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Ten Things You May Not Have Known About Costco

  1. Costco is the world’s largest retailer of choice and prime beef, organic foods, rotisserie chicken, and wine. Costco is the second largest auto seller in the US, just behind AutoNation. The #1 selling product is toilet paper – over a billion rolls a year.
  2. Costco rejects conventional marketing tools. It doesn’t advertise, doesn’t tell you where to find things, has a limited array of products, and members must pay up front to shop there. Costco has no public relations staff. This is definitely an anomaly – no other big public company operates without having a public relations department.
  3. The Costco Connectionis a magazine sent free to members of Costco. Its subscribers have an average household income of $156,000 a year. The magazine is the largest-circulation print monthly in the United States.
  4. Two types of things that Costco sells: Triggers and Treasures

A typical Costco warehouse store stocks only 4,000 types of items (in contrast, the average supermarket sells 40,000 types items. Wal-Mart stores, on the other hand, stock about 125,000 types of products).

Three-quarters of Costco’s products are what it calls “triggers” – staples such as paper towel, detergents, and cereals. The remaining one-quarter are “treasures” – items that make shopping an adventure. These items change frequently: one day you can find a luxury watch offered at a ridiculous discount and the next day, it’s gone. This creates a sense of urgency and the thrill of shopping that hooked people on what’s been called the “Costco Craze” or the “Costco Effect.”

Bonus fact: Items that are “treasures” rather than always-available staples are identified by an asterisk (*) after the price on the display tag over the product.  If there is an asterisk on an item you like, you better stock up on it because when what you see has been sold, it will not be re-stocked. Sometimes they repeat “treasure” offerings, but there may be a multi-month delay before it comes back.

  1. Costco is the largest retailer of wine in the world.

Each year, it sells almost $4 billion in alcohol, with wine making up almost half of that number. Wine prices are 10% – 20% less than other wine stores, sometimes more.  Look for wine prices that end in something other than $.99 – that means it is a markdown from the regular price or Costco negotiated a special price with its supplier.  Kirkland label wines may not be what you want to place on your fancy dinner table, but put it in a decanter and wait for the raves.  My favorite white wine is the Kirkland Sonoma County Chardonnay ($6.94) which was preferred over La Crema Sonoma Coast Chardonnay ($23 at Whole Foods, $18 at Costco) in a blind test I conducted on some friends who considered themselves to be knowledgeable wine imbibers.

  1. Costco buys up half of the world’s supply of cashews

People sure love cashews. Costco sells $300,000 worth of them every week. If you noticed, Costco’s cashew containers are square – not round – in order to maximize space on pallets.

When they switched to square containers, they reduced some 400 truck trips in shipping the product to its 600+ stores every year.

  1. Costco offers a foot-long all-beef $1.50 hot dog (with condiments, sauerkraut and a free unlimited soft drink). The price has remained the same since 1985. Costco sells more than 100 million hot dogs every year. To be able to continue to sell at that price, in 2008 Costco started making their own hot dogs in a facility in California’s Central Valley.
  2. When that clerk checks your sales receipt and looks at your full cart as you exit the store, what is he/she looking for? You might think that they are making sure that everything in your cart was paid for. You would be wrong.  They are checking to make sure that the cashier did not inadvertently charge you more than once for the same item, or enter an incorrect number on multiple-item orders.
  3. Costco makes virtually no profit on the stuff it sells

Okay, this requires a bit of explanation: Costco typically marks up its goods a maximum of 14% over its cost (most items have an 8% to 10% markup – Kirkland Signature brand has a 15% markup). After accounting for expenses such as real estate costs and wages, Costco just about breaks even on those goods.

Eighty percent of the company’s gross profit actually comes from the membership fees (between $55 to $110) from its 64 million members. That’s nothing to sneeze at: Costco’s annual profit is roughly $1.5 billion. Nearly 90% of its customers renew their membership every year.

There’s another benefit to requiring people to become members in order to shop: a customer who has to provide his details in the membership registration form is less likely to write bad checks or steal. Costco suffers only one-tenth the level of those two types of losses as compared to the average supermarket.

  1. Costco is amazingly generous to its employees

On average, Costco pays its workers about $20.89 an hour (in contrast to Wal-Mart which pays its full-time employees $12.67). More than 80% of Costco employees have company-sponsored health insurance. About 90% of its employees have retirement plans.

As a result, employees rarely leave. The turnover rate of employees who have been there over a year is 5%. Turnover rate of Costco executives is even lower at 1%. That way, the company saves quite a bit in having to train new employees and its rate of theft by employee is extremely low.

Costco generates almost double the operating profit per employee than does rival Sam’s Club, which pays its employees much lower wages.

Costco also loves to promote from within – in fact, 70% of its warehouse managers started out as cart pushers and cashiers.

Bonus Fact I: Kirkland Signature is named after the city of Kirkland, Washington. It is the company’s private label, and makes up about 15% of the store’s product line, and almost a third of its sales.

Bonus Fact II: The weirdest thing ever sold on Costco? Caskets.

Bonus Fact III: Next time you buy a new car, let the dealer know you have a Costco card.  You might just be eligible to receive a free $500 gas credit or other unexpected savings.

Bonus Fact IV: Costco went public on December 5, 1985 at $10.00 per share (before stock splits). Adjusting for stock splits, the initial price per share was approximately $1.67. If you had invested $5500 at that time, you would be a millionaire today.

Final Thought: Even more than enjoying everything about shopping at Costco, I love to trade options on the stock.  At the beginning of 2019, I set up a $20,000 portfolio to trade options on COST.  Starting at the beginning of March, every Sunday, I made a short video of my COST positions and discussed why I chose those particular options and what I might do with the portfolio in the coming week.  I made 26 of these short videos and have spliced them together into 4 more manageable modules which I plan to offer as part of a course on how to carry out a conservative options portfolio using COST options.

By the third week of October, this portfolio had made a gain of $80,887 for the year.  That works out to over 400%.  Of course, COST rose about 40% during that time, but my system would have made just as much if it had remained absolutely flat instead of steadily moving higher.

I took out over $40,000 for spending and opening other option portfolios, but I still had over $50,000 worth of COST options at work in this portfolio when I stopped making the weekly videos (I stopped because my wife and I took a 3-week walking vacation along the Jurassic Coast in Dorset, England).

Oh, how I love Costco, and stock options.

Happy trading,

Terry Allen

P.S. At the beginning of 2020, I used the same strategy that I have developed over the past 40 years on Costco (COST) and Microsoft (MSFT) options.  I started out the year with $108,000 and 7 weeks later, I had more than doubled the value of the account.  I am making a video showing the actual positions I started with, the strategy I used, and how to carry it out (the all-important little details).  By signing up for the Terry’s Tips free newsletter, you will receive full details as soon as I finish the video.

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