Costco (Audio)

1. BGBen Gilbert0:00

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

2. DRDavid Rosenthal0:06

   What are you, Charlie Munger?

3. BGBen Gilbert0:07

   It's just the deeper you dig, the more good things you find, and usually, it's the exact opposite of that. [laughing] It's like the opposite of being an early-stage venture capitalist. [laughing]

4. DRDavid Rosenthal0:17

   [laughing]

5. SPSpeaker0:18

   Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight, another story on the way. Who got the truth?

6. BGBen Gilbert0:35

   Welcome to season thirteen, episode two of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

7. DRDavid Rosenthal0:44

   I'm David Rosenthal.

8. BGBen Gilbert0:45

   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 two-and-a-half-pound container of cashews, prescription eyeglasses, a tank of gas, new tires for your car, ninety-six rolls of toilet paper, a new refrigerator, an outdoor shed, a ten-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 a buck fifty.

9. DRDavid Rosenthal1:20

   Ben, I don't believe you.

10. BGBen Gilbert1:21

    Hey, it has been the same price for forty years now?

11. DRDavid Rosenthal1:25

    Forty-seven years.

12. BGBen Gilbert1:27

    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 fifty clever innovations that they've refined over the years that all work 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, and if your goal is to offer extremely great value to your customers on high-quality products at the lowest possible prices, there are a lot of ways that you could go about doing that, and 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 that: extreme value, high-quality products, lowest possible prices, and David, my God, does this method work well. There is a reason Charlie Munger loves this business.

13. DRDavid Rosenthal2:31

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

14. BGBen Gilbert2:35

    Ooh, no.

15. DRDavid Rosenthal2:36

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

16. BGBen Gilbert2:55

    [laughing]

17. DRDavid Rosenthal2:55

    And then the hijackers turn to Warren, and he says, "Shoot me first."

18. BGBen Gilbert2:59

    [laughing]

19. DRDavid Rosenthal3:01

    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.

20. BGBen Gilbert3:06

    Oh, that is awesome. I mean, Charlie Munger, of course, on the board of Costco and longtime fan of the model, as you should be, too. So here are some insane stats. Costco has grown revenue right about ten percent for over thirty years in a row. Their revenue per square foot of 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, and 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.

21. DRDavid Rosenthal3:45

    I know. It's so great. I think I found that Kirkland Signature, as a unified brand, I think might be the largest brand in the world by revenue.

22. BGBen Gilbert3:55

    It's the largest consumer package brand in the world.

23. DRDavid Rosenthal3:57

    Yes, which is a misnomer because, like, they sell everything. [laughing] You know, most other brands only sell like shoes.

24. BGBen Gilbert4:04

    But their fifty-two billion a year that they sell, which inches by Nike by just about a billion dollars, doesn't even include the Kirkland Signature gas. All right, listeners, if you wanna know every single time a new episode drops, you can sign up for email updates, acquired.fm/email, and two brand-new things: We will be including little hints at what the next episode will be to the email list now, and two, 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, acquired.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 I, check out our second show, ACQ2, 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 Rosenthal, what are the history and facts?

25. DRDavid Rosenthal5:14

    So Costco was founded, as many people know, in Seattle, lovely city of Seattle, in 1983 by retail veterans Jim Sinegal and Jeffrey Brotman. Now, Jeff came from a long line of Seattle retailers. His dad was a retailer. His brother is a retailer. Jeff was one of the first investors and board members of Starbucks. Super cool.

26. BGBen Gilbert5:41

    Yeah.

27. DRDavid Rosenthal5:42

    And, uh, Jim, well, we'll talk about Jim as we go here. But if you were around and kind of of shopping age, shall we say, in 1983, you know that the true history of Costco dates way further back than that to someone that we talked a lot about on our Walmart episode, the legendary Sol Price, and his two companies, FedMart and Price Club.... And 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. And Price Club is really, of course, the actual result of Sol's previous company, FedMart, which FedMart itself really came out of FedCo in the 1940s.

28. BGBen Gilbert6:37

    In some ways, we sort of have to tell a whole industry history here, but in other ways, these kind of 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.

29. DRDavid Rosenthal6:53

    Totally. We start History and Facts in January 1916, in New York City, in the Bronx, where one Solomon "Sol" Price is born. Now, Sol's parents were Jewish immigrants from Belarus. They'd arrived just a couple years before at Ellis Island as teenagers. They had absolutely nothing. They spoke no English, they had no money, nothing. So Sol's parents, like many Jewish immigrants around then in New York, ended up getting jobs in the garment factories in the Lower East Side, and the conditions in these factories were, like, terrible, just absolutely terrible. If you went to school here in the US, you might remember learning in American history class about the Triangle Shirtwaist Factory fire-

30. BGBen Gilbert7:44

    Yes

Episode duration: 3:01:33