The Greatest Business Model

 

Over the years, I have received a great deal of mail about my Media Realism (MR) posts. Some 99% of the response comes from readers who do not post on the blog but maintain their privacy by e-mailing me directly at doncolemedia@gmail.com

 

One thing has stood out—every month or so, someone asks me what company or companies out there has a perfect business model. The simple answer, of course, is that the perfect model does not exist. Many do not accept that and ask which company has the best? Most people who write to me feel that Amazon is the best and, until recently, a number felt that Netflix was #1.

 

Here is my answer. No one has a complete handle on all the businesses across the globe of any size that could be analyzed but my “vote” goes for Costco.

 

While Amazon gets high marks who their stunning array of products, lightning-fast delivery times and customer-centric nature, I give Costco the nod when you look at all metrics (Full disclosure—I am not nor have ever been a Costco shareholder. That could change someday  ).

 

In brief, Costco Wholesale is a membership warehouse retailer that has been around since 1983. Founded in Seattle, Washington, it now operates 832 locations in 14 countries and continues to grow regardless of the state of the economy. In terms of volume, it is the 3rd largest retailer in the world.

 

Why do I admire them so? They, as is certainly true of Amazon, are laser focused on being customer-centric.  And, they resemble Amazon in that they think long term, in fact, very long term. As Costco has grown, so have the benefits to members. Costco basically caps profits of 15% on every item while most retailers go for up to 30% or more in many categories. The firm operates on a slim profit margin of 2% and makes the majority of their operating income on membership fees. You get a 5% discount on all  warehouse sales if you use the Costco Visa card. They treat employees quite well and pay better than other retailers. Shareholders benefit nicely with increasing dividends and somewhat recession resistant share prices over the years. I have tried to time visits to my nearest warehouse to avoid crowds but the parking lot is generally full.

 

Costco critics do not like that you often have to buy in bulk. This is because they can get better deals on merchandise by having a limited number of SKU’s (stock keeping units). You do not find 45 different toothpaste SKU’s at Costco, for sure. What they do have is great value. So, Costco may not be great for a single person living in a Manhattan studio apartment. I did suggest to one that he go long a few cases of tuna fish and store them under his bed. For homeowners for kids, Costco makes great sense.

 

A spectacular bargain is their ¼ pound hot dog and 20-ounce soda (plus a refill) that weighs in at $1.50 as it has been for decades. Not a healthy snack but long term customers love it.

 

These are attributes that have given Costco what Warren Buffett calls a durable competitive advantage. They are in the game for the long pull and have built loyalty among customers, employees and shareholders even though short term earnings may be suffered.

 

Speaking of Warren Buffett of Berkshire Hathaway, his long- term financial partner, Charles T. “Charlie” Munger joined the Costco board of directors in 1997. Many Costco policies to me look to have Charlie’s fingerprints of ethical treatment of all stakeholders all over them.

 

Companies of all stripes could learn a great deal by studying Costco. They move steadily but patiently forward quarter after quarter. The company has focus and the macroeconomic environment be damned.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

 

 

America's Feudal Future?

 

In recent weeks, I have received several messages from acquaintances who are frustrated with their lack of financial progress in today’s world. To a person, they appear to be on a treadmill of very busy activity but are feeling very insecure and used at the same time. They describe themselves as peasants, or wage slaves relative to their corporate CEO’s. Yesterday, someone whom I have never met in person but reads MR wrote, “You know what I am. I am nothing but a serf reporting to the lord of the manor.” He said that he was a student of history and that America was far along on a passage to a Neo-Feudal society.

 

It sounded  a bit dramatic to me but I had heard similar frustrations from others. As people like to say these days, let’s “unpack” this issue a bit.

 

Feudalism was a reciprocal agreement that was prominent in Western Europe from the 9^th-15^th centuries. It was an economic, military, legal and, to a large degree cultural system in which a lord (Baron, Earl or Duke) offered protection to people living near his castle. The serfs had to scramble for a living and part of their meager earnings/production went to the lord of the manor in exchange for personal protection in case of foreign invasion or neighboring groups attacking. The serfs could actually hide in the relative safety of the castle were the area invaded.  There was little chance for upward mobility as you were born, lived and died at your station in life that was largely determined at birth. The system died out as cities developed and artisans formed guilds and free markets began to emerge. A middle class began to emerge and serfdom diminished significantly.

 

When doing some research for this post, I was surprised to see how a small but vocal group are referring to what they see as our emerging feudal society. Interestingly, some are left wing and some are right wing. Their argument seems to hinge on the growing income and wealth inequality in the U.S. So, why do they feel they are trapped peasants or serfs?

 

Let us look at a few facts. Virtually everyone realizes that the top 10% of people in the U.S. control 80% of the assets. Yet that is true in many nations across the world.

 

Here are a few more stunning factoids that I confirmed from multiple sources:

 

1)  Since 1978, CEO compensation has grown by 940% while employee compensation has grown by 12% (both adjusted for inflation).

 

2)  In 1965, when Lyndon Johnson unveiled his war on poverty, the average ratio of CEO to median employee compensation was 21 to 1. Today, it is slightly over 320 to 1.  Read FORBES OR FORTUNE regularly and you will see that some CEO’s go way over 320 to 1. Should CEO’s be rewarded for good performance? Absolutely, in my opinion yet looking at these data gives me pause. Things do appear to be out of whack.

 

There is no question that wealth is getting concentrated into fewer and fewer hands. And, the middle class is shrinking for sure. So, are these sad or angry people writing to me far wrong when they refer to themselves as peasants or serfs? It is hard to say. Increasingly, upward mobility is getting more and more difficult in the U.S. What zip code you lived in as a child and what you parents did for a living have a great impact on where one can wind up thirty years later.

 

One wrote to me saying that the approximately three million among the 1% rule over the remaining 99% (340 million plus Americans) quietly but firmly.

 

The new billionaires from Silicon Valley are remarkably similar  in some ways to the Rockefellers, Vanderbilts, Carnegies and Morgans of the gilded age of the late 19^th and early 20^th centuries. The difference is that there was no income tax for the “robber barons” of the gilded age. Today, the 21^st century oligarchs benefit from special tax breaks and overseas corporate tax dodges. They have good lobbyists and have the ear of politicians from both major parties.

 

So, it is likely true that many people are simply jealous of the amazing success the daring tech entrepreneurs have had. Yet, it is not merely envy. Games are being played. During the height of the pandemic, politicians gave out cash to virtually all citizens. Yet, who benefitted the most? Clearly, the top 10% and especially the top 1% who own the real estate and stocks that soared to dizzying levels. Some 49% of US citizens have no stocks and about 40% do not own their dwellings.

 

Look, if you know me it is clear that I have always been an ardent capitalist and will die one. But is it crony capitalism that is causing the gulf between the top 10% and the bottom 90% to grow wider? America has been “the land of opportunity” for every generation from 1789 up until recently. Now, some young people are choosing not to have children as they say that they cannot afford them. Others are drowning in college loan debt (yes, they signed the papers but are paying it off over 15-20 years).

 

Reading and listening to these bitter young people remind me of the Andrew Yang political campaigns. He ran briefly for president in 2020 and more recently for mayor of New York City touting Universal Basic Income (UBI) as his major policy plank. All Americans would receive a guaranteed minimal income in his American utopia. I read his book THE WAR ON NORMAL PEOPLE a few times. It was a breezy read but, to me, it encourages a cycle of dependence that went far beyond what the feudal lords had over the serfs.

 

These 21^st century self-proclaimed “serfs” have my attention and sympathy. I do not see a new feudalism on the horizon as some of them do but I do see a bumpy road ahead and the possibility of social upheaval unless the ship can be righted a bit.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a comment on the blog.