Aug 21, 2023 · 3h 1m · acquired
Costco (Audio) · Acquired
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Acquired, hosts Ben Gilbert and David Rosenthal examine the history, business model, and corporate ethos of Costco. They trace its evolution from Sol Price's pioneering discount clubs to a global retail powerhouse driven by high-margin memberships, strict 14% markup caps, and scale economies shared with customers.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ben and David hold 99.8% of the talking time here. How this is scored →
Ben and David as informed peer 8.1 Guest teaching 0.0 Guest disagreement 0.0 Ben and David pushing back 0.0
speaking balance: gold is Ben and David, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 0:18 Theme Song Vocalist intro delivery
The theme song vocalist sings the opening Acquired intro line 'Who got the truth?', representing the only distinct non-host audio in an otherwise entirely collaborative discussion.
Hardest push from Ben and David ▶ 2:15:00 Ben challenges simple e-commerce critiqueBen pushes back on the simplistic notion that Costco simply missed the internet, clarifying the structural margin incompatibility between an 11% overhead model and home delivery.
Biggest teaching moment ▶ 23:15 David explains legal roots of discounter pricingDavid educates listeners and explains how Sol Price bypassed US fair-trade minimum retail price laws by using closed-door membership clubs.
Ben and David hold their own ▶ 57:30 Ben presents first-hand CFO inventory turn dataBen demonstrates deep first-hand expertise from interviewing Costco CFO Richard Galanti, detailing exact inventory turn figures (12.4x) and negative working capital float.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ben and David as informed peer | Guest teaching | Guest disagreement | Ben and David pushing back | Why |
|---|---|---|---|---|---|---|
| Sol Price's Origins and Socialist Roots | 8 | 0 | 0 | 0 | David and Ben deliver deep historical context on Sol Price's background in New York, his socialist influences, and how Sam Walton openly took retail concepts from him. | |
| Legal Roots and the Discovery of Fedco | 8 | 0 | 0 | 0 | The hosts detail Price's legal career in post-WWII San Diego and how advising clients led to discovering the non-profit Fedco buying club model. | |
| Pioneering the Modern Discount Retail Category | 9 | 0 | 0 | 0 | David explains the regulatory loophole of membership clubs bypassing manufacturer minimum pricing laws, birthing modern discount retail like FedMart, Kmart, and Walmart. | |
| Core Tenets: Fair Pricing and High Wages | 9 | 0 | 0 | 0 | Ben brings in specific data on Costco's low shrinkage rates, high wage structures compared to Walmart, and low employee turnover. | |
| The Hugo Mann Dispute and Sol's Ouster | 8 | 0 | 0 | 0 | The hosts recount the botched acquisition deal with German investor Hugo Mann, leading to Sol Price getting locked out of his own offices at age 60. | |
| Rebuilding from Scratch: The Birth of Price Club | 9 | 0 | 0 | 0 | David and Ben discuss isolating the centralized warehousing operations run by Jim Sinegal to invent Price Club solely for business members. | |
| Low SKUs and the Credit Union Breakthrough | 8 | 0 | 0 | 0 | The hosts explain the SKU reduction to 3,000 items, the breakthrough partnership with the San Diego City Credit Union, and the birth of the $1.50 hot dog combo. | |
| Negative Working Capital and Rapid Inventory Turns | 10 | 0 | 0 | 0 | Ben breaks down insights from Costco's CFO Richard Galanti on inventory turns (12.4x/year) and achieving a negative cash conversion cycle via net 30 payment terms. | |
| Sponsor Break: Blinkist | 2 | 0 | 0 | 0 | Standard mid-episode sponsor read for Blinkist featuring their summary of the Sol Price biography. | |
| The Founding and Explosive Rise of Costco | 8 | 0 | 0 | 0 | David traces Jeff Brotman and Jim Sinegal launching Costco in Seattle in 1983 and reaching $3B in revenue within six years. | |
| The 1993 Price-Costco Merger of Equals | 8 | 0 | 0 | 0 | The hosts detail the 1993 52/48 merger between Price Club and Costco to counter Sam's Club aggressive nationwide expansion. | |
| The 14% Markup Cap and Bezos's Lesson | 9 | 0 | 0 | 0 | Ben outlines the strict 14% markup ceiling and David links Jim Sinegal's philosophy to Jeff Bezos altering Amazon's pricing model in 2001. | |
| Code of Ethics and Supplier Partnerships | 9 | 0 | 0 | 0 | Ben explains Costco's Code of Ethics, tough-but-fair buyer relationships tracking commodity prices, and the birth of Kirkland Signature. | |
| Sponsor Break: Crusoe Cloud | 2 | 0 | 0 | 0 | Sponsor break highlighting Crusoe Cloud's modular, stranded-energy AI data centers. | |
| Cross-Dock Efficiency and Absolute Margin Dollars | 9 | 0 | 0 | 0 | The hosts analyze cross-dock distribution where 92% of goods bypass conventional warehousing storage, optimizing revenue per employee to $730K. | |
| Executive Membership and Unmatched Retention | 9 | 0 | 0 | 0 | Ben breaks down executive membership economics, 93% annual retention rates, and payment processing leverage over credit card networks. | |
| Cohort Performance and the Treasure Hunt Dynamics | 9 | 0 | 0 | 0 | Discussion of 14% same-store sales growth, cohort-level disclosures, $1,800/sq ft revenue density, and the 25% rotational 'treasure hunt' SKU strategy. | |
| Power Analysis: Shared Scale Economies and Counter-Positioning | 10 | 0 | 0 | 0 | Rigorous application of Hamilton Helmer's 7 Powers and Nick Sleep's 'scale economies shared' thesis, alongside counter-positioning against e-commerce giants. | |
| Latent Brand Power and Protecting the Hot Dog | 8 | 0 | 0 | 0 | Ben and David debate latent branding power, earned media tailwinds on social media, and Jim Sinegal's legendary threat over the $1.50 hot dog price. | |
| Playbook: Walled Gardens and Chicken Vertical Integration | 9 | 0 | 0 | 0 | Deep dive into Costco's selective vertical integration, specifically processing 200 million chickens annually across dedicated facilities in Nebraska and Alabama. | |
| Playbook: The Culture of Cents and Shareholder Compounding | 8 | 0 | 0 | 0 | Examination of internal promotion culture, the 'culture of cents' pricing mindset, and generating 330x shareholder returns since the 1985 IPO. | |
| Bear Case: E-Commerce Hesitation and Physical Scaling Limits | 8 | 0 | 0 | 0 | Ben evaluates bear cases: late entry into general e-commerce due to strict 11% operating cost constraints and the physical bottlenecks of warehouse expansion. | |
| Bull Case: Market Runway, China Appetite, and Costco Next | 9 | 0 | 0 | 0 | Evaluation of bull drivers: widening gaps over Sam's Club, massive member adoption in China (400k in store 1), and third-party discounts via Costco Next. | |
| Costco Trivia: Fine Wine, Eyeglass Labs, and Return Policies | 8 | 0 | 0 | 0 | Final segment highlighting Costco being the world's largest seller of fine wine, optical grinding labs, and infinite return policy history. |
Statements from this episode (65)
Costco has grown revenue roughly 10% annually for over 30 years
“Costco has grown revenue right about 10% for over 30 years in a row.”
Costco's Kirkland Signature generates more revenue than all of Nike
“Their store brand, Kirkland Signature, does more revenue alone, not including anything else in the store than all of Nike.”
Costco co-founder Jeff Brotman was an early Starbucks investor and director
“Jeff was one of the first investors and board members of Starbucks.”
Sol Price is arguably America's most influential retail capitalist
“Saul, maybe the most influential American retail capitalist in history, comes out of the Triangle Shirtwaist Factory movement and communism and socialism and everything that's happening in New York and the Jewish community at this time.”
Sam Walton admitted copying more ideas from Sol Price than anyone else
“Sam Walton actually wrote in Made in America That he stole more ideas from Saul than anyone else in his business career.”
Fedco was founded as a non-profit collective by 800 postal workers
“Well, Fedco, it turns out, was a non-profit 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 decided …”
REI uses one-time membership fees for customer affinity, not profit
“Very clearly REI is not interested in making money off the membership program. I pay, what is it, 85 dollars or something once just to grant me sort of a higher affinity to the store, and the money's not really relevant.”
US fair trade laws in the 1950s legally barred retailers from discounting
“There were actually laws on the books in the U.S. At the time that manufacturers of goods could set a minimum selling price for retail, and it was actually illegal for retailers to offer products below that price to the general public.”
Sol Price used the membership club model to legally bypass pricing minimums
“Saul kind of stumbles into figuring out that if you are 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.”
Sol Price ranked customer value and employee wages above investor profit
“As Saul is running the company during these first few years, he starts to codify some retail management philosophies, and he famously sort of canonizes these as FedMart's four priority order principles, and he teaches every new employee throughout the whole co…”
Costco pays an average hourly wage of $26 versus Walmart's $19.50
“Costco's average hourly wage is 26 dollars, and Walmart's is nineteen-fifty.”
Costco maintains a remarkably low 7% workforce attrition rate after year one
“After the first year, Costco today has only a seven percent attrition rate among their workforce.”
Costco's merchandise shrinkage rate is an astonishingly low 0.15% of sales
“The shrinkage, or the unaccounted for merchandise, At Costco today is astonishingly low. It is 0.15% of sales.”
Over a third of Costco's US employees have decadelong tenures
“So if you look at Costco today, 36% of U.S. Employees have over 10 years of service.”
Nearly all Costco executives have tenures exceeding 25 years
“If you look at their executive team at Costco today, Basically, all of them have been there for over 25 years. The only vice presidents at the company who have not are the digital e-commerce people that they had to bring in to address some issues.”
Wholesale warehouse models eliminate internal logistics and trucking operations
“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. You don't need to operate other warehouses. You don't need to move stuff around t…”
Price Club intentionally launched with roughly 3,000 SKUs to streamline operations
“So they decide as they're getting started that in order to keep the operations really tight and realize the maximum benefit, Ben, of everything you were describing of how these warehouses operate, they're only going to stock about 3000 of the highest volume it…”
Walmart and Kmart carried around 50,000 SKUs during Price Club's launch
“So at the time, Walmarts and Kmarts had on the order of about 50,000 SKUs and even FedMart had Probably close to that many at the time.”
The $1.50 hot dog combo is likely Costco's only loss leader
“There's a decent chance this is the one and only loss leader that Costco sells today.”
Costco sells 130 million hot dogs globally each year
“They also sell a hundred and thirty million of them per year.”
Costco turns its inventory 12.4 times yearly compared to Walmart's 8
“Costco actually turns their inventory 12.4 times per year. And just for comparison, Walmart turns their inventory eight times per year. Home Depot is more like five times per year.”
Costco has decreased its warehouse SKU count to just 3,800 items
“Costco in the last 10 years was around 4500, and then they sort of looked and said, can we bring it down and went to 4000? And today they're sitting at 3800. So this number is still going down, not up.”
Price Club became a public company in 1979 without an IPO
“Price Club goes public in 1979, three 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. So what happens is There's so much buying and sel…”
Sam Walton launched Sam's Club after Sol Price shared his playbook
“Also in 1982, Saul gets a call from his old buddy Sam Walton... Saul tells him 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? Ben Gilbert: Sam's…”
Sol Price gave Bernie Marcus the playbook to launch Home Depot
“Right around the same time, another person comes out to San Diego to visit Saul and Price Club. A guy named Bernie Marcus... Saul has him out to San Diego. He shows him the Price Club warehouse. He gives him the playbook and he says, look, Bernie, You've got a…”
Costco was the first company to hit $3 billion revenue within six years
“And three billion in less than six years, which is the first company ever to hit that milestone, too.”
Upfront membership fees and bulk buying inherently filter for wealthy consumers
“The first one is that it actually selects for wealthy customers. As does buying in bulk. So 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 fe…”
The typical Costco shopper earns $125,000, roughly 70% above the US median
“There was an independent research firm that found that the typical Costco consumer makes about a 125,000 dollars a year in household income and has a four-year degree. Walmart, by comparison, has a median income of about 80,000 dollars. And keep in mind, the m…”
Costco has the lowest retail prices and the wealthiest major customer base
“They have the lowest prices, but they have the wealthiest consumers of any major retailer.”
Costco enforces a strict 14% markup cap on all standard products
“They have enforced a strict cap on the margin that they are willing to make on any product. So they have decided internally that they are not allowed to mark up anything more than 14% above what these suppliers sell it to them for.”
Kirkland Signature is capped at a 15% markup at Costco
“The only exception to this is Kirkland Signature, where they cheat a little bit and let themselves go up to 15%.”
A 2001 coffee with Jim Sinegal inspired Amazon's core low-price philosophy
“Jeff has this coffee with Jim, and Jim explains this philosophy to Jeff. Jeff comes back to Amazon HQ the next day and is like, I'm reversing the policy, and says exactly what you just said. There are two types of companies in this world. Companies that work h…”
Walmart's US revenue is approximately triple Costco's US revenue
“So, Walmart's revenue today is about three times Costco in the US.”
Costco generates approximately ten times more revenue per SKU than Walmart
“The average revenue per product, because of the SKU count, at Costco is about 10 times Walmart.”
Kirkland Signature generated $52 billion last year, roughly a quarter of Costco's revenue
“Fifty two billion dollars of Kirkland Signature sales were done last year. That does not include the Kirkland Signature gas, so out of Costco's two hundred and thirty billion top line, a little under a quarter of it was Kirkland Signature sales, and closer to …”
Kirkland Signature is America's largest consumer packaged goods brand
“It's America's largest consumer package brand.”
A low-selection retail strategy requires high product quality and market-leading deals
“You can't just have low selection and be like, well, it's all cheap stuff. It has to be, like, high quality in its category and the best deal on the market in order for people to be ok with low selection, which drives low SKU count, which drives all the amazin…”
92% of Costco's merchandise is cross-docked compared to 10% for Walmart
“92% of Costco's merchandise is cross-stocked. Only 10% of Walmart has cross-stocked merchandise on a pallet system like this.”
Costco generates over $730,000 in annual revenue per employee
“And this is why they generate over 730,000 dollars of revenue per employee.”
Costco operates at an 11% gross margin and will never expand it
“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.”
Membership fees historically account for 70% of Costco's operating income
“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.”
Costco Executive members represent 45% of global memberships but 73% of sales
“Interestingly, 45% of paid members worldwide are executive members. But those members represent 73% of sales.”
Costco achieves a 93% annual member renewal rate in the United States
“93% of members in the U.S. Renew every single year.”
Costco likely generates net revenue from its Citi and Visa co-branded cards
“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 Vis…”
Costco is the third-largest retailer in the US behind Amazon and Walmart
“And you're the third biggest player in the largest market, you know, America, behind Amazon and Walmart.”
Costco generates $1,800 per square foot versus Walmart's $600 and Target's $450
“Target's about 450 dollars per square foot of revenue. Walmart's about 600 dollars. Costco is 1800 dollars per square foot of revenue.”
An average Costco warehouse generates $269 million in annual sales
“Two hundred and sixty-nine million dollars of sales per store on average per year.”
Costco's 2022 first-year store sales exceeded 2014 cohorts' fifth-year sales
“Year one of a store opened last year was better than year five of a store opened in 2014.”
Roughly 25% of Costco's SKUs are rotating, non-staple treasure hunt items
“And so today I think about 25% of their SKUs are these treasure hunt items.”
Costco is the largest buyer for most of its suppliers, ahead of Walmart
“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.”
Costco operates at 10% to 11% overhead compared to Amazon's roughly 30%
“Costco runs at 10, 11% overhead, and Amazon runs closer to, like, 30% overhead”
Costco strategically converts brand trust into sales volume rather than excess margin
“Costco will never generate excess margin because of their brand. But their brand earns them something. I mean, people become members and trust them, and that leads to something. I assume it leads to volume, it leads to willingness to buy, which leads to volume…”
Costco sells 500 million rotisserie chickens globally every year
“They sell five hundred million chickens a year. Not pounds, chickens.”
Costco's fully owned Nebraska facility processes two million chickens per week
“They learned, and then they proceeded to build their 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 two million chickens a w…”
Costco has never conducted an employee layoff in its corporate history
“The company has never done a layoff.”
A $10,000 investment in Costco's 1985 IPO generated a 330x return by 2023
“If you bought 10,000 dollars of shares in their IPO in 1985, you would have 3.3 million dollars today, a 330 X, and this does not include the dividends you would have earned along the way, which they've actually done a lot of dividends, including four-ish spec…”
Costco returned 80% of net income to shareholders over the past decade
“The company has returned 80% of net income to shareholders in the last decade rather than reinvesting it in growth, and the key reason for this is that it's just really, really hard to expand.”
Capital cannot eliminate Costco's physical and operational store scaling bottlenecks
“There are bottlenecks everywhere to scaling, and no amount of cash is gonna solve that problem.”
Costco expanded its US warehouse footprint over a decade while Sam's Club shrank
“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 …”
Costco's first China store reached 400,000 members in two years
“The first store in China opened in twenty-nineteen, which popped to 400,000 members within two years. The U.S. At maturity is at 68,000 members.”
All three CEOs in Costco's history previously worked at FedMart
“There have been three CEOs in the history of Costco. Saul Price, Jim Senegal, Craig Jelinek. All of whom worked at FedMart.”
Costco is the world's largest seller of fine wines
“Costco is the largest seller in the world of fine wines. Fine wines are defined as 20 to 300 dollar bottles.”
Costco sells one-third of all jumbo cashews globally
“They sell one third of the jumbo cashews in the entire world.”
All 160 Costco market and country managers meet at headquarters every month
“All of their market managers and country managers come to headquarters for two days every single month. So no matter what market you manage, you fly to Issaquah. That's a 160 people. To all sit in a room for two days and just talk about what's working, what's …”