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00:00Today's video is sponsored by Squarespace. Go to squarespace.com slash company man for a free trial and 10% off your first purchase.
00:15Costco is a unique business that's become very successful.
00:19They've been able to build that success in a way that's very different from their competitors.
00:23They're not everywhere. They have nearly 750 locations as of the end of 2017, which doesn't seem like many when you compare it to Walmart, who's approaching 12,000.
00:34But 750 is pretty good. They've mainly spread throughout the United States and Canada, as well as some other countries around the world.
00:4187% of their sales come from either U.S. or Canada, and 30% of those sales come from California.
00:48So if you're from Arkansas over there, I'm sorry, there doesn't appear to be any in your state.
00:54But there might be soon. Costco is on the rise. They've always been on the rise.
00:59They've been opening new locations every year.
01:01There's over 200 Costco's standing today that didn't exist 10 years ago.
01:06About 30 of them didn't exist last year.
01:09Here's some other ways to prove that they're growing.
01:12Paid memberships have gone up steadily, currently at 20,000 more than there were 10 years ago.
01:17Their number of employees have increased nearly 100,000 during that same period.
01:23Their revenue.
01:23They had a little dip there in 2009, but ever since then, it's exactly what you want to see.
01:29I think I've proven that they've grown quite a bit in the past 10 years.
01:33But you may still be skeptical.
01:35Just because they're growing doesn't mean they're successful.
01:38What if they're opening too many locations?
01:40Maybe they're opening locations too close to each other.
01:43Maybe a lot of the new ones just aren't doing well.
01:45This is the best I can do to address that.
01:48It's comparable sales growth.
01:50It's a way to measure how each location is doing.
01:52This year, it shows 4%, which means on average, their existing stores are generating 4% more sales
02:00when compared to the previous year.
02:02The negative one in 2009 is bad.
02:04It's messed up the whole graph.
02:06That's from that little dip we saw in 2009, but usually these numbers are positive.
02:10Costco is opening more locations each year, all while increasing sales in their existing locations.
02:18So, have I done it?
02:19Have I proven that they're successful?
02:21I hope I have.
02:22So, now I can move on to how they did it.
02:25For the people from any of the 6 continents that aren't North America, and the people of Arkansas,
02:30let me be clear about what makes Costco different.
02:33It's a warehouse.
02:34Here's a picture of a warehouse, and here's a picture of Costco.
02:38There's pallets everywhere with boxes on them that contain large quantities of food.
02:42They're stacked up to the ceiling.
02:44You don't buy the six-pack of Rice Krispie Treats.
02:47You buy the big box with 54 of them.
02:49And since you're buying it in bulk, you get quite a deal.
02:52It does have a layout where everything is accessible and properly displayed,
02:56as well as the cashiers at the front, but other than that, it's just a warehouse.
03:01That's how they refer to their own locations.
03:04Here's another graph.
03:05This is what makes them different from most other stores, and I think it's pretty self-explanatory.
03:11No?
03:13Okay, I'll explain it.
03:14It's gross profit margin.
03:16It's a measure of how much money they actually make on each sale.
03:20In 2017, where it says 11.33%, it means for every dollar in sales, they actually made 11 cents.
03:28When you look at this chart, 11.33% is pretty high for them.
03:32But now when we compare it to some other stores, it's not that high at all.
03:37It's very low.
03:38These heights that they're finally achieving are about half of Walmart and a third of Whole Foods.
03:44The point is, these other places make money when they sell you something, and Costco really doesn't.
03:50Here's what they do.
03:51They buy a ton of something and then do whatever they can to get rid of it.
03:56Buying a bunch of stuff allows them to get it for really cheap, but then since they're
04:00buying so much, they need to sell it really fast.
04:03They go through so much stuff before they've even paid for it, they've already sold it
04:08to us.
04:09And they don't buy five different flavors of crackers in three different sizes like most
04:13stores.
04:14They buy one flavor in one size, and that size is really big.
04:18Then they take that big box of crackers and they price it really cheap so you'll buy it.
04:22People would probably buy the smaller box if they had the option, but they don't have
04:27the option, so they go with the bigger box.
04:29The high volume of sales does help compensate for the small margins, but there's a bigger
04:35part to this whole plan.
04:36Remember when I showed you their increasing paid memberships?
04:39If you don't know much about Costco, you were probably confused at that point.
04:43You have to pay to shop at Costco.
04:45Each year, it's $60 for a Gold Star membership, which is just the regular membership, and for
04:51$120, you can become an executive member.
04:55You get a fancier looking card and a 2% annual reward up to $1,000.
05:00It's basically the more attractive option if you shop there a lot.
05:03These little $60 and $120 membership fees, that's what Costco cares about.
05:09All of their cheap prices were just part of the plan to get you to buy the membership.
05:14Costco is famous for their $4.99 rotisserie chicken, and people wonder, how can they afford
05:20to sell it for so cheap?
05:21Well, they can't afford it.
05:23They're losing money on it.
05:25But it's all part of the plan to get you to buy that membership.
05:28And the same thing goes for their $1.50 hot dogs and inexpensive pizza at the food court.
05:33Don't think of Costco as a traditional store.
05:36Think of it as Netflix.
05:37Netflix is after that subscription fee in the same way that Costco is after that membership
05:43fee.
05:44Or maybe think of it as a gym membership.
05:46In all cases, anything they do is just designed to convince you to sign up.
05:52Buying and selling a large volume of products with little profit is just their way to entice
05:57you into that $60 or hopefully $120 annual fee.
06:01The money they make aside from that, I would consider a bonus.
06:04And looking back to that graph, they have been raising the money they make from selling
06:09things, and that's while raising their paid memberships.
06:12Again, it's nowhere near the other stores, but it's not meant to be.
06:16The fact that it's as high as it is means they're doing well.
06:20I had a comment on one of my videos a few months ago.
06:22This guy suggested I do a video on Costco.
06:25He says he works for Costco and is making $14 an hour, which is expected to go up, along
06:31with full benefits and a retirement plan at age 20.
06:34He says that's the standard where he works, and I should make a video about how they're
06:39able to do these kind of things.
06:40He concluded by thanking me and calling me the goat.
06:43I responded by saying it was a good suggestion, and two others responded with things that crushed
06:48his optimism, and by the end of it, he was feeling bad to go to work in the morning, but
06:52he brought up something interesting.
06:54Costco pays their employees much more money than other companies would for similar jobs.
06:59The average employee makes around $20 an hour and has full benefits.
07:03It's yet another thing that separates them from everyone else, and paying them like this
07:08does have a lot of benefits to the company.
07:10It reduces the employee turnover rate.
07:13It makes them less likely to quit since it's hard for them to find something better.
07:16Low turnover means less money spent on selecting and training new people.
07:20Also, it makes the employees happier with their jobs.
07:23It should lead to a better environment and make the customers happier, which falls into their
07:28main plan of making the customers want to come back to renew their membership.
07:31And about 90% of them do renew their membership, by the way.
07:35For the question of how they're able to do it, the real answer is the same as how they're
07:39able to sell those chickens for so cheap.
07:41It's a sacrifice to help their main goal, but it is less of a sacrifice than you might expect.
07:47The Costco employees make the company more money than a store like Walmart.
07:51Walmart has to neatly stock shelves, and Costco really doesn't.
07:55Think of the cashiers at Costco.
07:57When they make one scan, it's for a $10 box of Nutri-Grain bars.
08:01When the cashier at Walmart makes one scan, it's for a $3 box of Nutri-Grain bars.
08:06It was the same amount of work for Costco to make the bigger sale.
08:10The ratio of sales per employee is much higher for Costco than their competitors.
08:16So the higher wages is really just a sacrifice for the greater goal, but things like this make
08:21it less of a sacrifice than it would be for others.
08:24When trying to answer the question of why is Costco so successful, I noticed a theme.
08:30It's that people seem to like Costco.
08:32The customers enjoy the low prices and the friendly employees.
08:36The employees enjoy the high pay and the benefits.
08:38Even the investors are fond of Costco.
08:41It's valued at $83 billion on the stock market, which is overpriced.
08:46But it only gets that way because the investors believe in it and give it that value.
08:51They've been giving out quarterly dividends of $0.50.
08:54If you own their stock all through last year, you receive $2 in dividends.
08:59Investors like something like that that they can count on.
09:02It's also a good sign for the company that they're even able to do it.
09:05They also had a special dividend last year of $7 and a $5 special dividend in 2015.
09:12These are things that make investors happy.
09:14Everything they do just seems generous.
09:17Now whether their intentions are pure or they're just trying to be liked to sell memberships
09:21and raise their stock price, I have no idea.
09:24But to try to answer the big question of why is Costco so successful, well, they use some
09:29unique strategies to sell these memberships.
09:32The strategies are all the things I talked about.
09:34Buying a ton of stuff and selling it quick at low prices, selling these chickens at a loss,
09:39paying their employees more than the others.
09:41They're all just ultimately ways to sell more memberships.
09:44And I believe that for Costco, the definition of success is selling more memberships.
09:50Let me know in the comments what you think about Costco and their unique strategies.
09:54Do you have a Costco membership and is it worth it?
09:57And that question wasn't directed toward the people of Arkansas.
10:00I already know your answer.
10:02But if you have anything else to say about the topic, leave it in the comments.
10:06I'd like to hear what you have to say.
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