approaching Costco level, too. They're around $1,600 a foot, but of course they have much smaller stores than Costco. Costco is just unbelievably efficient. We talked earlier about how that's illustrated in the headcount efficiency, but now we see it in the real-estate efficiency, too.

Yep. This point on growing revenue per foot is interesting. I mentioned it went from $600 to $1,800 over the last 25 years because it reminds us to look at an important, similar metric in retail, which is same-store sales.

Costco grew this by 14% last year. Wow—same-store sales, 14%, which is how you get to that $269 million of revenue per store. They are so good at this that they actually publish their stores by cohort year in their annual report, which almost no other company, and certainly no other retailer, does.

They clearly illustrate that not only does the average store increase meaningfully over the previous year in most years, but new stores also inherit a lot of the learnings. The first year of a new store is dramatically better than what first years of stores were years ago. To illustrate this, year one of a store opened last year was better than year five of a store opened in 2014.

Wow, it’s crazy. It’s also wild that these stores are still growing at those rates year over year, given that many Costco stores have been open for 30-plus years at this point, right?

It’s crazy. Part of it is the addition of gas and the other big-ticket items they’re selling, but part of it is also just being really good merchants, finding these little things that members love and find value in, and making little optimizations everywhere.

Yeah, and exactly to that point, one of the famous aspects of the Costco shopping experience today is the treasure-hunt nature of it. This is something they’ve learned over time. The original Sol Price Club business plan was just 3,000 core SKUs for businesses, and then they opened that up to consumers.

Along the way, they realized that if, in addition to the core staples they carry—which pretty much don’t change—we have a small number of additional ooh-and-ah, one-time items, then every time you come into the store as a member, there’s something new and different for you to find and buy at a really low price. That drives repeat traffic and makes coming to Costco more of a novelty, more of an entertainment event. Today, I think about 25% of their SKUs are these treasure-hunt items.

Huh, I did not realize that. I know they’ve learned a bunch of things over the years. When they brought in fresh food for the first time, they didn’t optimize the place in the store where they put it, but they still saw a huge spike because it drove repeat traffic. When you have fresh food, people come in because they want to buy that, and they add some other stuff.

They’ve been very clever in figuring out where to put it in the store to make sure that you have to walk by a bunch of other stuff to get there. The fresh food is in the back, right? If you’re coming in for fresh food, congratulations: You get to see all these other cool things that the buyers have managed to find out in the world for you, and of course you get some of those, too.

Yup. And for the non-staples, the treasure-hunt-type items, they intentionally want to run out so they aren’t going to be there the next time you come.

Yes, that’s a good point. Okay, analysis time. Let’s do it, because we have a hell of a business here.

10. Costco’s Durable Competitive Edge

The first segment we’re going to do in our analysis is power, which is adapted from Hamilton Helmer’s book 7 Powers, an amazing framework for business strategy. The question here is: What enables the business to achieve persistent differential returns? Put another way, how can a business be way more profitable than its closest competitor and do so sustainably?

The 7 options are counter-positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. There’s 1 here that is so painfully obvious that it has been observed over and over again over the years. The original credit goes to investor Nick Sleep, and the power is scale economies.

Hamilton Helmer’s notion is that Costco has the ability to leverage its scale to compete for items that its competitors can’t get, or perhaps get a better price from suppliers than any of its competitors. Nick Sleep has this phrase that I think is possibly the best way to describe Costco: scale economies shared with customers.

The flywheel looks like this. Costco has enormous volume, and what they do with that volume is go to the supplier and say, “What is your absolute lowest price where you’re still making an honest margin on this, but you’re willing to sell it to us?” Costco makes sure of that, does its research, and arrives at a price.

Then Costco looks at its own business and says, “How can we have the lowest possible overhead? What is the smallest number of dollars we can spend at our head office, turning the lights on at facilities? What is literally the leanest we could possibly run and still break even or generate a small profit?” That’s how they come up with this 11% target gross-margin number.

They mark up the goods by literally the smallest amount they can in order to share the most value with their shoppers and members. Then the cycle repeats: They get more members, and they get better deals from suppliers. To be honest, I don’t know how anyone could ever catch them in this moat they’ve built from the scale economies they share with customers.

Well, because, as we were talking about, for most, if not all, of their suppliers, they are by far the biggest buyer of their goods—even bigger than Walmart—because they have so many fewer SKUs in the store.

Yup. This is so fun. I feel like there’s such a resonance between Costco and Nike, even though on the surface they’re so different. Maybe this is a Pacific Northwest thing, but I really think Nike has incredible brand power, and they choose not to use it to increase their margins. They choose to use it to keep prices low and accessible for customers.

Costco does the exact same thing here. Costco could definitely make a higher margin than they do now and still charge lower prices than Walmart, but they choose not to. Instead, they share that benefit back with customers, and that is an investment in their enterprise value. Costco is choosing to invest those dollars in making the franchise more durable by getting more customer love.

It really is a choice in durability, I think. In fact, it’s what Jeff Bezos meant when he said, “Your margin is my opportunity.” Costco just runs the playbook so consistently.

When you look at their overhead—the fact that Costco runs at 10% or 11% overhead and Amazon runs closer to 30% overhead—Costco has chosen a business model where they can have lower margins on stuff because they don’t need to do things like ship goods to your home. They need way fewer people and way fewer investments in technology to do crazy robotic sorting at warehouses, picking, and packing.

The Costco business model is one where they’ve just gotten rid of all that. They say, “We’re not even going to play that game. Our goal is to lower our overhead so we can pass along the most savings to customers, and lower the prices that we’re paying suppliers so we can pass that on to customers, too.”

This is amazing. This might be the first example I think we’ve found in the history of the show where Costco has incredible counter-positioning power. Today, as a large incumbent, they have counter-positioning in a way that they did not have when they got started.

Oh, this is rare. They probably had some counter-positioning in other ways, but today I think they have huge counter-positioning versus Amazon and e-commerce. We should talk as we go here about Costco’s e-commerce operations, but they are famously Spartan, shall we say. To me, the whole point of Costco is that you go to the Costco, and the Costco headquarters believes that, too.

It is completely counter-positioned to Amazon’s whole reason for being, which is convenience. Certainly, if price is no object, it is way more convenient to click, click, click in the shopping cart on Amazon and have it show up at your door.

Yes, different set of trade-offs for sure. But it is rare that, as an incumbent, you have counter-positioning power. It’s usually something that startups do against incumbents. Costco is a $230 billion company that none of the other big companies can copy. Walmart is trying and still is not succeeding at it.

So, as we’ve been researching this episode, naively, in the past I always thought, “Oh, yeah, Costco is great, but they really don’t get the internet.” I think that was also true 15 years ago. I think they thought the internet was going to be a fad, which is why they missed it at first. Now they’re sort of intentionally missing it, but they’re doing it in their own way. They did underestimate it at first.

Yup, but I think where they’ve ended up is actually a pretty good place, and a better place than Walmart. That place is: No, the whole point is that we are not an e-commerce company. The whole point is that you come to the warehouse, and because you come physically to the warehouse and take the stuff off the shelves, you’re going to be able to get absolutely the best price versus anywhere else.

Amazon today has really become something else from what Jeff wanted it to be after his coffee with Jim Sinegal. It’s not always the lowest price. Often, you are paying for the convenience of shopping on Amazon—far from it. Very often, I will buy something that’s a little bit more expensive on Amazon because I’m thinking, “Well, it’s going to be easy to return,” or, “I trust this company.” That’s a very different premise from the original idea.

Yup. I really think that Costco, amazingly, has developed this huge amount of counter-positioning power as an incumbent.

Yeah, that’s a good point. Switching costs? I guess there are some. I’m not going to go join BJ’s Wholesale Club or Sam’s Club when I already have a membership, so to some extent. But I don’t think that’s the reason they win.

Network economies? Not really. I think it’s scale economies.

Process power, definitely. There’s a culture at Costco that others have failed to replicate, or haven’t tried hard enough to replicate. I don’t think there’s a cornered resource, but branding is an interesting one. Let’s talk about that.

Recently, a bunch of folks from Costco got to go ring the bell at the NASDAQ, and they were all wearing their Kirkland Signature sweatshirts. A joke was made about the idea of Kirkland couture. It’s worth footnoting this: It’s not the main point here, but it is weird how Kirkland has a passionate following in a way where it’s turning into a real brand, when that was not the intention. The brand identity is that it’s the anti-brand.

There’s a lot about our current consumerism climate that I think fuels that. Also, Costco has never tweeted. The account has a lot of followers and 0 tweets. They’re not really a participant in social media, but they have a massive tailwind from all the Costco TikTokers.

There are people constantly sharing videos about, “Here’s this amazing thing I found,” or, “Here’s how I’ve structured my day to work Costco in,” or, “Here’s my haul.” They’ve benefited enormously from influencers.

This has always been part of the strategy. Even going back to the FedMart and Price Club days, Sol Price and then Costco didn’t advertise at all, or very minimally. But they very intentionally tried to get local 6:00 news stories about the lines at Costco or some crazy treasure-hunt item at Costco, and it always worked.

Whenever there is a store opening, news crews go nuts. It’s kind of like Nike athletes wearing the shoes on the cover of Sports Illustrated. That’s worth a lot more in earned media than anything you could ever buy.

All right, David, while we’re here, we have to tell the hot-dog story.

This comes up literally every time there’s any sort of writing, podcast, book, or anything about Costco. Very famously, as Ben and I have talked about, the hot-dog-and-drink combo has been $1.50 for many, many years.

When Jim Sinegal handed over the reins to Craig Jelinek, Craig went to him and said, “You know, we’re close on margin here—or maybe we’re upside down. Nobody really knows on the hot dogs. We might need to raise the price.”

Of course, Jim Sinegal looked at him and goes, “If you raise the price of the hot-dog-and-drink combo, I will fucking kill you.” That’s why it’s still priced the way it is today.

This story has gotten so much airtime. It’s classic Costco. I’m sure this didn’t actually happen. They just kind of made up this story.

It might have actually happened.

Craig has been working at FedMart since the ’70s. He would never raise the price of the hot dog. He would have known better anyway.

Back to branding: There’s this interesting thing where it’s almost like Nike. I think they have latent branding power, and I’m not talking about Kirkland here. I’m talking about the buyers. Members trust the preselected inventory from Costco.

I don’t know where that shows up. It definitionally doesn’t show up in price. Costco will never generate excess margin because of its brand, but its brand earns it something. People become members and trust Costco, and that leads to something. I assume it leads to willingness to buy, which leads to volume, or it leads to retention.

This is the 2nd episode where it’s not branding power under Hamilton’s definition; it’s latent branding power.

Yup, just like the big one with scale economies here. In a lot of ways, I think what Costco is doing is realizing that it has latent branding power and latent scale economies, and choosing not to recognize short-term profits from those.

I think it’s all this super-long-term game. This is why the market is willing to pay a much higher multiple for Costco than for any of its competitors. There are a lot of ways that, if Costco wanted to, it could make more money today than it currently does, but it’s decided not to.

You get to the same result whether you look at it as, “Let’s assume they did take a little bit more margin,” or, “Let’s assume they did raise prices on members,” or, “Let’s assume they leaned into their branding power in some way and actually charged the prices they’ve earned.” Would the multiple then be reasonable? Yes, absolutely.

Or the other way to look at it is: Is this business just going to be around predictably for a longer period of time than any of its competitors because it’s making all these choices? You get to the same answer, which is that it’s worth paying a higher multiple of the dollars they’re recognizing today for a company that has made these choices.

Totally. Let’s just say—I don’t think we’ve talked about market cap yet—Costco does, what, $240 billion in revenue today?

Yup.

And Walmart does $620 billion.

There you go. Costco obviously trades at a much higher multiple than Walmart. You are exactly right: I think it’s because of the durability, because of the membership model. You know that revenue isn’t going anywhere, and there are profits they could take today that they choose not to.

Yes. Costco is pretty uniquely positioned in that it’s going to do well, I think, in any economic climate. In a recessionary environment, it’s going to do well because it’s the lowest-priced retailer of goods out there. In a boom environment, I think it’s also going to do well because of the nature of its customer base. As more people become affluent, they’re going to be more likely to shop at Costco.

I think that’s exactly right, and you can see it in the numbers. They do very well in every economic environment, whereas Walmart is getting squeezed in both directions. In recessionary times, Walmart probably does well, but not as well as Costco because it doesn’t have the absolute lowest prices. Then, in boom times, I think people migrate out of Walmart into shopping on Amazon and shopping at Costco.

Well, should we move into playbook themes?

Let’s do it.

To open this section, I want to say a Jim Sinegal quote: “This isn’t a tricky business. We just try to sell high-quality merchandise at a lower cost than everybody else.”

I think it’s hilariously farcical. He’s both right and so cheeky. This is an extremely tricky business.

I’ve heard him say that many times in my research, and I occasionally hear him say the 2nd part of the quote that he selectively leaves off. The 2nd part is, “Anybody can sell goods for cheap. The trick is to make money while doing so.”

We’ve talked about a bunch of this on the episode. It’s the 50 little things that all synchronize with each other that make it work. If you don’t do 1 of those things, it falls apart. “Oh, I want 10,000 SKUs. Oh, I want to be a leader in e-commerce. Oh, I don’t want a membership fee. Oh, I want to blow out a bunch of merchandise and do a sale.” Any of these trade-offs break the whole thing.

Yup. There are so many fun, little paradoxical things about this company. They sell goods at the lowest possible price, but that means they have a wealthy customer base. It always breaks my brain when I come back to this point, and I think it broke the brain of a lot of name-brand companies that refused to sell at Costco.

Until about 10 years ago, a lot of brands had this idea that low prices sent too negative a signal about their brand. It took decades for Costco to prove that it really did care about quality, that quality was part of its value proposition. It also took decades to prove that it could facilitate a huge amount of volume. Costco has won over everyone from Apple to Dom Pérignon.

I think this is a critical playbook theme for them. They’ve managed to create this sort of walled garden inside Costco, and I use that not in the typical walled-garden sense of being consumer-unfriendly or keeping consumers in the walled garden. It’s exactly the opposite.

Within the garden walls of a Costco warehouse, whatever the price of products is doesn’t, in the consumer’s mind, equate to their value or what their price should be outside of the garden.

100%. You can go and buy a $500 Southwest Airlines gift card for $450 at Costco. You can literally buy dollars for smaller dollars. This is an enormous company that a huge swath of the United States uses. It’s not some obscure restaurant or movie theater. It’s a thing you’re likely going to spend money on anyway, and this company has decided to put it in here for a lower price. Somehow, that works.

Another big piece of this is that, for the majority of suppliers, Costco mandates that the item they sell it is a unique SKU that the shopper can’t buy anywhere else. There’s not even any comparison shopping.

If you’re buying a blender, the Costco version will come with some extra cups. Maybe a 2-pack of Sonicare toothbrushes comes with a bunch of extra toothbrush heads. These things are custom and uniquely made for Costco shoppers. It is such a walled garden.

David, check this out: Nike normally refuses to sell at Costco. Of course they do; they’re Nike. They won’t even sell on Amazon. Except right now, as we talked about in our last episode, they have a lot of inventory and need to discount it to move it through the channel.

Nike can’t really discount anywhere. I guess they have their Nike outlets, but for the next couple of years they’re going to be moving a lot of merchandise through Costco because it’s Costco. It’s different. People pay to get in there. It’s a whole different thing.

Nike is actually willing to sell through Costco until it works through these inventory challenges, and then I’m sure it won’t do business with Costco again for a while. But even Nike, the most brand-conscious company in the world, plays ball sometimes.

Yeah, you mentioned Apple. Apple sells through Costco. You can buy iPads there and computers there.

Okay, there’s a thing we haven’t addressed yet, and that is the conflict between being operationally light—having low overhead—and having a tremendous amount of vertical integration. When you’re selling $50 billion of Kirkland, you have some vertical integration. You do some things yourselves.

The finest illustration of this is chickens.

Yes, I knew you were going to get to the chickens. I was waiting the whole time: When is Ben going to talk chickens? I want to do a whole episode on Costco chickens. We need to have Richard Galanti, Costco’s CFO, on the show to talk chickens.

I know, right? We should ask him.

When do they vertically integrate? They’ll do it when they can provide enough value to members to make it worth increasing their overhead. Here’s the chicken example: They sell 500 million chickens a year—not pounds, chickens. That’s roughly a U.S. and Canada population’s worth of chickens every year.

That is exactly right. And don’t think about it too much.

That’s also the thing with the chickens. 130 million of them are rotisserie chickens, so even the rotisserie chicken business alone is huge. The rest, of course, are chicken breasts, chicken thighs and legs, and everything else.

The chickens used in the food court for the chicken bake are also made by Costco, because when Costco makes things, it actually makes them itself. When you buy muffins, those are baked at Costco in its bakery.

There are really only 4 or 5 chicken-processing companies in America. When you have supplier concentration like that, prices can get artificially inflated. You can be on the wrong end of the stick as the buyer when there are so few suppliers.

So Costco decided, “We’re going to be doing this for a long time. We think our members might be getting a raw deal. What should we do? We can provide more value to members by doing the insane work of processing this ourselves.”

First, Costco figured out that it could rent 100% of the capacity of a plant in Alabama to learn the ropes: “We’re warehouse merchants; now we’re becoming chicken processors. How does this work?” It learned, and then proceeded to build its own fully owned facility in Fremont, Nebraska, outside of Omaha, and build relationships with 150 local farmers in the surrounding area.

I mean, this is nuts. That facility processes 2 million chickens a week now.

It worked. To take that even further, there are 2 other dedicated facilities that Costco doesn’t fully own but that are just for Costco. It can now process 200 million chickens a year.

So, while they’re still working with the other big chicken processors, at least Costco can keep them honest on pricing by taking on this huge amount of vertical integration themselves.

Wow. We’re going to convert a lot of people to vegans in this part of the episode.

And we didn’t even talk about the hot dogs.

Oh, boy. Okay, let’s move on.

A much nicer example is the fancy mixed nuts I was talking about earlier. Sol saw an opportunity to make a better product, worked directly with farmers and suppliers, and cleaned up that whole supply chain. They do the same thing in coffee: Bring down the price, increase the amount of fair-trade stuff going into the little Keurig pods. It’s fascinating to watch.

When they’re willing to leverage their scale to take on additional complexity, they do it when they feel that’s in the interest of members. Other times they say, “You know what? I think we’re going to be a merchant on this one.”

Yeah. So that’s the chicken example.

One thing is that whenever you talk to any of these current or former Costco employees, watch any of the YouTube videos of their talks, or read anything about them, they talk in cents. It’s the craziest thing.

You hear most executives talk in dollars, especially someone like Jensen Huang at NVIDIA. He has CEO speak—I can’t remember exactly what I called it before, CEO language—but it’s all in these plus-or-minus-10 estimates: A few billion here, a few billion there. We’re talking about a 70% gross-margin business for NVIDIA.

Exactly.

I love the concept of CEO math. Get the high-level concepts right and the rest will follow.

You talk to someone at Costco, and they’ll tell you that something costs $3.89. It’s not just $3 things. They’ll tell you that something costs $180.89. It’s ingrained in the culture that every cent matters, and I kind of love that because it’s so different from other companies.

It’s so fitting to the nature of the business and its margins. When you have 11% gross margins, you’re saying, “Yeah, I care about every penny.” You bet.

The thing that kept echoing in my head is that these people—and this isn’t quite a hero’s journey the way some of our episodes are—aren’t the same person all the way through. It’s not the same person; it’s Jim Sinegal and all the executives who are currently on the team today, because most of them have been there for 30-plus years.

The way all these people think and act is a different type of hero’s journey because they’re a different type of hero. A lot of the time in our society, the people we build up are these crazy, sociopathic, shoot-the-moon types. This is just a group of people who have spent their life’s work all working at the same combined company, trying to improve the model in little ways.

There’s so little personal ambition. None of these people have LinkedIn profiles.

They do, but they have 1 job on them, no picture, and no description. The Costco Twitter account has made no tweets ever. There’s a crazy consistency to the culture.

I walked into the headquarters, and the coffee was Kirkland pods from a Keurig. When you sit down in the lobby and someone says, “Would you like water?” and you say, “You bet,” the water they hand you is a Kirkland Signature water bottle. The executives you walk by are in cubicles. It’s exactly as you would imagine it. It’s perfectly consistent with Costco.

Yes, it’s so great. A few more things to say on this one: I literally just looked up Craig Jelinek’s LinkedIn profile as you were talking. It still says he’s an EVP at Costco. The dude has been CEO for almost a decade.

Amazing. The reason I looked up his LinkedIn profile is that the backgrounds of these people are so different from what you would typically think of as the management team of an American Fortune 50 company.

Jim went to San Diego City College. Craig went to San Diego State University. They started as baggers at FedMart when they were teenagers, and they just worked through the business all the way up.

Yeah. Occasionally there’s somebody like Giles Bateman, who went to Harvard Business School, but that’s the exception, not the rule.

A hundreds-of-billions-of-dollars market-cap company now.

Yup. It’s amazing. I will say, too, that there’s this famous quote about Amazon being a charity run for the benefit of customers. Do you remember that?

I do.

It’s actually Costco. On $230 billion of sales, they keep $7.5 billion in operating income. I’ve just never seen a company give more consumer surplus than Costco. They leave so much on the table for the ecosystem around them.

Yup. While we’re talking about the people here, I think a related but separate playbook theme is truly the promoting-from-within culture. It’s always been the case, going all the way back to FedMart, and really carries through to this day.

It’s astonishing to me that, at a $250 billion market-cap company, this is so ingrained in the culture. Other companies talk about this, but then you’ll see that they go to a CEO search and bring in somebody from McKinsey or something like that. Nobody walks the walk on this except Costco.

They’re a very noble company. All the decisions they make are very noble, and you get the sense that they’re having a lot of fun being noble. But you only earn the right to be noble if your machine works, and their machine really works.

I think that’s the point. They’ve earned the right to act this nobly. Acting this nobly partially got them to where they are, but where they are earns them the right to continue to be noble.

The company has never done a layoff. If it needed to, it would have done a layoff, but they’ve run the business in such a way and figured out the way that they’ve never needed to do that. Even after they did a merger—merging 2 nearly identical companies—they didn’t lay anybody off.

Right. That’s wild.

It’s crazy. So amazing.

Management.

My last big playbook item is an old quote. A Deutsche Bank analyst said, “It is better to be an employee or a customer than a shareholder,” which Costco management would say, “Yeah, that’s literally it. We’ve printed it. It’s in a PDF on our website called Our Code of Ethics.”

Did you read our annual report?

In the short term, maybe that’s a totally reasonable thing to say, and no one would argue with it. But in the long term, it has been fantastic to be a shareholder.

If you bought $10,000 of shares in their IPO in 1985, you would have $3.3 million today—a 330x return. This doesn’t include the dividends you would have earned along the way, and they’ve actually done a lot of dividends, including 4-ish special dividends that were huge.

It’s funny how, if you want to dip in and out of the stock in a year or 2, it’s not going to be great for you. It’ll be predictable, and it’ll be high-priced when you come in, but it’s not going to be world-changing. There’s a chance that, over 30 years, it is world-changing for you.

There are no hard-and-fast rules in investing, obviously, and if you think there are, that’s a great way to lose your shirt. But it’s funny to note that every time we’ve used a version of that phrase on Acquired—when studying a company that Wall Street analysts think is a charity being run for the benefit of some stakeholder—it turns out those are pretty great stocks to own and pretty great for the long term.

Yup. Those are the ones that are the most enduring, as our friends at NCS Capital would remind us.

Indeed.

All right, David. Bear case?

Let’s do it. You want to start with bear case?

Starting with bear case. How are you ever going to find a bear case about this company? I’d kind of like to bring Charlie in here and have him lecture you on this.

For better or worse, they have been very slow to e-commerce—maybe for better, as we talked about, but maybe for worse. The fact that Costco needs to run at 11% for it to work really did blind them to e-commerce.

I don’t think this was a conscious choice. This was a miss that they got really lucky on and that happened to work out well for them, where they could continue to run the same playbook and skip e-commerce for a long time.

I mean, they were 15 years late to e-commerce. Structurally, Costco can provide things at a far lower cost than Amazon, but at the end of the day, there really is no way Costco can do e-commerce like these other companies.

Even Walmart has figured it out. Walmart is as good for most use cases as Amazon, but they’re paying the price. It’s a huge amount of overhead to set up the infrastructure to do home delivery.

One of the things we’re going to talk about here in bear and bull is what Costco is doing that is Costco-flavored e-commerce instead of Amazon-flavored e-commerce. But I’ll save that for my bull case.

A 2nd bear case: It was popular in the past to say that Costco would have an issue with young people. I guess this isn’t really a bear case; it’s false for a couple of reasons.

There is nothing more Gen Z than Costco. Costco has been blowing up on TikTok, as we’ve talked about. But also, from all available data, young people are getting memberships at the same rate they always have.

Of course, the bulk of members will be people in their 40s and 50s with a family and a house, but that hasn’t really changed over time. If you liked the Costco business as an investor in the last decade, all signs are that it’s going to be pretty similar in the next decade, in terms of the ramp of when people become members.

There’s another one that I’ll put in bear case, but again, I’m not really sure it’s a bear case. It is worth pointing out that it is either true that this business cannot grow at more than 10% per year on average—they’ve had individual years where they’ve spiked—or management just doesn’t want it to. That would also be fine, because there are lots of benefits to being slow, steady, and durable.

But the company has a lot of cash on the balance sheet and regularly does dividends and buybacks. There’s this crazy stat from The Science of Hitting that the company has returned 80% of net income to shareholders in the last decade rather than reinvesting it in growth.

The key reason for this is that it’s just really hard to expand. They need to hire the right people, train them well, promote internally, and do all the work to scale. The new construction, expanding suppliers, and shipping large pallets into new geographies are incredibly physical.

Cash isn’t the constraint stopping them from expanding. There’s a physical limit to the speed at which this company can grow. I’m calling that a bear case because you should be aware that this thing can’t scale like Zoom scaled during the pandemic.

Zoom—or Slack, or Instagram launching Threads—has basically no bottlenecks next to infinite, instant growth. Costco is the literal opposite. There are bottlenecks everywhere to scaling, and no amount of cash is going to solve that problem.

Yep. Got any bear cases?

I think I’m going to quote Charlie on this one and say, “I have nothing more to add.”

I thought you might go there.

All right, bull case. The biggest one is that the flywheel is spinning, and I’m not really sure who can catch them.

Here’s another quote from The Science of Hitting: “The average Sam’s Club only generates about half the revenues of a Costco, and that gap has widened over time. Given the unit economics of the business, that’s a tough hurdle to overcome, which explains why Sam’s Club has a smaller unit base today than it did a decade ago.”

Crazy, right? Over the same period, Costco increased its U.S. warehouse count by 1/3. Anyone who could have challenged them is just done.

Maybe part of that is because Walmart has just been placing its resources elsewhere, particularly in the e-commerce fight against Amazon. Walmart has basically decided, “Look, we’re not going to kill the Sam’s Club business, but this is not where we’re focusing our competitive energies right now.”

To be more fair, this is no longer a market-share fight for the warehouse-retail business. This is global retail. The question is how much of global retail Costco’s model can address.

It’s not Costco versus a specific competitor. It’s Costco versus human behavior. How big is this market exactly? I think that’s actually a bull case for Costco, because you could argue that maybe they are—or maybe they aren’t—saturated in North America.

They’re not. They are definitely not saturated in Asia, in the rest of the world, in Europe, in Africa, or in Australia. They have a lot of global room to run.

This is my 2nd bull case, which you touched on with the domestic thing. As an aside, every 5 years on earnings calls and in annual letters, Costco management reveals that they’re surprised by how unsaturated they are in the U.S. market.

They’ll open a store in a city where they already have 3 or 4 stores, and they’ll say, “This one did just as well.” Of course, it doesn’t have as many members because you do actually saturate the population of a city, but the convenience of having the store closer means that it hits the payback targets you’d want it to hit just as fast as a store in a brand-new market.

At some point they’ll stop being surprised, or at some point they actually will saturate the North American market. But it’s amazing that they keep thinking it’s soon, and it’s never soon.

Yup. My 3rd one is international expansion, exactly as you’re saying, and in particular China. There is incredible pent-up demand.

Here’s an illustration from The Science of Hitting that is so good: The average U.S. store has 68,000 members. The first store in China opened in 2019 and reached 400,000 members within 2 years. The U.S. at maturity is at 68,000 members.

I miss doing our China tech episodes, because I feel like every 10 minutes in those episodes would just be, “China.” Things are of a different scale there. If you can operate there, that’s the big thing. For U.S. companies, it’s very complicated to operate there.

There are going to be 6 stores in China within the next year, and all indicators are that this concept performs just as well, if not better, than it does in the U.S. They have a lot of running room.

So much running room. They’ve been very deliberate about the China strategy. They got a permit to open their first store 20 years before they actually did. The Chinese government issued them a permit, and they waited 20 years.

What is more Costco than waiting 20 years after you’re allowed to do something to do it when you feel you’re in a good place to do it?

Well, A, they’re playing the long game. B, the executives at the time probably were reasonably assured that they were still going to be the executives 20 years from then, so why not?

It’s awesome.

Here’s my 4th bull case, and it’s actually e-commerce. Bear with me for a minute on this. They’re approaching e-commerce in a very Costco way, and they have a bunch of different approaches.

There’s 1 specific area where they have differentiation: big and bulky items. That’s where they’re putting a lot of their energy. They spent $1 billion to buy a company that became Costco Logistics, and they do things like deliver sheds to your house.

This is a pretty difficult thing to do from a traditional e-commerce company or an e-commerce-native company. This is sheds, refrigerators, washing machines, and water heaters.

Didn’t you almost just order a fridge this morning on Costco?

Exactly. I’m saying this because I almost had to replace my refrigerator. It turned out I was able to get it repaired, thankfully, but I was briefly in the market for a refrigerator, and it was super interesting.

Costco had the lowest price on the model I was looking at, but only by about $20 versus Best Buy and Home Depot. It was a $1,500 refrigerator, and all the other players clearly had a Samsung refrigerator promotion running. The MSRP was $2,000, and all those other retailers were saying, “This week only, it’s on sale for $1,500.”

Costco had it for about $1,470.

Next week, Costco will still have it for $1,470, and it'll be $2,000 at Best Buy.

Yep, that's exactly right. And so I do think this is an interesting area for Costco and e-commerce. The second one is CostcoNext.com. Do you know what this is, David?

No, I didn't find this.

It allows you to shop directly on other websites, put in your Costco number, and get a discount.

Oh, that's awesome.

Costco cuts a deal with those companies to say, “We're going to send you traffic. As long as the traffic we send you is verified, you give those people a discount.”

Wait, so this is literally like Ebates or Rakuten for Costco?

Yes. Costco looks at it like, “Oh, great. We get to give yet another value to our members without having to take on the e-commerce logistics that they hate, that complicates their business, and that changes people's impression of what Costco is.”

Fascinating. It's like the obvious way for them to play this market for anyone who's willing to partner with them. Again, to the supplier dynamics, it's the same thing here. On the surface, if you're an XYZ e-commerce player, that'd be crazy, but then you think about it and you're like, “Well, we could get a lot of very high-value traffic. Maybe we should do this.” It's like selling through Costco without having to sell through Costco, without having to physically drop stuff at their warehouse. It's the internet way to sell through Costco.

Amazing. So my last bull case really is Costco's culture. It just outlives any given quarter, year, or economic cycle, or even any CEO. Normally, when companies get bigger, things get worse. Standards of excellence fall, and execution gets sloppy, and Costco has just been exactly the opposite of that.

Costco was sort of technically founded in 1976 with Price Club. You can really say it was started with FedMart before that, but let's just say it was 1976. Here we are in 2023. There have been 3 CEOs in the history of Costco: Sol Price, Jim Sinegal, and Craig Jelinek, all of whom worked at FedMart.

Yes, crazy.

Okay, I have a bunch of Costco trivia before we get to carve-outs.

Yeah, let's do it.

All right, Costco is the largest seller in the world of fine wines. Fine wines are defined as bottles priced from $20 to $300.

Like, what? Costco is the—

They're just the largest seller of things.

Well, that is the most amazing encapsulation of their demographic.

Yes, it's wealthy people who like value and a deal.

Yes, exactly. Do you know their refund policy?

No questions asked, right?

No questions asked. How long do you think it lasts?

Infinite.

Infinite. There is an exception on things like electronics. Those are 90 days, but that's 75 more days than anywhere else.

Yep. Apple is 2 weeks. If I buy a MacBook Pro at Costco, it's a 90-day return policy. If I buy it at Apple, it's a 14-day return policy.

Yep.

In fact, I'm sitting here and I really want to buy a 13-inch MacBook Air, but I'm afraid that the 13-inch MacBook Air is about to become the M3 later this year. I should just go buy it at Costco now.

That is not really the behavior that they want to encourage. And I do know that if you take advantage of it over and over and over again, they do sort of take you aside and say, “Hey, it seems like we're not providing enough value to you. Let us refund the membership. We're so sorry we couldn't do a great job.”

What a great way to phrase kicking you out.

But I will tell you, the infinite return policy includes things like diamond rings.

Whoa. Wait, if you get divorced, can you return the engagement ring?

Last year, they sold a 10-carat diamond ring, and that diamond ring, to my knowledge, has a lifetime, no-questions-asked, full-value return policy.

Wow.

So there's some fun Seattle history around this. Do you know where the inspiration for this policy came from?

Nordstrom?

Yeah, for this policy. That's pretty—

I didn't know, but Nordstrom is such a famous local story around its favorable return policy.

Jim Sinegal and Jeff Brotman, before Jeff tragically passed away too young a few years ago, would talk about this, especially Jeff. The Brotmans, being Seattle retailers, were hugely influenced by Nordstrom, and Nordstrom famously has the same return policy.

Do you know the potentially apocryphal story about the famous return at Nordstrom?

No.

It may not be real, but at some point somebody brought tires back to Nordstrom and said, “I'd like to return these.” Instead of saying, “We don't sell tires,” the person thought about it for a while and said, “Well, could you just tell me a little bit more information?”

They said, “I bought these here,” and named a year. It turns out that before that real estate was a Nordstrom, it was actually a tire center. Nordstrom gave the guy money and took the tires.

Amazing.

Okay, while we're on Costco trivia and tires, there's a famous Sol Price story. I think this was in the Price Club days, when they were opening one of the early non-San Diego locations—the first new expansion site. He showed up and saw tires. Tires were one of the things they sold at Price Club, and the tires were all neatly stacked on the warehouse shelves.

He walks up and starts throwing them off the shelves onto the floor, and people are like, “Sol, what are you doing? Have you gone crazy? What's happening?” He's like, “You fucking idiots, how are the customers going to be able to pick up the tires when they're up high on the shelves? They have to be down on the floor.”

Oh, wow.

I do know, by the way, that Nordstrom has since adjusted its return policy to be capped, not infinite. So now Costco has a better return policy than Nordstrom.

Amazing. Wild.

All right, more stats just for fun. They sold 2.2 million pumpkin pies in the 3 days leading up to Thanksgiving last year. They sell one-third of the jumbo cashews in the entire world.

They, of course, sell eyeglasses, and this is one of the areas where they felt they should vertically integrate. I actually don't know why, but I suspect it's because prices are artificially high in the entire glasses supply chain.

Oh, yeah, the eyeglass industry is notoriously brutal.

So Costco now owns and operates 3 optical grinding labs to make prescription eyeglasses.

So great. It's the craziest thing.

And then, lastly, there's an illustration of their culture. I think they definitely believe that you must work long, smart, and hard if you're going to be a leader there, and none are optional. You just have to do it. To illustrate this, all of their market managers and country managers come to headquarters for 2 days every single month.

No matter what market you manage, you fly to Issaquah. That's 160 people sitting in a room for 2 days, talking about what's working, what's not, what you're seeing, how the whole company can get better, and sharing learnings.

Jim talks about this a lot in the talks I watched on YouTube. When he was CEO—and I think Craig does the same thing to this day—he visited every store every year.

Yes, he did.

There are hundreds of stores around the world. There are way more Costco stores out there than there are days in the year.

Yep. The dedication is incredible.

It's crazy.

All right, carve-outs.

Carve-outs.

I have 2, and I'm going to do them both because they're fast and small. The first one: there's a brand called Tifosi—that's T-I-F-O-S-I—that makes sunglasses for running. You can wear them for other stuff, too, but I love them because they're sunglasses that don't slip off my face.

When you're running or doing something and you get sweaty, they have these little grippy pads that sit on the nose. I feel like I've solved this mildly annoying thing in my life for a very long time, which is continually pushing up my sunglasses while running. Highly recommend Tifosi. They're also pretty cheap. I bought 3 pairs, and they're goofy in different colors and fun.

Amazing. You are becoming Phil Knight during his Oakley phase.

Yes, exactly. The second is a mashup that I found last night when I was looking for cool stuff to listen to while finishing the research and editing the script. Thank you to Jason Kottke, author of Kottke.org, for posting this.

There is a New York City DJ named Dwell who released a mashup about 4 months ago of “Everything in Its Right Place” by Radiohead and Kendrick Lamar's “N95,” and it is so sick.

That sounds awesome.

It's probably because I'm a huge—I don't listen to Radiohead that much anymore, but in college—

Oh, you used to be really into it.

Seven hours a day or something. Whenever I was programming, it was just Radiohead all the time. It instantly took me back to that place in my life, and it's honestly one of the best mashups I've ever heard.

I didn't know mashups were still a thing. That's awesome.

I used to love mashups in some DJ subculture.

I mean, it is crazy how mainstream Girl Talk and—

Yeah, what was the other one?

The White Panda. They were, for a while, massive.

So, love it.

Yeah, Radiohead and Kendrick Lamar. We'll link to it in the show notes.

Inspired by you, since you did 2 carve-outs, I'm also going to do 2 carve-outs. The first is a great episode of Invest Like the Best, friend of the show Patrick O'Shaughnessy, with Jeremy Giffon.

So good. Also a friend of the show. This was going to be my third, too.

Yeah, it was so good. One of the best podcast episodes I've listened to all year, I think. Especially because we know Jeremy pretty well from Tiny, and we know Patrick very well from hanging out with them a lot. I learned a ton.

Still, listening to their conversation—this conversation, I'll tell you, is exactly like hanging out with Jeremy, but in higher density. His personality is exactly how he comes across on the podcast, but it's definitely a best-of. Whenever I hang out with Jeremy, I get 6 or 7 mind-blowing one-liners, these insights that just come to him out of nowhere. The podcast has 30 in an hour and a half.

It's just awesome.

Yeah, it's just awesome. Go listen to it. Well worth your time.

Yep.

My second carve-out is a fun local one. Jenny and I did a date night last week. Highly recommend it for any parents out there. We have a standing babysitter who we love—a Friday-night weekly date night, unless something changes.

We went out in Dogpatch in San Francisco, which I hadn't been to in a long time. It's become such a cool neighborhood. We went to this awesome wine bar there, walked around, and got ice cream at Humphry Slocombe afterward.

Dogpatch is right on the water in the Bay. It's got an interesting history. It was the headquarters, I think, of the Hells Angels for a long, long time during the '50s and '60s. You worked there, right? Didn't you, when you were an intern?

Dogpatch Labs on the pier? I'm trying to remember the actual number, but yeah, there was a coworking space. When I worked at CoTweet, they condemned the pier and took it down because we were the last year that it was still—I don't know, we probably shouldn't have had an office in it. But yeah, I worked at CoTweet, and above us was the coworking space where the Instagram guys launched Instagram.

That's right. But yeah, you probably remember back then: Dogpatch was kind of a random outskirts-of-San Francisco, sleepy little neighborhood. It's become awesome. We walked by a game shop where they had Ladies' D&D Night going on. This is super cool. I'm going to hang out there more often.

So if you come to San Francisco, don't hang out downtown. Downtown is not a good place. The rest of the city is awesome. Go to Dogpatch. It's a very different experience.

Thank you for saving me. I was going to stay at a hotel on Market Street, and you were like, “Do not do that. Dear God, do not do that.”

But that's where all the hotels are.

I know. Airbnb is the thing.

All right, with that, our thanks to Blinkist and Go1, with some awesome links that you can check out in the show notes to see David’s and my personal bookshelf and also get the Blink of the Sol Price book at blinkist.com/costco. Thanks also to Statsig. You can supercharge your ability to launch features, measure them, see the impact, and collaborate better with your team around being data-driven in your decisions. And Crusoe—if you’re doing anything in AI, check out their cloud. Click the link in the show notes and get better AI data centers that are better for the world.

Sign up for notifications of new episodes at acquire.fm/email. We’ll be including little tidbits after we release episodes, including listener corrections and little fun stories that we didn’t have time for recording. We’ll also be teasing future episodes, so if you want to play a little trivia game with us to try and guess what the next episode is going to be, that is where we’ll be dropping those hints.

You can become an LP at acquire.fm/lp, become closer to the show, do Zoom calls with us every other month or so, and at least once a season help pick the next episode. The LPs chose Nike, our most recent episode before this one.

One thing we should say, in case you don’t follow us on social media and didn’t see the tweets about it: a friend of the show, David Lipsky, did an awesome, truly awesome piece in Fast Company about Acquired, and we’re super grateful that he took the time and dove deep and spent many hours with both of us. It was super cool—lots and lots of time basically tracking us as we were preparing the Nike episode. Since he’s been listening since 2017 or 2018, he knew a lot of the history of the show and wrote this really cool piece. If you are one of the people who has emailed us over the years and said it’d be great if we did something talking about how our research process for Acquired works, David chronicled that much better than David or I ever could have. So thank you, David Lipsky. We really appreciate it. We’ll link to the Fast Company piece in the show notes too.

Look for Acquired 2 if you want to learn more about AI in any podcast player, and check out the Slack. Come discuss it with us at acquire.fm/slack.

Listeners, we’ll see you next time.

I’m going to go get a hot dog and a soda.

I’ll see you there and get a chicken bake.

How much are the tickets?

More than a buck fifty, but it’s more substantial than a hot dog. It’s like 900 calories.

Wow.

But yeah, you’re not doing a lot of other eating that day.

I love it. All right, listeners, we’ll see you next time.

We’ll see you next time.